Registration No. 33-10362
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------
POST-EFFECTIVE AMENDMENT NO. 14 TO
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
and
REGISTRATION STATEMENT
under
THE INVESTMENT COMPANY ACT OF 1940
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PRINCIPAL GOVERNMENT SECURITIES FUND, INC.
(Exact name of Registrant as specified in Charter)
The Principal Financial Group
Des Moines, Iowa 50392
(Address of principal executive offices)
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Telephone Number (515) 248-3842
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MICHAEL D. ROUGHTON Copy to:
The Principal Financial Group JOHN W. BLOUCH, L.L.P.
Des Moines, Iowa 50392 Suite 405 West
1025 Thomas Jefferson Street, N.W.
Washington, DC 20007-0805
(Name and address of agent for service)
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It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)of Rule 485
X on December 31, 1997 pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a)(1) of Rule 485
on (date) pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
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<PAGE>
The Principal Variable Contracts Fund, Inc. described in this Prospectus is
a diversified, open-end management investment companyoffering a variety of
Accounts each of which was formerly a separately incorporated investment
company. Together, the Accounts provide the following range of investment
objectives:
Growth-Oriented Accounts
Aggressive Growth Account (formerly known as Principal Aggressive Growth Fund,
Inc.) seeks to provide long-term capital appreciation by investing primarily
in growth-oriented common stocks of medium and large capitalization U.S.
corporations and, to a limited
extent, foreign corporations.
Asset Allocation Account (formerly known as Principal Asset Allocation
Fund, Inc.) seeks to generate a total investment return consistent with the
preservation of capital.
Balanced Account (formerly known as Principal Balanced Fund, Inc.) seeks to
generate a total return consisting of current income and capital appreciation
while assuming reasonable risks in furtherance of the investment objective.
Capital Value Account (formerly known as Principal Capital Accumulation Fund,
Inc.) seeks to achieve primarily long-term capital appreciation and secondary
growth of investment income through the purchase primarily of common stocks, but
the Account may invest in other securities.
Growth Account (formerly known as Principal Growth Fund, Inc.) seeks growth
of capital through the purchase primarily of common stocks, but the Account may
invest in other securities.
International Account (formerly known as Principal World Fund, Inc.) seeks
long-term growth of capital by investing in a portfolio of equity securities of
companies domiciled in any of the nations of the world.
MidCap Account (formerly known as Principal Emerging Growth Fund, Inc.) seeks to
achieve capital appreciation by investing primarily in securities of emerging
and other growth-oriented companies.
Income-Oriented Accounts
Bond Account (formerly known as Principal Bond Fund, Inc.) seeks to provide
as high a level of income as is consistent with preservation of capital and
prudent investment risk.
Government Securities Account (formerly known as Principal Government Securities
Fund, Inc.) seeks a high level of current income, liquidity and safety of
principal. The Account seeks to achieve its objective through the purchase of
obligations issued or guaranteed by the United States Government or its
agencies, with emphasis on Government National Mortgage Association Certificates
("GNMA Certificates"). Account shares are not guaranteed by the United States
Government.
Money Market Account
Money Market Account (formerly known as Principal Money Market Fund, Inc.) seeks
as high a level of income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
An investment in the Money Market Account is neither insured nor guaranteed
by the U.S. Government. There can be no assurance the Money Market Account will
be able to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Variable
Contracts Fund, Inc. that an investor ought to know before investing. It should
be read and retained for future reference.
Additional information about the Fund has been filed with the Securities
and Exchange Commission, including a document called Statement of Additional
Information, dated December 31, 1997. The Statement of Additional Information is
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Variable Contracts Fund, Inc.
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is December 31, 1997.
TABLE OF CONTENTS
Page
Summary ...................................................... 2
Financial Highlights........................................... 5
Investment Objectives, Policies and Restrictions............... 11
Certain Investment Policies and Restrictions................... 20
Manager and Sub-Advisors ..................................... 23
Duties Performed by the Manager and Sub-Advisors............... 24
Managers' Comments............................................. 25
Determination of Net Asset Value of Account Shares............. 31
Performance Calculation........................................ 32
Income Dividends, Distributions and Tax Status................. 33
Eligible Purchasers and Purchase of Shares..................... 34
Shareholder Rights ............................................ 34
Redemption of Shares........................................... 35
Additional Information......................................... 36
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, shares of the Account in any jurisdiction in which such sale,
offer to sell, or solicitation may not be lawfully made. No dealer, salesperson,
or other person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund or the Fund's Manager.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Variable Contracts Fund, Inc. is an open-end diversified
management investment company offering multiple accounts.
Who may purchase shares of the Accounts?
Shares of the Accounts are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What does the Fund offer investors?
Professional Investment Management: Experienced securities analysts provide
each Account with professional investment management.
Diversification: Each Account will diversify by investing in securities
issued by a number of issuers doing business in a variety of industries and/or
located in different geographical regions. Diversification reduces investment
risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Accounts creates administrative efficiencies.
Redeemability: Upon request each Account will redeem its shares and
promptly pay the investor the current net asset value of the shares redeemed.
See "Redemption of Shares."
What are the Accounts' investment objectives?
Growth-Oriented Accounts
The investment objective of the Aggressive Growth Account is to provide
long-term capital appreciation by investing primarily in growth-oriented common
stocks of medium and large capitalization U.S. corporations and, to a limited
extent, foreign corporations.
The investment objective of the Asset Allocation Account is to generate a
total investment return consistent with the preservation of capital. The Account
intends to pursue a flexible investment policy in seeking to achieve this
investment objective.
The investment objective of the Balanced Account is to seek to generate a
total return consisting of current income and capital appreciation while
assuming reasonable risks in furtherance of this objective.
The primary investment objective of the Capital Value Account is long-term
capital appreciation and its secondary investment objective is growth of
investment income. The Account seeks to achieve its investment objectives
through the purchase primarily of common stocks, but the Account may invest in
other securities.
The investment objective of the Growth Account is growth of capital. The
Account seeks to achieve its objective through the purchase primarily of common
stocks, but the Account may invest in other securities.
The investment objective of the International Account is to seek long-term
growth of capital by investing in a portfolio of equity securities domiciled in
any of the nations of the world.
The investment objective of the MidCap Account is to achieve capital
appreciation by investing primarily in securities of emerging and other
growth-oriented companies.
Income-Oriented Accounts
The investment objective of the Bond Account is to provide as high a level
of income as is consistent with preservation of capital and prudent investment
risk.
The investment objective of the Government Securities Account is to seek a
high level of current income, liquidity and safety of principal. The Account
seeks to achieve its objective through the purchase of obligations issued or
guaranteed by the United States Government or its agencies, with emphasis on
Government National Mortgage Association Certificates ("GNMA Certificates").
Account shares are not guaranteed by the United States Government.
Money Market Account
The investment objective of the Money Market Account is to seek as high a
level of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
There can be no assurance that the investment objectives of any of the
Accounts will be realized. See "Investment Objectives, Policies and
Restrictions."
Who serves as Manager for the Accounts?
Principal Management Corporation (formerly known as Princor Management
Corporation)("Manager"), a corporation organized in 1969 by Principal Mutual
Life Insurance Company, is the Manager for each of the Accounts. It is also the
dividend disbursing and transfer agent for the Fund. In order to provide
investment advisory services for certain Accounts the Manager has executed
sub-advisory agreements with Invista Capital Management, Inc. (Balanced, Capital
Value, Government Securities, Growth, International and MidCap Accounts) and
Morgan Stanley Asset Management Inc. (Aggressive Growth Account and Asset
Allocation Account). Subsequent references to these corporations may be as
"Invista", "MSAM" or "Sub-Advisor". See "Manager and Sub-Advisors."
What fees and expenses apply to ownership of shares of the Accounts?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Accounts.
ANNUAL ACCOUNT OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Account Fee Expenses Expenses
Aggressive Growth Account .80% .05% .85%
Asset Allocation Account .80% .07% .87%
Balanced Account .60% .03% .63%
Bond Account .50% .03% .53%
Capital Value Account .48% .01% .49%
Government Securities Account .50% .02% .52%
Growth Account .50% .02% .52%
International Account .75% .15% .90%
MidCap Account .64% .02% .66%
Money Market Account .50% .06% .56%
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Period (in years)
Account 1 3 5 10
Aggressive Growth Account $9 $27 $47 $105
Asset Allocation Account $9 $28 $48 $107
Balanced Account $6 $20 $35 $79
Bond Account $5 $17 $30 $66
Capital Value Account $5 $16 $27 $62
Government Securities Account $5 $17 $29 $65
Growth Account $5 $17 $29 $65
International Account $9 $29 $50 $111
MidCap Account $7 $21 $37 $82
Money Market Account $6 $18 $31 $70
This Example is based on the Annual Account Operating expenses for each
Account described above. Please remember that the Example should not be
considered a representation of past or future expenses and that actual
expenses may be greater or less than shown.
The purpose of the above table is to assist you in understanding the
various expenses that an investor in the Accounts will bear directly or
indirectly. See "Duties Performed by the Manager and Sub-Advisors."
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from financial statements
which, for the five years in the period ended December 31, 1996, have been
audited by Ernst & Young LLP, independent auditors, whose report has been
incorporated by reference herein. The financial highlights should be read in
conjunction with the financial statements, related notes, and other financial
information incorporated by reference herein. Audited financial statements may
be obtained by shareholders, without charge, by telephoning 1-800-451-5447.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
Net Realized Excess
and Distri- Distri-
Net Asset Unrealized Total Dividends butions butions
Value at Net Gain from from Net from from Total
Beginning Investment (Loss) on Investment Investment Capital Capital Distri-
of Period Income Investments Operations Income Gains Gains(a) butions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth Account(b)
Six Months Ended June 30, 1997(c) $14.52 $ .02 $1.91 $1.93 -- $ (.45) -- $ (.45)
Year Ended December 31,
1996 12.94 .11 3.38 3.49 $(.11) (1.80) -- (1.91)
1995 10.11 .13 4.31 4.44 (.13) (1.48) -- (1.61)
Period Ended December 31, 1994(f) 9.92 .05 .24 .29 (.05) (.05) -- (.10)
Asset Allocation Account(b)
Six Months Ended June 30, 1997(c) 11.48 .16 1.14 1.30 -- (.21) -- (.21)
Year Ended December 31,
1996 11.11 .36 1.06 1.42 (.36) (.69) -- (1.05)
1995 9.79 .40 1.62 2.02 (.40) (.30) -- (.70)
Period Ended December 31, 1994(f) 9.98 .23 (.18) .05 (.23) -- $(.01) (.24)
Balanced Account(b)(f)
Six Months Ended June 30, 1997(c) 14.44 .22 1.19 1.41 -- (.01) -- (.01)
Year Ended December 31,
1996 13.97 .40 1.41 1.81 (.40) (.94) -- (1.34)
1995 11.95 .45 2.44 2.89 (.45) (.42) -- (.87)
1994 12.77 .37 (.64) (.27) (.37) (.18) -- (.55)
1993 12.58 .42 .95 1.37 (.42) (.76) -- (1.18)
Six Months Ended December 31, 1992(h) 12.93 .23 .75 .98 (.47) (.86) -- (1.33)
Year Ended June 30,
1992 11.33 .47 1.61 2.08 (.48) -- -- (.48)
1991 10.79 .54 .59 1.13 (.57) (.02) -- (.59)
1990 11.89 .60 (.48) .12 (.63) (.59) -- (1.22)
1989 11.75 .62 .30 .92 (.55) (.23) -- (.78)
Period Ended June 30, 1988(i) 10.00 .27 1.51 1.78 (.03) -- -- (.03)
Bond Account(b)
Six Months Ended June 30, 1997(c) 11.33 .38 (.04) .34 -- -- -- --
Year Ended December 31,
1996 11.73 .68 (.40) .28 (.68) -- -- (.68)
1995 10.12 .62 1.62 2.24 (.63) -- -- (.63)
1994 11.16 .72 (1.04) (.32) (.72) -- -- (.72)
1993 10.77 .88 .38 1.26 (.87) -- -- (.87)
Six Months Ended December 31, 1992(h) 11.08 .45 .13 .58 (.89) -- -- (.89)
Year Ended June 30,
1992 10.64 .91 .46 1.37 (.93) -- -- (.93)
1991 10.72 .94 (.06) .88 (.96) -- -- (.96)
1990 10.92 .95 (.21) .74 (.94) -- -- (.94)
1989 10.68 1.15 .17 1.32 (.96) (.12) -- (1.08)
Period Ended June 30, 1988(i) 10.00 .32 .40 .72 (.04) -- -- (.04)
Capital Value Account(b)
Six Months Ended June 30, 1997(c) 29.84 .32 3.81 4.13 -- (1.07) -- (1.07)
Year Ended December 31,
1996 27.80 .57 5.82 6.39 (.58) (3.77) -- (4.35)
1995 23.44 .60 6.69 7.29 (.60) (2.33) -- (2.93)
1994 24.61 .62 (.49) .13 (.61) (.69) -- (1.30)
1993 25.19 .61 1.32 1.93 (.60) (1.91) -- (2.51)
Six Months Ended December 31, 1992(h) 26.03 .31 1.84 2.15 (.64) (2.35) -- (2.99)
Year Ended June 30,
1992 23.35 .65 2.70 3.35 (.67) -- -- (.67)
1991 22.48 .74 1.22 1.96 (.79) (.30) -- (1.09)
1990 23.63 .79 .14 .93 (.81) (1.27) -- (2.08)
1989 23.23 .77 1.32 2.09 (.68) (1.01) -- (1.69)
1988 27.51 .60 (1.50) (.90) (.69) (2.69) -- (3.38)
1987 25.48 .40 4.46 4.86 (.50) (2.33) -- (2.83)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
<S> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth Account(b)
Six Months Ended June 30, 1997(c) $16.00 13.60%(d) $109,514 .83%(e) .31%(e) 179.5%(e) $.0563
Year Ended December 31,
1996 14.52 28.05% 90,106 .85% 1.05% 166.9% .0541
1995 12.94 44.19% 33,643 .90% 1.34% 172.9% N/A
Period Ended December 31, 1994(f) 10.11 2.59%(d) 13,770 1.03%(e) 1.06%(e) 105.6%(e) N/A
Asset Allocation Account(b)
Six Months Ended June 30, 1997(c) 12.57 11.47%(d) 71,892 .88%(e) 2.83%(e) 149.4%(e) .0559
Year Ended December 31,
1996 11.48 12.92% 61,631 .87% 3.45% 108.2% .0497
1995 11.11 20.66% 41,074 .89% 4.07% 47.1% N/A
Period Ended December 31, 1994(f) 9.79 .52%(d) 28,041 .95%(e) 4.27%(e) 60.7%(e) N/A
Balanced Account(b)(f)
Six Months Ended June 30, 1997(c) 15.84 9.74%(d) 113,288 .62%(e) 3.19%(e) 33.5%(e) .0374
Year Ended December 31,
1996 14.44 13.13% 93,158 .63% 3.45% 22.6% .0417
1995 13.97 24.58% 45,403 .66% 4.12% 25.7% N/A
1994 11.95 (2.09)% 25,043 .69% 3.42% 31.5% N/A
1993 12.77 11.06% 21,399 .69% 3.30% 15.8% N/A
Six Months Ended December 31, 1992(h) 12.58 8.00%(d) 18,842 .73%(e) 3.71%(e) 38.4%(e) N/A
Year Ended June 30,
1992 12.93 18.78% 17,344 .72% 3.80% 26.6% N/A
1991 11.33 11.36% 14,555 .73% 5.27% 27.1% N/A
1990 10.79 .87% 13,016 .74% 5.52% 33.1% N/A
1989 11.89 8.55% 12,751 .74% 5.55% 29.3% N/A
Period Ended June 30, 1988(i) 11.75 17.70%(d) 11,469 .80%(e) 4.96%(e) 41.7%(e) N/A
Bond Account(b)
Six Months Ended June 30, 1997(c) 11.67 3.00%(d) 71,812 .52%(e) 7.07%(e) 8.7%(e) N/A
Year Ended December 31,
1996 11.33 2.36% 63,387 .53% 7.00% 1.7% N/A
1995 11.73 22.17% 35,878 .56% 7.28% 5.9% N/A
1994 10.12 (2.90)% 17,108 .58% 7.86% 18.2% N/A
1993 11.16 11.67% 14,387 .59% 7.57% 14.0% N/A
Six Months Ended December 31, 1992(h) 10.77 5.33%(d) 12,790 .62%(e) 8.10%(e) 6.7%(e) N/A
Year Ended June 30,
1992 11.08 13.57% 12,024 .62% 8.47% 6.1% N/A
1991 10.64 8.94% 10,552 .63% 9.17% 2.7% N/A
1990 10.72 7.15% 9,658 .64% 9.09% 0.0% N/A
1989 10.92 13.51% 9,007 .64% 9.18% 12.2% N/A
Period Ended June 30, 1988(i) 10.68 6.06%(d) 17,598 .58%(e) 8.11%(e) 68.8%(e) N/A
Capital Value Account(b)
Six Months Ended June 30, 1997(c) 32.90 14.28%(d) 249,077 .48%(e) 2.22%(e) 29.0%(e) .0427
Year Ended December 31,
1996 29.84 23.50% 205,019 .49% 2.06% 48.5% .0426
1995 27.80 31.91% 135,640 .51% 2.25% 49.2% N/A
1994 23.44 .49% 120,572 .51% 2.36% 44.5% N/A
1993 24.61 7.79% 128,515 .51% 2.49% 25.8% N/A
Six Months Ended December 31, 1992(h) 25.19 8.81%(d) 105,355 .55%(e) 2.56%(e) 39.7%(e) N/A
Year Ended June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8% N/A
1991 23.35 9.46% 76,537 .53% 3.53% 14.0% N/A
1990 22.48 3.94% 74,008 .56% 3.56% 30.2% N/A
1989 23.63 10.02% 68,132 .57% 3.53% 23.5% N/A
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7% N/A
1987 27.51 22.17% 57,478 .63% 1.99% 16.1% N/A
</TABLE>
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
Net Realized Excess
and Distri- Distri-
Net Asset Unrealized Total Dividends butions butions
Value at Net Gain from from Net from from Total
Beginning Investment (Loss) on Investment Investment Capital Capital Distri-
of Period Income Investments Operations Income Gains Gains(a) butions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government Securities Account(b)
Six Months Ended June 30, 1997(c) $10.31 $.33 $ .01 $ .34 $(.01) $ -- $ -- $(.01)
Year Ended December 31,
