SUPPLEMENT DATED MARCH 8, 1999
TO THE PRINCIPAL FUNDS' PROSPECTUS
DATED MARCH 1, 1999
Effective March 8, 1999, the Prospectus for the Principal Mutual Funds is
amended by replacing the table on the bottom of page 40 with the following:
<TABLE>
<CAPTION>
All Funds (Except Sales Charge for 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
Amount invested Price Invested Price Invested Limited Term Bond Bond
--------------------------------- -------- ---------- --------- ---------- ----------------- ------------
<S> <C> <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%
MM 625 S-11
</TABLE>
PRINCIPAL MUTUAL FUNDS
DOMESTIC GROWTH-ORIENTED FUNDS
Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Growth Fund, Inc.
Principal MidCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Utilities Fund, Inc.
INTERNATIONAL GROWTH-ORIENTED FUNDS
Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.
INCOME-ORIENTED FUNDS
Principal Bond Fund, Inc.
Principal Government Securities Income Fund, Inc.
Principal High Yield Fund, Inc.
Principal Limited Term Bond Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
MONEY MARKET FUND
Principal Cash Management Fund, Inc.
This Prospectus describes mutual funds organized by Principal Life
Insurance Company. The Funds provide a choice of investment objectives through
Domestic Growth-Oriented Funds, International Growth-Oriented Funds,
Income-Oriented Funds and the Money Market Fund.
The date of this Prospectus is March 1, 1999.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
TABLE OF CONTENTS
Fund Descriptions..............................................................4
Domestic Growth-Oriented Funds..............................................6
Balanced Fund.............................................................6
Blue Chip Fund............................................................8
Capital Value Fund.......................................................10
Growth Fund .............................................................12
MidCap Fund..............................................................14
Real Estate Fund.........................................................16
SmallCap Fund............................................................18
Utilities Fund...........................................................20
International Growth-Oriented Funds........................................22
International Emerging Markets Fund......................................22
International Fund.......................................................24
International SmallCap Fund..............................................26
Income Funds...............................................................28
Bond Fund................................................................28
Government Securities Income Fund........................................30
High Yield Fund..........................................................32
Limited Term Bond Fund...................................................34
Tax-Exempt Bond Fund.....................................................36
Money Market Fund..........................................................38
Cash Management Fund.....................................................38
The Costs of Investing........................................................40
Certain Investment Strategies and Related Risks...............................46
Management, Organization and Capital Structure................................50
Pricing of Fund Shares........................................................51
Dividends and Distributions...................................................52
How To Buy Shares.............................................................53
How To Sell Shares............................................................55
How To Exchange Shares Among Principal Funds..................................58
General Information about a Fund Account......................................60
Financial Highlights..........................................................63
FUND DESCRIPTIONS.
The Principal Mutual Funds has three categories of funds: domestic
growth-oriented funds, international growth-oriented funds and income-oriented
funds.
The Growth-Oriented Funds invest primarily in common stocks. Under normal market
conditions, the Growth-Oriented Funds (except Balanced and Utilities) are fully
invested in equity securities. Under unusual circumstances, each of the
Growth-Oriented Funds may invest without limit in cash for temporary defensive
purposes. See Temporary Defensive Measures. When doing so, the Fund is not
investing to achieve its investment objective. The Funds also maintain a portion
of their assets in cash while they are making long-term investment decisions and
to cover sell orders from shareholders.
The Income-Oriented Funds each have a rating limitation with regard to the
quality of the bonds that are held in its portfolio. The rating limitation
applies when the Fund purchases a bond. If the rating on a bond changes while
the Fund owns it, the Fund is not required to sell the bond. The SAI contains
additional information about bond ratings by Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Corporation ("S&P").
In the description for each Fund, you will find important information about the
Fund's:
Primary investment strategy
This section summarizes how the Fund intends to achieve its investment
objective. It identifies the Fund's primary investment strategy (including the
type or types of securities in which the Fund invests) and any policy to
concentrate in securities of issuers in a particular industry or group of
industries.
Annual operating expenses
The annual operating expenses for each Fund are deducted from Fund assets
(stated as a percentage of Fund assets) and are shown as of the end of the most
recent fiscal year. The examples on the following pages are intended to help you
compare the cost of investing in a particular fund with the cost of investing in
other mutual funds. The examples assume you invest $10,000 in a Fund for the
time periods indicated. The first three lines of each example assume that you
sell all of your shares at the end of those time periods. The second three
assume that you do not sell your shares at the end of the periods. The examples
also assume that your investment has a 5% return each year and that the Fund's
operating expenses are the same as the most recent fiscal year expenses.
Although your actual costs may be higher or lower, based on these assumptions,
your costs would be as shown.
Day-to-day fund management
The investment professionals who manage the assets of each Fund are listed with
each Fund. Backed by their staffs of experienced securities analysts, they
provide the Funds with professional investment management.
Principal Management Corporation serves as the manager for the Principal Mutual
Funds. It has signed sub-advisory contracts with Invista Capital Management,
LLC. Under those contracts, Invista provides portfolio management for the
Growth-Oriented Funds (except the Real Estate Fund), the Government Securities
and Limited Term Bond Funds (see Management, Organization and Capital
Structure).
Fund Performance
Included in each Fund's description is a set of tables and a bar chart.
Together, these provide an indication of the risks involved when you invest.
The bar chart shows changes in the Fund's performance from year to year. The
performance reflected in the chart does not include a sales charge, which would
make the returns less than those shown. Fund shares are generally sold subject
to a sales charge which can be either a front-end sales charge or a contingent
deferred sales charge (CDSC) (see THE COSTS OF INVESTING). One of the tables
compares the Fund's average annual returns for 1, 5 and 10 years with a broad
based securities market index (a broad measure of market performance) and an
average of mutual funds with a similar investment objective and management
style. The averages used are prepared by Lipper, Inc. (an independent
statistical service). The table shows how the Fund's performance compares with
the returns of an index and with funds having similar investment objectives. The
other table for each Fund provides the highest and lowest quarterly rate of
return for that Fund's Class A shares during the last 10 years.
A Fund's past performance is not necessarily an indication of how the Fund will
perform in the future.
You may call Principal Mutual Funds (1-800-247-4123) to get the current 7-day
yield for the Cash Management Fund.
NOTE: All investors should read the prospectus sections discussing the Funds,
the expenses and management (See Fund Descriptions; The Costs of
Investing, Management, Organization and Capital Structure; Dividends
and Distributions; Pricing of Fund Shares; and Financial Highlights).
Investments in these Funds are not deposits of a bank and are not
insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
DOMESTIC GROWTH-ORIENTED FUND
Principal Balanced Fund, Inc.
The Balanced Fund seeks to generate a total investment return consisting of
current income and capital appreciation while assuming reasonable risks in
furtherance of the investment objective.
Main Strategies
The Balanced Fund invests primarily in common stocks and corporate bonds. It may
also invest in other equity securities, government bonds and notes (obligations
of the U.S. government or its agencies) and cash. Though the percentages in each
category are not fixed, common stocks generally represent 40% to 70% of the
Fund's assets. The remainder of the Fund's assets are invested in bonds and
cash.
In selecting common stocks, the Sub-Advisor, Invista, looks for companies that
have predictable earnings and which, based on growth prospects, are undervalued
in the marketplace. Invista buys stocks with the objective of long-term capital
appreciation. From time to time, Invista purchases stocks with the expectation
of price appreciation over the short term. In response to changes in economic
conditions, Invista may change the make-up of the portfolio and emphasize
different market sectors by buying and selling the portfolio's stocks.
The value of the stocks owned by the Fund changes on a daily basis. Stock prices
reflect the activities of individual companies and general market and economic
conditions. In the short term, stock prices can fluctuate dramatically in
response to these factors.
The Fund generates interest income by investing in bonds and notes. Bonds and
notes are also purchased for capital appreciation purposes when Invista thinks
that declining interest rates may increase market value. Deep discount bonds
(those which sell at a substantial discount from their face amount) are also
purchased to generate capital appreciation. The Fund may invest in bonds with
speculative characteristics but does not intend to invest more than 5% of its
assets in securities rated below BBB by S&P or Baa by Moody's. See Risks of High
Yield Securities.
Main Risks
Bond values change daily. Their prices reflect changes in interest rates, market
conditions and announcements of other economic, political or financial
information. Generally, when interest rates fall, the price of a bond rises and
when interest rates rise, the price declines.
Because the values of the Fund's assets may rise or fall, when shares of the
Fund are sold they may be worth more or less than the amount paid for them.
The Balanced Fund is generally a suitable investment for investors seeking
long-term growth but who are uncomfortable accepting the risks of investing
entirely in common stocks.
Annual Total Returns
"1989" 10.65
"1990" -5.18
"1991" 31.72
"1992" 10.47
"1993" 9.01
"1994" -3.38
"1995" 23.39
"1996" 13
"1997" 17.29
"1998" 11.2
Calendar Years Ended December 31
Highest & lowest
quarterly total returns
during the last 10 years
Quarter Ended Return
3/31/91 11.34%
9/30/90 (11.70%)
Average annual total returns
for the period ending December 31, 1998
Past One Past Five Past Ten
Year Years Years
Class A 11.20% 11.93% 11.33%
Class B 10.31 15.44* -
S&P 500 Stock Index 28.58 24.06 19.21
Lehman Brothers Government/
Corporate Bond Index 9.47 7.30 9.33
Lipper Balanced Fund Average 13.48 13.93 13.04
* Period from December 9, 1994, date Class B shares first offered
to the public, through December 31, 1998.
The year to date return as of December 31, 1998 for Class A shares is 11.20%
and for Class B shares is 10.31%.
Fund Operating Expenses
Class A Class B
Management Fees........................ 0.59% 0.59%
12b-1 Fees............................. 0.25% 0.91%
Other Expenses......................... 0.44% 0.54%
Total Fund Operating Expenses 1.28% 2.04%
Examples*
1 Year 3 Years 5 Years 10 Years
Class A $599 $862 $1,144 $1,947
Class B 619 967 1,330 2,082
You would pay the following expenses if you did not redeem your
shares:
Class A 599 862 1,144 1,947
Class B 207 640 1,098 2,082
* The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since April 1993 Co-Manager: Judith A. Vogel, CFA.
Portfolio Manager of Invista since 1987.
Since December 1997 Co-Manager: Martin J. Schafer, Portfolio
Manager of Invista since 1992.
DOMESTIC GROWTH-ORIENTED FUND
Principal Blue Chip Fund, Inc.
The Blue Chip Fund seeks to achieve growth of capital and growth of income by
investing primarily in common stocks of well capitalized, established companies.
Main Strategies
The Blue Chip Fund invests primarily in common stocks of large, established
companies. The Sub-Advisor, Invista, selects the companies it believes to have
the potential for growth of capital, earnings and dividends. Under normal market
conditions, the Fund invests at least 65% (and may invest up to 100%) of its
assets in blue chip companies. Blue chip companies are easily identified by:
o size (market capitalization of at least $1 billion)
o established history of earnings and dividends
o easy access to credit
o good industry position
o superior management structure
In addition, the large market of publicly held shares for these companies and
their generally high trading volume results in a relatively high degree of
liquidity for these stocks.
Invista may invest up to 35% of Fund assets in equity securities, other than
common stocks, issued by blue chip companies and in equity securities of
companies that do not fit the blue chip definition. It may also invest up to 5%
of Fund assets in securities of unseasoned issuers, which are more speculative
than blue chip company securities. See Securities of Unseasoned Issuers. Up to
20% of Fund assets may be invested in foreign securities. The issuers of the
foreign securities do not have to meet the criteria for blue chip companies (See
Foreign Securities).
Main Risks
The value of the stocks owned by the Fund changes on a daily basis. The current
price reflects the activities of individual companies and general market and
economic conditions. In the short term, stock prices can fluctuate dramatically
in response to these factors. Because of these fluctuations, principal values
and investment returns vary. When shares of the Fund are sold, they may be worth
more or less than the amount paid for them.
The Blue Chip Fund is generally a suitable investment for investors seeking
long-term growth who are willing to accept the risks of investing in common
stocks but who prefer investing in larger, established companies.
Annual Total Returns
"1992" 6.09
"1993" 2.62
"1994" 3.36
"1995" 33.19
"1996" 16.78
"1997" 26.25
"1998" 16.55
Calendar Years Ended December 31
Highest & lowest
quarterly total returns
during the last 8 years
Quarter Ended Quarterly Return
6/30/97 16.40%
9/30/98 (9.92%)
Average annua1 total returns
for the period ending December 31, 1998
Past One Past FivePast Ten
Year Years Years
Class A 16.55% 18.79% 14.87%*
Class B 15.69 22.38** -
S&P 500 Stock Index 28.58 24.06 19.21
Lipper Growth and
Income Fund Average 15.61 18.53 15.76
* Period from March 1, 1991, date Class A shares first offered to
the public, through December 31, 1998.
** Period from December 9, 1994, date Class B shares first offered
to the public, through December 31, 1998.
The year to date return as of December 31, 1998 for Class A shares is 16.55% and
for Class B shares is 15.69%.
Fund Operating Expenses
Class A Class B
Management Fees........................ 0.48% 0.48%
12b-1 Fees............................. 0.25% 0.91%
Other Expenses......................... 0.58% 0.63%
Total Fund Operating Expenses 1.31% 2.02%
Examples*
1 Year 3 Years 5 Years 10 Years
Class A $602 $870 $1,159 $1,979
Class B 617 961 1,320 2,080
You would pay the following expenses if you did not redeem your
shares:
Class A 602 870 1,159 1,979
Class B 205 634 1,088 2,080
* The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since March 1991 Manager: Mark T. Williams, CFA. Portfolio Manager of
Invista since 1995.
DOMESTIC GROWTH-ORIENTED FUND
Principal Capital Value Fund, Inc.
The Capital Value Fund seeks to achieve primarily long-term capital appreciation
and secondarily growth of investment income through the purchase primarily of
common stocks, but the Fund may invest in other securities.
Main Strategies
The Capital Value Fund invests primarily in common stocks. It may also invest in
other equity securities. To achieve its investment objective, the Sub-Advisor,
Invista, invests primarily in securities that have "value" characteristics. This
process is known as "value investing." Value stocks tend to have higher yields
and lower price to earnings (P/E) ratios than other stocks.
Securities chosen for investment may include those of companies which Invista
believes can be expected to share in the growth of the nation's economy over the
long term. The current price of the Fund's assets reflect the activities of the
individual companies and general market and economic conditions. In the short
term, stock prices can fluctuate dramatically in response to these factors.
Because of these fluctuations, principal values and investment returns vary.
In making selections for the Fund's investment portfolio, Invista uses an
approach described as "fundamental analysis." The basic steps involved in this
analysis are:
o Research. Invista researches economic prospects over the next one to
two years rather than focusing on near term expectations. This approach
is designed to provide insight into a company's real growth potential.
o Valuation. The research findings allow Invista to identify the
prospects for the major industrial, commercial and financial segments
of the economy. Invista looks at such factors as demand for products,
capacity to produce, operating costs, pricing structure, marketing
techniques, adequacy of raw materials and components, domestic and
foreign competition and research productivity. It then uses this
information to judge the prospects for each industry for the near and
intermediate term.
o Ranking. Invista then ranks the companies in each industry group
according to their relative value. The greater a company's estimated
worth compared to the current market price of its stock, the more
undervalued the company. Computer models help to quantify the research
findings.
o Stock selection. Invista buys and sells stocks according to the Fund's
own policies using the research and valuation rankings as a basis. In
general, Invista buys stocks that are identified as undervalued and
considers selling them when they appear overvalued. Along with
attractive valuation, other factors may be taken into account such as:
o events that could cause a stock's price to rise or fall;
o anticipation of high potential reward compared to potential risk;
and
o belief that a stock is temporarily mispriced because of market
overreactions.
Main Risks
The Capital Value Fund is generally a suitable investment for investors seeking
long-term growth, who are willing to accept the risks of investing in common
stocks but also prefer investing in companies that appear to be considered
undervalued relative to similar companies. When shares of the Fund are sold,
they may be worth more or less than the amount paid for them.
Annual Total Returns
"1989" 14.76
"1990" -10.64
"1991" 37.21
"1992" 9.09
"1993" 7.56
"1994" 0.21
"1995" 31.9
"1996" 23.42
"1997" 28.69
"1998" 12.13
Calendar Years Ended December 31
Highest & lowest
quarterly total returns
during the last 10 years
Quarter Ended Return
3/31/91 17.94%
9/30/90 (17.62%)
Average annua1 total returns
for the period ending December 31, 1998
Past One Past FivePast Ten
Year Years Years
Class A 12.13% 18.68% 14.54%
Class B 11.29 23.25* -
S&P 500 Stock Index 28.58 24.06 19.21
Lipper Growth and Income
Fund Average 15.61 18.53 15.76
* Period from December 9, 1994, date Class B shares first offered
to the public, through December 31, 1998.
The year to date return as of December 31, 1998 for Class A shares is 12.13% and
for Class B shares is 11.29%.
Fund Operating Expenses
Class A Class B
Management Fees........................ 0.38% 0.38%
12b-1 Fees............................. 0.14% 0.79%
shares:
Other Expenses......................... 0.22% 0.35%
Total Fund Operating Expenses 0.74%
Examples*
1 Year 3 Years 5 Years 10 Years
Class A $547 $700 $ 867 $1,350
Class B 569 813 1,066 1,503
You would pay the following expenses if you did not redeem your
Class A 547 700 867 1,350
1.52% Class B 155 480 829 1,503
* The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since November 1996 Manager: Catherine A. Zaharis, CFA.
Portfolio Manager of Invista since 1987.
DOMESTIC GROWTH-ORIENTED FUND
Principal Growth Fund, Inc.
The Growth Fund seeks growth of capital through the purchase primarily of common
stocks, but the Fund may invest in other securities.
Main Strategies
In seeking the Fund's objective of capital growth, the Fund's Sub-Advisor,
Invista, uses an approach described as "fundamental analysis." The basic steps
involved in this analysis are:
o Research. Invista researches economic prospects over the next one to
two years rather than focusing on near term expectations. This approach
is designed to provide insight into a company's real growth potential.
o Valuation. The research findings allow Invista to identify the
prospects for the major industrial, commercial and financial segments
of the economy. Invista looks at such factors as demand for products,
capacity to produce, operating costs, pricing structure, marketing
techniques, adequacy of raw materials and components, domestic and
foreign competition and research productivity. It then uses this
information to judge the prospects for each industry for the near and
intermediate term.
o Stock selection. Invista then purchases securities of issuers which
appear to have high growth potential. Common stocks selected for the
Fund may include securities of companies that:
o have a record of sales and earnings growth that exceeds the growth
rate of corporate profits of the S&P 500, or
o offer new products or new services.
Main Risks
These securities present greater opportunities for capital growth because of
high potential earnings growth, but may also involve greater risk than
securities which do not have the same potential. The companies may have limited
product lines, markets or financial resources, or may depend on a limited
management group. Their securities may trade less frequently and in limited
volume. As a result, these securities may change in value more than those of
larger, more established companies.
The Growth Fund is generally a suitable investment for investors who want
long-term growth. Additionally, the investor must be willing to accept the risks
of investing in common stocks that may have greater risks than stocks of
companies with lower potential for earnings growth. As the value of the stocks
owned by the Fund changes, the Fund share price changes. In the short term, the
share price can fluctuate dramatically. When shares of the Fund are sold, they
may be worth more or less than the amount paid for them.
Annual Total Returns
"1989" 18.07
"1990" -1.41
"1991" 56.61
"1992" 10.16
"1993" 7.51
"1994" 3.21
"1995" 33.47
"1996" 12.23
"1997" 28.41
"1998" 20.37
Calendar Years Ended December 31
Highest & lowest
quarterly total returns
for the last 10 years
Quarter Ended Quarterly Return
3/31/91 24.39%
9/30/90 (18.61%)
Average annua1 total returns
for the period ending December 31, 1998
Past One Past FivePast Ten
Year Years Years
Class A 20.37% 19.03% 17.83%
Class B 19.77 23.51* -
S&P 500 Stock Index 28.58 24.06 19.21
Lipper Growth Fund Average 22.86 19.03 17.16
* Period from December 9, 1994, date Class B shares first offered
to the public, through December 31, 1998.
The year to date return as of December 31, 1998 for Class A shares is 20.37%
and for Class B shares is 19.77%.
Fund Operating Expenses
Class A Class B
Management Fees........................ 0.41% 0.41%
12b-1 Fees............................. 0.21% 0.65%
Other Expenses......................... 0.33% 0.40%
Total Fund Operating Expenses 0.95% 1.46%
Examples*
1 Year 3 Years 5 Years 10 Years
Class A $567 $763 $976 $1,586
Class B 563 795 1,035 1,543
You would pay the following expenses if you did not redeem your
shares:
Class A 567 763 976 1,586
Class B 149 462 797 1,543
* The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since August 1987 Manager: Michael R. Hamilton, Portfolio
Manager of Invista since 1987.