1996 10.55 .59 (.24) .35 (.59) -- -- (.59)
1995 9.38 .60 1.18 1.78 (.61) -- -- (.61)
1994 10.61 .76 (1.24) (.48) (.75) -- -- (.75)
1993 10.28 .71 .33 1.04 (.71) -- -- (.71)
Six Months Ended December 31, 1992(h) 10.93 .40 .04 .44 (.78) -- (.31) (1.09)
Year Ended June 30,
1992 10.24 .80 .71 1.51 (.81) -- (.01) (.82)
1991 10.05 .80 .24 1.04 (.81) -- (.04) (.85)
1990 10.05 .78 -- .78 (.78) -- -- (.78)
1989 9.37 .80 .34 1.14 (.46) -- -- (.46)
1988 9.47 .78 (.09) .69 (.79) -- -- (.79)
Period Ended June 30, 1987(j) 10.00 .18 (.59) (.41) (.12) -- -- (.12)
Growth Account(b)
Six Months Ended June 30, 1997(c) 13.79 .09 2.01 2.10 -- -- -- --
Year Ended December 31,
1996 12.43 .16 1.39 1.55 (.16) (.03) -- (.19)
1995 10.10 .17 2.42 2.59 (.17) -- (.09) (.26)
Period Ended December 31, 1994(k) 9.60 .07 .51 .58 (.08) -- -- (.08)
International Account(b)
Six Months Ended June 30, 1997(c) 13.02 .17 2.03 2.20 -- -- (.04) (.04)
Year Ended December 31,
1996 10.72 .22 2.46 2.68 (.22) (.16) -- (.38)
1995 9.56 .19 1.16 1.35 (.18) -- (.01) (.19)
Period Ended December 31, 1994(k) 9.94 .03 (.33) (.30) (.05) (.02) (.01) (.08)
MidCap Account(b)(l)
Six Months Ended June 30, 1997(c) 29.74 .15 3.53 3.68 -- (.10) -- (.10)
Year Ended December 31,
1996 25.33 .22 5.07 5.29 (.22) (.66) -- (.88)
1995 19.97 .22 5.57 5.79 (.22) (.21) -- (.43)
1994 20.79 .14 .03 .17 (.14) (.85) -- (.99)
1993 18.91 .17 3.47 3.64 (.17) (1.59) -- (1.76)
Six Months Ended December 31, 1992(h) 15.97 .10 3.09 3.19 (.21) (.04) -- (.25)
Year Ended June 30,
1992 13.93 .21 2.04 2.25 (.21) -- -- (.21)
1991 14.25 .20 .50 .70 (.23) (.79) -- (1.02)
1990 13.35 .24 .87 1.11 (.20) (.01) -- (.21)
1989 12.85 .16 1.35 1.51 (.11) (.90) -- (1.01)
Period Ended June 30, 1988(i) 10.00 .05 2.83 2.88 (.03) -- -- (.03)
Money Market Account(b)
Six Months Ended June 30, 1997(c) 1.000 .025 -- .025 (.025) -- -- (.025)
Year Ended December 31,
1996 1.000 .049 -- .049 (.049) -- -- (.049)
1995 1.000 .054 -- .054 (.054) -- -- (.054)
1994 1.000 .037 -- .037 (.037) -- -- (.037)
1993 1.000 .027 -- .027 (.027) -- -- (.027)
Six Months Ended December 31, 1992(h) 1.000 .016 -- .016 (.016) -- -- (.016)
Year Ended June 30,
1992 1.000 .046 -- .046 (.046) -- -- (.046)
1991 1.000 .070 -- .070 (.070) -- -- (.070)
1990 1.000 .077 -- .077 (.077) -- -- (.077)
1989 1.000 .083 -- .083 (.083) -- -- (.083)
1988 1.000 .064 -- .064 (.064) -- -- (.064)
1987 1.000 .057 -- .057 (.057) -- -- (.057)
</TABLE>
<TABLE>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
<S> <C> <C> <C> <C> <C> <C> <C>
Government Securities Account(b)
Six Months Ended June 30, 1997(c) $10.64 3.26%(d) $84,656 .53%(e) 6.48%(e) 11.0%(e) N/A
Year Ended December 31,
1996 10.31 3.35% 85,100 .52% 6.46% 8.4% N/A
1995 10.55 19.07% 50,079 .55% 6.73% 9.8% N/A
1994 9.38 (4.53)% 36,121 .56% 7.05% 23.2% N/A
1993 10.61 10.07% 36,659 .55% 7.07% 20.4% N/A
Six Months Ended December 31, 1992(h) 10.28 4.10%(d) 31,760 .59%(e) 7.35%(e) 34.5%(e) N/A
Year Ended June 30,
1992 10.93 15.34% 33,022 .58% 7.84% 38.9% N/A
1991 10.24 10.94% 26,021 .59% 8.31% 4.2% N/A
1990 10.05 8.16% 21,488 .61% 8.48% 18.7% N/A
1989 10.05 12.61% 15,890 .63% 8.68% 3.7% N/A
1988 9.37 7.69% 12,902 .66% 8.47% 2.7% N/A
Period Ended June 30, 1987(j) 9.47 (.94)%(d) 10,778 .64%(e) 8.50%(e) 0.2%(e) N/A
Growth Account(b)
Six Months Ended June 30, 1997(c) 15.89 15.23%(d) 132,259 .51%(e) 1.36%(e) 7.5%(e) $.0452
Year Ended December 31,
1996 13.79 12.51% 99,612 .52% 1.61% 2.0% .0401
1995 12.43 25.62% 42,708 .58% 2.08% 6.9% N/A
Period Ended December 31, 1994(k) 10.10 5.42%(d) 13,086 .75%(e) 2.39%(e) 0.9%(e) N/A
International Account(b)
Six Months Ended June 30, 1997(c) 15.18 16.98%(d) 107,095 .84%(e) 2.92%(e) 25.4%(e) .0186
Year Ended December 31,
1996 13.02 25.09% 71,682 .90% 2.28% 12.5% .0120
1995 10.72 14.17% 30,566 .95% 2.26% 15.6% N/A
Period Ended December 31, 1994(k) 9.56 (3.37)%(d) 13,746 1.24%(e) 1.31%(e) 14.4%(e) N/A
MidCap Account(b)(l)
Six Months Ended June 30, 1997(c) 33.32 12.39%(d) 180,072 .65%(e) 1.05%(e) 10.9%(e) .0390
Year Ended December 31,
1996 29.74 21.11% 137,161 .66% 1.07% 8.8% .0379
1995 25.33 29.01% 58,520 .70% 1.23% 13.1% N/A
1994 19.97 .78% 23,912 .74% 1.15% 12.0% N/A
1993 20.79 19.28% 12,188 .78% .89% 22.4% N/A
Six Months Ended December 31, 1992(h) 18.91 20.12%(d) 9,693 .81%(e) 1.24%(e) 8.6%(e) N/A
Year Ended June 30,
1992 15.97 16.19% 7,829 .82% 1.33% 10.1% N/A
1991 13.93 5.72% 6,579 .89% 1.70% 11.1% N/A
1990 14.25 8.32% 6,067 .88% 1.74% 17.9% N/A
1989 13.35 13.08% 5,509 .90% 1.31% 21.4% N/A
Period Ended June 30, 1988(i) 12.85 28.72%(d) 4,857 .94%(e) .64%(e) 4.6%(e) N/A
Money Market Account(b)
Six Months Ended June 30, 1997(c) 1.000 2.50%(d) 43,688 .55%(e) 5.06%(e) N/A N/A
Year Ended December 31,
1996 1.000 5.07% 46,244 .56% 5.00% N/A N/A
1995 1.000 5.59% 32,670 .58% 5.32% N/A N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A N/A
Six Months Ended December 31, 1992(h) 1.000 1.54%(d) 27,680 .59%(e) 3.10%(e) N/A N/A
Year Ended June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A N/A
</TABLE>
Notes to Financial Highlights
(a) Due to the timing of dividend distributions and the differences in
accounting for income and realized gains (losses) for financial statement
and federal income tax purposes, the fiscal year in which amounts are
distributed may differ from the year in which the income and realized gains
(losses) are recorded for financial statement purposes by the fund. The
differences between the income and gains distributed on a book versus tax
basis are shown in the Financial Highlights as excess distributions from
net investment income and from capital gains.
(b) Effective January 1, 1998, the following Fund names were changed:
Principal Aggressive Growth Fund, Inc. became Aggressive Growth Account
Principal Asset Allocation Fund became Asset Allocation Account
Principal Balanced Fund, Inc. became Balanced Account
Principal Bond Fund, Inc. became Bond Account
Principal Capital Accumulation Fund, Inc. became Capital Value Account
Principal Emerging Growth Fund, Inc. became MidCap Account
Principal Government Securities Fund, Inc. became Government Securities
Account
Principal Growth Fund, Inc. became Growth Account
Principal Money Market Fund, Inc. became Money Market Account
Principal World Fund, Inc. became International Account
(c) Unaudited.
(d) Total return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from June 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Aggressive Growth Account and $.01 per share for the Asset Allocation
Account for the period from the initial purchase of shares on May 23, 1994
through May 31, 1994, was recognized, none of which was distributed to the
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the Aggressive Growth Account and the Asset
Allocation Account incurred unrealized losses on investments of $.09 and
$.03 per share, respectively, during the initial interim period. This
represented activities of each Account prior to the initial public offering
of Account shares.
(g) Effective May 1, 1994, the name of Principal Managed Fund, Inc. was changed
to Principal Balanced Fund, Inc.
(h) Effective July 1, 1992 the Account changed its fiscal year end from June 30
to December 31.
(i) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December
10, 1987 through December 17, 1987 was recognized, all of which was
distributed to the Account's sole stockholder, Principal Mutual Life
Insurance Company. This represented activity of the Account prior to the
initial offering of shares to eligible purchasers.
(j) Period from April 9, 1987, date shares first offered to the public, through
June 30, 1987. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on October 31, 1987 through
December 17, 1987 was recognized, all of which was distributed to the
Account's sole stockholder, Principal Mutual Life Insurance Company. This
represented activity of the Account prior to the initial offering of shares
to eligible purchasers.
(k) Period from May 1, 1994, date shares first offered to the public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
the Growth Account and $.04 per share for the International Account for the
period from the initial purchase of shares on March 23, 1994 through April
30, 1994, was recognized, none of which was distributed to the sole
stockholder, Principal Mutual Life Insurance Company, during the period.
Additionally, the Growth Account and the International Account incurred
unrealized losses on investments of $.41 and $.10 per share, respectively,
during the initial interim period. This represented activities of each
Account prior to the initial public offering of Account shares.
(l) Effective May 1, 1992, the name of Principal Aggressive Growth Fund, Inc.
was changed to Principal Emerging Growth Fund, Inc.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Account are described below.
There can be no assurance that the objectives of the Accounts will be realized.
GROWTH-ORIENTED ACCOUNTS
The Fund currently includes five Accounts which seek capital appreciation
through investments in equity securities (Aggressive Growth Account, Capital
Value Account, Growth Account, International Account and MidCap Account) and two
Accounts which seek a total investment return including both capital
appreciation and income through investments in equity and debt securities (Asset
Allocation Account and Balanced Account). These seven Accounts are collectively
referred to as the Growth-Oriented Accounts.
The Growth-Oriented Accounts may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and American Depository Receipts based
on any of the foregoing securities. The Aggressive Growth, Capital Value,
Growth, International and MidCap Accounts will seek to be fully invested under
normal conditions in equity securities. When, in the opinion of the Manager or
Sub-Advisor, current market or economic conditions warrant, a Growth-Oriented
Account may for temporary defensive purposes place all or a portion of its
assets in cash, on which the Account would earn no income, cash equivalents,
bank certificates of deposit, bankers acceptances, repurchase agreements,
commercial paper, commercial paper master notes which are floating rate debt
instruments without a fixed maturity, United States Government securities, and
preferred stocks and debt securities, whether or not convertible into or
carrying rights for common stock. A Growth-Oriented Account may also maintain
reasonable amounts in cash or short-term debt securities for daily cash
management purposes or pending selection of particular long-term investments.
Aggressive Growth Account
The Aggressive Growth Account's investment objective is to provide
long-term capital appreciation by investing primarily in growth-oriented common
stocks of medium and large capitalization U.S. corporations and, to a limited
extent, foreign corporations. Common stocks for this purpose include common
stocks and equivalents, such as securities convertible into common stocks and
securities having common stock characteristics, such as rights and warrants to
purchase common stocks. Under normal circumstances, the Account will invest at
least 65% of the value of its total assets in common stocks.
The Account employs a flexible and eclectic investment process in pursuit
of its investment objective. In selecting stocks for the Account, the
Sub-Advisor, MSAM, concentrates on a universe of rapidly growing, high quality
companies and lower but accelerating earnings growth situations. The
Sub-Advisor's universe of potential investments generally comprises companies
with market capitalizations of $750 million or more and is not restricted to
specific market sectors. The Sub-Advisor uses its research capabilities,
analytical resources and judgment to assess economic, industry and market
trends, as well as individual company developments, to select promising growth
investments for the Account. The Sub-Advisor concentrates on companies with
strong, communicative managements and clearly defined strategies for growth. In
addition, the Sub-Advisor rigorously assesses company developments, including
changes in strategic direction, management focus and current and likely future
earnings results. Valuation is important to the Sub-Advisor but is viewed in the
context of prospects for sustainable earnings growth and the potential for
positive earnings surprises vis-a-vis consensus expectations. The Account is
free to invest in any common stock which in the Sub-Advisor's judgment provides
above average potential for capital appreciation.
In selecting investments for the Account, the Sub-Advisor emphasizes
individual security selection. The Account's investments will generally be
diversified by industry but concentrated sector positions may result from the
investment process. The Account has a long-term investment perspective; however,
the Sub-Advisor may take advantage of short-term opportunities that are
consistent with its objective by selling recently purchased securities which
have increased in value.
The Account may invest in common stock and convertible securities of
domestic and foreign corporations. However, the Account does not expect to
invest more than 25% of its total assets at the time of purchase in securities
of foreign companies. The Account may invest in securities of foreign issuers
directly or in the form of Depository Receipts. The Account may enter into
forward foreign currency exchange contracts which provide for the purchase or
sale of foreign currencies in connection with the settlement of foreign
securities transactions or to hedge the underlying currency exposure related to
foreign investments. The Account will not enter into these commitments for
speculative purposes. Investors should recognize that investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies. See "Foreign Securities" and
"Currency Contracts."
The Account may invest in convertible securities of domestic and, subject
to the above restrictions, foreign issuers on occasions when, due to market
conditions, it is more advantageous to purchase such securities than common
stock. Convertible securities entitle the holder to exchange the securities for
a specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time and to receive interest or
dividends until the holder elects to exercise the conversion privilege. Since
the Account invests in both common stocks and convertible securities, the risks
of investing in the general equity markets may be tempered to a degree by the
Account's investments in convertible securities which are often not as volatile
as equity securities.
Asset Allocation Account
The Asset Allocation Account seeks to generate a total investment return
consistent with preservation of capital. In seeking to achieve its objective,
the Account intends to pursue a flexible investment policy by investing
primarily in the common stock and other securities having common stock
characteristics of large and small domestic or foreign companies that appear to
be undervalued relative to their earnings results or potential, or whose
earnings growth prospects appear to be more attractive than the economy as a
whole, and domestic or foreign fixed-income securities, including high yield
securities when, in the judgement of the Sub-Advisor, MSAM, it is appropriate to
do so.
The securities in which the Account invests will be identified as belonging
to an "asset class." Asset classes may include, but are not limited to, small
capitalization (companies whose market value is less than $1 billion) value
stocks, large capitalization (companies with a market value in excess of $1
billion) value stocks, small capitalization growth stocks, large capitalization
growth stocks, common stocks of foreign corporations, domestic fixed-income
securities, domestic high yield fixed-income securities, foreign fixed-income
securities, and money market instruments (debt securities maturing in one year
or less). "Value" stocks are generally defined as companies with distinctly
below average stock price to earnings ratios and stock price to book value
ratios, and higher than average dividend yields. "Growth" stocks are generally
defined as those companies whose earnings are expected to grow more rapidly than
the economy as a whole.
The allocation among asset classes is designed to lessen overall investment
risk through participation in a variety of types of investments in several
markets. Reallocation among asset classes, or the elimination of an asset class
for a period of time, will occur when in the Sub-Advisor's judgement such shift
offers the investor better prospects of achieving the overall investment
objective of the Account. Under normal conditions, abrupt shifts among asset
classes will not occur and it is not the policy of the Sub-Advisor to attempt
market timing. The Sub-Advisor does not undertake to maintain a specific portion
of the Account in any asset class, but expects that over time the investment mix
will be within the following ranges: 25% to 75% in equities, 20% to 60% in
fixed-income securities and 0% to 40% in money market instruments. Factors
involved with this decision will depend upon the judgement of the Sub-Advisor as
to general market and economic conditions, trends and investment yields and
interest rates and changes in fiscal or monetary policies. The Sub-Advisor will
seek to minimize declines in the net asset value per share; however, there is no
guarantee this goal can be achieved.
The Account may invest in all types of common stocks and other equities and
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Account may invest in
both exchange listed and over-the-counter securities, including American
Depository Receipts ("ADRs") and closed end mutual funds. The Account's
investments in corporate bonds and debentures and money market instruments are
not restricted by credit ratings or other objective investment criteria, except
with respect to bank certificates of deposit as set forth below. See
"Below-Investment Grade Bonds" for a discussion of the risks associated with
these securities. Normally, investments in below investment grade bonds are not
expected to exceed 20% of Account assets. Securities purchases may be either
U.S. dollar or Non-U.S. dollar denominated.
To achieve its investment objective, the Account may at times emphasize the
generation of interest income by investing in short, medium or long-term
fixed-income securities. Investment in those securities may also be made with a
view to realizing capital appreciation when the Sub-Advisor believes that
declining interest rates may increase market values.
Money market instruments in which the Account may invest may include U.S.
Treasury bills, bank certificates of deposit, bankers acceptances, repurchase
agreements, commercial paper and commercial paper master notes which are
floating rate debt instruments without a fixed maturity, and non-U.S. dollar
denominated money market instruments. The Account will only invest in domestic
bank certificates of deposit issued by banks which are members of the Federal
Reserve System that have total deposits in excess of $1 billion.
The Account may invest in U.S. government securities including U.S.
Treasury obligations and obligations of certain agencies such as the Government
National Mortgage Association which are supported by the full faith and credit
of the United States, as well as obligations of certain other federal agencies
or instrumentalities which are backed only by the right of the issuer to borrow
limited funds from the U.S. Treasury, by the discretionary authority of the U.S.
government to purchase such obligations or by the credit of the agency or
instrumentality itself.
Balanced Account
The investment objective of Balanced Account is to generate a total return
consisting of current income and capital appreciation while assuming reasonable
risks in furtherance of the investment objective. The term "reasonable risks"
refers to investment decisions that in the judgment of the Sub-Advisor, Invista,
do not present a greater than normal risk of loss in light of current or
anticipated future market and economic conditions, trends in yields and interest
rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Account invests
primarily in growth and income-oriented common stocks (including securities
convertible into common stocks), corporate bonds and debentures and short-term
money market instruments. The Account may also invest in other equity
securities, and in debt securities issued or guaranteed by the United States
Government and its agencies or instrumentalities. The Account seeks to generate
real (inflation plus) growth during favorable investment periods and may
emphasize income and capital preservation strategies during uncertain investment
periods. The Sub-Advisor will seek to minimize declines in the net asset value
per share. However, there is no guarantee that the Sub-Advisor will be
successful in achieving this goal.
The portions of the Account's total assets invested in equity securities,
debt securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Account's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Sub-Advisor as to general market and economic conditions, trends in investment
yields and interest rates and changes in fiscal or monetary policies.
The Account may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Account may invest in
both exchange-listed and over-the-counter securities, in small or large
companies, and in well-established or unseasoned companies. Also, the Account's
investments in corporate bonds and debentures and money market instruments are
not restricted by credit ratings or other objective investment criteria, except
with respect to bank certificates of deposit as set forth below. Some of the
fixed income securities in which the Account may invest may be considered to
include speculative characteristics and the Account may purchase such securities
that are in default but does not currently intend to invest more than 5% of its
assets in securities rated below BBB by Standard & Poor's or Baa by Moody's. See
"Below Investment-Grade Bonds" for a discussion of the risks associated with
these securities. The rating services' descriptions of BBB or Baa securities are
as follows: Moody's Investors Service, Inc. Bond Ratings -- Baa: Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories. The Account will not concentrate its
investments in any industry.
In selecting common stocks, the Sub-Advisor seeks companies which it
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Sub-Advisor determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Sub-Advisor may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Account may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Account may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The short-term money market investments in which the Account may invest
include the following: U.S. Treasury bills, bank certificates of deposit,
bankers' acceptances, repurchase agreements, commercial paper and commercial
paper master notes which are floating rate debt instruments without a fixed
maturity. The Account will only invest in domestic bank certificates of deposit
issued by banks which are members of the Federal Reserve System that have total
deposits in excess of $1 billion.
The United States government securities in which the Account may invest
include U.S. Treasury obligations and obligations of certain agencies, such as
the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Capital Value Account
The primary objective of Capital Value Account is long-term capital
appreciation. A secondary objective is growth of investment income.
The Account will invest primarily in common stocks, but it may invest in
other securities. In making selections for the Account's investment portfolio,
the Manager will use an approach described broadly as that of fundamental
analysis, which is discussed in the Statement of Additional Information. To
achieve the investment objective, Invista will invest in securities that have
"value" characteristics. This process is known as "value investing." Value
investing is purchasing securities of companies with above average dividend
yields and below average price to earnings (P/E) ratios. Securities chosen for
investment may include those of companies which the Manager believes can
reasonably be expected to share in the growth of the nation's economy over the
long term.
Growth Account
The objective of Growth Account is growth of capital. Realization of
current income will be incidental to the objective of growth of capital.
The Account will invest primarily in common stocks, but it may invest in
other equity securities. In making selections for the Account's investment
portfolio, the Sub-Advisor, Invista, will use an approach described broadly as
that of fundamental analysis, which is discussed in the Statement of Additional
Information. In pursuit of the Account's investment objective, investments will
be made in securities which as a group appear to possess potential for
appreciation in market value. Common stocks chosen for investment may include
those of companies which have a record of sales and earnings growth that exceeds
the growth rate of corporate profits of the S&P 500 or which offer new products
or new services. The policy of investing in securities which have a high
potential for growth of capital can mean that the assets of the Account may be
subject to greater risk than securities which do not have such potential.
International Account
The investment objective of International Account is to seek long-term
growth of capital through investment in a portfolio of equity securities of
companies domiciled in any of the nations of the world. In choosing investments
in equity securities of foreign and United States corporations, the Sub-Advisor,
Invista, intends to pay particular attention to long-term earnings prospects and
the relationship of then-current prices to such prospects. Short-term trading is
not generally intended, but occasional investments may be made for the purpose
of seeking short-term or medium-term gain. The Account expects its investment
objective to be met over long periods which may include several market cycles.
For a description of certain investment risks associated with foreign
securities, see "Foreign Securities."
For temporary defensive purposes, the International Account may invest in
the same kinds of securities as the other Growth-Oriented Accounts whether
issued by domestic or foreign corporations, governments, or governmental
agencies, instrumentalities or political subdivisions and whether denominated in
United States dollars or some other currency.
The Account intends that its investments normally will be allocated among
various countries. Although there is no limitation on the percentage of assets
that may be invested in any one country or denominated in any one currency, the
Account intends under normal market conditions to have at least 65% of its
assets invested in securities issued by corporations of at least five countries,
one of which may be the United States (although the Account currently intends
not to invest in equity securities of United States companies). Investments may
be made anywhere in the world, but it is expected that primary consideration
will be given to investing in the securities issued by corporations of Western
Europe, North America and Australasia (Australia, Japan and Far East Asia) that
have developed economies. Changes in investments may be made as prospects change
for particular countries, industries or companies.
MidCap Account
The objective of MidCap Account is to achieve capital appreciation. The
strategy of this Account is to invest primarily in the common stocks and
securities (both debt and preferred stock) convertible into common stocks of
emerging and other growth-oriented companies that, in the judgment of Invista,
are responsive to changes within the marketplace and have the fundamental
characteristics to support growth. In pursuing its objective of capital
appreciation, the MidCap Account may invest, for any period of time, in any
industry, in any kind of growth-oriented company, whether new and unseasoned or
well known and established. Under normal market conditions, the Account will
invest at least 65% of its assets in securities of companies with market
capitalizations in the $1 billion to $10 billion range. The Account may invest
up to 10% of its assets in securities of foreign issuers. For a description of
certain investment risks associated with foreign securities, see "Risk Factors."
There can be, of course, no assurance that the Account will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Account invests, the Account believes that its shares are
suitable only for persons who are prepared to experience above-average
fluctuations in net asset value, to assume above-average investment risk in
search of above-average return, and to consider the Account as a long-term
investment and not as a vehicle for seeking short-term profits. Moreover, since
the Account will not be seeking current income, investors should not view a
purchase of Account shares as a complete investment program.
INCOME-ORIENTED ACCOUNTS
The Fund currently include two Accounts which seek a high level of income
through investments in fixed-income securities (Bond Account and Government
Securities Account) collectively referred to as the "Income-Oriented Accounts."
An investment in either of the Income-Oriented Accounts involves market risks
associated with movements in interest rates. The market value of the Accounts'
investments will fluctuate in response to changes in interest rates and other
factors. During periods of falling interest rates, the values of outstanding
long-term fixed-income securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. Changes
by recognized rating agencies in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities will affect the Accounts' net asset values but will not affect cash
income derived from the securities unless a change results from a failure of an
issuer to pay interest or principal when due. Each Account's rating limitations
apply at the time of acquisition of a security, and any subsequent change in a
rating by a rating service will not require elimination of a security from the
Account's portfolio. The Statement of Additional Information contains
descriptions of ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard and Poor's Corporation ("S&P").
Bond Account
The investment objective of the Bond Account is to provide as high a level
of income as is consistent with preservation of capital and prudent investment
risk.
In seeking to achieve the investment objective, the Account will
predominantly invest in marketable fixed-income securities. Investments will be
made generally on a long-term basis, but the Account may make short-term
investments from time to time as deemed prudent by the Manager. Longer
maturities typically provide better yields but will subject the Account to a
greater possibility of substantial changes in the values of its portfolio
securities as interest rates change.
Under normal circumstances, the Account will invest at least 65% of its
assets, exclusive of cash items, in one or more of the following kinds of
securities: (i) corporate debt securities and taxable municipal obligations,
which at the time of purchase have an investment grade rating within the four
highest grades used by Standard & Poor's Corporation (AAA, AA, A or BBB) or by
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa) or which, if lower-rated or
nonrated, are comparable in quality in the opinion of the Account's Manager;
(ii) similar Canadian corporate, Provincial and Federal Government securities
payable in U.S. funds; and (iii) securities issued or guaranteed by the United
States Government or its agencies or instrumentalities. The balance of the
Account's assets may be invested in other fixed income securities, including
domestic and foreign corporate debt securities or preferred stocks, in common
stocks that provide returns that compare favorably with the yields on fixed
income investments, and in common stocks acquired upon conversion of debt
securities or preferred stocks or upon exercise of warrants acquired with debt
securities or otherwise and foreign government securities. The debt securities
and preferred stocks in which the Account invests may be convertible or
nonconvertible. The Account does not intend to purchase debt securities rated
lower than Ba3 by Moody's or BB - by S & P (bonds which are judged to have
speculative elements; their future cannot be considered as well-assured). See
"Below Investment-Grade Bonds" for a discussion of the risks associated with
these securities. The rating services' descriptions of BBB or Baa securities are
as follows: Moody's Investors Service, Inc. Bond Ratings -- Baa: Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories.
During the year ended December 31, 1996, the percentage of the Account's
portfolio securities invested in the various ratings established by Moody's
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Aaa .18%
Aa .81%
A 24.05%
Baa 68.04%
Ba 6.92%
* The above percentages for A rated securities include .57% respectively,
unrated securities which have been determined by the Manager to be of comparable
quality.
Cash equivalents in which the Account invests include corporate commercial
paper rated A-1+, A-1 or A-2 by Standard & Poor's or P-1 or P-2 by Moody's,
unrated commercial paper issued by corporations with outstanding debt securities
rated in the four highest grades by Standard & Poor's and Moody's and bank
certificates of deposit and bankers' acceptances issued or guaranteed by
national or state banks and repurchase agreements considered by the Account to
have investment quality. Under unusual market or economic conditions, the
Account may for temporary defense purposes invest up to 100% of its assets in
cash or cash equivalents.
Government Securities Account
The objective of Government Securities Account is a high level of current
income, liquidity and safety of principal.
The Account will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities include
Government National Mortgage Association ("GNMA") Certificates of the modified
pass-through type, Federal National Mortgage Association ("FNMA") Obligations,
Federal Home Loan Mortgage Corporation ("FHLMC") Certificates and Student Loan
Marketing Association ("SLMA") Certificates and other U.S. Government
Securities. GNMA is a wholly-owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned
corporation, FHLMC, a federal corporation, and SLMA, a government sponsored
stockholder-owned organization, are instrumentalities of the United States. The
securities and guarantees of FNMA, FHLMC and SLMA are not backed, directly or
indirectly, by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Account may maintain reasonable
amounts of cash or short-term debt securities for daily cash management purposes
or pending selection of particular long-term investments.
Cash equivalents in which the Account invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Account to have investment quality.
Depending on market conditions, up to 55% of the assets may be invested in
GNMA Certificates. GNMA is a United States Government corporation within the
Department of Housing and Urban Development. GNMA Certificates are
mortgage-backed securities representing an interest in a pool of mortgage loans.
Such loans are made by lenders such as mortgage bankers, insurance companies,
commercial banks and savings and loan associations. Then, they are either
insured by the Federal Housing Administration (FHA) or they are guaranteed by
the Veterans Administration (VA) or Farmers Home Administration (FmHA). The
lender or other prospective issuer creates a specific pool of such mortgages,
which it submits to GNMA for approval. After approval, a GNMA Certificate is
typically offered by the issuer to investors through securities dealers.
GNMA Certificates differ from bonds in that the principal is scheduled to
be paid back by the borrower on a monthly basis over the life of the loan rather
than returned in a lump sum at maturity. Modified pass-through GNMA
certificates, which are the only kind in which the Account intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of whether or not the mortgagor has made such payment.
The timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government.
Although the payment of interest and principal is guaranteed, the guarantee
does not extend to the value of a GNMA Certificate or the value of the shares of
the Account. The market value of a GNMA Certificate typically will fluctuate to
reflect changes in prevailing interest rates. It falls when rates increase (as
does the market value of other debt securities) and it rises when rates decline
(but it may not rise on a comparable basis with other debt securities because of
its prepayment feature), and, therefore, may be more or less than the face
amount of the GNMA Certificate, which reflects the aggregate principal amount of
the underlying mortgages. As a result, the net asset value of Account shares
will fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Account at prevailing
interest rates which may be less than the rate on the GNMA Certificate.
Prepayments are likely to increase as the interest rate for new mortgages moves
lower than the rate on the GNMA Certificate. Moreover, if the GNMA Certificate
had been purchased at a premium above principal because its rate exceeded
prevailing rates, the premium is not guaranteed and a decline in value to par
may result in a loss of the premium especially in the event of prepayment.
To the extent deemed appropriate by the Account's Manager, the Account
intends to purchase GNMA Certificates directly from Principal Mutual Life
Insurance Company and other issuers as well as from securities dealers. The
Account will purchase directly from issuers only if it can obtain a price
advantage by not paying the commission or mark-up that would be required if the
Certificates were purchased from a securities dealer. The Securities and
Exchange Commission has issued an order under the Investment Company Act of 1940
that permits the Account to purchase GNMA Certificates directly from Principal
Mutual Life Insurance Company subject to certain conditions.
The FNMA and FHLMC securities in which the Account invests are very similar
to GNMA certificates as described above but are not guaranteed by the full faith
and credit of the United States but rather by the agency itself. FNMA and FHLMC
securities are rated Aaa by Moody's and AAA by Standard & Poor's. These ratings
reflect the status of FNMA and FHLMC as federal agencies as well as the
important role each plays in financing purchases of homes in the U.S.
Student Loan Marketing Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Account
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by the agency and is traded regularly in denominations similar to
those in which government obligations are traded.
The Account will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the
Account's investment objective. Accordingly, the Account may sell portfolio
securities in anticipation of a rise in interest rates and purchase securities
for inclusion in its portfolio in anticipation of a decline in interest rates.
As a hedge against changes in interest rates, the Account may enter into
contracts with dealers in GNMA Certificates whereby the Account agrees to
purchase or sell an agreed-upon principal amount of GNMA Certificates at a
specified price on a certain date. The Account may enter into similar purchase
agreements with issuers of GNMA Certificates other than Principal Mutual Life
Insurance Company. The Account may also purchase optional delivery standby
commitments which give the Account the right to sell particular GNMA
Certificates at a specified price on a specified date. Failure of the other
party to such a contract or commitment to abide by the terms thereof could
result in a loss to the Account. To the extent the Account engages in delayed
delivery transactions it will do so for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for the
purpose of investment leverage or to speculate on interest rate changes.
Liability accrues to the Account at the time it becomes obligated to purchase
such securities, although delivery and payment occur at a later date. From the
time the Account becomes obligated to purchase securities on a delayed delivery
basis the Account has all the rights and risks attendant to the ownership of a
security. At the time the Account enters into a binding obligation to purchase
such securities, Account assets of a dollar amount sufficient to make payment
for the securities to be purchased will be segregated. The availability of
liquid assets for this purpose and the effect of asset segregation on the
Account's ability to meet its current obligations, to honor requests for
redemption and to have its investment portfolio managed properly will limit the
extent to which the Account may engage in forward commitment agreements. Except
as may be imposed by these factors, there is no limit on the percent of the
Account's total assets that may be committed to transactions in such agreements.
MONEY MARKET ACCOUNT
The Fund also includes an Account which invests primarily in short-term
securities, the Money Market Account. Securities in which the Money Market
Account will invest may not yield as high a level of current income as
securities of low quality and longer maturities which generally have less
liquidity, greater market risk and more fluctuation.
The Money Market Account will limit its portfolio investments to United
States dollar denominated instruments that the board of directors determines
present minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in respect to
a class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security that at the time of issuance was a long-term security that
has a remaining maturity of 397 calendar days or less, and whose issuer
has received from a nationally recognized statistical rating
organization a rating, with respect to a class of short-term debt
obligations (or any security within that class) that is now comparable
in priority and security with the security, in one of the two highest
rating categories for short-term debt obligations; or
(3) An unrated security that is of comparable quality to a security meeting
the requirements of (1) or (2) above, as determined by the board of
directors.
The Account will not invest more than 5% of its total assets in the
following securities:
(1) Securities which, when acquired by the Account (either initially or
upon any subsequent rollover), are rated below the highest rating
category for short-term debt obligations;
(2) Securities which, at the time of issuance were long-term securities but
when acquired by the Account have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Account's board
of directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Account
will maintain a dollar-weighted average portfolio maturity of 90 days
or less.
The objective of the Money Market Account is to seek as high a level of
current income available from short-term securities as is considered consistent
with preservation of principal and maintenance of liquidity by investing its
assets in a portfolio of money market instruments. These money market
instruments are U.S. Government Securities, U.S. Government Agency Securities,
Bank Obligations, Commercial Paper, Short-term Corporate Debt and Repurchase
Agreements, which are described briefly below and in more detail in the
Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
The Account intends to hold its investments until maturity, but may on
occasion trade securities to take advantage of market variations. Also, revised
valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at times when such sales might otherwise not be
desirable. The Account's right to borrow to facilitate redemptions may reduce
the need for such sales. It is the Account's policy to be as fully invested as
reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the Account
expects to usually transact purchases and sales of portfolio securities with
issuers or dealers on a net basis, it is not anticipated that the Account will
pay any significant brokerage commissions. The Account is free to dispose of
portfolio securities at any time, when changes in circumstances or conditions
make such a move desirable in light of the investment objective.