DOMESTIC GROWTH-ORIENTED FUND
Principal MidCap Fund, Inc.
The MidCap Fund seeks to achieve capital appreciation by investing primarily in
securities of emerging and other growth-oriented companies.
Main Strategies
The MidCap Fund primarily invests in stocks of growth-oriented companies. Stocks
that are chosen for the Fund by the Sub-Advisor, Invista, are thought to be
responsive to changes in the marketplace and have the fundamental
characteristics to support growth. The Fund may invest for any period in any
industry, in any kind of growth-oriented company. Companies may range from the
well-established and well-known to the new and unseasoned (see Unseasoned
Issuers).
Under normal market conditions, the Fund invests at least 65% of its assets in
securities of companies with market capitalizations in the $1 billion to $10
billion range. Market capitalization is defined as total current market value of
a company's outstanding common stock.
The Fund may invest up to 20% of its assets in securities of foreign companies.
See Foreign Securities for a description of the unique risks associated with
foreign securities.
Main Risks
The value of the stocks owned by the Fund changes on a daily basis. The current
share price reflects the activities of individual companies and general market
and economic conditions. In the short term, stock prices can fluctuate
dramatically in response to these factors. Because of these fluctuations,
principal values and investment returns vary. When shares of the Fund are sold,
they may be worth more or less than the amount paid for them.
The MidCap Fund is generally a suitable investment for investors seeking
long-term growth and who are willing to accept the potential for short-term,
fluctuations in the value of their investments. The Fund is an aggressive
capital appreciation fund. It is designed for long-term investors for a portion
of their investments and not designed for investors seeking income or
conservation of capital.
Annual Total Returns
"1989" 20.53
"1990" -6.33
"1991" 52.83
"1992" 14.81
"1993" 12.29
"1994" 3.03
"1995" 34.2
"1996" 19.13
"1997" 22.94
"1998" -0.23
Calendar Years Ended December 31
Highest & lowest
quarterly total returns
for the last 10 years
Quarter Ended Quarterly Return
3/31/91 25.77%
9/30/98 (21.24%)
Average annua1 total
for the period ending December 31, 1998
Past One Past FivePast Ten
Year Years Years
Class A (0.23)% 15.10% 16.22%
Class B (0.67) 18.98* -
S&P 500 Stock Index 28.58 24.06 19.21
Lipper Mid-Cap Fund Average 12.16 15.18 15.83
* Period from December 9, 1994, date Class B shares first offered
to the public, through December 31, 1998.
The year to date return as of December 31, 1998 for Class A shares is (0.23)%
and for Class B shares is (0.67)%.
Fund Operating Expenses
Class A Class B
Management Fees........................ 0.56% 0.56%
12b-1 Fees............................. 0.24% 0.70%
Other Expenses......................... 0.42% 0.47%
Total Fund Operating Expenses 1.22% 1.73%
Examples*
1 Year 3 Years 5 Years 10 Years
Class A $593 $844 $1,113 $1,882
Class B 589 875 1,173 1,843
You would pay the following expenses if you did not redeem your
shares:
Class A 593 844 1,113 1,882
Class B 176 545 939 1,843
* The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since December 1987 Manager: Michael R. Hamilton, Portfolio
Manager of Invista since 1987.
DOMESTIC GROWTH-ORIENTED FUND
Principal Real Estate Fund, Inc.
The Real Estate Fund seeks to generate total return by investing primarily in
equity securities of companies principally engaged in the real estate industry.
Main Strategies
The Real Estate Fund invests primarily in equity securities of companies engaged
in the real estate industry. For purposes of the Fund's investment policies, a
real estate company has at least 50% of its assets, income or profits derived
from products or services related to the real estate industry. Real estate
companies include real estate investment trusts 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 assets in securities of foreign
real estate companies. See Foreign Securities for a description of the unique
risks associated with foreign securities.
Real estate investment trusts ("REITs") are corporations or business trusts that
are effectively permitted to eliminate corporate level federal income taxes if
they meet certain requirements of the Internal Revenue Code. The Fund focuses on
equity REITs. REITs are characterized as:
o equity REITs, which primarily own property and generate revenue from
rental income;
o mortgage REITs, which invest in real estate mortgages; and
o hybrid REITs, which combine the characteristics of both equity and
mortgage REITs.
Main Risks
Securities of real estate companies are subject to securities market risks as
well as risks similar those of direct ownership of real estate. These include:
o declines in the value of real estate
o risks related to general and local economic conditions
o dependency on management skills
o heavy cash flow dependency
o possible lack of available mortgage funds
o overbuilding
o extended vacancies in properties
o increases in property taxes and operating expenses
o changes in zoning laws
o expenses incurred in the cleanup of environmental problems
o casualty or condemnation losses
o changes in interest rates
In addition to the risks listed above, equity REITs are affected by the
changes in the value of the properties owned by the trust. Mortgage REITs are
affected by the quality of the credit extended. Both equity and mortgage REITs:
o are dependent upon management skills and may not be diversified;
o are subject to cash flow dependency and defaults by borrowers; and
o could fail to qualify for tax-free pass through of income under the
Code.
Because of these factors, the values of the Fund's assets change on a daily
basis. The current share price reflects the activities of individual companies
and general market and economic conditions. In the short term, share prices can
fluctuate dramatically in response to these factors. Because of these
fluctuations, principal values and investment returns vary. When shares of the
Fund are sold, they may be worth more or less than the amount paid for them.
The Real Estate Fund is generally a suitable investment for investors seeking
long-term growth, who want to invest in companies engaged in the real estate
industry and who are willing to accept fluctuations in the value of their
investment.
Annual Total Returns
"1998" -13.62
Calendar Year Ended December 31
Highest & lowest
quarterly total returns
for the last 1 year
Quarter Ended Quarterly Return
12/31/98 0.26%
9/30/98 (7.81%)
Average annua1 total return
for the period ending December 31, 1998
Past One
Year
Class A (13.62)%
Class B (14.02)
Morgan Stanley REIT Index (16.90)
Lipper Real Estate
Fund Average (15.46)
The year to date return as of December 31, 1998 for Class A shares is (13.62)%
and for Class B shares is (14.02)%.
Fund Operating Expenses
Class A Class B
Management Fees........................ 0.90% 0.90%
12b-1 Fees............................. 0.31% 0.60%
Other Expenses......................... 1.04% 0.97%
Total Fund Operating Expenses 2.25% 2.47%
Examples*
1 Year 3 Years 5 Years 10 Years
Class A $692 $1,145 $1,623 $2,937
Class B 660 1,093 1,542 2,727
You would pay the following expenses if you did not redeem your
shares:
Class A 692 1,145 1,623 2,937
Class B 250 770 1,316 2,727
* The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since December 1997 Manager: Kelly D. Rush, CFA. Assistant
Director - Investment - Commercial Real Estate of Principal
Capital Management since 1996.
DOMESTIC GROWTH-ORIENTED FUND
Principal SmallCap Fund, Inc.
The SmallCap Fund seeks to achieve long-term growth of capital by investing
primarily in equity securities of companies with comparatively smaller market
capitalizations.
Main Strategies
The SmallCap Fund invests in equity securities of companies in the U.S. with
comparatively smaller market capitalizations. Market capitalization is defined
as total current market value of a company's outstanding common stock. Under
normal market conditions, the Fund invests at least 65% of its assets in
securities of companies with market capitalizations of $1 billion or less.
In selecting securities for investment, Invista looks at stocks with value
and/or growth characteristics. In managing the assets of the Fund, Invista does
not have a policy of preferring one of these categories to the other. The value
orientation emphasizes buying stocks at less than their investment value and
avoiding stocks whose price has been artificially built up. The growth
orientation emphasizes buying stocks of companies whose potential for growth of
capital and earnings is expected to be above average. Selection is based on
fundamental analysis of the company relative to other companies with the focus
being on Invista's estimation of forward looking rates of return.
Main Risks
Investments in companies with smaller market capitalizations may involve greater
risks and price volatility (wide, rapid fluctuations) than investments in
larger, more mature companies. For a more thorough discussion of the risks of
investing in small companies, please review the sections of this prospectus
which discuss the risks of investing in companies with small market
capitalizations (see Securities of Smaller Companies) and the risks of investing
in companies with limited operating history (see Unseasoned Issuers)
The value of the stocks owned by the Fund changes on a daily basis. The current
share price reflects the activities of individual companies as well as general
market and economic conditions. In the short term, stock prices can fluctuate
dramatically in response to these factors. Because of these fluctuations,
principal values and investment returns vary. When shares of the Fund are sold,
they may be worth more or less than the amount paid for them.
The SmallCap Fund is generally a suitable investment for investors seeking
long-term growth and who are willing to accept the potential for volatile
fluctuations in the value of their investment. This Fund is an aggressive
capital appreciation fund designed for long-term investors for a portion of
their investments. It is not designed for investors seeking income or
conservation of capital.
Annual Total Returns
"1998" -5.68
Calendar Year Ended December 31
Highest & lowest
quarterly total returns
for the last 1 year
Quarter Ended Quarterly Return
12/31/98 22.22%
9/30/98 (23.52%)
Average annua1 total returns
for the period ending December 31, 1998
Past One
Year
Class A (5.68)%
Class B (6.28)
S&P 500 Stock Index (28.58)
Lipper Small-Cap
Fund Average (0.33)
The year to date return as of December 31, 1998 for Class A shares is (5.68)%
and for Class B shares is (6.28)%.
Fund Operating Expenses
Class A Class B
Management Fees........................ 0.85% 0.85%
12b-1 Fees............................. 0.37% 0.63%
Other Expenses......................... 1.36% 1.32%
Total Fund Operating Expenses 2.58% 2.80%
Examples*
1 Year 3 Years 5 Years 10 Years
Class A $724 $1,239 $1,780 $3,251
Class B 692 1,188 1,702 3,052
You would pay the following expenses if you did not redeem your
shares:
Class A 724 1,239 1,780 3,251
Class B 283 868 1,479 3,052
* The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since December 1997 Co-Manager: Mark T. Williams, CFA.
Portfolio Manager of Invista
since 1995.
Since December 1997 Co-Manager: John F. McClain, Portfolio
Manager of Invista since 1995.
DOMESTIC GROWTH-ORIENTED FUND
Principal Utilities Fund, Inc.
The Utilities Fund seeks to provide high current income and long-term growth of
income and capital. The Fund seeks to achieve its objective by investing
primarily in equity and fixed income securities of companies in the public
utilities industry.
Main Strategies
The Utilities Fund invests in securities issued by companies in the public
utilities industry. These companies include:
o companies engaged in the manufacturer production, generation, sale or
distribution of electric or gas energy or other types of energy, and
o companies engaged in telecommunications, including telephone,
telegraph, satellite, microwave and other communications media (but not
public broadcasting or cable television).
The Sub-Advisor, Invista, considers a company to be in the public utilities
industry if, at the time of investment, at least 50% of the company's assets,
revenues or profits are derived from one or more of those industries.
Under normal market conditions, at least 65% (and up to 100%) of the assets of
the Fund are invested in equity securities and fixed-income securities in the
public utilities industry. The Fund does not have any policy to concentrate its
assets in any segment of the utilities industry. The portion of Fund assets
invested in equity securities and fixed-income securities varies from time to
time. When determining how to invest the Fund's assets to achieve its investment
objective, Invista considers:
o changes in interest rates,
o prevailing market conditions, and
o general economic and financial conditions.
The Fund invests in fixed income securities, which at the time of purchase, are
o rated in one of the top four categories by S&P or Moody's, or
o if not rated, in the Manager's opinion are of comparable quality.
Main Risks
Since the Fund's investments are concentrated in the utilities industry, the
value of its shares changes in response to factors affecting those industries.
Many utility companies have been subject to risks of
o increase in fuel and other operating costs;
o changes in interests rates on borrowings for capital improvement
programs;
o changes in applicable laws and regulations;
o changes in technology which render existing plants, equipment or
products obsolete;
o effects of conservation; and
o increased costs and delays associated with environmental regulations.
Generally, the prices charged by utilities are regulated with the intention of
protecting the public while ensuring that utility companies earn a return
sufficient to attract capital to grow and provide appropriate services. However,
due to political and regulatory factors, rate changes ordinarily occur following
a change in financing costs. This delay tends to favorably affect a utility
company's earnings and dividends when costs are decreasing but also adversely
affects earnings and dividends when costs are rising. In addition, the value of
the utility company bond prices rise when interest rates fall and fall when
interest rates rise.
Certain states are adopting deregulation plans. These plans generally allow for
the utility company to set the amount of their earnings without regulatory
approval.
The Utilities Fund is generally a suitable investment for investors seeking
quarterly dividends for income or to be reinvested for growth. Suitable
investors are those who want to invest in companies in the utilities industry
and are willing to accept fluctuations in the value of their investment. The
share price of the Fund may fluctuate more widely than the value of shares of a
fund that invests in a broader range of industries. Because of these
fluctuations, principal values and investment returns vary. When shares of the
Fund are sold, they may be worth more or less than the amount paid for them.
Annual Total Returns
"1993" 8.42
"1994" -11.09
"1995" 33.87
"1996" 4.56
"1997" 29.58
"1998" 22.5
Calendar Years Ended December 31
Highest & lowest
quarterly total returns
for the last 6 years
Quarter Ended Quarterly Return
12/31/97 19.24%
3/31/94 (9.00%)
Average annua1 total returns
for the period ending December 31, 1998
Past One Past FivePast Ten
Year Years Years
Class A 22.50% 14.59% 13.77%*
Class B 21.59 20.91** -
S&P 500 Stock Index 28.58 24.06 19.21
Dow Jones Utilities Index
with Income Fund Average 18.81 12.26 -
* Period from December 16, 1992, date Class A shares first
offered to
the public, through December 31, 1998.
** Period from December 9, 1994, date Class B shares first offered
to the public, through December 31, 1998.
The year to date return as of December 31, 1998 for Class A shares is 22.50% and
for Class B shares is 21.59%.
Fund Operating Expenses
Class A Class B
Management Fees*....................... 0.60% 0.60%
12b-1 Fees............................. 0.25% 0.90%
Other Expenses......................... 0.38% 0.50%
Total Fund Operating Expenses 1.23% 2.00%
* The Manager voluntarily waived certain fees and expenses during the fiscal
year ended October 31, 1998. After waiver, the Class A share management fee
paid was 0.52% (total expenses 1.15%). After waiver, the Class B share
management fee paid was 0.50% (total expenses 1.90%).
Examples**
1 Year 3 Years 5 Years 10 Years
Class A $594 $847 $1,119 $1,893
Class B 615 955 1,310 2,036
You would pay the following expenses if you did not redeem your
shares:
Class A 594 847 1,119 1,893
Class B 203 627 1,078 2,036
** The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since April 1993 Manager: Catherine A. Zaharis, CFA.
Portfolio Manager of Invista since 1987.
INTERNATIONAL GROWTH-ORIENTED FUND
Principal International Emerging Markets Fund, Inc.
The International Emerging Markets Fund seeks to achieve long-term growth of
capital by investing primarily in equity securities of issuers in emerging
market countries.
Main Strategies
The International Emerging Markets Fund seeks to achieve its objective by
investing in common stocks of companies in emerging market countries. For this
Fund, the term "emerging market country" means any country which is considered
to be an emerging country by the international financial community (including
the International Bank for Reconstruction and Development (also 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.
Investing in many emerging market countries is not feasible or may involve
unacceptable political risk. Invista, the Sub-Advisor, focuses on those emerging
market countries that it believes have strongly developing economies and markets
which are becoming more sophisticated.
Under normal conditions, at least 65% of the Fund's assets are invested in
emerging market country equity securities. The Fund invests in securities of:
o companies with their principal place of business or principal office in
emerging market countries;
o companies for which the principal securities trading market is an
emerging market country; or
o companies, regardless of where its securities are 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.
Main Risks
Investments in emerging market countries involve special risks. Certain emerging
market countries have historically experienced, and may continue to experience,
certain economic problems. These may include: 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 risks involved with any investment in foreign securities
(see Foreign Securities).
Under unusual market or economic conditions, the Fund may invest in the same
kinds of securities as the other Growth-Oriented Funds. These include securities
issued by domestic or foreign corporations, governments or governmental
agencies, instrumentalities or political subdivisions. The securities may be
denominated in U.S. dollars or other currencies.
The International Emerging Markets Fund is generally a suitable investment for
investors seeking long-term growth who want to invest a portion of their assets
in securities of companies in emerging market countries. Because the values of
the Fund's assets are likely to rise or fall dramatically, when shares of the
Fund are sold they may be worth more or less than the amount paid for them. This
Fund is not an appropriate investment for investors seeking either preservation
of capital or high current income. Investors must be able to assume the
increased risks of higher price volatility and currency fluctuations associated
with investments in international stocks which trade in non-U.S. currencies.
Annual Total Returns
"1998" -17.42
Calendar Year Ended December 31
Highest & lowest
quarterly total returns
for the last 1 year
Quarter Ended Quarterly Return
12/31/98 13.38%
9/30/98 (18.97%)
Average annua1 total returns
for the period ending December 31, 1998
Past One Past Five
Year Years
Class A (17.42)% (20.56)%*
Class B (17.80) (20.92)*
Morgan Stanley Capital
International EMF
(Emerging Markets Free)
Index (27.52) (11.13)
Lipper Emerging Markets
Fund Average (26.83) (10.01)
* Period from August 29, 1997, date shares first offered to the
public, through December 31, 1998.
The year to date return as of December 31, 1998 for Class A shares is (17.42)%
and for Class B shares is (17.80)%.
Fund Operating Expenses
Class A Class B
Management Fees........................ 1.25% 1.25%
12b-1 Fees............................. 0.39% 0.64%
Other Expenses......................... 1.67% 1.70%
Total Fund Operating Expenses 3.31% 3.59%
Examples*
1 Year 3 Years 5 Years 10 Years
Class A $793 $1,445 $2,119 $3,907
Class B 767 1,413 2,074 3,764
You would pay the following expenses if you did not redeem your
shares:
Class A 793 1,445 2,119 3,907
Class B 362 1,100 1,859 3,764
* The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since May 1997 Manager: Kurtis D. Spieler, CFA. Portfolio
Manager of Invista since 1995.
INTERNATIONAL GROWTH-ORIENTED FUND
Principal International Fund, Inc.
The International Fund seeks long-term growth of capital by investing in a
portfolio of equity securities of companies domiciled in any of the nations of
the world.
Main Strategies
The International Fund invests in common stocks of companies established outside
of the U.S. The Fund has no limitation on the percentage of assets that are
invested in any one country or denominated in any one currency. However under
normal market conditions, the Fund intends to have at least 65% of its assets
invested in companies in at least three different countries. One of those
countries may be the U.S. though currently the Fund does not intend to invest in
equity securities of U.S. companies.
Investments may be made anywhere in the world. Primary consideration is given to
securities of corporations of Western Europe, North America and Australasia
(Australia, Japan and Far East Asia). Changes in investments are made as
prospects change for particular countries, industries or companies.
In choosing investments for the Fund, Invista pays particular attention to the
long-term earnings prospects of the various companies under consideration.
Invista then weighs those prospects relative to the price of the security.
Main Risks
The values of the stocks owned by the Fund change on a daily basis. Stock prices
reflect the activities of individual companies as well as general market and
economic conditions. In the short term, stock prices and currencies can
fluctuate dramatically in response to these factors. In addition, there are
risks involved with any investment in foreign securities (see Foreign
Securities). Because the values of the Fund's assets may rise or fall, when
shares of the Fund are sold they may be worth more or less than the amount paid
for them.
The International Fund is generally a suitable investment for investors who seek
long-term growth and who want to invest in non-U.S. companies. This Fund is not
an appropriate investment for investors who are seeking either preservation of
capital or high current income. Suitable investors must be able to assume the
increased risks of higher price volatility and currency fluctuations associated
with investments in international stocks which trade in non-U.S. currencies.
Under unusual market or economic conditions, the Fund may invest in the same
kinds of securities as the other Growth-Oriented Funds. These include securities
issued by domestic or foreign corporations, governments or governmental
agencies, instrumentalities or political subdivisions. The securities may be
denominated in U.S. dollars or other currencies.