A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Account invests.
The rate of return and the net asset value will be affected by such other
factors as sales of portfolio securities prior to maturity and the Account's
operating expenses.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Accounts
may use in an effort to achieve their respective investment objectives.
Diversification
Each Account is subject to the diversification requirements of Section
817(h) of the Internal Revenue Code (the "Code") which must be met at the end of
each quarter of the year (or within 30 days thereafter). Regulations issued by
the Secretary of the Treasury have the effect of requiring each Account to
invest no more than 55% of its total assets in securities of any one issuer, no
more than 70% in the securities of any two issuers, no more than 80% in the
securities of any three issuers, and no more than 90% in the securities of any
four issuers. For this purpose, the United States Treasury and each U.S.
Government agency and instrumentality is considered to be a separate issuer.
Thus, the Government Securities Account intends to invest in U.S. Treasury
securities and in securities issued by at least four U.S. Government agencies or
instrumentalities in the amounts necessary to meet those diversification
requirements at the end of each quarter of the year (or within thirty days
thereafter).
In the event any of the Accounts do not meet the diversification
requirements of Section 817(h) of the Code, the contracts funded by shares of
the Accounts will not be treated as annuities or life insurance for Federal
income tax purposes and the owners of the Accounts will be subject to taxation
on their share of the dividends and distributions paid by the Accounts.
Foreign Securities
Each of the following Accounts has adopted investment restrictions that
limit its investments in foreign securities to the indicated percentage of its
assets: Asset Allocation and International Accounts - 100%; Aggressive Growth
Account - 25%; Bond and Capital Value Accounts - 20%; Balanced, Growth and
MidCap Accounts - 10%. Debt securities issued in the United States pursuant to a
registration statement filed with the Securities and Exchange Commission are not
considered "foreign securities" for purposes of this investment limitation.
Investment in foreign securities presents certain risks including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. An Account's investment in foreign securities may also
result in higher custodial costs and the costs associated with currency
conversions.
Currency Contracts
The Aggressive Growth, Asset Allocation and International Accounts may each
enter into forward currency contracts, currency futures contracts and options
thereon and options on currencies for hedging and other non-speculative
purposes. A forward currency contract involves a privately negotiated obligation
to purchase or sell a specific currency at a future date at a price set at the
time of the contract. The Accounts will not enter into a transaction to hedge
currency exposure to an extent greater in effect than the aggregate market value
of the securities held or to be purchased by the Accounts that are denominated
or generally quoted in or currently convertible into the currency. When the
Account enters into a contract to buy or sell a foreign currency, it generally
will hold an amount of that currency, liquid securities denominated in that
currency or a forward contract for such securities equal to the Account's
obligation, or it will segregate liquid high grade debt obligations equal to the
amount of the Account's obligations. The use of currency contracts involves many
of the same risks as transactions in futures contracts and options as well as
the risk of government action through exchange controls or otherwise that would
restrict the ability of the Account to deliver or receive currency.
Repurchase Agreements and Securities Loans
Each of the Accounts may enter into repurchase agreements with, and each of
the Accounts, except the Capital Value and Money Market Accounts, may lend its
portfolio securities to, unaffiliated broker-dealers and other unaffiliated
qualified financial institutions. These transactions must be fully
collateralized at all times, but involve some credit risk to the Account if the
other party should default on its obligations, and the Account is delayed or
prevented from recovering on the collateral. See the Accounts' Statement of
Additional Information for further information regarding the credit risks
associated with repurchase agreements and the standards adopted by the Fund's
Board of Directors to deal with those risks. None of the Accounts intend either
(i) to enter into repurchase agreements that mature in more than seven days if
any such investment, together with any other illiquid securities held by the
Account, would amount to more than 10% of its total assets or (ii) to loan
securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Accounts may enter into forward commitment
agreements which call for the Accounts to purchase or sell a security on a
future date and at a price fixed at the time the Account enters into the
agreement. Each of the Accounts may also acquire rights to sell its investments
to other parties, either on demand or at specific intervals.
Warrants
Each of the Accounts, except the Money Market and Government Securities
Accounts, may invest in warrants up to 5% of its assets, of which not more than
2% may be invested in warrants that are not listed on the New York or American
Stock Exchange. For the International Account, the 2% limitation also does not
apply to warrants listed on the Toronto Stock Exchange or the Chicago Board
Options Exchange.
Borrowing
As a matter of fundamental policy, each Account may borrow money only for
temporary or emergency purposes. The Balanced, Bond, Capital Value and Money
Market Accounts may borrow only from banks. Further, each may borrow only in an
amount not exceeding 5% of its assets, except the Capital Value Account which
may borrow only in an amount not exceeding the lesser of (i) 5% of the value of
its assets less liabilities other than such borrowings, or (ii) 10% of its
assets taken at cost at the time the borrowing is made, and the Money Market
Account which may borrow only in an amount not exceeding the lesser of (i) 5% of
the value of its assets, or (ii) 10% of the value of its net assets taken at
cost at the time the borrowing is made.
Options
The Aggressive Growth, Asset Allocation, Balanced, Bond, Government
Securities, Growth, International, and MidCap Accounts may purchase covered
spread options, which would give the Account the right to sell a security that
it owns at a fixed dollar spread or yield spread in relationship to another
security that the Account does not own, but which is used as a benchmark. These
same Accounts may also purchase and sell financial futures contracts, options on
financial futures contracts and options on securities and securities indices,
but will not invest more than 5% of their assets in the purchase of options on
securities, securities indices and financial futures contracts or in initial
margin and premiums on financial futures contracts and options thereon. The
Accounts may write options on securities and securities indices to generate
additional revenue and for hedging purposes and may enter into transactions in
financial futures contracts and options on those contracts for hedging purposes.
Below Investment Grade Bonds
Below investment-grade bonds are securities rated Ba1 or lower by Moody's
Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("S&P") or unrated securities which the Account's Manager or
Sub-Advisor believes are of comparable quality. These securities are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and to repay principal in accordance with the terms of the
obligation. The Accounts, except the Asset Allocation Account, do not intend to
invest in securities rated lower than Ba3 by Moody's or BB by S&P. The Asset
Allocation Account does not intend to invest in securities rated below Caa by
Moody's and below CCC by S&P. The Asset Allocation Account normally will not
invest more than 20% of its assets in below investment grade securities. The
Bond Account may not invest more than 35% of its assets in such securities. The
Balanced Account does not intend to invest more than 5% of its assets in such
securities.
The rating services' descriptions of below investment grade securities
rating categories in which the Accounts may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small. Caa:
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the high end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB, B, CCC, CC: Debt rated
"BB", "B", "CCC" and "CC" is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The "BB" rating may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
Below investment-grade securities present special risks to investors. The
market value of lower-rated securities may be more volatile than that of
higher-rated securities and generally tends to reflect the market's perception
of the creditworthiness of the issuer and short-term market developments to a
greater extent than more highly rated securities, which reflect primarily
fluctuations in general levels of interest rates. Periods of economic
uncertainty and change can be expected to result in increased volatility in the
market value of lower-rated securities. Further, such securities may be subject
to greater risks of loss of income and principal, particularly in the event of
adverse economic changes or increased interest rates, because their issuers
generally are not as financially secure or as creditworthy as issuers of
higher-rated securities. Additionally, to the extent that there is not a
national market system for secondary trading of lower-rated securities, there
may be a low volume of trading in such securities which may make it more
difficult to value or sell those securities than higher-rated securities.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield securities,
especially in a thinly traded market.
Investors should recognize that the market for below investment-grade
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the Accounts and the ability of the
issuers of the securities held by the Accounts to pay principal and interest. A
default by an issuer may result in an Account incurring additional expenses to
seek recovery of the amounts due it.
Some of the securities in which the Accounts invest may contain call
provisions. If the issuer of such a security exercises a call provision in a
declining interest rate market, the Account would have to replace the security
with a lower-yielding security, resulting in a decreased return for investors.
Further, a higher-yielding security's value will decrease in a rising interest
rate market, which will be reflected in the Account's net asset value per share.
The Statement of Additional Information includes further information
concerning the Accounts' investment policies and applicable investment
restrictions. Each Account's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for an Account are not fundamental
and may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISORS
The Manager for the Fund is Principal Management Corporation (formerly
known as Princor Management Corporation) (the "Manager"), an indirectly
wholly-owned subsidiary of Principal Mutual Life Insurance Company, a mutual
life insurance company organized in 1879 under the laws of the State of Iowa.
The address of the Manager is The Principal Financial Group, Des Moines, Iowa
50392. The Manager was organized on January 10, 1969, and since that time has
managed various mutual funds sponsored by Principal Mutual Life Insurance
Company. As of December 31, 1996, the Manager served as investment advisor for
26 such funds with assets totaling approximately $4.0 billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced, Capital Value,
Government Securities, Growth, International and MidCap Accounts. The Manager
will reimburse Invista for the cost of providing these services. Invista, an
indirectly wholly-owned subsidiary of Principal Mutual Life Insurance Company
and an affiliate of the Manager, was founded in 1985 and manages investments for
institutional investors, including Principal Mutual Life. Assets under
management at December 31, 1996 were approximately $19.6 billion. Invista's
address is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.
The Manager has also executed an agreement with Morgan Stanley Asset
Management Inc. ("MSAM") under which MSAM has agreed to assume the obligations
of the Manager to provide investment advisory services for the Aggressive Growth
Account and Asset Allocation Account. The Manager pays MSAM a fee for such
investment advisory services. MSAM, with principal offices at 1221 Avenue of the
Americas, New York, NY 10020, provides a broad range of portfolio management
services to customers in the United States and abroad. At December 31, 1996,
MSAM managed investments totaling approximately $72.6 billion, including
approximately $54.9 billion under active management and $17.7 billion as Named
Fiduciary or Fiduciary Adviser.
The Manager, Invista, or MSAM has assigned certain individuals the primary
responsibility for the day-to-day management of each Account's portfolio. The
persons primarily responsible for the day-to-day management of each Account are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Account Responsible Since Person Primarily Responsible
<S> <C> <C>
Aggressive Growth May, 1994 Kurt Feuerman (MBA degree, Columbia University; M.A. degree, Syracuse
(Account's inception) University). Managing Director, Morgan Stanley Asset Management Inc.
and Morgan Stanley & Co. Incorporated.
Asset Allocation May, 1994 Francine J. Bovich (MBA degree, New York University). Principal, Morgan
(Account's inception) Stanley Asset Management Inc. and Morgan Stanley & Co. Incorporated.
May, 1994 Kurt Feuerman (MBA degree, Columbia University; M.A. degree, Syracuse
(Account's inception) University). Managing Director, Morgan Stanley Asset Management Inc.
and Morgan Stanley & Co. Incorporated.
April, 1996 Stephen C. Sexauer (MBA degree, University of Chicago). Principal,
Morgan Stanley Asset Management Inc. and Morgan Stanley & Co. Incorporated.
Balanced April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President, Invista
Capital Management, Inc. Co-Manager since December, 1997: Martin J. Schafer
(BBA degree, University of Iowa). Vice President, Invista Capital
Management, Inc.
Bond November, 1996 Scott A. Bennett, CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company.
Capital Value November, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice
(Account's inception) President, Invista Capital Management, Inc.; Co-Manager since November,1996:
Catherine A. Green, CFA, (MBA degree, Drake University). Vice President,
Invista Capital Management, Inc.
Government Securities April, 1987 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
(Account's inception) Capital Management, Inc.
Growth and MidCap May, 1994 Michael R. Hamilton, (BMBA degree, Bellarmine College). Vice President,
(Account's inception) Invista Capital Management, Inc.
and December, 1987
(Account's inception),
respectively
International April, 1994 Scott D. Opsal, CFA (MBA degree, University of Minnesota). Executive Vice
President, Invista Capital Management, Inc.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISORS
Under Maryland law, the business and affairs of the Fund are managed under
the direction of its Board of Directors. The investment services and certain
other services referred to under the heading "Cost of Manager's Services" in the
Statement of Additional Information are furnished to the Fund under the terms of
a Management Agreement between the Fund and the Manager and, for some of the
Accounts, a Sub-Advisory Agreement between the Manager and Invista or the
Manager and MSAM. The Manager, Invista, or MSAM, advises the Accounts on
investment policies and on the composition of the Accounts' portfolios. In this
connection, the Manager, or Sub-Advisor, furnishes to the Board of Directors of
the Fund a recommended investment program consistent with the Account's
investment objective and policies. The Manager, or Sub-Advisor, is authorized,
within the scope of the approved investment program, to determine which
securities are to be bought or sold, and in what amounts.
The compensation paid by each Account to the Manager for the fiscal year
ended December 31, 1996 was, on an annual basis, equal to the following
percentage of average net assets:
Total
Manager's Annualized
Account Fee Expenses
- ------------------------------------------------------------------------------
Aggressive Growth Account .80% .85%
Asset Allocation Account .80% .87%
Balanced Account .60% .63%
Bond Account .50% .53%
Capital Value Account .48% .49%
Government Securities Account .50% .52%
Growth Account .50% .52%
International Account .75% .90%
MidCap Account .64% .66%
Money Market Account .50% .56%
The compensation being paid by the Aggressive Growth Account, Asset
Allocation Account and International Account for investment management services
is higher than that paid by most funds to their advisor, but it is not higher
than the fees paid by many funds with similar investment objectives and
policies.
The Manager and Sub-Advisors may purchase at their own expense statistical
and other information or services from outside sources, including Principal
Mutual Life Insurance Company. An Investment Service Agreement between the
Manager, Principal Mutual Life Insurance Company and the Fund provides that
Principal Mutual Life Insurance Company will furnish certain personnel, services
and facilities required by the Manager in connection with its performance of the
Management Agreement for each Account except the Aggressive Growth and Asset
Allocation Accounts, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard.
The Accounts may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc., a broker-dealer that is an affiliate of the Distributor and
Manager of the Fund. The Account may also execute transactions for portfolio
securities through Morgan Stanley & Co. Incorporated and Morgan Stanley Trust
Company affiliates of Morgan Stanley Asset Management Inc.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company.
MANAGERS' COMMENTS
Principal Management Corporation, Invista and MSAM are staffed with
investment professionals who manage each individual Account. Comments by these
individuals in the following paragraphs summarize in capsule form the general
strategy and results of each Account through 1996. The accompanying charts
display results for the past 10 years or the life of the Account, whichever is
shorter. Average Annual Total Return figures provided for each Account in the
graphs below reflect all expenses of the Account and assume all distributions
are reinvested at net asset value. The figures do not reflect expenses of the
variable life insurance contracts or variable annuity contracts that purchase
Account shares; performance figures for the divisions of the contracts would be
lower than performance figures for the Accounts due to the additional contract
expenses. Past performance is not predictive of future performance. Returns and
net asset values fluctuate. Shares are redeemable at current net asset value,
which may be more or less than original cost.
The various indices included in the following graphs are unmanaged and do
not reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.
Growth-Oriented Accounts
Aggressive Growth Account
(Kurt Feuerman)
Since it first became available on June 1, 1994, the Aggressive Growth
Account has generated an annualized return of 28.05% versus 23.63% for the S&P
500 and 19.18% for the Lipper Growth Fund Average. In 1996 the Fund returned
28.05% versus 22.96% for the S&P 500 and 19.24% for the Lipper Growth Fund
Average.
For the third consecutive year, substantial overweighting of the portfolio
in the tobacco sector contributed positively to relative performance. After a
market-smashing total return of 62% in 1995 (including dividends), Philip Morris
stock surged late in 1996 for a full-year total return of 25%. Philip Morris was
the largest single holding in the portfolio throughout most of 1995 and 1996.
At year-end 1996, Philip Morris stock at $113 represented about 5% of the
Account's portfolio. Philip Morris as well as other positions in RJR Nabisco,
Loews and Consolidated Cigar as a group will clearly be subject to bouts of
selling pressure since the industry is under attack from a number of directions.
However, tobacco stocks are in the midst of a multi-year trend of upward
revaluation. Combined with strong underlying growth fundamentals, this creates a
powerful investment opportunity which many investors are missing.
Entering into 1997, the S&P 500 Index has outperformed the vast majority of
active managers for three consecutive years. Also, the Index has outpaced the
earnings growth of the underlying companies. One could argue that there are many
positive factors driving the U.S. markets higher and that these factors could
persist; stable interest rates, solid economic growth without inflationary
pressures, the opening up of emerging markets, the acceptance of shareholder
value as the key motivator of corporate managements, and the huge cash flow
coming into stocks supported by powerful demographic trends.
Still, there is no doubt that many large cap, "blue chip," stocks have
outperformed their own businesses. General Electric, for example, rose 40% in
1996 while earnings per share grew about 15%. Another example would be Merck, a
stock up 77% in 1995 and 24% in 1996, with earnings in those two years up only
12% and 20%, respectively.
Morgan Stanley's estimate is that active managers will have an easier time
beating the Index this year. This will be more likely to occur if smaller
company stocks do well. While large cap managers continue to feel comfortable
with many large cap names, at the margin there are opportunities in secondary
stocks, especially high beta growth issues that have missed the recent market
move, but where company fundamentals are intact.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year Since Inception Date 6/1/94 10 Year
28.05% 28.05% --
Comparison of Change in Value of $10,000 Investment in the
Aggressive Growth Account, S&P 500 and Lipper Growth Fund Average
--------------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Growth
December 31, Return Index Average
10,000 10,000 10,000
1994 10,259 10,230 10,055
1995 14,793 14,069 13,151
1996 18,942 17,297 15,681
Note: Past performance is not predictive of future performance.
Asset Allocation Account
(Francine J. Bovich)
In a volatile year for financial assets, the U.S. stock market continued
its strong performance (+23.2%) but ranked 11th in global markets beaten by
fully half of the international markets (in U.S. dollars), notably Spain
(+40.1%), Sweden (+37.2%) and Hong Kong (+33.1%). Markets were boosted by
abundant liquidity provided through loose monetary policy, moderate economic
growth and a benign inflation environment.