Annual Total Returns
"1989" 14.77
"1990" -9.51
"1991" 15.25
"1992" 0.81
"1993" 46.34
"1994" -5.26
"1995" 11.56
"1996" 23.76
"1997" 12.22
"1998" 8.48
Calendar Years Ended December 31
Highest & lowest
quarterly total returns
for the last 10 years
Quarter Ended Quarterly Return
12/31/98 15.54%
9/30/90 (18.37%)
Average annua1 total returns
for the period ending December 31, 1998
Past One Past FivePast Ten
Year Years Years
Class A 8.48% 9.75% 10.88%
Class B 7.78 13.15* -
Morgan Stanley Capital
International EAFE
(Europe, Australia and
Far East) Index 20.00 9.19 5.54
Lipper International Fund
Average 13.02 7.87 9.39
* Period from December 9, 1994, date Class B shares first offered
to the public, through December 31, 1998.
The year to date return as of December 31, 1998 for Class A shares is 8.48%
and for Class B shares is 7.78%.
Fund Operating Expenses
Class A Class B
Management Fees........................ 0.68% 0.68%
12b-1 Fees............................. 0.19% 0.74%
Other Expenses......................... 0.38% 0.49%
Total Fund Operating Expenses 1.25% 1.91%
Examples*
1 Year 3 Years 5 Years 10 Years
Class A $596 $ 853 $1,129 $1,915
Class B 606 929 1,264 1,981
You would pay the following expenses if you did not redeem your
shares:
Class A 596 853 1,129 1,915
Class B 194 600 1,032 1,981
* The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since April 1994 Manager: Scott D. Opsal, CFA. Executive Vice
President and Chief Investment
Officer of Invista since 1997.
INTERNATIONAL GROWTH-ORIENTED FUND
Principal International SmallCap Fund, Inc.
The International SmallCap Fund seeks to achieve long-term growth of capital by
investing primarily in equity securities of non-United States companies with
comparatively smaller market capitalizations.
Main Strategies
The International SmallCap Fund invests in stocks of non-U.S. companies with
comparatively smaller market capitalizations. Market capitalization is defined
as total current market value of a company's outstanding common stock. Under
normal market conditions, the Fund invests at least 65% of its assets in
securities of companies having market capitalizations of $1 billion or less.
Please review the sections of this prospectus which discuss the risks involved
with any investment in foreign securities (see Foreign Securities) and with
investments in companies with small market capitalizations (see Securities of
Smaller Companies).
The Fund diversifies its investments geographically. There is no limitation of
the percentage of assets that may be invested in one country or denominated in
any one currency. However, under normal market circumstances, the Fund intends
to have at least 65% of its assets invested in securities of companies of at
least three countries.
Main Risks
This Fund is not an appropriate investment for investors seeking either
preservation of capital or high current income. Investors must be able to assume
the increased risks of higher price volatility and currency fluctuations
associated with investments in international stocks which trade in non-U.S.
currencies.
The International SmallCap Fund is generally a suitable investment for investors
seeking long-term growth who want to invest a portion of their assets in
smaller, non-U.S. companies. Because the values of the Fund's assets may rise or
fall, when shares of the Fund are sold they may be worth more or less than the
amount paid for them.
Annual Total Returns
"1998" 14.4
Calendar Year Ended December 31
Highest & lowest
quarterly total returns
for the last 1 year
Quarter Ended Quarterly Return
3/31/98 21.74%
9/30/98 (19.84%)
Average annua1 total returns
for the period ending December 31, 1998
Past One Past Five
Year Years
Class A 14.40% 9.23%*
Class B 14.00 8.86*
Morgan Stanley Capital
International EAFE
(Europe, Australia and
Far East) Index 20.00 9.19
Lipper International Small-Cap
Fund Average 13.02 6.10
* Period from August 29, 1997, date shares first offered to the
public, through December 31, 1998.
The year to date return as of December 31, 1998 for Class A shares is 14.40% and
for Class B shares is 14.00%.
Fund Operating Expenses
Class A Class B
Management Fees........................ 1.20% 1.20%
12b-1 Fees............................. 0.33% 0.61%
Other Expenses......................... 1.13% 1.09%
Total Fund Operating Expenses 2.66% 2.90%
Examples*
1 Year 3 Years 5 Years 10 Years
Class A $731 $1,262 $1,818 $3,326
Class B 701 1,217 1,750 3,141
You would pay the following expenses if you did not redeem your
shares:
Class A 731 1,262 1,818 3,326
Class B 293 898 1,528 3,141
* The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since May 1997 Manager: Darren K. Sleister, CFA.
Investment Officer of Invista since 1995.
INCOME-ORIENTED FUND
Principal Bond Fund, Inc.
The Bond Fund seeks to provide as high a level of income as is consistent with
preservation of capital and prudent investment risk.
Main Strategies
The Bond Fund invests in fixed-income securities. Generally, the Fund invests on
a long-term basis but may make short-term investments. Longer maturities
typically provide better yields but expose the Fund to the possibility of
changes in the values of its securities as interest rates change. Generally,
when interest rates fall, the price per share rises, and when rates rise, the
price per share declines.
Under normal circumstances, the Fund invests at least 65% of its assets in:
o debt securities and taxable municipal bonds;
o rated, at the time of purchase, in one of the top four categories by
S&P or Moody's, or
o if not rated, in the Manager's opinion are of comparable quality.
o similar Canadian, Provincial or Federal Government securities payable
in U.S. dollars; and
o securities issued or guaranteed by the U.S. Government or its agencies.
The rest of the Fund's assets may be invested in securities that may be
convertible (may be exchanged for a fixed number of shares of common stock of
the same issuer) or nonconvertible including:
o domestic and foreign debt securities;
o preferred and common stock;
o foreign government securities; and
o securities rated less than the four highest grades of S&P or Moody's
but not lower BB- (S&P) or Ba3 (Moody's) (see Risks of High Yield
Securities).
During the fiscal year ended October 31, 1998, based on the dollar-weighted
average ratings of the Fund's portfolio at the end of each month in the fiscal
year, net assets of the Fund were invested in securities rated as follows (all
ratings are by Moody's):
20.06% in securities rated A
70.49% in securities rated BAA
8.36% in securities rated BA
Under unusual market or economic conditions, the Fund may invest up to 100% of
its assets in cash and cash equivalents (see Temporary Defensive Measures).
Main Risks
The Bond Fund is generally a suitable investment for an investor seeking monthly
dividends to produce income or to be reinvested in additional fund shares to
help achieve modest growth objectives without accepting the risks of investing
in common stocks. However, because of fluctuations in value, when sold, shares
of the Fund may be worth more or less than the amount paid for them.
Annual Total Returns
"1989" 13.43
"1990" 4.64
"1991" 17.45
"1992" 8.61
"1993" 12.77
"1994" -4.35
"1995" 22.28
"1996" 2.27
"1997" 10.96
"1998" 7.14
Calendar Years Ended December 31
Highest & lowest
quarterly total returns
for the last 10 years
Quarter Ended Quarterly Return
6/30/95 8.54%
3/30/94 (4.06%)
Average annua1 total returns
for the period ending December 31, 1998
Past One Past FivePast Ten
Year Years Years
Class A 7.14% 7.30% 9.28%
Class B 6.35 9.48* -
Lehman Brothers BAA
Corporate Index 6.96 7.34 9.25
Lipper Corporate Debt BBB
Rated Fund Average 6.25 7.00 9.19
* Period from December 9, 1994, date Class B shares first offered
to the public, through December 31, 1998.
The year to date return as of December 31, 1998 for Class A shares is 7.14% and
for Class B shares is 6.35%.
Fund Operating Expenses
Class A Class B
Management Fees*....................... 0.48% 0.48%
12b-1 Fees............................. 0.23% 0.89%
Other Expenses......................... 0.33% 0.44%
Total Fund Operating Expenses 1.04% 1.81%
* The Manager voluntarily waived certain fees and expenses during the fiscal
year ended October 31, 1998. After waiver, the Class A share management fee
paid was 0.39% (total expenses 0.95%). After waiver, the Class B share
management fee paid was 0.34% (total expenses 1.67%).
Examples**
1 Year 3 Years 5 Years 10 Years
Class A $576 $790 $1,022 $1,686
Class B 597 899 1,214 1,829
You would pay the following expenses if you did not redeem your
shares:
Class A 576 790 1,022 1,686
Class B 184 569 980 1,829
** The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since November 1996 Manager: Scott A. Bennett, CFA. Assistant
Director - Securities Investment of
Principal Capital Management since 1996.
INCOME-ORIENTED FUND
Principal Government Securities Income Fund, Inc.
The Government Securities Income Fund seeks a high level of current income,
liquidity and safety of principal by purchasing obligations issued or guaranteed
by the United States Government or its agencies, with emphasis on Government
National Mortgage Associations Certificates. The guarantees by the United States
Government extends only to principal and interest. There are certain risks
unique to GNMA Certificates.
Main Strategies
The Government Securities Income Fund invests in U.S. Government securities,
which include obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities. The Fund may invest in securities supported by:
o full faith and credit of the U.S. Government (e.g. GNMA certificates);
or
o credit of the instrumentality (e.g. bonds issued by the Federal Home
Loan Bank).
Although some of the securities the Fund purchases are backed by the U.S.
government and its agencies, shares of the Fund are not guaranteed. Generally,
when interest rates fall, the value of the Fund's shares rises, and when rates
rise, the value declines. Because of the fluctuation in values of the Fund's
shares, when sold, shares of the Fund may be worth more or less than the amount
paid for them.
U.S. Government securities do not involve the degree of credit risk associated
with investments in lower quality fixed-income securities. As a result, the
yields available from U.S. Government securities are generally lower than the
yields available from many other fixed-income securities. Like other
fixed-income securities, the values of U.S. Government securities change as
interest rates fluctuate. Fluctuations in the value of the Fund's securities do
not effect interest income on securities already held by the Fund, but are
reflected in the Fund's price per share. Since the magnitude of these
fluctuation generally are greater at times when the Fund's average maturity is
longer, under certain market conditions the Fund may invest in short-term
investments yielding lower current income rather than investing in higher
yielding longer term securities.
GNMA Certificates are mortgage-backed securities representing an interest in a
pool of mortgage loans. Various lenders make the loans which are then insured
(by the Federal Housing Administration) or loans which are guaranteed (by
Veterans Administration or Farmers Home Administration). The lender or other
security issuer creates a pool of mortgages which it submits to GNMA for
approval.
The Fund invests in modified pass-through GNMA Certificates. Owners of
Certificates receive all interest and principal payments owed on the mortgages
in the pool, regardless of whether or not the mortgagor has made the payment.
Timely payment of interest and principal is guaranteed by the full faith and
credit of the U.S. Government.
Main Risks
Mortgage-backed securities are subject to prepayment risk. Prepayments,
unscheduled principal payments, may result from voluntary prepayment,
refinancing or foreclosure of the underlying mortgage. When interest rates
decline, significant unscheduled prepayments may result. These prepayments must
then be reinvested at lower rates. Prepayments may also shorten the effective
maturities of these securities, especially during periods of declining interest
rates. On the other hand, during period of rising interest rates, a reduction in
prepayments may increase the effective maturities of these securities,
subjecting them to the risk of decline in market value in response to rising
interest and potentially increasing the volatility of the fund.
In addition, prepayments may cause losses on securities purchased at a premium
(dollar amount by which the price of the bond exceeds its face value). At times,
mortgage-backed securities may have higher than market interest rates and are
purchased at a premium. Unscheduled prepayments are made at par and cause the
Fund to experience a loss of some or all of the premium.
The Government Securities Income Fund is generally a suitable investment for
investors who want monthly dividends to provide income or to be reinvested in
additional Fund shares to produce growth. Such investors prefer to have the
repayment of principal and interest on most of the securities in which the Fund
invests to be back by the U.S. Government or its agencies.
Annual Total Returns
"1989" 15.04
"1990" 9.52
"1991" 16.83
"1992" 6.13
"1993" 9.16
"1994" -4.89
"1995" 19.19
"1996" 3.85
"1997" 9.69
"1998" 7.19
Calendar Years Ended December 31
Highest & lowest
quarterly total returns
for the last 10 years
Quarter Ended Quarterly Return
6/30/89 8.75%
3/31/94 (4.38%)
Average annua1 total returns
for the period ending December 31, 1998
Past One Past FivePast Ten
Year Years Years
Class A 7.19% 6.72% 8.97%
Class B 6.44 9.13* -
Lehman Brothers GNMA
Index 6.93 7.34 9.25
Lipper GNMA Fund Average 6.47 6.52 8.31
* Period from December 9, 1994, date Class B shares first offered
to the public, through December 31, 1998.
The year to date return as of December 31, 1998 for Class A shares is 7.19%
and for Class B shares is 6.44%.
Fund Operating Expenses
Class A Class B
Management Fees........................ 0.45% 0.45%
12b-1 Fees............................. 0.20% 0.81%
Other Expenses......................... 0.21% 0.31%
Total Fund Operating Expenses 0.86% 1.57%
Examples*
1 Year 3 Years 5 Years 10 Years
Class A $559 $736 $929 $1,485
Class B 573 828 1,092 1,587
You would pay the following expenses if you did not redeem your
shares:
Class A 559 736 929 1,485
Class B 160 496 855 1,587
* The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund Management:
Since May 1985 Manager: Martin J. Schafer, CFA.
Portfolio Manager of Invista since 1992.
INCOME-ORIENTED FUND
Principal High Yield Fund, Inc.
The High Yield Fund 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.
Main Strategies
The High Yield Fund invests in high yield, lower or unrated fixed income
securities commonly known as "junk bonds" (see Risks of High Yield Securities).
The Fund invests its assets in securities rated Ba1 or lower by Moody's or BB+
or lower by S&P. The Fund may also invest in unrated securities which the
Manager believes to be of comparable quality. These securities are considered to
be speculative with respect to the issuer's ability to pay interest and repay
principal. The Fund does not invest in securities rated below Caa (Moody's) or
below CCC (S&P) at the time of purchase. The SAI contains descriptions of the
securities rating categories.
During the fiscal year ended October 31, 1998, based on the dollar-weighted
average ratings of the Fund's portfolio at the end of each month in the fiscal
year, net assets of the Fund were invested in securities rated as follows (all
ratings are by Moody's):
0.17% in securities rated Baa
34.62% in securities rated Ba
62.28% in securities rated B
2.93% in securities rated C
Main Risks
Investors assume special risks when investing in the Fund. Compared to higher
rated securities, lower rated securities may:
o have a more volatile market value, generally reflecting specific events
affecting the issuer;
o be subject to greater risk of loss of income and principal (issuers are
generally not as financially secure);
o have a lower volume of trading, making it more difficult to value or
sell the security; and
o be more susceptible to a change in value or liquidity based on adverse
publicity and investor perception, whether or not based on factual
analysis.
The market for higher-yielding, lower-rated securities has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
these securities. This could cause financial stress to the issuer negatively
affecting the issuer's ability to pay principal and interest. This may also
negatively affect the value of the Fund's securities. In addition, if an issuer
defaults the Fund may have additional expenses if it tries to recover the
amounts due it.
Some securities the Fund buys have call provisions. A call provision allows the
issuer of the security to redeem it before its maturity date. If a bond is
called in a declining interest rate market, the Fund would have to replace it
with a lower yielding security. This results in a decreased return for
investors. In addition, in a rising interest rate market, a higher yielding
security's value decreases. This is reflected in a lower share price for the
Fund.
The Fund tries to minimize the risks of investing in lower rated securities by
diversification, investment analysis and attention to current developments in
interest rates and economics conditions. Although the Fund's Manager considers
securities ratings when making investment decisions, it performs its own
investment analysis. This analysis includes traditional security analysis
considerations such as:
o experience and managerial strength
o changing financial condition
o borrowing requirements or debt maturity schedules
o responsiveness to changes in business conditions
o relative value based on anticipated cash flow
o earnings prospects
The Manager continuously monitors the issuers of the Fund's securities to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments. It also monitors each security to
assure the security's liquidity so the Fund can meet requests for sales of Fund
shares.
For defensive purposes, the Fund may invest in other securities. During periods
of adverse market conditions, the Fund may invest in all types of money market
instruments, higher rated fixed income securities or any other fixed income
securities consistent with the temporary defensive strategy. The yield to
maturity on these securities is generally lower than the yield to maturity on
lower rated fixed income securities.
The High Yield Fund is generally a suitable investment for investors seeking
monthly dividends to provide income or to be reinvested in Fund shares for
growth. However, it is suitable only for that portion of the investor's
investments for which the investor is willing to accept potentially greater
risk. Investors should carefully consider their ability to assume the risks of
this Fund before making an investment. Investors should be prepared to maintain
their investment in the Fund during periods of adverse market conditions. This
Fund should not be relied on to meet short-term financial needs. When shares of
the Fund are sold, they may be worth more or less than the amount paid for them.
Annaul Total Returns
"1989" -1.51
"1990" -11.66
"1991" 28.74
"1992" 13.09
"1993" 12.1
"1994" -0.65
"1995" 15.61
"1996" 12.54
"1997" 9.68
"1998" -1.28
Calendar Years Ended December 31
Highest & lowest
quarterly total returns
for the last 10 years
Quarter Ended Quarterly Return
3/31/91 9.75%
9/30/98 (6.52%)
Average annua1 total returns
for the period ending December 31, 1998
Past One Past FivePast Ten
Year Years Years
Class A (1.28)% 6.95% 7.11%
Class B (2.14) 7.98* -
Lehman Brothers High Yield
Composite Bond Index 1.87 8.57 10.55
Lipper High Current Yield
Fund Average (0.44) 7.42 9.40
* Period from December 9, 1994, date Class B shares first offered
to the public, through December 31, 1998.
The year to date return as of December 31, 1998 for Class A shares is (1.28)%
and for Class B shares is (2.14)%.
Fund Operating Expenses
Class A Class B
Management Fees........................ 0.60% 0.60%
12b-1 Fees............................. 0.25% 1.03%
Other Expenses......................... 0.55% 0.71%
Total Fund Operating Expenses 1.40%
Examples*
1 Year 3 Years 5 Years 10 Years
Class A $611 $897 $1,204 $2,075
Class B 648 1,055 1,478 2,331
You would pay the following expenses if you did not redeem your
shares:
Class A 611 897 1,204 2,075
2.34% Class B 237 730 1,250 2,331
* The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since April 1998 Manager: Mark P. Denkinger, CFA.
Assistant Director - Securities Investment of
Principal Capital Management since 1998.
INCOME-ORIENTED FUND
Principal Limited Term Bond Fund, Inc.
The Limited Term Bond Fund seeks a high level of current income consistent with
a relatively high level of principal stability by investing in a portfolio of
securities with a dollar weighted average maturity of five years or less.
Main Strategies and Risks
The Limited Term Bond Fund invests in high grade, short-term debt securities.
Under normal circumstances, it invests at least 80% of its assets in:
o securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities;
o debt securities of U.S. issuers rated in the three highest grades by
S&P or Moody's; or
o if unrated, are of comparable quality in the opinion of the
Sub-Advisor, Invista.
The rest of the Fund's assets are invested in securities in the fourth highest
rating category or their equivalent. Securities in the fourth highest category
are "investment grade." While they are considered to have adequate capacity to
pay interest and repay principal, they do have speculative characteristics.
Changes in economic and other conditions are more likely to impact the ability
of the issuer to make principal and interest payments than is the case with
higher rated securities.
During the fiscal year ended October 31, 1998, based on the dollar-weighted
average ratings of the Fund's portfolio at the end of each month in the fiscal
year, net assets of the Fund were invested in securities rated as follows (all
ratings are by Moody's):
7.01% in securities rated Aa
6.60% in securities rated A
73.44% in securities rated Baa
12.95% in securities rated Ba
The Fund may invest in corporate debt securities and mortgage-backed securities.
For a discussion of mortgage-backed securities, see the discussion of the U.S.
Government Securities Income Fund.
Under normal circumstances, the Fund maintains a dollar-weighted average
maturity of not more than five years. In determining the average maturity of the
Fund's assets, the maturity date of callable or prepayable securities may be
adjusted to reflect Invista's judgment regarding the likelihood of the security
being called or prepaid.
Under unusual market or economic conditions, for temporary defensive purposes
the Fund may invest up to 100% of its assets in the cash or cash equivalents.
The Limited Term Bond Fund is generally a suitable investment for investors who
want monthly dividends for income or to reinvest for modest growth. Suitable
investors are willing to accept some volatility in the value of their investment
but do not want dramatic volatility.
Annual Total Returns
"1997" 6.63
"1998" 6.7
Calendar Years Ended December
Highest & lowest
quarterly total returns
for the last 2 years
Quarter Ended Quarterly Return
9/30/98 2.99%
3/31/96 (0.25%)
Average annua1 total returns
for the period ending December 31, 1998
Past One Past Five
Year Years
Class A 6.70% 6.32%*
Class B 6.26 5.90*
Lehman Brothers Intermediate
Government/Corporate Index 8.42 6.60
Lipper Short-Intermediate
Investment Grade Debt
Fund Average 6.60 5.58
* Period from February 29, 1996, date shares first offered to
the public, through December 31, 1998.