Bond markets in local currency also had a good year with returns ranging
from 5.9% in Japan to 24.2% in Italy. In the U.S., mixed economic data and
expectations of monetary tightening drove bond prices down well into the third
quarter until the Federal reserve announced that interest rates would remain
unchanged. In contrast, the European bond markets rallied throughout the year
driven by monetary easing from the core European central banks, weakening
currencies, optimism surrounding the prospects of the European Monetary Union,
and improving inflation data. Japanese bond yields fell to all-time lows on the
prospect of substantial fiscal tightening in 1997, the fragility of some
financial institutions, and doubts about the strength of the economic recovery.
Against a declining interest rate backdrop, high yielding debt rallied as
investors clamored for yield.
Throughout the year, we maintained our diversified investment policy. At
year-end 1996, the Account was invested: 32% domestic stocks, 26% international
stocks, 20% U.S. domestic bonds, 9% domestic high yield bonds, 11% real estate
investment trusts ("REITs"), and 2% short-term investments. For 1996, the
Account continued its positive performance gaining 12.9% relative to the Lipper
Flexible Portfolio Fund average gain of 13.6%.
Within domestic stocks, commitments to large cap growth companies and REITs
significantly enhanced returns. In the growth segment, overweight commitments to
consumer cyclicals, consumer staples and financial sectors were the primary
contributors to positive results. Our REIT portfolio benefited from an overall
positive backdrop and selected commitments to the office, industrial, and hotel
sectors. In addition, we allocated a portion of the portfolio to "California
Recovery" companies which performed well.
In aggregate, the international stock results lagged the S&P 500 primarily
due to the performance of Japan. Japanese stocks declined -15.5% based on the
same concerns that drove bond yields to historic lows. In contrast, European
stocks were a brighter spot thanks to the continuing efforts of most continental
governments to achieve the Maastricht criteria. Asian market returns were led by
Hong Kong, which benefited from lessened political fears and an improved
economic outlook. Latin America enjoyed stellar performance throughout the year
and was a primary contributor to the international ADR's outperformance (+11.3%)
relative to the EAFE benchmark gain of 6.1%. The economic recovery that began in
1995 and continued throughout 1996 attracted renewed capital flows to the region
and the Fund benefited from overweight positions in Brazil and Mexico.
Over the near term, we expect the U.S. market to be driven higher by the
continuation of the positive capital market trends experienced in 1996. However,
U.S. stocks are not cheap, the market cycle is very long in the tooth, and is
vulnerable to strong economic data and/or an untoward event. International
stocks have benefited from many of the same factors which propelled the U.S.
markets, but on a relative basis to the U.S., valuations are not as high. In
addition, prospects for further declines in interest rates and improved economic
and earnings growth in Asia, Latin America and Europe remain probable, albeit on
a lagged basis.
After a year of declining global interest rates, we expect increased
volatility as investors analyze every data point to detect a policy change. Fed
watchers will be particularly active given Mr. Greenspan's concern about
"irrational exuberance." We begin the year overweighted to yield sectors and
believe that a higher income strategy will serve to moderate price volatility.
Total Returns *
As of December 31, 1996
---------------------------------------------------------
1 Year Since Inception Date 6/1/94 10 Year
12.92% 12.95% --
Comparison of Change in Value of $10,000 Investment in the Asset
Allocation Account, S&P 500 and Lipper Flexible Portfolio Fund Average
------------------------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Flexible Portfolio
December 31, Return Index Index
10,000 10,000 10,000
1994 10,052 10,230 10,008
1995 12,128 14,069 12,518
1996 13,696 17,297 14,220
Note: Past performance is not predictive of future performance.
Balanced Account
(Judith A. Vogel)
This balanced portfolio combines stocks, bonds and cash in a relatively
conservative mix which seeks to provide both capital appreciation and income to
the shareholder without taking on undue risk. The asset allocation of the
Account generally approximates 60% stocks and 40% bonds. In the year ended
December 31, 1996 the stock market produced exceptional results. Aided by a
healthy economy, continued corporate profit growth, and a good dose of investor
enthusiasm, the S&P 500 Stock Index advanced nearly 23%. Conditions in the bond
market were less supportive over the year. Long-term interest rates rose 0.70%
in 1996, with a lot of volatility along the way, causing the bond returns to
hover between zero and 3% for the year. Demonstrating its balanced nature, the
Account produced a 13% annual return, about midway between stock and bond market
results and very near the Lipper Balanced Fund Average. The bond portion of the
Account's portfolio is comprised of U.S. Government notes and bonds with an
emphasis on safety of principal. The stock portion of the portfolio is
concentrated in companies with stable or growing earnings that are not terribly
sensitive to economic activity. After six years of economic expansion resulting
in high rates of resource utilization, corporate profit growth is likely to come
down, causing a scarcity of earnings growth. Companies that can continue to grow
earnings will be afforded premium valuations. There is no independent market
index against which to measure returns of balanced portfolios, however, we show
the S&P 500 Stock Index for your information.
Total Returns *
As of December 31, 1996
---------------------------------------------------
Since Inception
1 Year 5 Year Date 12/18/87
13.13% 11.57% 12.16%
Comparison of Change in Value of $10,000 Investment in the
Balanced Account, S&P 500 and Lipper Balanced Fund Average
----------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Mid Cap
December 31, Return Index Index
10,000 10,000 10,000
1988 11,637 11,661 11,229
1989 12,982 15,356 13,429
1990 12,147 14,877 13,355
1991 16,321 19,412 16,930
1992 18,410 20,891 18,122
1993 20,447 22,992 20,066
1994 20,019 23,294 19,561
1995 24,941 32,037 24,482
1996 28,215 39,388 27,851
Note: Past performance is not predictive of future performance.
Capital Value Account
(David L. White and Catherine A. Green)
The strategy with this portfolio is to hold common stocks of companies
based on a valuation that is attractive when compared to the market. The
analytical staff looks at companies' current valuations compared to the market,
then at historical information to compare valuations to historical averages. The
focus is on the fundamentals of an industry and the company to determine the
current and future outlook as these potential investments. From there the
portfolio is constructed to provide a diversified set of investments.
The Account outperformed the S&P 500 Index and Lipper Growth and Income
Fund Average for 1996. The strength of the market was in much fewer stocks than
in the past. The volatility between industries was much greater than the overall
results. The Account benefited from several areas of exposure. Banks and health
care were the strongest areas for the Account during the year. The focus has
been away from the more cyclical areas of the economy which also helped during
the year. As the economic cycle progresses, the market places more emphasis on
companies with consistent earnings growth, and we have tended to overweight
these areas of the market. As the market performance continues to narrow,
however, it becomes increasingly difficult to select the correct areas of
overperformance.
Total Returns *
As of December 31, 1996
----------------------------------------
1 Year 5 Year 10 Year
23.50% 14.08% 13.08%
Comparison of Change in Value of $10,000 Investment in the
Capital Value Account, S&P 500 and Lipper Growth and Income Fund Average
----------------------------------------------------------------------------
Fund S&P 500 Lipper
Year Ended Total Stock Growth & Income
December 31, Return Index Fund Average
10,000 10,000 10,000
1987 10,647 10,526 10,184
1988 12,183 12,274 11,814
1989 14,155 16,163 14,596
1990 12,759 15,659 13,946
1991 17,693 20,433 18,002
1992 19,377 21,990 19,618
1993 20,888 24,201 21,884
1994 20,990 24,519 21,678
1995 27,688 33,722 28,360
1996 34,193 41,460 34,253
Note: Past performance is not predictive of future performance.
Growth Account
(Michael R. Hamilton)
The Growth Account struggled against the market in 1996; struggle being
relative as 12.23% return is respectable from a historical perspective. The S&P
500 Index last year was heavily influenced by the top 25 holdings in the Index.
These are very large companies. The Account is more diversified than the Index
and therefore its results were more representative of the broader market. With
the market continuing to struggle against the potential of an economic boom on
one hand, versus a slowing or recession on the other, the market could be
subjected to emotional swings depending on the inflation outlook.
The Account's portfolio still has a large focus on health care given the
demographics of the United States. This was not a strong sector in 1996,
particularly the managed care companies of which the portfolio has a large
exposure. Also, the portfolio has large positions in technology and growth
cyclicals. These companies should do well if the economy continues to move
forward which is indicated by current data.
The portfolio contains many companies that are able to compete on a world
wide basis. This is important as global competition continues.
Total Returns *
As of December 31, 1996
-------------------------------------------------------
1 Year Since Inception Date 5/2/94 10 Year
12.51% 16.12% --
Comparison of Change in Value of $10,000 Investment in the
Growth Account, S&P 500 and Lipper Growth Fund Average
---------------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Growth
December 31, Return Index Index
10,000 10,000 10,000
1994 10,542 10,397 10,090
1995 13,243 14,299 13,197
1996 14,899 17,580 15,736
Note: Past performance is not predictive of future performance.
International Account
(Scott D. Opsal)
The International Account's 26.2% total return in 1996 was driven by broad
based market rallies across Europe. Several European markets have climbed more
than 20% in 1996, with Japan and Italy being the only major markets not
reflecting strong gains. The Account's investment strategy of holding stocks in
smaller European economies produced outperformance as interest rate moves have
been favorable this year. Long bond yields in secondary European markets fell
while rates in the stronger core countries have inched up. The Account's
overexposure to the falling rate markets and underexposure to the rising rate
markets was a significant positive factor producing returns that exceeded EAFE's
6.1% and the average international fund in 1996.
The Account also benefited from non-cyclical stockholdings in Europe. Food,
drug, technology, and stable growth cyclicals have outperformed the heavier
cyclical industries. The Account's move into non-cyclical growth stocks early in
the year proved timely. The Account remains underweighted in Japan due to poor
valuations and a weak economic outlook. Japan has been the worst performing
major market, and the Account's lack of exposure to this market also boosted
relative returns.
Adverse currency changes diminished the Account's returns as measured in
U.S. dollars by an estimated 2%. We believe the EAFE index has suffered a
currency loss exceeding 4%, and the average manager has lost an estimated 3%.
Thus, the Account's investment strategy placed it in markets suffering
relatively small foreign exchange losses thereby aiding relative return
performance.
The Account is subject to specific risks associated with foreign currency
rates, foreign taxation and foreign economies.
Total Returns *
As of December 31, 1996
----------------------------------------------------
1 Year Since Inception Date 5/2/94 10 Year
25.09% 12.83% --
Comparison of Change in Value of $10,000 Investment in the
International Account, EAFE and Lipper International Fund Average
------------------------------------------------------------
Fund Morgan Stanley Lipper
Year Ended Total EAFE International
December 31, Return Index Index
10,000 10,000 10,000
1994 9,663 9,990 9,758
1995 11,032 11,110 10,676
1996 13,800 11,781 11,934
Note: Past performance is not predictive of future performance.
MidCap Account
(Michael R. Hamilton)
The equity market was strong in 1996, but within the market there were two
different trends. Large-cap stocks performed much better than small-cap stocks.
The MidCap Account returned 19.13% compared with the Lipper Mid Cap Average of
17.9%. The Account and the Lipper Average trailed the S&P 500 Index because of
their emphasis on small cap stocks. While both trailed the S&P 500, this was a
good year for the Account.
The financial market continues to grapple with the paradox of strong
economic growth with no apparent inflation. Productivity will be key in 1997 if
inflation is to remain benign. The Account's portfolio continues to be focused
on companies that should enhance productivity of both labor and capital. Several
of the technology, service and cyclical areas support this emphasis. The
portfolio is also overweighted in the financial sector as bank consolidation
continues.
Continued profit growth will be important in 1997 as well. Companies with
more predictable and visible earnings growth are preferred. This continues to be
those that are low cost producers and have competitive barriers to entry.
Selectivity in all sectors will be crucial to outperformance.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
21.11% 16.64% 17.73%
Comparison of Change in Value of $10,000 Investment
in the MidCap Account, S&P 500 and
Lipper Mid Cap Fund Average
-----------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 MID CAP
December 31, Return Index Index
10,000 10,000 10,000
1988 12,369 11,661 11,476
1989 15,070 15,356 14,586
1990 13,186 14,877 14,067
1991 20,240 19,412 21,275
1992 23,264 20,891 23,213
1993 27,750 22,992 26,625
1994 27,967 23,294 26,079
1995 36,080 32,037 34,469
1996 43,697 39,388 40,646
Note: Past performance is not predictive of future performance.
Important Notes of the Growth-Oriented Accounts:
Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Growth Fund Average: This average consists of funds which normally invest
in companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices. The one-year average at December 31, 1996 contained 669 funds.
Lipper Flexible Portfolio Fund Average: This average consists of funds which
allocate their investments across various asset classes, including domestic
common stocks, bonds and money market instruments, with a focus on total return.
The one-year average at December 31, 1996 contained 186 funds.
Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average at December 31, 1996 contained 272 mutual funds.
Lipper Growth & Income Fund Average: this average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one year average at December 31, 1996 contained 522
funds.
Lipper Mid Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average at December 31, 1996 contained 154
funds.
Morgan Stanley Capital International EAFE (Europe, Australia and Far East)
Index: This average reflects an arithmetic, market value weighted average of
performance of 1,920 listed securities which are listed on the stock exchanges
of the following countries: Australia, Austria, Belgium, Denmark, Netherlands,
New Zealand, Norway, Singapore/Malaysia, Spain, Sweden, Switzerland, and the
United Kingdom.
Lipper International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average at December 31, 1996 contained 331 funds.
Income-Oriented Accounts:
Bond Account
(Scott A. Bennett)
The Bond Account's performance in 1996 lagged when compared to 1995. 1995
was a banner year, mainly because of dramatically declining interest rates.
During 1996 interest rates increased throughout most of the year based on fears
of increasing inflation. This hurt the Account's relative performance as the
duration target of 7 years (actual duration at 12/31/96 was 6.98 years) is
longer than the average BBB rated bond fund and the BAA Lehman Corporate Index.
Relative performance was also negatively impacted by the lack of a significant
amount of less than investment grade bonds in the portfolio. High yield (less
than investment grade) debt performed extremely well during 1996, with many of
the top performing funds in the Lipper BAA universe having significant exposures
to this asset class.
Over the long-term, the Account continues to outperform the average BBB
fund. This is attributed to remaining fully invested and not trying to guess
interest rates. The BBB corporate bond class continued to be an attractive asset
class in 1996, outperforming all other taxable investment grade classes. Spreads
continued to narrow during the year with defaults low and a large amount of
funds chasing the available bonds.
Total Returns *
As of December 31, 1996
- --------------------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
2.36% 8.20% 9.55%
Comparison of Change in Value of $10,000 Investment in the Bond Account, Lehman
Brothers BAA Corporate Index and Lipper Corporate Debt BBB Rated Fund Average
-----------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total BAA BBB
December 31, Return Index Avg
10,000 10,000 10,000
1988 10,991 11,129 10,900
1989 12,514 12,699 12,060
1990 13,167 13,595 12,751
1991 15,369 16,113 15,020
1992 16,810 17,512 16,258
1993 18,771 19,665 18,261
1994 18,227 18,707 17,447
1995 22,268 22,959 20,948
1996 22,794 23,882 21,616
Note: Past performance is not predictive of future performance.
Government Securities Account
(Martin J. Schafer)
Interest rates rose in 1996, which dampened absolute fixed income returns.
The Account underperformed the Lipper U.S. Mortgage Fund Average and the Lehman
MBS Index in 1996 due to its slightly longer duration. However, since the
Account's inception of 4/9/87 it has outperformed the Lipper U.S. Mortgage Fund
Average and is competitive with the Lehman MBS Index.
Results were enhanced last year through identification and selection of
certain undervalued sectors of mortgage-backed securities for a portion of the
portfolio. These securities have now become very popular with Wall Street and
other investors, resulting in their increasing in value.
The current portfolio is well positioned for the period ahead. It has a
number of securities that are "seasoned" (e.g., original 30 year loans that have
been outstanding for three years or more) and therefore valued more highly in
the marketplace. There are few securities priced above par, so prepayment risk
is negligible. If the future continues to be an era of economic prosperity we
should continue to see strong housing markets and housing turnover that will
cause prepayments on our securities to exceed market expectations. These
repayments are welcomed, as the portfolio is priced at a discount and the
Account will be paid-off at par.
Total Returns *
As of December 31, 1996
- --------------------------------------------------
1 Year 5 Year Since Inception Date 4/9/87
3.35% 6.68% 8.63%
Comparison of Change in Value of $10,000 Investment in the Government Securities
Account, Lehman Brothers Mortgage Index and Lipper U.S. Mortgage Fund Average
- --------------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total Mortgage U.S. Mortgage
December 31, Return Index Index
10,000 10,000 10,000
1987 10,099 10,204 10,104
1988 10,939 11,094 10,858
1989 12,645 12,808 12,224
1990 13,852 14,183 13,370
1991 16,200 16,410 15,348
1992 17,308 17,551 16,285
1993 19,051 18,751 17,499
1994 18,188 18,450 16,769
1995 21,656 21,549 19,491
1996 22,381 22,702 20,245
Note: Past performance is not predictive of future performance.
Important Notes of the Income-Oriented Accounts:
Lehman Brothers, BAA Corporate Index: an unmanaged index of all publicly issued
fixed rate nonconvertible, dollar-denominated,
SEC-registered corporate debt rated Baa or BBB by Moody's or S&P.
Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average at
December 31, 1996 contained 102 mutual funds.
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgages/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average at December 31, 1996 contained 59 mutual
funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES
The net asset value of each Account's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange,
except on days on which changes in the value of the Account's portfolio
securities will not materially affect the current net asset value of the
Account's redeemable securities, on days during which an Account receives no
order for the purchase or sale of its redeemable securities and no tender of
such a security for redemption, and on customary national business holidays. The
net asset value per share of each Account is determined by dividing the value of
the Account's securities plus all other assets, less all liabilities, by the
number of Account shares outstanding.
Growth-Oriented and Income-Oriented Accounts
The following valuation information applies to the Growth-Oriented and
Income-Oriented Accounts. Securities for which market quotations are readily
available are valued using those quotations. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.
As previously described, some of the Accounts may purchase foreign
securities whose trading is substantially completed each day at various times
prior to the close of the New York Stock Exchange. The values of such securities
used in computing net asset value per share are usually determined as of such
times. Occasionally, events which affect the values of such securities and
foreign currency exchange rates may occur between the times at which they are
generally determined and the close of the New York Stock Exchange and would
therefore not be reflected in the computation of the Account's net asset value.
If events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the Manager or Sub-Advisor under procedures established and
regularly reviewed by the Board of Directors. To the extent the Account invests
in foreign securities listed on foreign exchanges which trade on days on which
the Account does not determine its net asset value, for example Saturdays and
other customary national U.S. Holidays, the Account's net asset value could be
significantly affected on days when shareholders have no access to the Account.
Money Market Account
The Money Market Account values its securities at amortized cost. For a
description of this calculation procedure see the Fund's Statement of Additional
Information.
PERFORMANCE CALCULATION
From time to time, the Accounts may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Accounts. The Account's yield and total return
figures described below will vary depending upon market conditions, the
composition of the Account's portfolios and operating expenses. These factors
and possible differences in the methods used in calculating yield and total
return should be considered when comparing the Accounts' performance figures to
performance figures published for other investment vehicles. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices. Any performance data quoted for the Accounts represents only
historical performance and is not intended to indicate future performance of the
Accounts. The calculation of average annual total return and yield for the
Accounts does not include fees and charges of the separate accounts that invest
in the Accounts and, therefore, does not reflect the investment performance of
those separate accounts. For further information on how the Accounts calculate
yield and total return figures, see the Statement of Additional Information.
Average Annual Total Return
Each Account may advertise its respective average annual total return.
Average annual total return for each Account is computed by calculating the
average annual compounded rate of return over the stated period that would
equate an initial $1,000 investment to the ending redeemable value assuming the
reinvestment of all dividends and capital gains distributions at net asset
value. The same assumptions are made when computing cumulative total return by
dividing the ending redeemable value by the initial investment. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices.
Yield and Effective Yield
From time to time the Money Market Account may advertise its respective
yield and effective yield. The yield of the Account refers to the income
generated by an investment in the Account over a seven-day period. This income
is then annualized. That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the
Account is assumed to be reinvested. The effective yield will be slightly higher
than the yield because of the compounding effect of this assumed reinvestment.
The yield for the Money Market Account will fluctuate daily as the income
earned on the investments of the Account fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Account is one of a Series of Accounts issued by an
open-end investment company and there is no guarantee that the net asset value
or any stated rate of return will remain constant. A shareholder's investment in
the Account is not insured. Investors comparing results of the Account with
investment results and yields from other sources such as banks or savings and
loan associations should understand these distinctions. Historical and
comparative yield information may, from time to time, be presented by the
Account.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
It is the policy of each Account to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which
the Fund so qualifies it will be exempt from federal income tax upon the amounts
so distributed to investors.
Any dividends from the net investment income of the Accounts (except the
Money Market Account) will normally be payable to the shareholders annually, and
any net realized gains will be distributed annually. All dividends and capital
gains distributions are applied to purchase additional Account shares at net
asset value as of the payment date without the imposition of any sales charge.
Each Account will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Accounts to consult with tax advisors on the federal
and state tax aspects of their investments and redemptions.
Money Market Account
The Money Market Account declares dividends of all its daily net investment
income on each day the Account's net asset value per share is determined.
Dividends are payable daily and are automatically reinvested in full and
fractional shares of the Account at the then current net asset value unless a
shareholder requests payment in cash.
Net investment income, for dividend purposes, consists of (1) accrued
interest income plus or minus accrued discount or amortized premium; plus or
minus (2) all net short-term realized gains and losses; minus (3) all accrued
expenses of the Account. Expenses of the Account are accrued each day. Net
income will be calculated immediately prior to the determination of net asset
value per share of the Account.
Since the Account's policy is, under normal circumstances, to hold
portfolio securities to maturity and to value portfolio securities at amortized
cost, it does not expect any capital gains or losses. If the Account does
experience gains, however, it could result in an increase in dividends. Capital
losses could result in a decrease in dividends. If for some extraordinary reason
the Account realizes net long-term capital gains, it will distribute them once
every 12 months.
Since the net income of the Account (including realized gains and losses on
the portfolio securities) is declared as a dividend each time the net income of
the Account is determined, the net asset value per share of the Account normally
remains at $1.00 immediately after each determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Account,
representing reinvestment of dividend income, is reflected by an increase in the
number of shares of the Account.
Normally the Account will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Account
determined at any time is a negative amount, the net asset value per share will
be reduced below $1.00. If this happens, the Account may endeavor to restore the
net asset value per share to $1.00 by reducing the number of outstanding shares
by redeeming proportionately from shareholders without the payment of any
monetary consideration, such number of full and fractional shares as is
necessary to maintain a net asset value per share of $1.00. Each shareholder
will be deemed to have agreed to such a redemption in these circumstances by
investing in the Account. The Account may seek to achieve the same objective of
restoring the net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share would increase to the extent of positive net income which
is not declared as a dividend, or any other method approved by the Board of
Directors.
The Board of Directors may revise the above dividend policy, or postpone
the payment of dividends, if the Account should have or anticipate any large
presently unexpected expense, loss or fluctuation in net assets which in the
opinion of the Board might have a significant adverse affect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Accounts. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Account shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
Each Account serves an underlying investment medium for variable annuity
contracts and variable life insurance policies that are funded in separate
accounts established by Principal Mutual Life Insurance Company. It is
conceivable that in the future it may be disadvantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest in
the Accounts simultaneously. Although neither Principal Mutual Life Insurance
Company nor the Accounts currently foresee any such disadvantages either to
variable life insurance policy owners or to variable annuity contract owners,
the Fund's Board of Directors intends to monitor events in order to identify any
material conflicts between such policy owners and contract owners and to
determine what action, if any, should be taken in response thereto. Such action
could include the sale of Account shares by one or more of the separate
accounts, which could have adverse consequences. Material conflicts could result
from, for example, (1) changes in state insurance laws, (2) changes in Federal
income tax law, (3) changes in the investment management of an Account, or (4)
differences in voting instructions between those given by policy owners and
those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Fund. There are no sales charges on the Accounts'
shares. There are no restrictions on amounts to be invested in the Accounts'
shares.
Shareholder accounts for each Account will be maintained under an open
account system. Under this system, an account is automatically opened and
maintained for each new investor. Each investment is confirmed by sending the
investor a statement of account showing the current purchase and the total
number of shares then owned. The statement of account is treated by each Account
as evidence of ownership of Account shares in lieu of stock certificates, and
unless written request is made to the Account, stock certificates will not be
issued or delivered to investors. Certificates, which can be stolen or lost, are
unnecessary except for special purposes such as collateral for a loan.
Fractional interests in the Account's shares are reflected to three decimal
places in the statement of account, but any stock certificates will be issued
only for full shares owned.
If an offer to purchase shares is received by any of the Accounts before
the close of trading on the New York Stock Exchange, the shares will be issued
at the offering price (net asset value of Account shares) computed on that day.
If an offer is received after the close of trading or on a day which is not a
trading day, the shares will be issued at the offering price computed on the
first succeeding day on which a price is determined. Dividends on the Money
Market Account shares will be paid on the next day following the effective date
of a purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each Account of the Principal
Variable Contracts Fund, Inc. Each Account share is entitled to one vote either
in person or by proxy at all shareholder meetings for that Account. This
includes the right to vote on the election of directors, selection of
independent accountants and other matters submitted to meetings of shareholders
of the Account. Each share has equal rights with every other share of the
Account as to dividends, earnings, voting, assets and redemption. Shares are
fully paid and non-assessable, and have no preemptive or conversion rights.
Shares of an Account may be issued as full or fractional shares, and each
fractional share has proportionately the same rights, including voting, as are
provided for a full share. Shareholders of the Fund may remove any director with
or without cause by the vote of a majority of the votes entitled to be cast at a
meeting of all Account shareholders.
The bylaws of the Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of the Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Fund intends to hold shareholder meetings only when required by
law and at such other times as may be deemed appropriate by the Board of
Directors.
Shareholder inquiries should be directed to the Principal Variable
Contracts Fund, Inc. at The Principal Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Fund's shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of the Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Account's shares
allocated to each of its separate accounts registered under the Investment
Company Act of 1940 and attributable to variable annuity contracts or variable
life insurance policies participating therein in accordance with instructions
received from contract or policy holders, participants and annuitants. Other
shares of each Account held by each registered separate account, including those
for which no timely instructions are received, are voted in proportion to the
instructions that are received with respect to contracts or policies
participating in that separate account. Shares of each of the Accounts held in
the general account of Principal Mutual Life Insurance Company or in its
unregistered separate accounts are voted in proportion to the instructions that
are received with respect to contracts and policies participating in its
registered and unregistered separate accounts. If Principal Mutual determines
pursuant to applicable law that an Account's shares held in one or more separate
accounts or in its general account need not be voted pursuant to instructions
received with respect to participating contracts or policies, it then may vote
those Account shares in its own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Account will redeem its shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Account requesting redemption of any part or all of
the shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, the Account will not require a signature guarantee as a part of a
proper endorsement; otherwise the shareholder's signature must be guaranteed by
either a commercial bank, trust company, credit union, savings and loan
association, national securities exchange member, or by a brokerage firm. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Account in proper and complete form. The amount received for
shares upon redemption may be more or less than the cost of such shares
depending upon the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Account may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Account of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Account
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Account. An Account
will redeem only those shares for which it has received good payment. To avoid
the inconvenience of such a delay, shares may be purchased with a certified
check, bank cashier's check or money order. During the period prior to the time
a redemption from the Money Market Account is effective, dividends on such
shares will accrue and be payable and the shareholder will be entitled to
exercise all other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Accounts may be transferred to
an Eligible Purchaser. However, whenever any of the Accounts is requested to
transfer shares to other than an Eligible Purchaser, the Account has the right
at its election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Account must notify the transferee or transferees of such
shares in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Accounts
except the International Account. The custodian for the International Account is
Chase Manhattan Bank, Global Securities Services, Chase Metro Tech Center,
Brooklyn, New York 11245. The custodians perform no managerial or policymaking
functions for the Fund.
Organization and Share Ownership: Effective January 1, 1998, an Agreement
and Plan of Reorganization and Liquidation was implemented under which a Series
of the Principal Variable Contracts Fund, Inc. adopted the assets and
liabilities of the corresponding Fund. The Funds were incorporated in the state
of Maryland on the following dates: Aggressive Growth Fund - August 20, 1993;
Asset Allocation Fund - August 20, 1993; Balanced Fund - November 26, 1986; Bond
Fund - November 26, 1986; Capital Accumulation Fund - May 26, 1989 (effective
November 1, 1989 succeeded to the business of a predecessor Fund that had been
incorporated in Delaware on February 6, 1969); Emerging Growth Fund - February
20, 1987; Government Securities Fund - June 7, 1985; Growth Fund August 20,
1993; Money Market Fund - June 10, 1982; and World Fund - August 20, 1993.
Principal Mutual Life Insurance Company owns 100% of each Fund's outstanding
shares.
Capitalization: The authorized capital stock of each Account consists of
100,000,000 shares of common stock (500,000,000 for Money Market Account), $.01
par value.
Financial Statements: Copies of the financial statements of each Account
will be mailed to each shareholder of that Account semi-annually. At the close
of each fiscal year, each Account's financial statements will be audited by a
firm of independent auditors. The firm of Ernst & Young LLP has been appointed
to audit the financial statements of the Fund for the present fiscal year.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the Fund
has filed with the Securities and Exchange Commission. The Fund's Statement of
Additional Information is hereby incorporated by reference into this Prospectus.
A copy of the Fund's Statement of Additional Information can be obtained upon
request, free of charge, by writing or telephoning the Fund. You may obtain a
copy of Part C of the Registration Statements filed with the Securities and
Exchange Commission, Washington, D.C., from the Commission upon payment of the
prescribed fees.
Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for the Principal Variable Contracts Fund, Inc.
The Principal Variable Contracts Fund, Inc. described in this Prospectus
is a diversified, open-end management investment company offering a variety of
Accounts each of which was formerly a separately incorporated investment
company. Together, the Accounts provide the following range of investment
objectives:
Growth-Oriented Accounts
Balanced Account (formerly known as Principal Balanced Fund, Inc.) seeks to
generate a total return consisting of current income and capital appreciation
while assuming reasonable risks in furtherance of the investment objective.
Capital Value Account (formerly known as Principal Capital Accumulation Fund,
Inc.) seeks to achieve primarily long-term capital appreciation and secondary
growth of investment income through the purchase primarily of common stocks, but
the Account may invest in other securities.
Growth Account (formerly known as Principal Growth Fund, Inc.) seeks growth of
capital through the purchase primarily of common stocks, but the Account may
invest in other securities.
International Account (formerly known as Principal World Fund, Inc.) seeks
long-term growth of capital by investing in a portfolio of equity securities of
companies domiciled in any of the nations of the world.
MidCap Account (formerly known as Principal Emerging Growth Fund, Inc.) seeks to
achieve capital appreciation by investing primarily in securities of emerging
and other growth-oriented companies.
Income-Oriented Accounts
Bond Account (formerly known as Principal Bond Fund, Inc.) seeks to provide as
high a level of income as is consistent with preservation of capital and
prudent investment risk.
Government Securities Account (formerly known as Principal Government Securities
Fund, Inc.) seeks a high level of current income, liquidity and safety of
principal. The Account seeks to achieve its objective through the purchase of
obligations issued or guaranteed by the United States Government or its
agencies, with emphasis on Government National Mortgage Association Certificates
("GNMA Certificates"). Account shares are not guaranteed by the United States
Government.
Money Market Account
Money Market Account (formerly known as Principal Money Market Fund, Inc.) seeks
as high a level of income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
An investment in the Money Market Account is neither insured nor guaranteed
by the U.S. Government. There can be no assurance the Money Market Account will
be able to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Variable
Contracts Fund, Inc. that an investor ought to know before investing. It should
be read and retained for future reference.
Additional information about the Fund has been filed with the Securities
and Exchange Commission, including a document called Statement of Additional
Information, dated December 31, 1997. The Statement of Additional Information is
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Variable Contracts Fund, Inc.
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is December 31, 1997.
TABLE OF CONTENTS
Page
Summary ............................................................ 3
Financial Highlights................................................. 5
Investment Objectives, Policies and Restrictions..................... 11
Certain Investment Policies and Restrictions......................... 18
Manager and Sub-Advisor ............................................ 21
Duties Performed by the Manager and Sub-Advisor...................... 21
Managers' Comments................................................... 22
Determination of Net Asset Value of Account Shares................... 27
Performance Calculation.............................................. 27
Income Dividends, Distributions and Tax Status....................... 28
Eligible Purchasers and Purchase of Shares........................... 29
Shareholder Rights .................................................. 30
Redemption of Shares................................................. 30
Additional Information............................................... 31
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, shares of the Account in any jurisdiction in which such sale,
offer to sell, or solicitation may not be lawfully made. No dealer, salesperson,
or other person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund or the Fund's Manager.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Variable Contracts Fund, Inc. is an open-end diversified
management investment company offering multiple Accounts.
Who may purchase shares of the Accounts?
Shares of the Accounts are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Accounts offer investors?
Professional Investment Management: Experienced securities analysts
provide each Account with professional investment management.
Diversification: Each Account will diversify by investing in securities
issued by a number of issuers doing business in a variety of industries and/or
located in different geographical regions. Diversification reduces investment
risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Accounts creates administrative efficiencies.
Redeemability: Upon request each Account will redeem its shares and
promptly pay the investor the current net asset value of the shares redeemed.
See "Redemption of Shares."
What are the Accounts' investment objectives?
Growth-Oriented Accounts
The investment objective of the Balanced Account is to seek to generate a
total return consisting of current income and capital appreciation while
assuming reasonable risks in furtherance of this objective.
The primary investment objective of the Capital Value Account is long-term
capital appreciation and its secondary investment objective is growth of
investment income. The Account seeks to achieve its investment objectives
through the purchase primarily of common stocks, but the Account may invest in
other securities.
The investment objective of the Growth Account is growth of capital. The
Account seeks to achieve its objective through the purchase primarily of common
stocks, but the Account may invest in other securities.
The investment objective of the International Account is to seek long-term
growth of capital by investing in a portfolio of equity securities domiciled in
any of the nations of the world.
The investment objective of the MidCap Account is to achieve capital
appreciation by investing primarily in securities of emerging and other
growth-oriented companies.
Income-Oriented Accounts
The investment objective of the Bond Account is to provide as high a level
of income as is consistent with preservation of capital and prudent investment
risk.
The investment objective of the Government Securities Account is to seek a
high level of current income, liquidity and safety of principal. The Account
seeks to achieve its objective through the purchase of obligations issued or
guaranteed by the United States Government or its agencies, with emphasis on
Government National Mortgage Association Certificates ("GNMA Certificates").
Account shares are not guaranteed by the United States Government.
Money Market Account
The investment objective of the Money Market Account is to seek as high a
level of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
There can be no assurance that the investment objectives of any of the
Accounts will be realized. See "Investment Objectives, Policies and
Restrictions."
Who serves as Manager for the Accounts?
Principal Management Corporation (formerly known as Princor Management
Corporation) ("Manager"), a corporation organized in 1969 by Principal Mutual
Life Insurance Company, is the Manager for each of the Accounts. It is also the
dividend disbursing and transfer agent for the Fund. In order to provide
investment advisory services for the Balanced, Capital Value, Government
Securities, Growth, International and MidCap Accounts the Manager has executed
sub-advisory agreements with Invista Capital Management, Inc. ("Invista" or
"Sub-Advisor"). See "Manager and Sub-Advisor."
What fees and expenses apply to ownership of shares of the Accounts?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Accounts.
ANNUAL ACCOUNT OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Total
Management Other Operating
Account Fee Expenses Expenses
Balanced Account .60% .03% .63%
Bond Account .50% .03% .53%
Capital Value Account .48% .01% .49%
Government Securities Account .50% .02% .52%
Growth Account .50% .02% .52%
International Account .75% .15% .90%
MidCap Account .64% .02% .66%
Money Market Account .50% .06% .56%
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Period (in years)
Account 1 3 5 10
Balanced Account $6 $20 $35 $79
Bond Account $5 $17 $30 $66
Capital Value Account $5 $16 $27 $62
Government Securities Account $5 $17 $29 $65
Growth Account $5 $17 $29 $65
International Account $9 $29 $50 $111
MidCap Account $7 $21 $37 $82
Money Market Account $6 $18 $31 $70
This Example is based on the Annual Account Operating expenses for each
Account described above. Please remember that the Example should not be
considered a representation of past or future expenses and that actual
expenses may be greater or less than shown.