The year to date return as of December 31, 1998 for Class A shares is 6.70%
and for Class B shares is 6.26%.
Fund Operating Expenses
Class A Class B
Management Fees*....................... 0.50% 0.50%
12b-1 Fees............................. 0.15% 0.50%
Other Expenses......................... 0.48% 1.36%
Total Fund Operating Expenses 1.13% 2.36%
* The Manager voluntarily waived certain fees and expenses during the fiscal
year ended October 31, 1998. After waiver, the Class A share management fee
paid was 0.19% (total expenses 0.82%). After waiver, the Class B share
management fee paid was 0% and other expenses were 0.72% (total expenses
1.22%).
Examples**
1 Year 3 Years 5 Years 10 Years
Class A $263 $ 504 $ 763 $1,504
Class B 367 818 1,317 2,243
You would pay the following expenses if you did not redeem your
shares:
Class A 263 504 763 1,504
Class B 239 736 1,260 2,243
** The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since February 1996 Manager: Martin J. Schafer, CFA.
Portfolio Manager of Invista since 1992.
INCOME-ORIENTED FUND
Principal Tax-Exempt Bond Fund, Inc.
The Tax-Exempt Bond Fund seeks as high a level of current income exempt from
federal income tax as is consistent with preservation of capital. The Fund seeks
to achieve its objective primarily through the purchase of investment grade
quality, tax-exempt fixed income obligations.
Main Strategies and Risks
The Tax-Exempt Bond Fund invests in a diversified portfolio of securities issued
by or on behalf of state or local governments and other public authorities. In
the opinion of the issuer's bond counsel, interest on these obligations is
exempt from federal income tax. Investment in the Fund is not appropriate for
IRA or other tax-advantaged accounts.
Under normal market conditions, the Fund invests at least 80% of its assets in
municipal obligations. At the time these securities are purchased, they are:
o municipal bonds which are rated in the four highest grades by Moody's;
o municipal notes rated in the highest grade by Moody's;
o municipal commercial paper rated in the highest grade by Moody's or
S&P; or
o if unrated, are of comparable quality in the opinion of the Manager.
During normal market conditions, the Fund will not invest more than 20% of its
assets in:
o securities that do not meet the criteria stated above;
o taxable securities; or
o municipal obligations the interest on which is treated as a tax
preference item for purposes of the federal alternative minimum tax.
Up to 20% of Fund assets may be invested in debt securities rated lower than BBB
by S&P or Baa by Moody's. These are sometimes referred to as "junk bonds" and
are considered speculative (see Risks of High Yield Securities). The Fund will
not purchase municipal bonds rated lower than B by Moody's or S&P. It also will
not buy municipal notes or commercial paper which are unrated or are not
comparable in quality to rated securities.
During the fiscal year ended October 31, 1998, based on the dollar-weighted
average ratings of the Fund's portfolio at the end of each month in the fiscal
year, net assets of the Fund were invested in securities rated as follows (all
ratings are by Moody's):
18.35% in securities rated Aa
46.96% in securities rated A
33.27% in securities rated Bbb
The Fund may not invest more than 5% of its assets in the securities of any one
issuer (except U.S. Government securities). It may invest without limit in
obligations of issuers located in the same state. It may also invest in debt
obligations which are repayable out of revenue from economically related
projects or facilities. This represents a risk to the Fund since an economic,
business or political development or change affecting one security could also
affect others.
The Fund may purchase industrial development bonds. These securities are issued
by industrial development authorities. They may only be backed by the assets and
revenues of the industrial corporation which uses the facility financed by the
bond.
The Fund may also invest in taxable securities which mature one year or less
from the time of purchase. These taxable investments are generally made for
liquidity purposes or as a temporary investment of cash pending investment in
municipal obligations.
Under unusual market or economic conditions, for temporary defensive purposes
the Fund may invest more than 20% of its assets in taxable securities.
The Tax-Exempt Bond Fund is generally a suitable investment for
investors seeking monthly, federally tax-exempt dividends for income or to be
reinvested for modest growth and who are willing to accept fluctuations in the
value of their investment.
Annual Total Returns
"1989" 11.24
"1990" 5.08
"1991" 12.07
"1992" 9.62
"1993" 12.44
"1994" -9.44
"1995" 20.72
"1996" 4.6
"1997" 9.19
"1998" 5.08
Calendar Years Ended December 31
Highest & lowest
quarterly total returns
for the last 10 years
Quarter Ended Quarterly Return
3/31/95 9.13%
3/31/94 (7.08%)
Average annua1 total returns
for the period ending December 31, 1998
Past One Past FivePast Ten
Year Years Years
Class A 5.08% 5.58% 7.80%
Class B 4.34 9.15* -
Lehman Brothers Municipal
Bond Index 6.48 6.23 8.22
Lipper General Municipal Debt
Fund Average 5.32 5.44 7.70
* Period from December 9, 1994, date Class B shares first offered
to the public, through December 31, 1998.
The year to date return as of December 31, 1998 for Class A shares is 5.08% and
for Class B shares is 4.34%.
Fund Operating Expenses
Class A Class B
Management Fees........................ 0.47% 0.47%
12b-1 Fees............................. 0.23% 0.69%
Other Expenses......................... 0.13% 0.27%
Total Fund Operating Expenses 0.83% 1.43%
Examples*
1 Year 3 Years 5 Years 10 Years
Class A $556 $727 $ 914 $1,452
Class B 560 786 1,020 1,473
You would pay the following expenses if you did not redeem your
shares:
Class A 556 727 914 1,452
Class B 146 452 782 1,473
* The Examples assume 1) an investment of $10,000, 2) a 5% annual
return and 3) expenses are the same as the most recent fiscal
year expenses.
Day-to-day Fund management:
Since July 1991 Manager: Daniel J. Garrett, CFA.
Assistant Director - Securities Investment of
Principal Life Insurance Company since 1994.
MONEY MARKET FUNDS
Principal Cash Management Fund, Inc.
Principal Cash Management Fund seeks as high a level of income available from
short-term securities as is considered consistent with preservation of principal
and maintenance of liquidity by investing in a portfolio of money market
instruments.
Main Strategies
The Cash Management Fund seeks as high a level of income available from
short-term securities as is considered consistent with preservation of principal
and maintenance of liquidity by investing in a portfolio of money market
instruments.
The Fund invests its assets in a portfolio of money market instruments. The
investments are U.S. dollar denominated securities which the Manager believes
present minimal credit risks. At the time the Fund purchases each security, it
is an "eligible security" as defined in the regulations issued under the
Investment Company Act of 1940.
The Fund maintains a dollar weighted average portfolio maturity of 90 days or
less. It intends to hold its investments until maturity. However, the Fund may
sell a security before it matures:
o to take advantage of market variations;
o to generate cash to cover sales of Fund shares by its shareholders; or
o upon revised credit opinions of the security's issuer.
The sale of a security by the Fund before maturity may not be in the best
interest of the Fund. The Fund does have an ability to borrow money to cover the
sale of Fund shares. The sale of portfolio securities is usually a taxable
event.
It is the policy of the Fund to be as fully invested as possible to maximize
current income. Securities in which the Fund invests include:
o Government securities which are issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
o U.S. Government agency securities which are issued or guaranteed by
agencies or instrumentalities of the U.S. Government. These are backed
either by the full faith and credit of the U.S. Government or by the
credit of the particular agency or instrumentality.
o Bank obligations consisting of:
o certificates of deposit which generally are negotiable certificates
against funds deposited in a commercial bank or
o bankers acceptances which are time drafts drawn on a commercial
bank, usually in connection with international commercial
transactions.
o Commercial paper which is short-term promissory notes issued by U.S. or
foreign corporations primarily to finance short-term credit needs.
o Short-term corporate debt consisting of notes, bonds or debentures
which at the time of purchase by the Fund has 397 days or less
remaining to maturity.
o Repurchase agreements under which securities are purchased with an
agreement by the seller to repurchase the security at the same price
plus interest at a specified rate. Generally these have a short
duration (less than a week) but may also have a longer duration.
o Taxable municipal obligations which are short-term obligations issued
or guaranteed by state and municipal issuers which generate taxable
income.
Main Risks
An investment in the Fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the Fund seeks to
preserve the value of an investment at $1.00 per share, it is possible to lose
money by investing in the Fund.
The Cash Management Fund is generally a suitable investment for investors
seeking monthly dividends to produce income without incurring much principal
risk or for investor's short-term needs.
Annual Total Returns
"1989" 8.42
"1990" 7.63
"1991" 5.8
"1992" 3.38
"1993" 2.63
"1994" 3.77
"1995" 5.44
"1996" 4.96
"1997" 4.88
"1998" 5.15
Calendar Years Ended December 31
The 7-day yield ending on December 31, 1998 for Class A shares is 4.65% and for
Class B shares is 4.07%. To obtain the Fund's current yield information, please
call 1-800-247-4123.
Fund Operating Expenses
Class A Class B
Management Fees........................ 0.38% 0.42%
12b-1 Fees............................. None 0.32%
Other Expenses......................... 0.18% 0.75%
Total Fund Operating Expenses 0.56% 1.49%
Examples
1 Year 3 Years 5 Years 10 Years
Class A $ 57 $179 $ 313 $ 701
Class B 566 804 1,051 1,408
You would pay the following expenses if you did not redeem your
shares:
Class A 57 179 313 701
Class B 152 471 813 1,408
Day-to-day Fund management:
Since March 1983 Manager: Michael R. Johnson. Assistant Director -
Securities Trading of Principal Capital Management
since 1994.
THE COSTS OF INVESTING
Fees and Expenses of the Funds
This table describes the fees and expenses that you may pay if you buy and hold
shares of a Fund.
<TABLE>
<CAPTION>
<S> <C> <C>
Shareholder Fees
(fees paid directly from your investment)
Class A Shares Class B Shares
Maximum Sales Charge Maximum Deferred Sales Charge
on Purchases (as a percentage of the lower of
(as a percentage of the original purchase price
offering price) or current market value)
Redemptions During Year
1 2 3 4 5 6 7
------------------------------------------
All Funds except Limited Term Bond Fund
and Money Market Funds 4.75% 4% 4% 3% 3% 2% 1% 0%
Limited Term Bond Fund 1.50% 1.25% 1.25% .75% .75% .50% .25% 0%
Money Market Funds None 4% 4% 3% 3% 2% 1% 0%
</TABLE>
Notes:
o Class A and Class B shares do not have an exchange or redemption fee.
o A wire charge of $6.00 will be deducted for all wire transfers.
o Class A shares have no deferred sales charge on sales of less than $1
million.
o Class B shares have no frontend sales charge.
Fees and expenses are important because they lower your earnings. However, low
costs do not guarantee higher earnings. For example, a fund with no front-end
sales charge may have higher ongoing expenses than a fund with such a sales
charge. Before investing, you should be sure you understand the nature of
different costs. Your Registered Representative can help you with this process.
One-time fees. You may pay a one-time sales charge for each purchase (Class A
shares) or sale (Class B shares).
o Class A shares may be purchased at a price equal to the share price plus
an initial sales charge.
o Purchases of $1 million or more of Class A shares are sold without an
initial sales charge but may be subject to a contingent deferred sales
charge (CDSC) at the time of redemption.
o Class B shares have no initial sales charge but may be subject to a
contingent deferred sales charge (CDSC). If you sell (redeem) shares and
the CDSC is imposed, it will reduce the amount of sales proceeds. (see
Contingent deferred sales charge: Class B shares)
Front-end sales charge: Class A shares
There is no sales charge on purchases of Class A shares of the Cash Management
Fund or on shares of any of the funds purchased with reinvested dividends or
other distributions. Class A shares of the other Funds are sold with a sales
charge that is a variable percentage based on the amount of the purchase. This
table shows the sales charge for those funds which is based on the amount of
your purchase.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
Amount invested Price Invested Price Invested Limited Term Bond Bond
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 $500,00 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>
The front-end sales charge is waived on an investment of $1 million or more in
Class A shares. There may be a CDSC on shares sold within 18 months of the
purchase date. The CDSC does not apply to shares purchased with reinvested
dividends or other distributions. The CDSC is calculated as 0.75% (0.25% for the
Limited Term Bond Fund) of the lesser of the current market value or the initial
purchase price of the shares sold. The CDSC is waived on shares sold to fund a
Principal Mutual Fund 401(a) or Principal Mutual Fund 401(k) retirement plan,
except redemptions which are the result of termination of the plan or transfer
of all plan assets. The CDSC is also waived:
o on shares sold to satisfy IRS minimum distribution rules
o using a periodic withdrawal plan. (You may sell up to 10% of the value
of the shares subject to a CDSC without paying the CDSC.)
In the case of selling some but not all of the shares in an account, the shares
not subject to a sales charge are redeemed first. Other shares are redeemed in
the order purchased (first in, first out). Shares subject to the CDSC which are
exchanged into another Principal Mutual Fund continue to be subject to the CDSC
until the CDSC expires.
Broker-dealers that sell Principal Mutual Funds are paid a certain percentage of
the sales charge in exchange for their services. At the option of Princor
Financial Services Corporation, the amount paid to a dealer may be more or less
than that shown in the chart above. The amount paid depends on the services
provided. Amounts paid to dealers on purchases without an front-end sales charge
are determined by and paid for by Princor.
SALES CHARGE WAIVER OR REDUCTION
Class A shares of the Funds may be purchased without a sales charge or at a
reduced sales charge. The Funds reserve the right to change or stop offering
shares in this manner at any time for new accounts and with 60 days notice to
shareholders of existing accounts.
Waiver of sales charge
A Fund's Class A shares may be purchased without a sales charge:
o by its Directors, Principal Life and its subsidiaries and their
employees, officers, directors (active or retired), brokers or agents.
This also includes their immediate family members and trusts for the
benefit of these individuals;
o by the Principal Employees' Credit Union;
o by non-ERISA clients of Invista;
o by any employee or Registered Representative (and their employees)
of an authorized broker-dealer;
o through broker-dealers, investment advisors and other financial
institutions that have entered into an agreement with Princor
which includes a requirement that such shares be sold for the benefit
of clients participating in a "wrap account" or similar program under
which clients pay a fee to the broker-dealer, investment advisor or
financial institution;
o by unit investment trusts sponsored by Principal Life and/or
its subsidiaries or affiliates; o by certain employee welfare
benefit plan customers of Principal Life with Plan Deposit Accounts;
o by participants who receive distributions from certain annuity
contracts offered by Principal Life (except for shares of Tax-Exempt
Bond Fund);
o to the extent the investment represents the proceeds of a total
surrender of certain Principal Life issued unregistered group annuity
contracts if Principal Life waives any applicable CDSC or other
contract surrender charge; and
o to the extent the purchase proceeds represent a distribution from a
terminating 401(a) plan if the employer or plan trustee has entered
into a written agreement with Princor permitting the group solicitation
of employees/participants. Such purchases are subject to the CDSC which
applies to purchases of $1 million or more as described above.
Class A shares may also be purchased without a sales charge if your Registered
Representative has recently become affiliated with a broker-dealer authorized to
sell shares of the Principal Mutual Funds. The following conditions must be met;
o your purchase of Class A shares must take place within the first 180
days of your Registered Representative's affiliation with the
authorized broker-dealer;
o your investment must represent the sales proceeds from other mutual
fund shares (you must have paid a front-end sales charge or a CDSC) and
the sale must occur within the 180 day period; and
o you must indicate on your Principal Mutual Fund application that you
are eligible for waiver of the front-end sales charge.
o you must send us either:
o the check for the sales proceeds (endorsed to Principal Mutual
Funds) or
o a copy of the confirmation statement from the other mutual fund
showing the sale transaction. If you place your order to buy
Principal Mutual Fund shares on the telephone, you must send us a
copy of the confirmation within 21 days of placing the order. If
we do not receive the confirmation within 21 days, we will sell
enough of your Class A shares to pay the sales charge that
otherwise would have been charged.
NOTE: Please be aware that the sale of your other mutual funds shares may be
subject to federal (and state) income taxes. In addition, you may pay a
surrender charge to the other mutual fund.
Reduction of sales charge
1) Dollar amount of purchase. The sales charge varies with the size of your
purchase. Reduced charges apply to the total of Principal Mutual Funds'
(excluding the Cash Management Fund) shares purchased at one time by any
"Qualified Purchaser." A Qualified Purchaser includes an individual and his/her
spouse and their children under the age of 25, a trust primarily for such
persons, and a trustee or other fiduciary purchasing for a single trust estate
or single fiduciary account. If the total amount being invested in the Principal
Funds is near a sales charge breakpoint, you should consider increasing amount
invested to take advantage of a lower sales charge. A purchase made by or
through an employer on behalf of an employee or employees (including independent
contractors) is also considered a purchase by a Qualified Purchaser.
2) Statement of intention (SOI). Qualified Purchasers may obtain reduced sales
charges by signing an SOI. The SOI is a nonbinding obligation on the Qualified
Purchaser to purchase the full amount indicated in the SOI. The sales charge is
based on the total amount to be invested in a 13 month period (24 months if the
intended investment is $1 million or more). Upon your request, we will set up a
90 day lookback period to include earlier purchases - the 13 (24) month period
then begins on the date of your first purchase during the 90-day period. If the
intended investment is not made, sufficient shares will be sold to pay the
additional sales charge due. A 401(a) plan trustee must submit the SOI at the
time of the first plan purchase. The 90-day lookback period is not available to
a 401(a) plan trustee.
3) Rights of accumulation. The Class A and Class B shares already owned by a
Qualified Purchaser are added to the amount of the new purchase to determine the
applicable sales charge percentage. Class A shares of the Cash Management Fund
are not included in the calculation unless they were acquired in exchange for
other Principal Mutual Fund shares.
4) Death Benefit proceeds. Death benefit proceeds from a life insurance policy
or certain annuity contracts issued by Principal Life (or its subsidiaries or
affiliates) may be invested in Class A shares at a reduced sales charge. To
qualify for the reduced sales charge, the proceeds must be applied to the
purchase of shares of a Principal Mutual Fund within one year of the insured's
death. The applicable sales charge is determined by the table below.
<TABLE>
<CAPTION>
Sales Charge as a % of:
<S> <C> <C> <C>
Net Dealer Allowance
Offering Amount as % of
Amount of Purchase Price Invested Offering Price
Less than $500,000 2.50% 2.56% 2.10%
$500,000 but less than 1.50% 1.52% 1.25%
$1,000,000 No Sales Charge
$1,000,000 or more
</TABLE>
5) Employer sponsored plans. Retirement plans meeting the requirements of
Section 401 of the Code (401(k), Profit Sharing and Money Purchase Pension
Plans) and other employer sponsored retirement plans (SIMPLE IRAs, SEPs,
SAR-SEPs, non-qualified deferred compensation plans, and Payroll Deduction
Plans). The employer chooses to fund the Plan with either Class A or Class B
shares when the plan is established.
a) Principal Mutual Fund 401 Plans.
o If Class A shares are used:
o all plan investments are treated as made by a single investor to
determine the applicable sales charge,
o the sales charge for investments of less than $250,000 is 3.75%
as a percentage of offering price (3.90% of net amount
invested), and
o if the investment is $250,000 or more, the regular sales charge
table is used (see Front-end sales charge: Class A shares).
o If Class B shares are used:
o contributions into the plan after the plan assets are $250,000
or more are used to buy Class A shares.
o Plan assets are not combined with investments made outside of the
plan to determine the applicable sales charge.
o Investments by plan participants outside the plan are not included
with plan assets to determine the applicable sales charge.
b) Other employer sponsored retirement plans.
o If Class A shares are used:
o all plan investments are treated as made by a single investor to
determine the applicable sales charge,
o the sales charge for investments of less than $250,000 is 3.75%
as a percentage of offering price (3.90% of net amount
invested), and
o if the investment is $250,000 or more, the regular sales charge
table is used (see Front-end sales charge: Class A shares).
o If Class B shares are used:
o contributions into the plan for a plan participant, after the
plan assets of that plan participant are $250,000 or more, are
used to buy Class A shares (unless the plan participant elects
otherwise).
o Plan assets are not combined with investments made outside of the
plan to determine the applicable sales charge.
o Investments by plan participants outside the plan are not included
with plan assets to determine the applicable sales charge.
c) Participants of Principal Mutual Fund 403(b) plans may buy Fund
shares at the same sales charge levels available to other employer
sponsored plans described above. Contributions by plan participants
are not combined to determine the applicable sales charge.
Contingent deferred sales charge: Class B shares
A CDSC is imposed on sales of Class B shares within six years of purchase (five
years for certain sponsored plans). Princor receives the proceeds of any CDSC.