The purpose of the above table is to assist you in understanding the
various expenses that an investor in the Accounts will bear directly or
indirectly. See "Duties Performed by the Manager and Sub-Advisor."
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from financial statements
which, for the five years in the period ended December 31, 1996, have been
audited by Ernst & Young LLP, independent auditors, whose report has been
incorporated by reference herein. The financial highlights should be read in
conjunction with the financial statements, related notes, and other financial
information incorporated by reference herein. Audited financial statements may
be obtained by shareholders, without charge, by telephoning 1-800-451-5447.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
Net Realized Excess
and Distri- Distri-
Net Asset Unrealized Total Dividends butions butions
Value at Net Gain from from Net from from Total
Beginning Investment (Loss) on Investment Investment Capital Capital Distri-
of Period Income Investments Operations Income Gains Gains(a) butions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balanced Account(b)(c)
Six Months Ended June 30, 1997(d) $14.44 $ .22 $1.19 $1.41 -- $(.01) $ -- $ (.01)
Year Ended December 31,
1996 13.97 .40 1.41 1.81 $(.40) (.94) -- (1.34)
1995 11.95 .45 2.44 2.89 (.45) (.42) -- (.87)
1994 12.77 .37 (.64) (.27) (.37) (.18) -- (.55)
1993 12.58 .42 .95 1.37 (.42) (.76) -- (1.18)
Six Months Ended December 31, 1992(g) 12.93 .23 .75 .98 (.47) (.86) -- (1.33)
Year Ended June 30,
1992 11.33 .47 1.61 2.08 (.48) -- -- (.48)
1991 10.79 .54 .59 1.13 (.57) (.02) -- (.59)
1990 11.89 .60 (.48) .12 (.63) (.59) -- (1.22)
1989 11.75 .62 .30 .92 (.55) (.23) -- (.78)
Period Ended June 30, 1988(h) 10.00 .27 1.51 1.78 (.03) -- -- (.03)
Bond Account(c)
Six Months Ended June 30, 1997(d) 11.33 .38 (.04) .34 -- -- -- --
Year Ended December 31,
1996 11.73 .68 (.40) .28 (.68) -- -- (.68)
1995 10.12 .62 1.62 2.24 (.63) -- -- (.63)
1994 11.16 .72 (1.04) (.32) (.72) -- -- (.72)
1993 10.77 .88 .38 1.26 (.87) -- -- (.87)
Six Months Ended December 31, 1992(g) 11.08 .45 .13 .58 (.89) -- -- (.89)
Year Ended June 30,
1992 10.64 .91 .46 1.37 (.93) -- -- (.93)
1991 10.72 .94 (.06) .88 (.96) -- -- (.96)
1990 10.92 .95 (.21) .74 (.94) -- -- (.94)
1989 10.68 1.15 .17 1.32 (.96) (.12) -- (1.08)
Period Ended June 30, 1988(h) 10.00 .32 .40 .72 (.04) -- -- (.04)
Capital Value Account(c)
Six Months Ended June 30, 1997(d) 29.84 .32 3.81 4.13 -- (1.07) -- (1.07)
Year Ended December 31,
1996 27.80 .57 5.82 6.39 (.58) (3.77) -- (4.35)
1995 23.44 .60 6.69 7.29 (.60) (2.33) -- (2.93)
1994 24.61 .62 (.49) .13 (.61) (.69) -- (1.30)
1993 25.19 .61 1.32 1.93 (.60) (1.91) -- (2.51)
Six Months Ended December 31, 1992(g) 26.03 .31 1.84 2.15 (.64) (2.35) -- (2.99)
Year Ended June 30,
1992 23.35 .65 2.70 3.35 (.67) -- -- (.67)
1991 22.48 .74 1.22 1.96 (.79) (.30) -- (1.09)
1990 23.63 .79 .14 .93 (.81) (1.27) -- (2.08)
1989 23.23 .77 1.32 2.09 (.68) (1.01) -- (1.69)
1988 27.51 .60 (1.50) (.90) (.69) (2.69) -- (3.38)
1987 25.48 .40 4.46 4.86 (.50) (2.33) -- (2.83)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced Account(b)(c)
Six Months Ended June 30, 1997(d) $15.84 9.74%(e) $113,288 .62%(f) 3.19%(f) 33.5%(f) $.0374
Year Ended December 31,
1996 14.44 13.13% 93,158 .63% 3.45% 22.6% .0417
1995 13.97 24.58% 45,403 .66% 4.12% 25.7% N/A
1994 11.95 (2.09)% 25,043 .69% 3.42% 31.5% N/A
1993 12.77 11.06% 21,399 .69% 3.30% 15.8% N/A
Six Months Ended December 31, 1992(g) 12.58 8.00%(e) 18,842 .73%(f) 3.71%(f) 38.4%(f) N/A
Year Ended June 30,
1992 12.93 18.78% 17,344 .72% 3.80% 26.6% N/A
1991 11.33 11.36% 14,555 .73% 5.27% 27.1% N/A
1990 10.79 .87% 13,016 .74% 5.52% 33.1% N/A
1989 11.89 8.55% 12,751 .74% 5.55% 29.3% N/A
Period Ended June 30, 1988(h) 11.75 17.70%(e) 11,469 .80%(f) 4.96%(f) 41.7%(f) N/A
Bond Account(c)
Six Months Ended June 30, 1997(d) 11.67 3.00%(e) 71,812 .52%(f) 7.07%(f) 8.7%(f) N/A
Year Ended December 31,
1996 11.33 2.36% 63,387 .53% 7.00% 1.7% N/A
1995 11.73 22.17% 35,878 .56% 7.28% 5.9% N/A
1994 10.12 (2.90)% 17,108 .58% 7.86% 18.2% N/A
1993 11.16 11.67% 14,387 .59% 7.57% 14.0% N/A
Six Months Ended December 31, 1992(g) 10.77 5.33%(e) 12,790 .62%(f) 8.10%(f) 6.7%(f) N/A
Year Ended June 30,
1992 11.08 13.57% 12,024 .62% 8.47% 6.1% N/A
1991 10.64 8.94% 10,552 .63% 9.17% 2.7% N/A
1990 10.72 7.15% 9,658 .64% 9.09% 0.0% N/A
1989 10.92 13.51% 9,007 .64% 9.18% 12.2% N/A
Period Ended June 30, 1988(h) 10.68 6.06%(e) 17,598 .58%(f) 8.11%(f) 68.8%(f) N/A
Capital Value Account(c)
Six Months Ended June 30, 1997(d) 32.90 14.28%(e) 249,077 .48%(f) 2.22%(f) 29.0%(f) .0427
Year Ended December 31,
1996 29.84 23.50% 205,019 .49% 2.06% 48.5% .0426
1995 27.80 31.91% 135,640 .51% 2.25% 49.2% N/A
1994 23.44 .49% 120,572 .51% 2.36% 44.5% N/A
1993 24.61 7.79% 128,515 .51% 2.49% 25.8% N/A
Six Months Ended December 31, 1992(g) 25.19 8.81%(e) 105,355 .55%(f) 2.56%(f) 39.7%(f) N/A
Year Ended June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8% N/A
1991 23.35 9.46% 76,537 .53% 3.53% 14.0% N/A
1990 22.48 3.94% 74,008 .56% 3.56% 30.2% N/A
1989 23.63 10.02% 68,132 .57% 3.53% 23.5% N/A
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7% N/A
1987 27.51 22.17% 57,478 .63% 1.99% 16.1% N/A
</TABLE>
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
Net Realized Excess
and Distri- Distri-
Net Asset Unrealized Total Dividends butions butions
Value at Net Gain from from Net from from Total
Beginning Investment (Loss) on Investment Investment Capital Capital Distri-
of Period Income Investments Operations Income Gains Gains(a) butions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Government Securities Account(c)
Six Months Ended June 30, 1997(d) $10.31 $ .33 $ .01 $.34 $(.01) $ -- $ -- $ (.01)
Year Ended December 31,
1996 10.55 .59 (.24) .35 (.59) -- -- (.59)
1995 9.38 .60 1.18 1.78 (.61) -- -- (.61)
1994 10.61 .76 (1.24 (.48) (.75) -- -- (.75)
1993 10.28 .71 .33 1.04 (.71) -- -- (.71)
Six Months Ended December 31, 1992(g) 10.93 .40 .04 .44 (.78) -- (.31) (1.09)
Year Ended June 30,
1992 10.24 .80 .71 1.51 (.81) -- (.01) (.82)
1991 10.05 .80 .24 1.04 (.81) -- (.04) (.85)
1990 10.05 .78 -- .78 (.78) -- -- (.78)
1989 9.37 .80 .34 1.14 (.46) -- -- (.46)
1988 9.47 .78 (.09) .69 (.79) -- -- (.79)
Period Ended June 30, 1987(i) 10.00 .18 (.59) (.41) (.12) -- -- (.12)
Growth Account(c)
Six Months Ended June 30, 1997(d) 13.79 .09 2.01 2.10 -- -- -- --
Year Ended December 31,
1996 12.43 .16 1.39 1.55 (.16) (.03) -- (.19)
1995 10.10 .17 2.42 2.59 (.17) -- (.09) (.26)
Period Ended December 31, 1994(j) 9.60 .07 .51 .58 (.08) -- -- (.08)
International Account(c)
Six Months Ended June 30, 1997(d) 13.02 .17 2.03 2.20 -- -- (.04) (.04)
Year Ended December 31,
1996 10.72 .22 2.46 2.68 (.22) (.16) -- (.38)
1995 9.56 .19 1.16 1.35 (.18) -- (.01) (.19)
Period Ended December 31, 1994(j) 9.94 .03 (.33) (.30) (.05) (.02) (.01) (.08)
MidCap Account(c)(k)
Six Months Ended June 30, 1997(d) 29.74 .15 3.53 3.68 -- (.10) -- (.10)
Year Ended December 31,
1996 25.33 .22 5.07 5.29 (.22) (.66) -- (.88)
1995 19.97 .22 5.57 5.79 (.22) (.21) -- (.43)
1994 20.79 .14 .03 .17 (.14) (.85) -- (.99)
1993 18.91 .17 3.47 3.64 (.17) (1.59) -- (1.76)
Six Months Ended December 31, 1992(g) 15.97 .10 3.09 3.19 (.21) (.04) -- (.25)
Year Ended June 30,
1992 13.93 .21 2.04 2.25 (.21) -- -- (.21)
1991 14.25 .20 .50 .70 (.23) (.79) -- (1.02)
1990 13.35 .24 .87 1.11 (.20) (.01) -- (.21)
1989 12.85 .16 1.35 1.51 (.11) (.90) -- (1.01)
Period Ended June 30, 1988(i) 10.00 .05 2.83 2.88 (.03) -- -- (.03)
Money Market Account(c)
Six Months Ended June 30, 1997(d) 1.000 .025 -- .025 (.025) -- -- (.025)
Year Ended December 31,
1996 1.000 .049 -- .049 (.049) -- -- (.049)
1995 1.000 .054 -- .054 (.054) -- -- (.054)
1994 1.000 .037 -- .037 (.037) -- -- (.037)
1993 1.000 .027 -- .027 (.027) -- -- (.027)
Six Months Ended December 31, 1992(g) 1.000 .016 -- .016 (.016) -- -- (.016)
Year Ended June 30,
1992 1.000 .046 -- .046 (.046) -- -- (.046)
1991 1.000 .070 -- .070 (.070) -- -- (.070)
1990 1.000 .077 -- .077 (.077) -- -- (.077)
1989 1.000 .083 -- .083 (.083) -- -- (.083)
1988 1.000 .064 -- .064 (.064) -- -- (.064)
1987 1.000 .057 -- .057 (.057) -- -- (.057)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
<S> <C> <C> <C> <C> <C> <C> <C>
Government Securities Account(c)
Six Months Ended June 30, 1997(d) $10.64 3.26%(e) $84,656 .53%(f) 6.48%(f) 11.0%(f) N/A
Year Ended December 31,
1996 10.31 3.35% 85,100 .52% 6.46% 8.4% N/A
1995 10.55 19.07% 50,079 .55% 6.73% 9.8% N/A
1994 9.38 (4.53)% 36,121 .56% 7.05% 23.2% N/A
1993 10.61 10.07% 36,659 .55% 7.07% 20.4% N/A
Six Months Ended December 31, 1992(g) 10.28 4.10%(e) 31,760 .59%(f) 7.35%(f) 34.5%(f) N/A
Year Ended June 30,
1992 10.93 15.34% 33,022 .58% 7.84% 38.9% N/A
1991 10.24 10.94% 26,021 .59% 8.31% 4.2% N/A
1990 10.05 8.16% 21,488 .61% 8.48% 18.7% N/A
1989 10.05 12.61% 15,890 .63% 8.68% 3.7% N/A
1988 9.37 7.69% 12,902 .66% 8.47% 2.7% N/A
Period Ended June 30, 1987(i) 9.47 (.94)%(e) 10,778 .64%(f) 8.50%(f) 0.2%(f) N/A
Growth Account(c)
Six Months Ended June 30, 1997(d) 15.89 15.23%(e) 132,259 .51%(f) 1.36%(f) 7.5%(f) $.0452
Year Ended December 31,
1996 13.79 12.51% 99,612 .52% 1.61% 2.0% .0401
1995 12.43 25.62% 42,708 .58% 2.08% 6.9% N/A
Period Ended December 31, 1994(j) 10.10 5.42%(e) 13,086 .75%(f) 2.39%(f) 0.9%(f) N/A
International Account(c)
Six Months Ended June 30, 1997(d) 15.18 16.98%(e) 107,095 .84%(f) 2.92%(f) 25.4%(f) .0186
Year Ended December 31,
1996 13.02 25.09% 71,682 .90% 2.28% 12.5% .0120
1995 10.72 14.17% 30,566 .95% 2.26% 15.6% N/A
Period Ended December 31, 1994(j) 9.56 (3.37)%(e) 13,746 1.24%(f) 1.31%(f) 14.4%(f) N/A
MidCap Account(c)(k)
Six Months Ended June 30, 1997(d) 33.32 12.39%(e) 180,072 .65%(f) 1.05%(f) 10.9%(f) .0390
Year Ended December 31,
1996 29.74 21.11% 137,161 .66% 1.07% 8.8% .0379
1995 25.33 29.01% 58,520 .70% 1.23% 13.1% N/A
1994 19.97 .78% 23,912 .74% 1.15% 12.0% N/A
1993 20.79 19.28% 12,188 .78% .89% 22.4% N/A
Six Months Ended December 31, 1992(g) 18.91 20.12%(e) 9,693 .81%(f) 1.24%(f) 8.6%(f) N/A
Year Ended June 30,
1992 15.97 16.19% 7,829 .82% 1.33% 10.1% N/A
1991 13.93 5.72% 6,579 .89% 1.70% 11.1% N/A
1990 14.25 8.32% 6,067 .88% 1.74% 17.9% N/A
1989 13.35 13.08% 5,509 .90% 1.31% 21.4% N/A
Period Ended June 30, 1988(i) 12.85 28.72%(e) 4,857 .94%(f) .64%(f) 4.6%(f) N/A
Money Market Account(c)
Six Months Ended June 30, 1997(d) 1.000 2.50%(e) 43,688 .55%(f) 5.06%(f) N/A N/A
Year Ended December 31,
1996 1.000 5.07% 46,244 .56% 5.00% N/A N/A
1995 1.000 5.59% 32,670 .58% 5.32% N/A N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A N/A
Six Months Ended December 31, 1992(g) 1.000 1.54%(e) 27,680 .59%(f) 3.10%(f) N/A N/A
Year Ended June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A N/A
</TABLE>
Notes to financial highlights
(a) Due to the timing of dividend distributions and the differences in
accounting for income and realized gains (losses) for financial statement
and federal income tax purposes, the fiscal year in which amounts are
distributed may differ form the year in which the income and realized gains
(losses) are recorded for financial statement purposes by the fund. The
differences between the income and gains distributed on a book versus tax
basis are shown in the Financial Highlights as excess distributions from
net investment income and from capital gains.
(b) Effective May 1,1994, the name of Principal Managed Fund, Inc. was changed
to Principal Balanced Fund, Inc.
(c) Effective January 1, 1998, the following Fund names were changed:
Principal Balanced Fund, Inc. became Balanced Account
Principal Bond Fund, Inc. became Bond Account
Principal Capital Accumulation Fund, Inc. became Capital Value Account
Principal Emerging Growth Fund, Inc. became MidCap Account
Principal Government Securities Fund, Inc. became Government Securities
Account
Principal Growth Fund, Inc. became Growth Account
Principal Money Market Fund, Inc. became Money Market Account
Principal World Fund, Inc. became International Account
(d) Unaudited.
(e) Total return amounts have not been annualized.
(f) Computed on an annualized basis.
(g) Effective July 1, 1992 the Account changed its fiscal year end from
June 30 to December 31.
(h) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December
10, 1987 through December 17, 1987 was recognized, all of which was
distributed to the Account's sole stockholder, Principal Mutual Life
Insurance Company. This represented activity of the Account prior to the
initial offering of shares to eligible purchasers.
(i) Period from April 9, 1987, date shares first offered to the public, through
June 30, 1987. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on October 31, 1987 through
December 17, 1987 was recognized, all of which was distributed to the
Account's sole stockholder, Principal Mutual Life Insurance Company. This
represented activity of the Account prior to the initial offering of shares
to eligible purchasers.
(j) Period from May 1, 1994, date shares first offered to the public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
the Growth Account, Inc. and $.04 per share for the International Account
for the period from the initial purchase of shares on March 23, 1994
through April 30, 1994, was recognized, none of which was distributed to
the sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, the Growth Account and the International Account
incurred unrealized losses on investments of $.41 and $.10 per share,
respectively, during the initial interim period. This represented
activities of each Account prior to the initial public offering of Account
shares.