The CDSC does not apply to shares purchased with reinvested dividends or other
distributions. The amount of the CDSC is a percentage based on the number of
years you own the shares multiplied by the lesser of the current market value or
the initial purchase price of the shares sold.
o In the case of selling some but not all of the shares in an account,
the shares not subject to a sales charge are redeemed first. Other
shares are redeemed in the order purchased (first in, first out).
o Using a periodic withdrawal plan, you may sell up to 10% of the value
of the shares subject to a CDSC without paying the CDSC.
o Shares subject to the CDSC which are exchanged into another Principal
Mutual Fund continue to be subject to the CDSC until the CDSC expires.
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge
as a Percentage of
Dollar Amount Subject to Charge
<S> <C> <C> <C> <C> <C>
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
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>
Class B shares of the Cash Management Fund may be purchased only by exchange
from other Class B share accounts. Class B shares automatically convert into
Class A shares (based on share prices, not numbers of shares) 7 years after
purchase. Class B shares provide you the benefit of putting all your dollars to
work from the time of investment, but (until conversion) have higher ongoing
fees and lower dividends than Class A shares.
WAIVER OF THE SALES CHARGE
The CDSC will be waived on sales of Class B shares which are sold o due to a
shareholder's death;
o due to the shareholder's disability, as defined in the Internal Revenue
Code;
o from retirement plans to satisfy minimum distribution rules under the
Code;
o to pay surrender charges;
o to pay retirement plan fees;
o involuntarily from small balance accounts;
o through a systematic withdrawal plan;
o from a retirement plan to assure the plan complies with Sections
401(k), 401(m) 408(k) and 415 of the
Code; or
o from retirement plans qualified under Section 401(a) of the Code due to
the plan participant's death, disability, retirement or separation from
service after attaining age 55.
Ongoing fees. Each Fund pays ongoing operating fees to its Manager, Underwriter
and others who provide services to the Fund. They reduce the value of each share
you own (see MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE and Distribution
(12b-1) Fees).
Distribution (12b-1) Fees
Each of the Funds (except the Cash Management Fund for Class A shares) has
adopted a Distribution Plan under Rule 12b-1 of the Investment Company Act of
1940. Under the Plan, the Fund pays a fee to Princor based on the average daily
net asset value of the Fund. These ongoing fees pay expenses relating to
distribution fees for the sale of Fund shares and for services provided by
Princor and other selling dealers to shareholders. Because they are ongoing
fees, over time they may exceed other types of sales charges.
The maximum 12b-1 fees that may be paid by the Funds on an annual basis are:
o Class A shares (except Cash Management and Limited Term Bond Funds) 0.25%
o Class A shares of the Limited Term Bond Fund 0.15%
o Class B shares (except the Limited Term Bond Fund) 1.00%
o Class B shares of the Limited Term Bond Fund 0.50%
CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS
The Statement of Additional Information (SAI) contains additional information
about investment strategies and their related risks.
Securities and Investment Practices
Equity Securities include common stocks, preferred stocks, convertible
securities and warrants. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. Although equity securities have a
history of long-term growth in value, their prices fluctuate based on changes in
a company's financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.
Debt securities include bonds and other debt instruments that are used by
issuers to borrow money from investors. The issuer generally pays the investor a
fixed, variable or floating rate of interest. The amount borrowed must be repaid
at maturity. Some debt securities, such as zero coupon bonds, do not pay current
interest, but are sold at a discount from their face values.
Debt securities are sensitive to changes in interest rates. In general, bond
prices rise when interest rates fall and fall when interest rates rise. Longer
term bonds and zero coupon bonds are generally more sensitive to interest rate
changes.
Bond prices are also affected by the credit quality of the issuer. Investment
grade debt securities are medium and high quality securities. Some bonds may
have speculative characteristics and be particularly sensitive to economic
conditions and the financial condition of the issuers.
Repurchase Agreements and Loaned Securities
Each of the Principal Mutual Funds may invest a portion of its assets in
repurchase agreements. Repurchase agreements typically involve the purchase of
debt securities from a financial institution such as a bank, savings and loan
association or broker-dealer. A repurchase agreement provides that the Fund
sells back to the seller and that the seller repurchases the underlying
securities at a specified price on a specific date. Repurchase agreements may be
viewed as loans by a Fund collateralized by the underlying securities. This
arrangement results in a fixed rate of return that is not subject to market
fluctuation while the Fund holds the security. In the event of a default or
bankruptcy by a selling financial institution, the affected Fund bears a risk of
loss. To minimize such risks, the Fund enters into repurchase agreements only
with large, well-capitalized and well-established financial institutions. In
addition, the value of the collateral underlying the repurchase agreement is
always at least equal to the repurchase price, including accrued interest.
Each of the Principal Mutual Funds, except the Capital Value, Growth and Cash
Management Funds, may lend its portfolio securities to unaffiliated
broker-dealers and other unaffiliated qualified financial institutions.
Currency Contracts
The International, International Emerging Markets and International SmallCap
Funds may each enter into forward currency contracts, currency futures contracts
and options, and options on currencies for hedging and other non-speculative
purposes. A forward currency contract involves a privately negotiated obligation
to purchase or sell a specific currency at a future date at a price set in the
contract. A Fund will not hedge currency exposure to an extent greater than the
aggregate market value of the securities held or to be purchased by the Fund
(denominated or generally quoted or currently convertible into the currency).
Hedging is a technique used in an attempt to reduce risk. If a Fund's Manager or
Sub-Advisor hedges market conditions incorrectly or employs a strategy that does
not correlate well with the Fund's investment, these techniques could result in
a loss, regardless of whether the intent was to reduce risk or to increase
return. These techniques may increase the volatility of a Fund and may involve a
small investment of cash relative to the magnitude of the risk assumed. In
addition, these techniques could result in a loss if the other party to the
transaction does not perform as promised. Additionally, there is the risk of
government action through exchange controls that would restrict the ability of
the Fund to deliver or receive currency.
Forward Commitments
Each of the Income-Oriented Funds and the Balanced Fund may enter into forward
commitment agreements. These agreements call for the Fund to purchase or sell a
security on a future date at a fixed price. Each of these Funds may also enter
into contracts to sell its investments either on demand or at a specific
interval.
Warrants
Each of the Funds (except Cash Management, Government Securities Income and
Tax-Exempt Bond) may invest up to 5% of its assets in warrants. Up to 2% of a
Fund's assets may be invested in warrants which are not listed on either the New
York or American Stock Exchanges. For the International, International Emerging
Markets and International SmallCap Funds, the 2% limitation also applies to
warrants not listed on the Toronto Stock and Chicago Board Options Exchanges.
Risks of High Yield Securities
The Balanced, Bond, High Yield and Tax-Exempt Bond Funds may, to varying
degrees, invest in debt securities rated lower than BBB by S&P or Baa by Moody's
or, if not rated, determined to be of equivalent quality by the Manager. Such
securities are sometimes referred to as high yield or "junk bonds" and are
considered speculative.
Investment in high yield bonds involves special risks in addition to the risks
associated with investment in high rated debt securities. High yield bonds may
be regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Moreover, such securities may,
under certain circumstances, be less liquid than higher rated debt securities.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities. The ability of a
Fund to achieve its investment objective may, to the extent of its investment in
high yield bonds, be more dependent on such creditworthiness analysis than would
be the case if the Fund were investing in higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher grade bonds. The prices of high
yield bonds have been found to be less sensitive to interest rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. If the issuer of high yield bonds
defaults, a Fund may incur additional expenses to seek recovery.
The secondary market on which high yield bonds are traded may be less liquid
than the market for higher grade bonds. Less liquidity in the secondary trading
market could adversely affect the price at which a Fund could sell a high yield
bond and could adversely affect and cause large fluctuations in the daily price
of the Fund's shares. Adverse publicity and investor perceptions, whether or not
based on fundamental analysis, may decrease the value and liquidity of high
yield bonds, especially in a thinly traded market.
The use of credit ratings for evaluating high yield bonds also involves certain
risks. For example, credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield bonds. Also, credit rating
agencies may fail to change credit ratings in a timely manner to reflect
subsequent events. If a credit rating agency changes the rating of a portfolio
security held by a Fund, the Fund may retain the security if the Manager thinks
it is in the best interest of shareholders.
Options
Each of the Funds (except Capital Value, Cash Management, Growth, and Tax-Exempt
Bond) may buy and sell certain types of options. Each type is more fully
discussed in the SAI.
Foreign Securities
Each of the following Funds may invest in foreign securities (securities of
non-U.S. companies) to the indicated percentage of its assets: (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.)
o International, International Emerging Markets and International
SmallCap Funds - 100%;
Real Estate Fund - 25%;
o Balanced, Blue Chip, Bond, Capital Value, Growth, High Yield, Limited
Term Bond, MidCap, SmallCap and Utilities Funds - 20%.
o The Cash Management Fund does not invest in foreign securities other
than those that are United States dollar denominated. All principal and
interest payments for the security are payable in U.S. dollars. The
interest rate, the principal amount to be repaid and the timing of
payments related to the security 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.
Investment in foreign securities presents certain risks including: fluctuations
in currency exchange rates, revaluation of currencies, the imposition of foreign
taxes, future political and economic developments including war, expropriations,
nationalization, the possible imposition of currency exchange controls and other
foreign governmental laws or restrictions. In addition, there may be reduced
availability of public information concerning issuers compared to domestic
issuers. Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements that apply to domestic issuers. Transactions in foreign securities
may be subject to higher costs. Each Fund's investment in foreign securities may
also result in higher custodial costs and the costs associated with currency
conversions.
Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. Foreign securities markets,
particularly those in emerging market countries, are known to experience long
delays between the trade and settlement dates of securities purchased and sold.
Such delays may result in a lack of liquidity and greater volatility in the
price of securities on those markets. As a result of these factors, the Boards
of Directors of the Funds have adopted Daily Pricing and Valuation Procedures
for the Funds. These procedures outline the steps to be followed by the Manager
and Sub-Advisor to establish a reliable market or fair value if a reliable
market value is not available through normal market quotations. The Executive
Committee of the Boards of Directors oversees this process.
Euro Conversion. A new European currency was introduced on January 1, 1999. The
new currency is called the "euro." It is expected to be utilized by eleven
European countries. The eleven countries are members of the European Economic
Monetary Union (EMU). Because of the euro's introduction, European securities
will undergo a redenomination period which may result in otherwise unlikely
accounting differences and tax consequences. Further uncertainty exists because
not all EMU members, including the United Kingdom, will officially implement the
euro on January 1, 1999.
Securities of Smaller Companies
The International SmallCap, MidCap and SmallCap Funds invest in securities of
companies with small- or mid-sized market capitalizations. Market capitalization
is defined as total current market value of a company's outstanding common
stock. Investments in companies with smaller market capitalizations may involve
greater risks and price volatility (wide, rapid fluctuations) than investments
in larger, more mature companies. Smaller companies may be less mature than
larger companies. At this earlier stage of development, the companies may have
limited product lines, reduced market liquidity for their shares, limited
financial resources or less depth in management than larger or more established
companies. Small companies also may be less significant within their industries
and may be at a competitive disadvantage relative to their larger competitors.
While smaller companies may be subject to these additional risks, they may also
realize more substantial growth than larger or more established companies.
Unseasoned Issuers
The Funds may invest in the securities of unseasoned issuers. Unseasoned issuers
are companies with a record of less than three years continuous operation,
including the operation of predecessors and parents. Unseasoned issuers by their
nature have only a limited operating history which can be used for evaluating
the companies growth prospects. As a result, investment decisions for these
securities may place a greater emphasis on current or planned product lines and
the reputation and experience of the companies management and less emphasis on
fundamental valuation factors than would be the case for more mature growth
companies. In addition, many unseasoned issuers also may be small companies and
involve the risks and price volatility associated with smaller companies.
Temporary Defensive Measures
For temporary defensive purposes in times of unusual or adverse market
conditions, the Growth-Oriented Funds, the Bond and Limited Term Bond Funds, may
invest without limit in cash and cash equivalents. For this purpose, cash
equivalents include: bank certificates of deposit, bank acceptances, repurchase
agreements, commercial paper, and commercial paper master notes which are
floating rate debt instruments without a fixed maturity. In addition, a Fund may
purchase U.S. Government securities, preferred stocks and debt securities,
whether or not convertible into or carrying rights for common stock.
Portfolio Turnover
"Portfolio Turnover" is the term used in the industry for measuring the amount
of trading that occurs in a Fund's portfolio during the year. For example, a
100% turnover rate means that on average every security in the portfolio has
been replaced once during the year.
Funds with high turnover rates (more than 100%) often have higher transaction
costs (which are paid by the Fund) and may generate short-term capital gains (on
which you pay taxes even if you don't sell any of your shares during the year).
You can find the turnover rate for each Fund, except for the Cash Management
Fund, in the Fund's Financial Highlights table.
Please consider all the factors when you compare the turnover rates of different
funds. A fund with consistently higher total returns and higher turnover rates
than another fund may actually be achieving better performance precisely because
the managers are active traders. You should also be aware that the "total
return" line in the Financial Highlights already includes portfolio turnover
costs.
MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE
The Manager
Principal Management Corporation (the "Manager") serves as the manager for the
Principal Mutual Funds. In its handling of the business affairs of each Fund,
the Manager provides clerical, recordkeeping and bookkeeping services, and keeps
the financial and accounting records required for the Funds. The Manager has
signed sub-advisory agreements with Invista for portfolio management functions
for the Growth-Oriented Funds (except the Real Estate Fund), the Government
Securities Income Fund and the Limited Term Bond Fund. The Manager compensates
Invista for its subadvisory services as provided in the Subadvisory Agreement
between Invista and the Manager. The Manager may periodically reallocate
management fees between itself and Invista.
The Manager is a subsidiary of Principal Life Insurance Company. It has managed
mutual funds since 1969. As of December 31, 1998, the Funds it managed had
assets of approximately $5.9 billion. The Manager's address is Principal
Financial Group, Des Moines, Iowa 50392-0200.
Invista is also a subsidiary of Principal Life Insurance Company and is an
affiliate of the Manager. Invista has managed investments for institutional
investors, including Principal Life, since 1985. As of December 31, 1998, it
managed assets of approximately $31 billion. Invista's address is 1800 Hub
Tower, 699 Walnut, Des Moines, Iowa 50309.
The Manager or Invista provides the Board of Directors of each Fund a
recommended investment program. Each program must be consistent with the Fund's
investment objective and policies. Within the scope of the approved investment
program, the Manager or Invista advises each Fund on its investment policies and
determines which securities are bought and sold, and in what amounts.
The Manager is paid a fee by each Fund for its services, which includes any fee
paid to Invista. The fee paid by each Fund (as a percentage of the average daily
net assets) for the fiscal year ended October 31, 1998 was:
Balanced 0.59%
Blue Chip 0.48%
Bond 0.48%
Capital Value 0.38%
Cash Management 0.38%
Government Securities Income 0.46%
Growth 0.41%
High Yield 0.60%
International 0.68%
International Emerging Markets 1.25%
International SmallCap 1.20%
Limited Term Bond 0.50%
MidCap 0.56%
Real Estate 0.89%
SmallCap 0.75%
Tax-Exempt Bond 0.47%
Utilities 0.60%
The Principal Tax-Exempt Cash Management Fund, Inc. and the Principal Cash
Management Fund, Inc., following authorization by their boards of directors, and
the Manager will propose a transaction to the shareholders of the Principal
Tax-Exempt Cash Management Fund. The proposed transaction provides for Cash
Management to acquire the assets and assume the liabilities of Tax-Exempt Cash
Management. In exchange, Tax-Exempt Cash Management will receive shares of Cash
Management. Immediately thereafter, Tax-Exempt Cash Management will distribute
on a pro rata basis to the shareholders of record of Tax-Exempt Cash Management
at the close of business on the closing date the shares of Cash Management
received in the exchange. Tax-Exempt Cash Management will then dissolve in
accordance with applicable laws.
In addition, the Principal Tax-Exempt Bond Fund will offer to exchange its Class
A shares without a sales charge for shares of the Tax-Exempt Cash Management
Fund or shares of the Cash Management Fund issued in exchange for those shares.
The Exchange offer will commence on the day after the shareholders approve the
proposed transaction and will continue until June 1, 1999.
Shareholders of the Tax-Exempt Cash Management Fund will vote on the proposed
transaction at a shareholder meeting called for that purpose.
PRICING OF FUND SHARES
Each Fund's shares are bought and sold at the current share price. The share
price of each Class of shares of each Fund is calculated each day the New York
Stock Exchange is open. The share price is determined at the close of business
of the Exchange (normally at 3:00 p.m. Central Time). When Princor receives your
order to buy or sell shares, the share price used to fill the order is the next
price calculated after the order is placed.
For all Funds, except the Cash Management Fund, the share price is calculated
by:
o taking the current market value of the total assets of the Fund
o subtracting liabilities of the Fund
o dividing the remainder proportionately into the Classes of the Fund
o subtracting the liabilities of each Class
o dividing the remainder by the total number of shares owned by that Class.
The securities of the Cash Management Fund are valued at amortized cost. The
calculation procedure is described in the Statement of Additional Information.
The Cash Management Fund reserves the right to determine a share price more than
once a day.
NOTES:
o If current market values are not readily available for a security, its
fair value is determined using a policy adopted by the Fund's Board of
Directors.
o A Fund's securities may be traded on foreign securities markets which
generally complete trading at various times during the day prior to the
close of the New York Stock Exchange. The values of foreign securities
used in computing share price are determined at the time the foreign
market closes. Occasionally, events affecting the value of foreign
securities occur when the foreign market is closed and the New York
Stock Exchange is open. If the Manager believes the market value is
materially affected, the share price will be calculated using the
policy adopted by the Fund.
o Certain securities issued by companies in emerging market countries may
have more than one quoted valuation at any point in time. These may be
referred to as a local price and a premium price. The premium price is
often a negotiated price that may not consistently represent a price at
which a specific transaction can be effected. The international
growth-oriented funds each have a policy to value such securities at a
price at which the Manager or Sub-Advisor expects the shares may be
sold.
DIVIDENDS AND DISTRIBUTIONS
The Growth-Oriented and Income-Oriented Funds pay most of their net dividend
income to you every year. The payment schedule is:
<TABLE>
<CAPTION>
<S> <C> <C>
Funds Record Date Payable Date
Balanced, Blue Chip, three business days before March 24, June 24,
Real Estate and each payable date September 24 and
December 24
Utilities (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
Bond, Government Securities three business days before monthly on the 24th
Income, High Yield, Limited each payable date (or previous business
day)
Term Bond and Tax-Exempt Bond
</TABLE>
Net realized capital gains, if any, are distributed annually. Generally the
distribution is made on the fourth business day of December. Payments are made
to shareholders of record on the third business day prior to the payable date.
Capital gains may be taxable at different rates, depending on the length of time
that the Fund holds it assets.
You can authorize income dividend and capital gain distributions to be:
o invested in additional shares of the Fund you own without a sales charge;
o invested in shares of another Principal Mutual Fund (Dividend
Relay) without a sales charge (distributions of a Fund may be directed
only to one receiving Fund); or
o paid in cash.
NOTE: Payment of income dividends and capital gains shortly after you buy
shares has the effect of reducing the share price by the amount of the
payment.
Distributions from a Fund, whether received in cash or reinvested in
additional shares, may be subject to federal (and state) income tax.
Money Market Fund
The Cash Management Fund declares dividends of all its daily net investment
income each day its shares are priced. The dividends are paid daily and are
automatically reinvested back into additional shares of the Fund. You may ask to
have your dividends paid to you monthly in cash. These cash payments are made on
the 20th (or preceding business day if the 20th is not a business day) of each
month.
Under normal circumstances, the Fund intends to hold portfolio securities until
maturity and value them at amortized cost. Therefore, the Fund does not expect
any capital gains or losses. Should there be any gain, it could result in an
increase in dividends. A capital loss could result in a dividend decrease.
HOW TO BUY SHARES
To open an account and buy fund shares, rely on your Registered Representative.
Principal Mutual Funds are "load" funds which means you pay a sales charge for
the ongoing assistance of your Registered Representative.
Fill out the Principal Mutual Fund application* completely. You must include:
o the name(s) you want to appear on the account;
o the Principal Mutual Fund(s) you want to invest in and your choice of
Class A or Class B shares;
o the amount of the investment;
o your Social Security number or Taxpayer I.D. number;
o investor information (used to help your Registered Representative
confirm that your investment selection is consistent with your goals and
circumstances) ;
o employer information; and
o other required information (may include corporate resolutions, trust
agreements, etc.).
* An application is included with this prospectus. A different
application is needed for an IRA, 403(b), SEP, SIMPLE, SAR-SEP or
certain employee benefit plans. Call Principal Mutual Funds
(1-800-247-4123) for more information.
Each Fund requires a minimum initial investment:
o Regular Accounts $1,000
o Uniform Transfer to Minor Accounts $500
o IRA Accounts $500
Subsequent investment minimums are $100 per Fund. However, if your subsequent
investment are made using an Automatic Investment Plan, the investment minimum
is $50 per Fund. (see Establish an Automatic Investment Plan).
Note: The minimum investment applies on a fund level, not on the total
investment being made. Minimums may be waived on accounts set up for:
certain employee benefit plans; Principal Mutual Fund asset allocation
programs; Automatic Investment Plans; and Cash Management Accounts
(with Delaware Charter Guarantee and Trust Company as trustee).
Invest by mail:
o Send a check and completed application to:
Principal Mutual Funds
P. O. Box 10423
Des Moines Iowa 50306-9780
o Make your check payable to Principal Mutual Funds.
o Your purchase will be priced at the next share price calculated after
Principal Mutual Funds receives your completed paperwork.
Order by telephone:
o Call us at 1-800-247-4123 between 7:00 a.m. and 7:00 p.m. Central Time
on any day that the New York Stock Exchange is open.
o To buy shares the same day, you need to call before 3:00 p.m. Central
Time.
o We must receive your payment for the order within three business days
(or the order will be canceled and you may be liable for any loss).
o For new accounts, you also need to send a completed application.
Wire money from your bank:
o Have your Registered Representative call Principal Mutual Funds
(1-800-247-4123) for an account number and wiring nstructions.
o For both initial and subsequent purchases, federal funds should be
wired to:
Norwest Bank Iowa, N.A.
Des Moines, Iowa 50309
ABA No.: 073000228
For credit to: Principal Mutual Funds
Account No.: 3000499968
For credit: Principal ________ Fund, Class ____
Shareholder Account No. __________________
Shareholder Registration __________________
o Give the number and instructions to your bank (which may charge a wire
fee).
o To buy shares the same day, the wire must be received before 3:00 p.m.
Central Time.
o No wires are accepted on days when the New York Stock Exchange is
closed or when the Federal Reserve is
closed(because the bank that would receive your wire is closed).
Establish an Automatic Investment Plan
o Make regular monthly investments with automatic deductions from your
bank or other financial institution account.
o Minimum investment amounts are waived if you set up an Automatic
Investment Plan when you open your account.
o Minimum monthly purchase $50 per Fund (except Cash Management Fund).
o Cash Management Fund minimum monthly purchase is $100. However, if the
Cash Management account is greater than $1,000 when the plan is set up,
the monthly minimum is $50.
o Send completed application, check authorization form and voided check
(or voided deposit slip) to:
Principal Mutual Funds
P. O. Box 10423
Des Moines Iowa 50306-9780
Set up a Dividend Relay
o Invest your dividends and capital gains from one Principal Mutual Fund
in shares of another Principal Mutual Fund.
o Distributions from a Fund may be directed only to one receiving Fund.
o The Fund share class receiving the investment must be the same class
as the originating Fund. o There is no sales charge or administrative
charge for the Dividend Relay.
o You can set up Dividend Relay:
o on the application for a new account; or
o by calling Principal Mutual Funds (1-800-247-4123) if telephone
services apply to the originating account; or
o in writing (a signature guarantee may be required).
o You may discontinue your Dividend Relay election with a written notice
to Principal Mutual Funds.
o There may be a delay of up to 10 days before the Dividend Relay plan is
discontinued.
o The receiving Fund must meet fund minimums. If it does not, the Fund
reserves the right to close the account if it is not brought up to the
minimum investment amount within 90 days of sending you a deficiency
notice.
HOW TO SELL SHARES
After you place a sell order in proper form, shares are sold using the next
share price calculated. The amount you receive will be reduced by any applicable
CDSC. There is no additional charge for a sale. However, you will be charged a
$6 wire fee if you have the sale proceeds wired to your bank. Generally, the
sale proceeds are sent out on the next business day after the sell order has
been placed. At your request, the check will be sent overnight (a $15 overnight
fee will be deducted from your account unless other arrangements are made). The
Fund can only sell shares after your check making the Fund investment has
cleared your bank. To avoid the inconvenience of a delay in obtaining sale
proceeds, shares may be purchased with a cashier's check, money order or
certified check. A sell order from one owner is binding on all joint owners.
Selling shares may create a gain or a loss for federal (and state) income tax
purposes. You should maintain accurate records for use in preparing your income
tax returns.
Generally, sales proceeds checks are:
o payable to all owners on the account (as shown in the account
registration) and
o mailed to address on the account (if not changed within last month) or
previously authorized bank account.
For other payment arrangements, please call Principal Mutual Funds
(1-800-247-4123).
You should also call Principal Mutual Funds (1-800-247-4123) for special
instructions that may apply to sales from accounts:
o when an owner has died;
o for certain employee benefit plans, or
o owned by corporations, partnerships, agents or fiduciaries.
Within 60 days after the sale of shares, the amount of the sale proceeds can be
reinvested in any Principal Mutual Funds' Class A shares without a sales charge
if the shares that were sold were:
o Class A shares on which a sales charge was paid;
o Class A shares acquired by conversion of Class B shares; or
o Class B shares on which a CDSC was paid.
The transaction is considered a sale for federal (and state) income tax purposes
even if the proceeds are reinvested. If a loss is realized on the sale, the
reinvestment may be subject to the "wash sale" rules resulting in the
postponement of the recognition of the loss for tax purposes.
Sell shares by mail
o Send a letter (signed by the owner of the account) to:
Principal Mutual Funds
P. O. Box 10423
Des Moines Iowa 50306-9780
o Specify the Fund and account number.
o Specify the number of shares or the dollar amount to be sold.
o A signature guarantee* will be required if the:
o sell order is for more than $100,000;
o account address has been changed within one month of the sell
order; or
o check is payable to a party other than the account shareholder(s)
or Principal Life Insurance Company.
* If required, the signature(s) must be guaranteed by a commercial
bank, trust company, credit union, savings and loan, national
securities exchange member or brokerage firm. A signature
guaranteed by a notary public or savings bank is not acceptable.
Sell shares in amounts of $100,000 or less by telephone* (1-800-247-4123)
o Address on account must not have been changed within the last month and
telephone privileges must apply to the account from which the shares
are being sold.
o If our phone lines are busy, you may need to send in a written sell
order.
o To sell shares the same day, the order must be received before
3:00 p.m. Central Time.
o Telephone privileges are not available for Principal Mutual Funds IRAs,
403(b)s, certain employee benefit plans, or on shares for which
certificates have been issued.
o If previously authorized, checks can be sent to a shareholder's U.S.
bank account.
* The Fund and transfer agent reserve the right to refuse telephone
orders to sell shares. The shareholder is liable for a loss
resulting from a fraudulent telephone order that the Fund
reasonably believes is genuine. Each Fund will use reasonable
procedures to assure instructions are genuine. If the procedures
are not followed, the Fund may be liable for loss due to
unauthorized or fraudulent transactions. The procedures include:
recording all telephone instructions, requesting personal
identification information (name, phone number, social security
number, birth date, etc.) and sending written confirmation to the
address on the account.
Sell shares by checkwriting (Class A shares of Cash Management Fund only)
o Checkwriting must be elected on initial application or by written request
to Principal Mutual Funds. o The Fund can only sell shares after your check
making the Fund investment has cleared your bank.
o Checks must be written for at least $100.
o Checks are drawn on Norwest Bank Iowa, N.A. and its rules concerning
checking accounts apply.
o If the account does not have sufficient funds to cover the check, it is
marked "Insufficient Funds" and returned (the Fund may revoke
checkwriting on accounts on which "Insufficient Funds" checks are
drawn).
o Accounts may not be closed by withdrawal check (accounts continue to
earn dividends until checks clear and the exact value of the account
is not known until the check is received by Norwest).
o Not available for Principal Mutual Funds IRAs, 403(b)s, SEPs, SIMPLES,
SAR-SEPs or certain employee benefit plans or shares subject to a
CDSC or on shares for which a certificate has been issued.
Periodic withdrawal plans
You may set up a periodic withdrawal plan o on a monthly, quarterly,
semiannual or annual basis to:
o sell a fixed number of sales ($25 initial minimum amount),
o sell enough shares to provide a fixed amount of money ($25 initial
minimum amount).
o pay insurance or annuity premiums or deposits to Principal Life
Insurance Company (call us at
1-800-247-4123 for details), and
o to provide an easy method of making monthly installment payments
(if the service is available from your creditor who must supply
the necessary forms).
You can set up a periodic withdrawal plan by:
o completing the applicable section of the application; or
o sending us your written instructions (and share certificate, if any,
issued for the account).
Your periodic withdrawal plan continues until:
o you instruct us to stop, or
o your Fund account is exhausted.
When you set up the withdrawal plan, you select which day you want the sale made
(if none selected, the sale will be made on the 15th of the month). If the
selected date is not a trading day, the sale will take place on the next trading
day (if that day falls in the month after your selected date, the transaction
will take place on the trading day before your selected date). If telephone
privileges apply to the account, you may change the date or amount by
telephoning us at 1-800-247-4123.
Sales may be subject to a CDSC. Up to 10% of the value of a Class B share
account may be withdrawn annually free of a CDSC. If the plan is set up when the
Class B share account is opened, 10% of the value of additional purchases made
within 60 days may also be withdrawn free of a CDSC. The amount of the 10%
withdrawal privilege is reset as of the last business day of December of each
year based on the account's value as of that day.
Withdrawal payments are sent on or before the third business day after the date
of the sale. Sales made under your periodic withdrawal plan will reduce and may
eventually exhaust your account. The Funds do not normally accept purchase
payments for shares of any Fund except the Cash Management Fund while a periodic
withdrawal plan is in effect (unless the purchase represents a substantial
addition to your account).
The Fund from which the periodic withdrawal is made makes no recommendation as
to either the number of shares or the fixed amount that you withdraw. The
portion of sales proceeds from the Tax-Exempt Bond Fund which represents
tax-exempt income which has been accrued but not declared a dividend by the Fund
may be taxed at capital gains rates (see DIVIDENDS AND DISTRIBUTIONS).
HOW TO EXCHANGE SHARES AMONG PRINCIPAL FUNDS
Your shares in the Funds (except Class A shares of the Cash Management and
Limited Term Bond Funds) may be exchanged without a sales charge for the same
class of any other Fund. After 90 days of their purchase, Class A shares of the
Limited Term Bond Fund may be exchanged for Class A shares of the other Funds.
Class A shares of the Cash Management Fund may be exchanged into
o Class A shares of other Principal Mutual Funds.
o If the Cash Management shares were acquired by direct purchase, a
sales charge will be imposed on the exchange into other Class A
shares.
o If the Cash Management shares were acquired by (i) exchange from
other Funds, (ii) conversion of Class B shares or (iii)
reinvestment of dividends earned on Class A shares that were
acquired through exchange, no sales charge will be imposed on the
exchange into other Class A shares.
o Class B shares of other Principal Mutual Funds - subject to the CDSC
The CDSC is not charged on exchanges. However, the purchase date of the
exchanged shares and the CSDC table are used to determine if the newly acquired
shares are subject to the CDSC (and the amount of the CDSC if any) when they are
sold.
You may exchange shares by:
o calling us (1-800-247-4123), if you have telephone privileges on the
account and if
o the amount of the exchange is $500,000 or less, and
o no share certificate has been issued.
o sending a written request to:
Principal Mutual Funds
P. O. Box 10423
Des Moines, Iowa 50306-9780
o completing an Exchange Authorization Form (call us at 1-800-247-4123
to obtain the form).
Automatic exchange election
This election authorizes an exchange from one Principal Mutual Fund to another
on a monthly, quarterly, semiannual or annual basis. You can set up an automatic
exchange by:
o completing the Automatic Exchange Election section of the application;
o by calling us (1-800-247-4123) if telephone privileges apply to the
account from which the exchange is to be made, or
o sending us your written instructions.
Your automatic exchange continues until:
o you instruct us to stop, or
o your Fund account is exhausted.
You may specify the day of the exchange. If the selected day is not a trading
day, the sale will take place on the next trading day (if that day falls in the
month after your selected date, the transaction will take place on the trading
day before your selected date). If telephone privileges apply to the account,
you may change the date or amount by telephoning us at 1-800-247-4123.
General
o An exchange by any joint owner is binding on all joint owners.
o If you do not have an existing account in the Fund to which the
exchange is being made, a new account is established. The new account
has the same owner(s), dividend and capital gain options and dealer of
record as the account from which the shares are being exchanged.
o All exchanges are subject to the minimum investment and eligibility
requirement of the Fund being acquired.
o You may acquire shares of a Fund only if its shares are legally
offered in your state of residence. o If a certificate has been
issued, it must be returned to the Fund before the exchange can take
place.
The exchange privilege is not intended for short-term trading. Excessive
exchange activity may interfere with portfolio management and have an adverse
impact on all shareholders. In order to limit excessive exchange activity, and
under other circumstances where the Board of Directors of the Fund or the
Manager believes it is 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, reject any exchange or close the account. You would be notified of
any such action to the extent required by law.
Fund shares used to fund an employee benefit plan may be exchanged only for
shares of other Principal Mutual Funds available to employee benefit plans. Such
an exchange must be made by following the procedures provided in the employee
benefit plan and the written service agreement. The exchange is treated as a
sale of shares for federal income tax purposes and may result 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.
GENERAL INFORMATION ABOUT A FUND ACCOUNT
Statements
You will receive quarterly statements (monthly statements for the Cash
Management Fund) for the Funds you own The statements provide the number and
value of shares you own, transactions during the quarter, dividends declared or
paid and other information. The year end statement includes information for all
transactions that took place during the year. Please review your statement as
soon as your receive it. Keep your statements as you may need them for tax
reporting purposes.
Generally, each time you buy, sell or exchange shares between Principal Mutual
Funds, you will receive a confirmation in the mail shortly thereafter. It
summarizes all the key information; what you bought or sold, the amount of the
transaction, and other vital data. The Cash Management Fund mails confirmations
only once a month detailing dividend and account activity.
Certain purchases and sales are only included on your quarterly statement. These
include accounts
o when the only activity during the quarter:
o is purchase of shares from reinvested dividends and/or capital gains;
o is a result of Dividend Relay;
o purchases under a Automatic Investment Plan;
o sales under a periodic withdrawal plan; and
o purchases or sales under an automatic exchange election.
o used to fund certain individual retirement or individual pension plans.
o established under a payroll deduction plan.
Signature Guarantees
Certain transactions require that your signature be guaranteed. If required, the
signature(s) must be guaranteed by a commercial bank, trust company, credit
union, savings and loan, national securities exchange member or brokerage firm.
A signature guaranteed by a notary public or savings bank is not acceptable.
Signature guarantees are required:
o if you sell more than $100,000 from any one Fund;
o if a sales proceeds check is payable to other than the account
shareholder(s), Principal Life Insurance Company or one of its
affiliates;
o to make a Dividend Relay election from an account with joint owners to
an account with only one owner or different joint owners;
o to change ownership of an account;
o to add telephone transaction services to an existing account;
o to change bank account information designated under an existing
telephone withdrawal plan;
o to have a sales proceeds check mailed to an address other than the
address on the account or to the address on the account if it has
been changed within the preceding month; and
o to add wire privileges to an existing account.
Minimum Account Balance
Generally, the Funds do not have a minimum required balance. Because of the
disproportional high cost of maintaining small accounts, the Funds reserve the
right to set a minimum and sell all shares in an account with a value of less
than $300. The sales proceeds would then be mailed to you. These involuntary
sales will not be triggered just by market conditions. If a Fund exercises this
right, you will be notified that the redemption is going to be made. You will
have 30 days to make an additional investment and bring your account up to the
required minimum. The Funds reserve the right to increase the required minimum.
Special Plans
The Funds reserve the right to amend or terminate the special plans described in
this prospectus. Such plans include automatic investment, dividend relay,
periodic withdrawal, and waiver or reduction of sales charges for certain
purchasers. You will be notified of any such action to the extent required by
law.
Telephone Orders
The Principal Mutual Funds reserve the right to refuse telephone orders to sell
shares. You are liable for a loss resulting from a fraudulent telephone order
that we reasonably believe is genuine. We will use reasonable procedures to
assure instructions are genuine. If the procedures are not followed, we may be
liable for loss due to unauthorized or fraudulent transactions. The procedures
include: recording all telephone instructions, requesting personal
identification information (name, phone number, social security number, birth
date, etc.) and sending written confirmation to the shareholder's address of
record.
Year 2000 Readiness Disclosure
The business operations of the Funds depend on computer systems that contain
date fields. These systems include securities transfer agent operations and
securities pricing systems. Many of these systems were constructed using a two
digit date field to represent the date. Unless these systems are changed or
modified, they may not be able to distinguish the Year 1900 from the Year 2000
(commonly referred to as the Year 2000 Problem).
When the Year 2000 arrives, the Funds' operations could be adversely affected if
the computer systems used by the Manager, the service providers and other third
parties it does business with are not Year 2000 compliant. For example, the
Funds' portfolios and operational areas could be impacted, included securities
pricing, dividend and interest payments, shareholder account servicing and
reporting functions. In addition, a Fund could experience difficulties in
transactions if foreign broker-dealers or foreign markets are not Year 2000
compliant.
The Manager relies on public filings and other statements made by companies
about their Year 2000 readiness. Issuers in countries outside of the U.S.,
particularly in emerging countries, may not be required to make the same
disclosures about their readiness as are required in the U.S. It is likely that
if a company a Fund invests in is adversely affected by Year 2000 problems, the
price of its securities will also be negatively impacted. A decrease in value of
one or more of a Fund's securities will decrease that Fund's share price.
In addition, the Manager and affiliated service providers are working to
identify their Year 2000 problems and taking steps they reasonably believe will
address these issues. This process began in 1996 with the identification of
product vendors and service providers as well as the internal systems that might
be impacted.
At this time, testing of internal systems has been completed. The Manager is now
participating in a corporate-wide initiative lead by senior management
representatives of Principal Life. Currently they are engaged in regression
testing of internal programs. They are also participating in development of
contingency plans in the event that Year 2000 problems develop and/or persist on
or after January 1, 2000. This plan is scheduled to be completed in March 1999.
The contingency plan calls for:
o identification of business risks;
o consideration of alternative approaches to critical business risks; and o
development of action plans to address problems.
Other important Year 2000 initiatives include:
o the service provider for our transfer agent system has renovated its
code. Client testing will occur in the first and second quarters of
1999. The service provider is also participating in a securities
industry wide testing program that is scheduled to be completed by the
end of April 1999;
o the securities pricing system we use has renovated its code and
conducted client testing in June 1998;
o Facilities Management of Principal Life has identified non-systems
issues (heat, lights, water, phone,
etc.) and is working with these service providers to ensure continuity
of service; and
o the Manager and other areas of Principal Life have contacted all
vendors with which we do business to receive assurances that they
are able to deal with any Year 2000 problems. We continue to work
with the vendors to identify any areas of risk.
In its budget for 1999 and 2000, the Manager has estimated expenses of between
$100,000 and $500,000 to deal with Year 2000 issues.
Financial Statements
You will receive an annual financial statement for the Funds, examined by the
Funds' independent auditors, Ernst & Young LLP. That report is a part of this
prospectus. You will also receive a semiannual financial statement which is
unaudited. The following financial highlights are based on financial statements
which were audited by Ernst & Young LLP.
FINANCIAL HIGHLIGHTS
Domestic Growth-Oriented Funds
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
PRINCIPAL BALANCED FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
- ------------------------------------------------------------------- ----------- ---- ---- ----
Net Asset Value, Beginning of Period................... $15.11 $14.61 $13.74 $12.43 $13.26
Income from Investment Operations:
Net Investment Income............................... .42 .35 .38 .41 .32
Net Realized and Unrealized Gain (Loss) on Investments 1.15 1.81 1.59 1.31 (.20)
Total from Investment Operations 1.57 2.16 1.97 1.72 .12
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.37) (.36) (.43) (.36) (.40)
Distributions from Capital Gains.................... (1.03) (1.30) (.67) (.05) (.55)
Total Dividends and Distributions (1.40) (1.66) (1.10) (.41) (.95)
Net Asset Value, End of Period......................... $15.28 $15.11 $14.61 $13.74 $12.43
Total Return(b)........................................ 11.00% 15.88% 15.10% 14.18% .94%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $104,414 $85,436 $70,820 $57,125 $53,366
Ratio of Expenses to Average Net Assets............. 1.28% 1.33% 1.28% 1.37% 1.51%
Ratio of Net Investment Income to Average Net Assets 2.86% 2.42% 2.82% 3.21% 2.70%
Portfolio Turnover Rate............................. 57.0% 27.6% 32.6% 35.8% 14.4%
PRINCIPAL BALANCED FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
- -------------------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period................... $15.05 $14.56 $13.71 $11.80
Income from Investment Operations:
Net Investment Income............................... .31 .25 .29 .31
Net Realized and Unrealized Gain (Loss) on Investments 1.14 1.79 1.55 1.90
Total from Investment Operations 1.45 2.04 1.84 2.21
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.25) (.25) (.32) (.30)
- ---
Distributions from Capital Gains.................... (1.03) (1.30) (.67) --
Total Dividends and Distributions (1.28) (1.55) (.99) (.30)
Net Asset Value, End of Period......................... $15.22 $15.05 $14.56 $13.71
Total Return(b)........................................ 10.18% 14.96% 14.10% 18.72%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $18,930 $11,885 $5,964 $1,263
Ratio of Expenses to Average Net Assets............. 2.04% 2.14% 2.13% 1.91%(d)
Ratio of Net Investment Income to Average Net Assets 2.08% 1.58% 1.93% 2.53%(d)
Portfolio Turnover Rate................................ 57.0% 27.6% 32.6% 35.8%(d)
PRINCIPAL BLUE CHIP FUND, INC.(a)
- ------------------------------
Class A shares 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------- ---- ---- ----
Net Asset Value, Beginning of Period................... $20.22 $17.10 $15.03 $12.45 $11.94
Income from Investment Operations:
Net Investment Income............................... .12 .21 .23 .24 .20
Net Realized and Unrealized Gain (Loss) on Investments 3.57 3.58 2.45 2.55 .57
Total from Investment Operations 3.69 3.79 2.68 2.79 .77
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.12) (.21) (.26) (.21) (.26)
Distributions from Capital Gains.................... (2.08) (.46) (.35) -- --
Total Dividends and Distributions (2.20) (.67) (.61) (.21) (.26)
Net Asset Value, End of Period......................... $21.71 $20.22 $17.10 $15.03 $12.45
Total Return(b)........................................ 19.48% 22.57% 18.20% 22.65% 6.58%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $126,740 $79,985 $44,389 $35,212 $27,246
Ratio of Expenses to Average Net Assets............. 1.31% 1.30% 1.33% 1.38% 1.46%
Ratio of Net Investment Income to Average Net Assets .57% 1.10% 1.41% 1.83% 1.72%
Portfolio Turnover Rate............................. .5% 55.4% 13.3% 26.1% 5.5%
PRINCIPAL BLUE CHIP FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
- -------------------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period................... $20.14 $17.03 $14.99 $11.89
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.02) .07 .11 .15
Net Realized and Unrealized Gain (Loss) on Investments 3.53 3.54 2.41 3.10
Total from Investment Operations 3.51 3.61 2.52 3.25
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.02) (.04) (.13) (.15)
Distributions from Capital Gains.................... (2.08) (.46) (.35) --
Total Dividends and Distributions (2.10) (.50) (.48) (.15)
Net Asset Value, End of Period......................... $21.55 $20.14 $17.03 $14.99
Total Return(b)........................................ 18.59% 21.59% 17.18% 26.20%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $34,223 $18,265 $6,527 $1,732
Ratio of Expenses to Average Net Assets............. 2.02% 2.06% 2.19% 1.90%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.14)% .32% .49% .97%(d)
Portfolio Turnover Rate................................ .5% 55.4% 13.3% 26.1%(d)
PRINCIPAL CAPITAL VALUE FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------- ---- ---- ----
Net Asset Value, Beginning of Period................... $29.69 $27.72 $23.69 $20.83 $21.41
Income from Investment Operations:
Net Investment Income............................... .50 .50 .45 .45 .39
Net Realized and Unrealized Gain (Loss) on Investments 3.88 5.80 5.48 3.15 .93
Total from Investment Operations 4.38 6.30 5.93 3.60 1.32
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.53) (.48) (.43) (.39) (.41)
Distributions from Capital Gains.................... (2.47) (3.85) (1.47) (.35) (1.49)
Total Dividends and Distributions (3.00) (4.33) (1.90) (.74) (1.90)
Net Asset Value, End of Period......................... $31.07 $29.69 $27.72 $23.69 $20.83
Total Return(b)........................................ 15.59% 25.36% 26.41% 17.94% 6.67%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $565,052 $494,444 $435,617 $339,656 $285,965
Ratio of Expenses to Average Net Assets............. .74% .70% .69% .75% .83%
Ratio of Net Investment Income to Average Net Assets 1.67% 1.85% 1.82% 2.08% 2.02%
Portfolio Turnover Rate................................ 23.2% 30.8% 50.2% 46.0% 31.7%
PRINCIPAL CAPITAL VALUE FUND, INC.(a)..................
Class B shares 1998 1997 1996 1995(e)
- -------------------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period................... $29.51 $27.58 $23.61 $19.12
Income from Investment Operations:
Net Investment Income............................... .26 .23 .21 .33
Net Realized and Unrealized Gain (Loss) on Investments 3.86 5.77 5.45 4.46
Total from Investment Operations 4.12 6.00 5.66 4.79
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.26) (.22) (.22) (.30)
Distributions from Capital Gains.................... (2.47) (3.85) (1.47) --
Total Dividends and Distributions (2.73) (4.07) (1.69) (.30)
Net Asset Value, End of Period......................... $30.90 $29.51 $27.58 $23.61
Total Return(b)........................................ 14.71% 24.13% 25.19% 25.06%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $44,765 $27,240 $9,832 $2,248
Ratio of Expenses to Average Net Assets............. 1.52% 1.65% 1.70% 1.50%(d)
Ratio of Net Investment Income to Average Net Assets .88% .84% .80% 1.07%(d)
Portfolio Turnover Rate................................ 23.2% 30.8% 50.2% 46.0%(d)
PRINCIPAL GROWTH FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------- ---- ---- ----
Net Asset Value, Beginning of Period................... $50.43 $39.54 $37.22 $31.14 $30.41
Income from Investment Operations:
Net Investment Income............................... .35 .31 .35 .35 .26
Net Realized and Unrealized Gain (Loss) on Investments 7.14 11.26 3.50 6.67 2.56
Total from Investment Operations 7.49 11.57 3.85 7.02 2.82
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.34) (.31) (.35) (.31) (.28)
Distributions from Capital Gains.................... (1.49) (.37) (1.18) (.63) (1.81)
Total Dividends and Distributions (1.83) (.68) (1.53) (.94) (2.09)
Net Asset Value, End of Period......................... $56.09 $50.43 $39.54 $37.22 $31.14
Total Return(b)........................................ 15.17% 29.55% 10.60% 23.29% 9.82%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $395,954 $317,386 $228,361 $174,328 $116,363
Ratio of Expenses to Average Net Assets............. .95% 1.03% 1.08% 1.16% 1.30%
Ratio of Net Investment Income to Average Net Assets .66% .68% .95% 1.12% .95%
Portfolio Turnover Rate................................ 21.9% 16.5% 1.8% 12.2% 13.6%
PRINCIPAL GROWTH FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
- ------------------------------------------------------------------- ----------- ---- ----
Net Asset Value, Beginning of Period................... $50.36 $39.43 $37.10 $28.33
Income from Investment Operations:
Net Investment Income............................... .06 .09 .08 .21
Net Realized and Unrealized Gain (Loss) on Investments 7.14 11.23 3.48 8.76
Total from Investment Operations 7.20 11.32 3.56 8.97
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.09) (.02) (.05) (.20)
Distributions from Capital Gains.................... (1.49) (.37) (1.18) --
Total Dividends and Distributions (1.58) (.39) (1.23) (.20)
Net Asset Value, End of Period......................... $55.98 $50.36 $39.43 $37.10
Total Return(b)........................................ 14.58% 28.92% 9.80% 31.48%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $64,809 $42,241 $24,019 $8,279
Ratio of Expenses to Average Net Assets............. 1.46% 1.48% 1.79% 1.80%(d)
Ratio of Net Investment Income to Average Net Assets .15% .23% .22% .31%(d)
Portfolio Turnover Rate................................ 21.9% 16.5% 1.8% 12.2%(d)
PRINCIPAL MIDCAP FUND, INC.(a)
- ---------------------------
Class A shares 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------- ---- ---- ----
Net Asset Value, Beginning of Period................... $45.33 $35.75 $31.45 $25.08 $23.56
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.07) .07 .14 .12 --
Net Realized and Unrealized Gain (Loss) on Investments (4.26) 10.80 5.05 6.45 1.61
Total from Investment Operations (4.33) 10.87 5.19 6.57 1.61
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- (.11) (.14) (.06) --
Distributions from Capital Gains.................... (1.10) (1.18) (.75) (.14) (.09)
Total Dividends and Distributions (1.10) (1.29) (.89) (.20) (.09)
Net Asset Value, End of Period......................... $39.90 $45.33 $35.75 $31.45 $25.08
Total Return(b)........................................ (9.78)% 31.26% 16.89% 26.89% 6.86%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $332,942 $346,666 $229,465 $150,611 $92,965
Ratio of Expenses to Average Net Assets............. 1.22% 1.26% 1.32% 1.47% 1.74%
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.14)% .20% .46% .47% .02%
Portfolio Turnover Rate................................ 25.1% 9.5% 12.3% 13.5% 8.1%
PRINCIPAL MIDCAP FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
- -------------------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period................... $44.88 $35.48 $31.31 $23.15
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.23) (.05) (.04) --
Net Realized and Unrealized Gain (Loss) on Investments (4.26) 10.64 4.97 8.18
Total from Investment Operations (4.49) 10.59 4.93 8.18
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- (.01) (.01) (.02)
Distributions from Capital Gains.................... (1.10) (1.18) (.75) --
Total Dividends and Distributions (1.10) (1.19) (.76) (.02)
Net Asset Value, End of Period......................... $39.29 $44.88 $35.48 $31.31
Total Return(b)........................................ (10.24)% 30.64% 16.07% 35.65%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $68,358 $59,554 $28,480 $8,997
Ratio of Expenses to Average Net Assets............. 1.73% 1.69% 2.01% 2.04%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.66)% (.24)% (.24)% (.17)%(d)
Portfolio Turnover Rate................................ 25.1% 9.5% 12.3% 13.5%(d)
PRINCIPAL REAL ESTATE FUND, INC.
Class A shares 1998(f)
- ----------------------------------------------------------------
Net Asset Value, Beginning of Period................... $10.15
Income from Investment Operations:
Net Investment Income............................... .20
Net Realized and Unrealized Gain (Loss) on Investments (1.76)
Total from Investment Operations (1.56)
Less Dividends:
Dividends from Net Investment Income................ (.20)
Total Dividends (.20)
Net Asset Value, End of Period......................... $ 8.39
Total Return(b)........................................ (15.45)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $5,490
Ratio of Expenses to Average Net Assets............. 2.25%(d)
Ratio of Net Investment Income to Average Net Assets 2.89%(d)
Portfolio Turnover Rate............................. 60.4%(d)
PRINCIPAL REAL ESTATE FUND, INC.
Class B shares 1998(f)
- ----------------------------------------------------------------
Net Asset Value, Beginning of Period................... $10.15
Income from Investment Operations:
Net Investment Income............................... .20
Net Realized and Unrealized Gain (Loss) on Investments (1.78)
Total from Investment Operations (1.58)
Less Dividends:
Dividends from Net Investment Income................ (.19)
Total Dividends (.19)
Net Asset Value, End of Period......................... $ 8.38
Total Return(b)........................................ (15.67)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $3,120
Ratio of Expenses to Average Net Assets............. 2.47%(d)
Ratio of Net Investment Income to Average Net Assets 2.67%(d)
Portfolio Turnover Rate............................. 60.4%(d)
PRINCIPAL SMALLCAP FUND, INC.
Class A shares 1998(f)
- ----------------------------------------------------------------
Net Asset Value, Beginning of Period................... $ 9.92
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.08)
Net Realized and Unrealized Gain (Loss) on Investments (1.41)
Total from Investment Operations (1.49)
Less Dividends:
Dividends from Net Investment Income................ --
Total Dividends --
Net Asset Value, End of Period......................... $8.43
Total Return(b)........................................ (15.95)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $18,438
Ratio of Expenses to Average Net Assets............. 2.58%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (1.65)%(d)
Portfolio Turnover Rate............................. 20.5%(d)
PRINCIPAL SMALLCAP FUND, INC.
Class B shares 1998(f)
- ----------------------------------------------------------------
Net Asset Value, Beginning of Period................... $ 9.91
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.11)
Net Realized and Unrealized Gain (Loss) on Investments (1.39)
Total from Investment Operations (1.50)
Less Dividends:
Dividends from Net Investment Income................ --
Total Dividends --
Net Asset Value, End of Period......................... $8.41
Total Return(b)........................................ (16.15)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $6,550
Ratio of Expenses to Average Net Assets............. 2.80%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (1.85)%(d)
Portfolio Turnover Rate............................. 20.5%(d)
PRINCIPAL UTILITIES FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
- ------------------------------------------------------------------- ----------- ---- ---- ----
Net Asset Value, Beginning of Period................... $12.55 $11.40 $10.94 $9.25 $11.45
Income from Investment Operations:
Net Investment Income(g)............................ .41 .48 .44 .48 .46
Net Realized and Unrealized Gain (Loss) on Investments 3.59 1.12 .45 1.70 (2.19)
Total from Investment Operations 4.00 1.60 .89 2.18 (1.73)
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.44) (.45) (.43) (.49) (.45)
Distributions from Capital Gains.................... -- -- -- -- (.02)
Total Dividends and Distributions (.44) (.45) (.43) (.49) (.47)
Net Asset Value, End of Period......................... $16.11 $12.55 $11.40 $10.94 $9.25
Total Return(b)........................................ 32.10% 14.26% 8.13% 24.36% (15.20)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $83,533 $64,366 $66,322 $65,873 $56,747
Ratio of Expenses to Average Net Assets(g).......... 1.15% 1.15% 1.17% 1.04% 1.00%
Ratio of Net Investment Income to Average Net Assets 2.73% 3.90% 3.85% 4.95% 4.89%
Portfolio Turnover Rate............................. 11.9% 22.5% 34.2% 13.0% 13.8%
PRINCIPAL UTILITIES FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
- -------------------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period................... $12.53 $11.38 $10.93 $9.20
Income from Investment Operations:
Net Investment Income(g)............................ .30 .38 .36 .40
Net Realized and Unrealized Gain (Loss) on Investments 3.59 1.13 .43 1.77
Total from Investment Operations 3.89 1.51 .79 2.17
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.33) (.36) (.34) (.44)
Distributions from Capital Gains.................... -- -- -- --
Total Dividends and Distributions (.33) (.36) (.34) (.44)
Net Asset Value, End of Period......................... $16.09 $12.53 $11.38 $10.93
Total Return(b)........................................ 31.23% 13.41% 7.23% 24.18%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $11,391 $6,937 $5,579 $3,952
Ratio of Expenses to Average Net Assets(g).......... 1.90% 1.90% 1.93% 1.72%(d)
Ratio of Net Investment Income to Average Net Assets 2.04% 3.14% 3.07% 3.84%(d)
Portfolio Turnover Rate 11.9%. 22.5% 34.2% 13.0%(d)
</TABLE>
Notes to Financial Highlights
(a) Effective January 1, 1998, the following changes were made to the names of
the Domestic Growth Funds:
Former Fund Name New Fund Name
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.
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.
(b) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(c) Total return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. The Domestic Growth Funds' Class B shares
recognized net investment income as follows for the period from the initial
purchase of Class B shares on December 5, 1994 through December 8, 1994,
none of which was distributed to the sole shareholder, Principal Management
Corporation. The Domestic Growth Funds' Class B shares incurred unrealized
losses on investments during the initial interim period as follows. This
represents Class B share activities of each fund prior to the initial
public offering of Class B shares:
Net Investment
Income
Principal Balanced Fund, Inc. $-- $(.19)
Principal Blue Chip Fund, Inc. -- (.15)
Principal Capital Value Fund, Inc. -- (.46)
Principal Growth Fund, Inc. -- (.86)
Principal MidCap Fund, Inc. -- (.77)
Principal Utilities Fund, Inc. .01 (.01)
(f) Period from December 31, 1997, date Class A and Class B shares first
offered to the public, through October 31, 1998. With respect to
Principal Real Estate Fund, Inc. Class A and Class B shares, net
investment income aggregating $.03 per share for the period from the
initial purchase of shares on December 11, 1997 through December 30,
1997 was recognized, of which $.01 per share was distributed to its sole
shareholder, Principal Life Insurance Company, during the period. With
respect to Principal SmallCap Fund, Inc. Class A and Class B shares, net
investment income aggregating $.01 per share from the initial purchase of
shares on December 11, 1997 through December 30, 1997 was recognized.
Principal SmallCap Fund, Inc. Class A and Class B distributed a tax return
of capital of $.01 per share to the sole shareholder, Principal Life
Insurance Company, during the period. Principal Real Estate Fund, Inc.
and Principal SmallCap Fund, Inc. Class A and Class B shares incurred
unrealized gains (losses) on investments during the initial interim
period as follows. This represents Class A and Class B share activities
of each fund prior to the initial public offering of each class of
shares.
Per Share Unrealized
Gain (Loss)
Class Class
A B
Principal Real Estate Fund, Inc. $ .13 $ .13
Principal SmallCap Fund, Inc. (.08) (.09)
(g) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods
indicated, Principal Utilities Fund, Inc. would have had per share net
investment income and the ratios of expenses to average net assets as
shown:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year Ended
October 31, Per Share Ratio of Expenses
Except Net Investment to Average Net Amount
as Noted Income Assets Waived
Class A 1998 $.39 1.23% $ 60,477
1997 .46 1.25% 65,940
1996 .43 1.25% 54,932
1995 .46 1.30% 151,145
1994 .41 1.50% 284,836
Class B 1998 .29 2.00% 9,557
1997 .37 1.95% 3,753
1996 .34 2.06% 6,690
1995(e) .40 1.81%(d) 1,338
</TABLE>
International Growth-Oriented Funds
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
<S> <C> <C>
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Class A shares 1998 1997(a)
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $8.29 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.02) (.01)
Net Realized and Unrealized Gain (Loss) on Investments (1.73) (1.21)
Total from Investment Operations (1.75) (1.22)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --
Total Dividends and Distributions -- --
Net Asset Value, End of Period......................... $6.54 $8.29
Total Return(b)........................................ (21.11)% (10.18)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $7,312 $5,039
Ratio of Expenses to Average Net Assets............. 3.31% 2.03%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.36)% (.32)%(d)
Portfolio Turnover Rate............................. 45.2% 21.4%(d)
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Class B shares 1998 1997(a)
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $8.28 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.05) (.01)
Net Realized and Unrealized Gain (Loss) on Investments (1.71) (1.22)
Total from Investment Operations (1.76) (1.23)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --
Total Dividends and Distributions -- --
Net Asset Value, End of Period......................... $6.52 $8.28
Total Return(b)........................................ (21.26)% (10.29)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $3,275 $3,116
Ratio of Expenses to Average Net Assets............. 3.59% 2.16%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.69)% (.46)%(d)
Portfolio Turnover Rate............................. 45.2% 21.4%(d)
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
PRINCIPAL INTERNATIONAL FUND, INC.(e)
Class A shares 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------- ---- ---- ----
Net Asset Value, Beginning of Period................... $9.33 $8.14 $7.28 $7.44 $6.85
Income from Investment Operations:
Net Investment Income............................... .13 .09 .10 .08 .01
Net Realized and Unrealized Gain (Loss) on Investments .04 1.52 1.17 (.02) .64
Total from Investment Operations .17 1.61 1.27 .06 .65
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.10) (.11) (.08) (.03) (.02)
Distributions from Capital Gains.................... (.20) (.31) (.33) (.19) (.04)
Total Dividends and Distributions (.30) (.42) (.41) (.22) (.06)
Net Asset Value, End of Period......................... $9.20 $9.33 $8.14 $7.28 $7.44
Total Return(b)........................................ 1.93% 20.46% 18.36% 1.03% 9.60%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $302,757 $281,158 $172,276 $126,554 $115,812
Ratio of Expenses to Average Net Assets............. 1.25% 1.39% 1.45% 1.63% 1.74%
Ratio of Net Investment Income to Average Net Assets 1.45% 1.25% 1.43% 1.10% .10%
Portfolio Turnover Rate................................ 38.7% 26.6% 23.8% 35.4% 13.2%
PRINCIPAL INTERNATIONAL FUND, INC.(e)
Class B shares 1998 1997 1996 1995(f)
- -------------------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period................... $9.26 $8.07 $7.24 $6.71
Income from Investment Operations:
Net Investment Income............................... .07 .03 .03 .05
Net Realized and Unrealized Gain (Loss) on Investments .04 1.51 1.15 .51
Total from Investment Operations .11 1.54 1.18 .56
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.03) (.04) (.02) (.03)
Distributions from Capital Gains.................... (.20) (.31) (.33) --
Total Dividends and Distributions (.23) (.35) (.35) (.03)
Net Asset Value, End of Period......................... $9.14 $9.26 $8.07 $7.24
Total Return(b)........................................ 1.27% 19.62% 17.16 9.77%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $41,676 $33,842 $15,745 $3,908
Ratio of Expenses to Average Net Assets............. 1.91% 2.17% 2.28% 2.19%(d)
Ratio of Net Investment Income to Average Net Assets .77% .42% .64% .58%(d)
Portfolio Turnover Rate................................ 38.7% 26.6% 23.8% 35.4%(d)
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Class A shares 1998 1997(a)
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.07) (.01)
Net Realized and Unrealized Gain (Loss) on Investments .10 (.07)
Total from Investment Operations .03 (.08)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --
Total Dividends and Distributions -- --
Net Asset Value, End of Period......................... $9.99 $9.96
Total Return(b)........................................ .30% .50%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $11,765 $6,210
Ratio of Expenses to Average Net Assets............. 2.66% 1.99%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.81)% (.40)%(d)
Portfolio Turnover Rate............................. 99.8% 10.4%(d)
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Class B shares 1998 1997(a)
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.10) (.01)
Net Realized and Unrealized Gain (Loss) on Investments .11 (.07)
Total from Investment Operations .01 (.08)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --
Total Dividends and Distributions -- --
Net Asset Value, End of Period......................... $9.97 $9.96
Total Return(b)........................................ .10% .50%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $6,585 $4,774
Ratio of Expenses to Average Net Assets............. 2.90% 2.07%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (1.05)% (.47)%(d)
Portfolio Turnover Rate............................. 99.8% 10.4%(d)
</TABLE>
Notes to Financial Highlights
(a) 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 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.
<TABLE>
<CAPTION>
<S> <C> <C>
Per Share Per Share
Net Investment Unrealized
Income Gain (Loss)
Principal International Emerging Markets Fund, Inc.:
Class A $.01 $(.50)
Class B .01 (.50)
Principal International SmallCap Fund, Inc.:
Class A .01 .03
Class B .01 .03
</TABLE>
(b) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(c) Total return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Effective January 1, 1998, Princor World Fund, Inc. changed its name to
Principal International Fund, Inc.
(f) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Principal International 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.
Income-Oriented Funds
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
PRINCIPAL BOND FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period..................... $11.44 $11.17 $11.42 $10.27 $11.75
Income from Investment Operations:
Net Investment Income(b)............................. .71 .75 .76 .78 .78
Net Realized and Unrealized Gain (Loss) on Investments .16 .33 (.25) 1.16 (1.47)
Total from Investment Operations .87 1.08 .51 1.94 (.69)
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.72) (.81) (.76) (.78) (.78)
Distributions from Capital Gains...................... -- -- -- (.01) (.01)
Total Dividends and Distributions (.72) (.81) (.76) (.79) (.79)
Net Asset Value, End of Period........................... $11.59 $11.44 $11.17 $11.42 $10.27
Total Return(c).......................................... 7.76% 10.15% 4.74% 19.73% (6.01)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $148,081 $126,427 $113,437 $106,962 $88,801
Ratio of Expenses to Average Net Assets(b)............ .95% .95% .95% .94% .95%
Ratio of Net Investment Income to Average Net Assets.. 6.19% 6.70% 6.85% 7.26% 7.27%
Portfolio Turnover Rate.................................. 15.2% 12.8% 3.4% 5.1% 8.9%
PRINCIPAL BOND FUND, INC.(a)
Class B shares 1998 1997 1996 1995(f)
- --------------------------------------------------------------------------------------------- ----
Net Asset Value, Beginning of Period..................... $11.42 $11.15 $11.41 $10.19
Income from Investment Operations:
Net Investment Income(b).............................. .63 .67 .67 .63
Net Realized and Unrealized Gain (Loss) on Investments .16 .31 (.25) 1.19
Total from Investment Operations .79 .98 .42 1.82
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.63) (.71) (.68) (.60)
Distributions from Capital Gains...................... -- -- -- --
Total Dividends and Distributions (.63) (.71) (.68) (.60)
Net Asset Value, End of Period........................... $11.58 $11.42 $11.15 $11.41
Total Return(c).......................................... 7.04% 9.20% 3.91% 17.98%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $22,466 $13,403 $7,976 $2,708
Ratio of Expenses to Average Net Assets(b)............ 1.67% 1.70% 1.69% 1.59%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.45% 5.92% 6.14% 6.30%(e)
Portfolio Turnover Rate.................................. 15.2% 12.8% 3.4% 5.1%(e)
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period..................... $11.51 $11.26 $11.31 $10.28 $11.79
Income from Investment Operations:
Net Investment Income................................. .70 .70 .70 .71 .69
Net Realized and Unrealized Gain (Loss) on Investments .12 .29 (.05) 1.02 (1.40)
Total from Investment Operations .82 .99 .65 1.73 (.71)
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.70) (.74) (.70) (.70) (.68)
Distributions from Capital Gains...................... -- -- -- -- (.12)
Total Dividends and Distributions (.70) (.74) (.70) (.70) (.80)
Net Asset Value, End of Period........................... $11.63 $11.51 $11.26 $11.31 $10.28
Total Return(c).......................................... 7.38% 9.23% 6.06% 17.46% (6.26)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $251,455 $249,832 $259,029 $261,128 $249,438
Ratio of Expenses to Average Net Assets............... .86% .84% .81% .87% .95%
Ratio of Net Investment Income to Average Net Assets.. 6.07% 6.19% 6.31% 6.57% 6.35%
Portfolio Turnover Rate.................................. 17.1% 10.8% 25.9% 10.1% 24.8%
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.(a)
Class B shares 1998 1997 1996 1995(f)
- --------------------------------------------------------------------------------------------- ----
Net Asset Value, Beginning of Period..................... $11.50 $11.23 $11.29 $10.20
Income from Investment Operations:
Net Investment Income................................. .62 .64 .61 .56
Net Realized and Unrealized Gain (Loss) on Investments .12 .29 (.05) 1.07
Total from Investment Operations .74 .93 .56 1.63
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.64) (.66) (.62) (.54)
Distributions from Capital Gains...................... -- -- -- --
Total Dividends and Distributions (.64) (.66) (.62) (.54)
Net Asset Value, End of Period........................... $11.60 $11.50 $11.23 $11.29
Total Return(c).......................................... 6.60% 8.65% 5.17% 16.07%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $24,370 $15,431 $11,586 $4,699
Ratio of Expenses to Average Net Assets............... 1.57% 1.39% 1.60% 1.53%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.43% 5.63% 5.53% 5.68%(e)
Portfolio Turnover Rate.................................. 17.1% 10.8% 25.9% 10.1%(e)
PRINCIPAL HIGH YIELD FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period..................... $8.52 $8.27 $8.06 $7.83 $8.36
Income from Investment Operations:
Net Investment Income................................. .64 .67 .68 .68 .63
Net Realized and Unrealized Gain (Loss) on Investments (.88) .31 .23 .20 (.51)
Total from Investment Operations (.24) .98 .91 .88 .12
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.64) (.73) (.70) (.65) (.65)
Excess Distribution of Net Investment Income(h)....... (.01) -- -- -- --
Total Dividends and Distributions (.65) (.73) (.70) (.65) (.65)
Net Asset Value, End of Period........................... $7.63 $8.52 $8.27 $8.06 $7.83
Total Return(c).......................................... (3.18)% 12.33% 11.88% 11.73% 1.45%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $33,474 $38,239 $28,432 $23,396 $19,802
Ratio of Expenses to Average Net Assets............... 1.40% 1.22% 1.26% 1.45% 1.46%
Ratio of Net Investment Income to Average Net Assets.. 7.71% 7.99% 8.49% 8.71% 7.82%
Portfolio Turnover Rate.................................. 65.9% 39.2% 18.8% 40.3% 27.2%
PRINCIPAL HIGH YIELD FUND, INC.(a)
Class B shares 1998 1997 1996 1995(f)
- --------------------------------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period..................... $8.47 $8.22 $8.05 $7.64
Income from Investment Operations:
Net Investment Income................................. .57 .62 .60 .53
Net Realized and Unrealized Gain (Loss) on Investments (.87) .28 .20 .38
Total from Investment Operations (.30) .90 .80 .91
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.57) (.65) (.63) (.50)
Excess Distribution of Net Investment Income(h)....... (.01) -- -- --
Total Dividends and Distributions (.58) (.65) (.63) (.50)
Net Asset Value, End of Period........................... $7.59 $8.47 $8.22 $8.05
Total Return(c).......................................... (3.93)% 11.31% 10.46% 12.20%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $8,527 $6,558 $2,113 $633
Ratio of Expenses to Average Net Assets............... 2.34% 2.13% 2.38% 2.10%(e)
Ratio of Net Investment Income to Average Net Assets.. 6.78% 7.03% 7.39% 7.78%(e)
Portfolio Turnover Rate.................................. 65.9% 39.2% 18.8% 40.3%(e)
PRINCIPAL LIMITED TERM BOND FUND, INC.(a)
- --------------------------------------
Class A shares 1998 1997 1996(g)
- -----------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period..................... $9.88 $9.89 $9.90
Income from Investment Operations:
Net Investment Income(b).............................. .57 .61 .38
Net Realized and Unrealized Gain (Loss) on Investments .06 .03 (.04)
Total from Investment Operations .63 .64 .34
Less Dividends from Net Investment Income................ (.58) (.65) (.35)
Net Asset Value, End of Period........................... $9.93 $9.88 $9.89
Total Return(c).......................................... 6.57% 6.75% 3.62%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $27,632 $20,567 $17,249
Ratio of Expenses to Average Net Assets(b)............ .82% .90% .89%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.86% 6.20% 6.01%(e)
Portfolio Turnover Rate............................... 23.8% 17.4% 16.5%(e)
PRINCIPAL LIMITED TERM BOND FUND, INC.(a)
Class B shares 1998 1997 1996(g)
- -----------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period..................... $9.90 $9.89 $9.90
Income from Investment Operations:
Net Investment Income(b).............................. .54 .56 .36
Net Realized and Unrealized Gain (Loss) on Investments .06 .04 (.05)
Total from Investment Operations .60 .60 .31
Less Dividends from Net Investment Income................ (.52) (.59) (.32)
Net Asset Value, End of Period........................... $9.98 $9.90 $9.89
Total Return(c).......................................... 6.24% 6.31% 3.32%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $1,705 $625 $112
Ratio of Expenses to Average Net Assets(b)............ 1.22% 1.24% 1.15%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.44% 5.84% 5.75%(e)
Portfolio Turnover Rate.................................. 23.8% 17.4% 16.5%(e)
PRINCIPAL TAX-EXEMPT BOND FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------- ---- ----
Net Asset Value, Beginning of Period..................... $12.38 $12.04 $11.98 $10.93 $12.62
Income from Investment Operations:
Net Investment Income................................. .60 .63 .64 .65 .64
Net Realized and Unrealized Gain (Loss) on Investments .22 .39 .07 1.05 (1.54)
Total from Investment Operations .82 1.02 .71 1.70 (.90)
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.61) (.68) (.65) (.65) (.63)
Distributions from Capital Gains...................... -- -- -- -- (.16)
Total Dividends and Distributions (.61) (.68) (.65) (.65) (.79)
Net Asset Value, End of Period........................... $12.59 $12.38 $12.04 $11.98 $10.93
Total Return(c)......................................... 6.76% 8.71% 6.08% 16.03% (7.41)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $204,865 $193,007 $187,180 $179,715 $171,425
Ratio of Expenses to Average Net Assets............... .83% .79% .78% .83% .91%
Ratio of Net Investment Income to Average Net Assets.. 4.83% 5.14% 5.34% 5.67% 5.49%
Portfolio Turnover Rate.................................. 6.6% 8.9% 9.8% 17.6% 20.6%
PRINCIPAL TAX-EXEMPT BOND FUND, INC.(a)
Class B shares 1998 1997 1996 1995(f)
- --------------------------------------------------------------------------------------------- ----
Net Asset Value, Beginning of Period..................... $12.39 $12.02 $11.96 $10.56
Income from Investment Operations:
Net Investment Income................................. .53 .55 .55 .50
Net Realized and Unrealized Gain (Loss) on Investments .20 .40 .06 1.38
Total from Investment Operations .73 .95 .61 1.88
Less Dividends and Distributions:
Dividends from Net Investment Income................. (.53) (.58) (.55) (.48)
Distributions from Capital Gains..................... -- -- -- --
Total Dividends and Distributions (.53) (.58) (.55) (.48)
Net Asset Value, End of Period........................... $12.59 $12.39 $12.02 $11.96
Total Return(c).......................................... 6.01% 8.08% 5.23% 17.97%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $11,419 $7,783 $5,794 $3,486
Ratio of Expenses to Average Net Assets............... 1.43% 1.45% 1.52% 1.51%(e)
Ratio of Net Investment Income to Average Net Assets.. 4.22% 4.46% 4.59% 4.78%(e)
Portfolio Turnover Rate.................................. 6.6% 8.9% 9.8% 17.6%(e)
</TABLE>
Notes to Financial Highlights
(a) Effective January 1, 1998, the following changes were made to the names of
the Income Funds:
<TABLE>
<CAPTION>
<S> <C>
Former Fund Name New Fund Name
--------------------------------------- -------------
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Government Securites Income Fund, Inc. Principal Government Securities Income Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc. Principal Limited Term Bond Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc. Principal Tax-Exempt Bond Fund, Inc.
</TABLE>
(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods
indicated, the following funds would have had per share net investment
income and the ratios of expenses to average net assets as shown:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Year Ended
October 31, Per Share Ratio of Expenses
Except Net Investment to Average Net Amount
as Noted Income Assets Waived
Principal Bond Fund, Inc.:
Class A 1998 $.70 1.04% $121,092
1997 .74 .98 41,256
1996 .76 .97 22,536
1995 .77 1.02 86,018
1994 .77 1.09 120,999
Class B 1998 .62 1.81 26,130
1997 .66 1.79 8,982
1996 .67 1.79 5,874
1995(f) .62 1.62(e) 300
Principal Limited Term Bond Fund, Inc.:
Class A 1998 .55 1.13 76,952
1997 .59 1.15 46,271
1996(h) .37 1.16(e) 22,716
Class B 1998 .47 2.36 11,537
1997 .46 3.82 6,528
1996(h) .34 1.94(e) 259
</TABLE>
(c) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(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. 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 losses on investments during the initial interim period
as follows. This represents Class B share activities of each fund prior to
the initial public offering of Class B shares:
<TABLE>
<CAPTION>
<S> <C> <C>
Per Share Per Share
Net Investment Unrealized
Income (Loss)
Principal Bond Fund, Inc. $.01 $ --
Principal Government Securities Income Fund, Inc. .01 (.02)
Principal High Yield Fund, Inc. .01 (.03)
Principal Tax-Exempt Bond Fund, Inc. -- (.05)
</TABLE>
(g) Period from February 29, 1996, date shares first offered to the public,
through October 31, 1996. With respect to Class A shares, net investment
income, aggregating $.02 per share for the period from the initial
purchase of shares on February 13, 1996 through February 28, 1996,
was recognized, none of which was distributed to its sole shareholder,
Principal Life Insurance Company during the period. Additionally,
Class A shares incurred unrealized losses on investments of $.12 per share
during the initial interim period. With respect to Class B shares, no net
investment income was recognized for the period from initial purchase
of shares on February 27, 1996 through February 28, 1996. Additionally,
Class B shares incurred unrealized losses on investments of $.02 per share
during the initial interim period. This represents Class A share and
Class B share activities of the fund prior to the initial public offering
of both classes of shares.
(h) Dividends and distributions which exceed investment income and net realized
gains for financial reporting purposes but not for tax purposes are
reported as dividends in excess of net investment income or distributions
in excess of net realized gains on investments. To the extent distributions
exceed current and accumulated earnings and profits for federal income tax
purposes, they are reported as tax return of capital distributions.
Money Market Fund
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------- ---- ---- ----
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b)............................. .051 .050 .049 .052 .033
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
Total from Investment Operations .051 .050 .049 .052 .033
Less Dividends From Net Investment Income............... (.051) (.050) (.049) (.052) (.033)
Net Asset Value, End of Period.......................... $1.000 $1.000 $1.000 $1.000 $1.000
Total Return(c)......................................... 5.10% 4.96% 5.00% 5.36% 2.67%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $294,918 $836,072 $694,962 $623,864 $332,346
Ratio of Expenses to Average Net Assets(b)........... .56%(e) .63% .66% .72% .70%
Ratio of Net Investment Income to Average Net Assets. 5.12% 4.98% 4.88% 5.24% 3.27%
PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class B shares 1998 1997 1996 1995(g)
- --------------------------------------------------------------------------------------------- ----
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b)............................. .042 .041 .041 .041
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- --
Total from Investment Operations .042 .041 .041 .041
Less Dividends from Net Investment Income............... (.042) (.041) (.041) (.041)
Net Asset Value, End of Period.......................... $1.000 $1.000 $1.000 $1.000
Total Return(c)......................................... 4.25% 4.05% 4.13% 4.19%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $3,602 $992 $520 $208
Ratio of Expenses to Average Net Assets(b)........... 1.41%(e) 1.47% 1.50% 1.42%(f)
Ratio of Net Investment Income to Average Net Assets. 4.23% 4.08% 4.08% 4.50%(f)
</TABLE>
Notes to Financial Highlights
(a) Effective January 1, 1998, the following changes were made to the names of
the Money Market Funds:
Former Fund Name New Fund Name
Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.
(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods
indicated, the Money Market Funds would have had per share net investment
income and the ratios of expenses to average net assets as shown:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Year Ended Ratio of
October 31, Per Share Expenses
Except Net Investment to Average Amount
as Noted Income Net Assets Waived
Principal Cash Management Fund, Inc.:
Class A 1998(e) $ .051 .56% $ --
1997 .050 .63 --
1996 .049 .67 7,102
1995 .052 .78 296,255
1994 .031 .90 595,343
Class B 1998(e) .041 1.49 1,343
1997 .036 2.14 5,492
1996 .029 3.94 6,140
1995(g) .041(f) 1.63(f) 104
</TABLE>
(c) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(d) Total return amounts have not been annualized.
(e) Management fee waivers apply to November 1, 1997 through February 28, 1998.
(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.
Additional information about the Funds is available in the Statement of
Additional Information dated March 1, 1999, and which is part of this
prospectus. Information about the Funds' investments is also available in the
Funds' annual and semi-annual reports to shareholders. In the Funds' annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Funds' performance during its last
fiscal year. The Statement of Additional Information and annual and semi-annual
reports can be obtained free of charge by writing or telephoning Princor
Financial Services Corporation, P.O. Box 10423, Des Moines, IA 50306.
Telephone 1-800-247-4123.
Information about the Funds can be reviewed and copied at the Securities and
Exchange Commission's Public Reference Room in Washington, D.C. Information on
the operation of the public reference room may be obtained by calling the
Commission at 800-SEC-0330. Reports and other information about the Funds are
available on the Commission's internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.
The U.S. Government does not insure or guarantee an investment in any of the
Funds. There can be no assurance the Money Market Fund will be able to maintain
a stable share price of $1.00 per share.
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.
SEC FILE DOMESTIC GROWTH-ORIENTED FUNDS
811-05072 Principal Balanced Fund, Inc.
811-06263 Principal Blue Chip Fund, Inc.
811-01874 Principal Capital Value Fund, Inc.
811-01873 Principal Growth Fund, Inc.
811-05171 Principal MidCap Fund, Inc.
811-08379 Principal Real Estate Fund, Inc.
811-08381 Principal SmallCap Fund, Inc.
811-07266 Principal Utilities Fund, Inc.
INTERNATIONAL GROWTH-ORIENTED FUNDS
811-08249 Principal International Emerging Markets Fund, Inc.
811-03183 Principal International Fund, Inc.
811-08251 Principal International SmallCap Fund, Inc.
INCOME-ORIENTED FUNDS
811-05172 Principal Bond Fund, Inc.
811-04226 Principal Government Securities Income Fund, Inc.
811-05174 Principal High Yield Fund, Inc.
811-07453 Principal Limited Term Bond Fund, Inc.
811-04449 Principal Tax-Exempt Bond Fund, Inc.
MONEY MARKET FUND
811-03585 Principal Cash Management Fund, Inc.