(k) Effective May 1, 1992, the name of Principal Aggressive Growth Fund, Inc.
was changed to Principal Emerging Growth Fund, Inc.
(l) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December
10, 1987 through December 17, 1987 was recognized, all of which was
distributed to the Account's sole stockholder, Principal Mutual Life
Insurance Company. This represented activity of the Account prior to the
initial offering of shares to eligible purchasers.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Account are described below.
There can be no assurance that the objectives of the Accounts will be realized.
GROWTH-ORIENTED ACCOUNTS
The Fund includes four Accounts which seek capital appreciation through
investments in equity securities (Capital Value, Growth, International and
MidCap Accounts) and one Account which seeks a total investment return including
both capital appreciation and income through investments in equity and debt
securities (Balanced Account). These five Accounts are collectively referred to
as the Growth-Oriented Accounts.
The Growth-Oriented Accounts may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and American Depository Receipts based
on any of the foregoing securities. The Capital Value, Growth, International and
MidCap Accounts will seek to be fully invested under normal conditions in equity
securities. When, in the opinion of the Manager or Sub-Advisor, current market
or economic conditions warrant, a Growth-Oriented Account may for temporary
defensive purposes place all or a portion of its assets in cash, on which the
Account would earn no income, cash equivalents, bank certificates of deposit,
bankers acceptances, repurchase agreements, commercial paper, commercial paper
master notes which are floating rate debt instruments without a fixed maturity,
United States Government securities, and preferred stocks and debt securities,
whether or not convertible into or carrying rights for common stock. A
Growth-Oriented Account may also maintain reasonable amounts in cash or
short-term debt securities for daily cash management purposes or pending
selection of particular long-term investments.
Balanced Account
The investment objective of Balanced Account is to generate a total return
consisting of current income and capital appreciation while assuming reasonable
risks in furtherance of the investment objective. The term "reasonable risks"
refers to investment decisions that in the judgment of the Sub-Advisor, Invista,
do not present a greater than normal risk of loss in light of current or
anticipated future market and economic conditions, trends in yields and interest
rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Account invests
primarily in growth and income-oriented common stocks (including securities
convertible into common stocks), corporate bonds and debentures and short-term
money market instruments. The Account may also invest in other equity
securities, and in debt securities issued or guaranteed by the United States
Government and its agencies or instrumentalities. The Account seeks to generate
real (inflation plus) growth during favorable investment periods and may
emphasize income and capital preservation strategies during uncertain investment
periods. The Sub-Advisor will seek to minimize declines in the net asset value
per share. However, there is no guarantee that the Sub-Advisor will be
successful in achieving this goal.
The portions of the Account's total assets invested in equity securities,
debt securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Account's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Sub-Advisor as to general market and economic conditions, trends in investment
yields and interest rates and changes in fiscal or monetary policies.
The Account may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Account may invest in
both exchange-listed and over-the-counter securities, in small or large
companies, and in well-established or unseasoned companies. Also, the Account's
investments in corporate bonds and debentures and money market instruments are
not restricted by credit ratings or other objective investment criteria, except
with respect to bank certificates of deposit as set forth below. Some of the
fixed income securities in which the Account may invest may be considered to
include speculative characteristics and the Account may purchase such securities
that are in default but does not currently intend to invest more than 5% of its
assets in securities rated below BBB by Standard & Poor's or Baa by Moody's. See
"Below Investment-Grade Bonds" for a discussion of the risks associated with
these securities. The rating services' descriptions of BBB or Baa securities are
as follows: Moody's Investors Service, Inc. Bond Ratings -- Baa: Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories. The Account will not concentrate its
investments in any industry.
In selecting common stocks, the Sub-Advisor seeks companies which it
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Sub-Advisor determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Sub-Advisor may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Account may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Account may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The short-term money market investments in which the Account may invest
include the following: U.S. Treasury bills, bank certificates of deposit,
bankers' acceptances, repurchase agreements, commercial paper and commercial
paper master notes which are floating rate debt instruments without a fixed
maturity. The Account will only invest in domestic bank certificates of deposit
issued by banks which are members of the Federal Reserve System that have total
deposits in excess of $1 billion.
The United States government securities in which the Account may invest
include U.S. Treasury obligations and obligations of certain agencies, such as
the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Capital Value Account
The primary objective of Capital Value Account is long-term capital
appreciation. A secondary objective is growth of investment income.
The Account will invest primarily in common stocks, but it may invest in
other securities. In making selections for the Account's investment portfolio,
the Manager will use an approach described broadly as that of fundamental
analysis, which is discussed in the Statement of Additional Information. To
achieve the investment objective, Invista will invest in securities that have
"value" characteristics. This process is known as "value investing." Value
investing is purchasing securities of companies with above average dividend
yields and below average price to earnings (P/E) ratios. Securities chosen for
investment may include those of companies which the Manager believes can
reasonably be expected to share in the growth of the nation's economy over the
long term.
Growth Account
The objective of Growth Account is growth of capital. Realization of
current income will be incidental to the objective of growth of capital.
The Account will invest primarily in common stocks, but it may invest in
other equity securities. In making selections for the Account's investment
portfolio, the Sub-Advisor, Invista, will use an approach described broadly as
that of fundamental analysis, which is discussed in the Statement of Additional
Information. In pursuit of the Account's investment objective, investments will
be made in securities which as a group appear to possess potential for
appreciation in market value. Common stocks chosen for investment may include
those of companies which have a record of sales and earnings growth that exceeds
the growth rate of corporate profits of the S&P 500 or which offer new products
or new services. The policy of investing in securities which have a high
potential for growth of capital can mean that the assets of the Account may be
subject to greater risk than securities which do not have such potential.
International Account
The investment objective of International Account is to seek long-term
growth of capital through investment in a portfolio of equity securities of
companies domiciled in any of the nations of the world. In choosing investments
in equity securities of foreign and United States corporations, the Sub-Advisor,
Invista, intends to pay particular attention to long-term earnings prospects and
the relationship of then-current prices to such prospects. Short-term trading is
not generally intended, but occasional investments may be made for the purpose
of seeking short-term or medium-term gain. The Account expects its investment
objective to be met over long periods which may include several market cycles.
For a description of certain investment risks associated with foreign
securities, see "Foreign Securities."
For temporary defensive purposes, the International Account may invest in
the same kinds of securities as the other Growth-Oriented Accounts whether
issued by domestic or foreign corporations, governments, or governmental
agencies, instrumentalities or political subdivisions and whether denominated in
United States dollars or some other currency.
The Account intends that its investments normally will be allocated among
various countries. Although there is no limitation on the percentage of assets
that may be invested in any one country or denominated in any one currency, the
Account intends under normal market conditions to have at least 65% of its
assets invested in securities issued by corporations of at least five countries,
one of which may be the United States (although the Account currently intends
not to invest in equity securities of United States companies). Investments may
be made anywhere in the world, but it is expected that primary consideration
will be given to investing in the securities issued by corporations of Western
Europe, North America and Australasia (Australia, Japan and Far East Asia) that
have developed economies. Changes in investments may be made as prospects change
for particular countries, industries or companies.
MidCap Account
The objective of MidCap Account is to achieve capital appreciation. The
strategy of this Account is to invest primarily in the common stocks and
securities (both debt and preferred stock) convertible into common stocks of
emerging and other growth-oriented companies that, in the judgment of the
Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the MidCap Account may invest, for any period of time, in
any industry, in any kind of growth-oriented company, whether new and unseasoned
or well known and established. Under normal market conditions, the Account will
invest at least 65% of its assets in securities of companies with market
capitalizations in the $1 billion to $10 billion range. The Account may invest
up to 10% of its assets in securities of foreign issuers. For a description of
certain investment risks associated with foreign securities, see "Risk Factors."
There can be, of course, no assurance that the Account will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Account invests, the Account believes that its shares are
suitable only for persons who are prepared to experience above-average
fluctuations in net asset value, to assume above-average investment risk in
search of above-average return, and to consider the Account as a long-term
investment and not as a vehicle for seeking short-term profits. Moreover, since
the Account will not be seeking current income, investors should not view a
purchase of Account shares as a complete investment program.
INCOME-ORIENTED ACCOUNTS
The Fund currently include two Accounts which seek a high level of income
through investments in fixed-income securities (Bond Account and Government
Securities Account) collectively referred to as the "Income-Oriented Accounts."
An investment in either of the Income-Oriented Accounts involves market risks
associated with movements in interest rates. The market value of the Accounts'
investments will fluctuate in response to changes in interest rates and other
factors. During periods of falling interest rates, the values of outstanding
long-term fixed-income securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. Changes
by recognized rating agencies in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities will affect the Accounts' net asset values but will not affect cash
income derived from the securities unless a change results from a failure of an
issuer to pay interest or principal when due. Each Account's rating limitations
apply at the time of acquisition of a security, and any subsequent change in a
rating by a rating service will not require elimination of a security from the
Account's portfolio. The Statement of Additional Information contains
descriptions of ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard and Poor's Corporation ("S&P").
Bond Account
The investment objective of the Bond Account is to provide as high a level
of income as is consistent with preservation of capital and prudent investment
risk.
In seeking to achieve the investment objective, the Account will
predominantly invest in marketable fixed-income securities. Investments will be
made generally on a long-term basis, but the Account may make short-term
investments from time to time as deemed prudent by the Manager. Longer
maturities typically provide better yields but will subject the Account to a
greater possibility of substantial changes in the values of its portfolio
securities as interest rates change.
Under normal circumstances, the Account will invest at least 65% of its
assets, exclusive of cash items, in one or more of the following kinds of
securities: (i) corporate debt securities and taxable municipal obligations,
which at the time of purchase have an investment grade rating within the four
highest grades used by Standard & Poor's Corporation (AAA, AA, A or BBB) or by
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa) or which, if lower-rated or
nonrated, are comparable in quality in the opinion of the Account's Manager;
(ii) similar Canadian corporate, Provincial and Federal Government securities
payable in U.S. funds; and (iii) securities issued or guaranteed by the United
States Government or its agencies or instrumentalities. The balance of the
Account's assets may be invested in other fixed income securities, including
domestic and foreign corporate debt securities or preferred stocks, in common
stocks that provide returns that compare favorably with the yields on fixed
income investments, and in common stocks acquired upon conversion of debt
securities or preferred stocks or upon exercise of warrants acquired with debt
securities or otherwise and foreign government securities. The debt securities
and preferred stocks in which the Account invests may be convertible or
nonconvertible. The Account does not intend to purchase debt securities rated
lower than Ba3 by Moody's or BB - by S & P (bonds which are judged to have
speculative elements; their future cannot be considered as well-assured). See
"Below Investment-Grade Bonds" for a discussion of the risks associated with
these securities. The rating services' descriptions of BBB or Baa securities are
as follows: Moody's Investors Service, Inc. Bond Ratings -- Baa: Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories.
During the year ended December 31, 1996, the percentage of the Account's
portfolio securities invested in the various ratings established by Moody's
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Aaa .18%
Aa .81%
A 24.05%
Baa 68.04%
Ba 6.92%
* The above percentages for A rated securities include .57% respectively,
unrated securities which have been determined by the Manager to be of comparable
quality.
Cash equivalents in which the Account invests include corporate commercial
paper rated A-1+, A-1 or A-2 by Standard & Poor's or P-1 or P-2 by Moody's,
unrated commercial paper issued by corporations with outstanding debt securities
rated in the four highest grades by Standard & Poor's and Moody's and bank
certificates of deposit and bankers' acceptances issued or guaranteed by
national or state banks and repurchase agreements considered by the Account to
have investment quality. Under unusual market or economic conditions, the
Account may for temporary defense purposes invest up to 100% of its assets in
cash or cash equivalents.
Government Securities Account
The objective of Government Securities Account is a high level of current
income, liquidity and safety of principal.
The Account will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities include
Government National Mortgage Association ("GNMA") Certificates of the modified
pass-through type, Federal National Mortgage Association ("FNMA") Obligations,
Federal Home Loan Mortgage Corporation ("FHLMC") Certificates and Student Loan
Marketing Association ("SLMA") Certificates and other U.S. Government
Securities. GNMA is a wholly-owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned
corporation, FHLMC, a federal corporation, and SLMA, a government sponsored
stockholder-owned organization, are instrumentalities of the United States. The
securities and guarantees of FNMA, FHLMC and SLMA are not backed, directly or
indirectly, by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Account may maintain reasonable
amounts of cash or short-term debt securities for daily cash management purposes
or pending selection of particular long-term investments.
Cash equivalents in which the Account invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Account to have investment quality.
Depending on market conditions, up to 55% of the assets may be invested in
GNMA Certificates. GNMA is a United States Government corporation within the
Department of Housing and Urban Development. GNMA Certificates are
mortgage-backed securities representing an interest in a pool of mortgage loans.
Such loans are made by lenders such as mortgage bankers, insurance companies,
commercial banks and savings and loan associations. Then, they are either
insured by the Federal Housing Administration (FHA) or they are guaranteed by
the Veterans Administration (VA) or Farmers Home Administration (FmHA). The
lender or other prospective issuer creates a specific pool of such mortgages,
which it submits to GNMA for approval. After approval, a GNMA Certificate is
typically offered by the issuer to investors through securities dealers.
GNMA Certificates differ from bonds in that the principal is scheduled to
be paid back by the borrower on a monthly basis over the life of the loan rather
than returned in a lump sum at maturity. Modified pass-through GNMA
certificates, which are the only kind in which the Account intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of whether or not the mortgagor has made such payment.
The timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government.
Although the payment of interest and principal is guaranteed, the guarantee
does not extend to the value of a GNMA Certificate or the value of the shares of
the Account. The market value of a GNMA Certificate typically will fluctuate to
reflect changes in prevailing interest rates. It falls when rates increase (as
does the market value of other debt securities) and it rises when rates decline
(but it may not rise on a comparable basis with other debt securities because of
its prepayment feature), and, therefore, may be more or less than the face
amount of the GNMA Certificate, which reflects the aggregate principal amount of
the underlying mortgages. As a result, the net asset value of Account shares
will fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Account at prevailing
interest rates which may be less than the rate on the GNMA Certificate.
Prepayments are likely to increase as the interest rate for new mortgages moves
lower than the rate on the GNMA Certificate. Moreover, if the GNMA Certificate
had been purchased at a premium above principal because its rate exceeded
prevailing rates, the premium is not guaranteed and a decline in value to par
may result in a loss of the premium especially in the event of prepayment.
To the extent deemed appropriate by the Account's Manager, the Account
intends to purchase GNMA Certificates directly from Principal Mutual Life
Insurance Company and other issuers as well as from securities dealers. The
Account will purchase directly from issuers only if it can obtain a price
advantage by not paying the commission or mark-up that would be required if the
Certificates were purchased from a securities dealer. The Securities and
Exchange Commission has issued an order under the Investment Company Act of 1940
that permits the Account to purchase GNMA Certificates directly from Principal
Mutual Life Insurance Company subject to certain conditions.
The FNMA and FHLMC securities in which the Account invests are very similar
to GNMA certificates as described above but are not guaranteed by the full faith
and credit of the United States but rather by the agency itself. FNMA and FHLMC
securities are rated Aaa by Moody's and AAA by Standard & Poor's. These ratings
reflect the status of FNMA and FHLMC as federal agencies as well as the
important role each plays in financing purchases of homes in the U.S.
Student Loan Marketing Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Account
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by the agency and is traded regularly in denominations similar to
those in which government obligations are traded.
The Account will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the
Account's investment objective. Accordingly, the Account may sell portfolio
securities in anticipation of a rise in interest rates and purchase securities
for inclusion in its portfolio in anticipation of a decline in interest rates.
As a hedge against changes in interest rates, the Account may enter into
contracts with dealers in GNMA Certificates whereby the Account agrees to
purchase or sell an agreed-upon principal amount of GNMA Certificates at a
specified price on a certain date. The Account may enter into similar purchase
agreements with issuers of GNMA Certificates other than Principal Mutual Life
Insurance Company. The Account may also purchase optional delivery standby
commitments which give the Account the right to sell particular GNMA
Certificates at a specified price on a specified date. Failure of the other
party to such a contract or commitment to abide by the terms thereof could
result in a loss to the Account. To the extent the Account engages in delayed
delivery transactions it will do so for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for the
purpose of investment leverage or to speculate on interest rate changes.
Liability accrues to the Account at the time it becomes obligated to purchase
such securities, although delivery and payment occur at a later date. From the
time the Account becomes obligated to purchase securities on a delayed delivery
basis the Account has all the rights and risks attendant to the ownership of a
security. At the time the Account enters into a binding obligation to purchase
such securities, Account assets of a dollar amount sufficient to make payment
for the securities to be purchased will be segregated. The availability of
liquid assets for this purpose and the effect of asset segregation on the
Account's ability to meet its current obligations, to honor requests for
redemption and to have its investment portfolio managed properly will limit the
extent to which the Account may engage in forward commitment agreements. Except
as may be imposed by these factors, there is no limit on the percent of the
Account's total assets that may be committed to transactions in such agreements.
MONEY MARKET ACCOUNT
The Fund also includes an Account which invests primarily in short-term
securities, the Money Market Account. Securities in which the Money Market
Account will invest may not yield as high a level of current income as
securities of low quality and longer maturities which generally have less
liquidity, greater market risk and more fluctuation.
The Money Market Account will limit its portfolio investments to United
States dollar denominated instruments that the board of directors determines
present minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in respect to
a class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security that at the time of issuance was a long-term security that
has a remaining maturity of 397 calendar days or less, and whose issuer
has received from a nationally recognized statistical rating
organization a rating, with respect to a class of short-term debt
obligations (or any security within that class) that is now comparable
in priority and security with the security, in one of the two highest
rating categories for short-term debt obligations; or
(3) An unrated security that is of comparable quality to a security meeting
the requirements of (1) or (2) above, as determined by the board of
directors.
The Account will not invest more than 5% of its total assets in the
following securities:
(1) Securities which, when acquired by the Account (either initially or
upon any subsequent rollover), are rated below the highest rating
category for short-term debt obligations;
(2) Securities which, at the time of issuance were long-term securities but
when acquired by the Account have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Account's board
of directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Account
will maintain a dollar-weighted average portfolio maturity of 90 days
or less.
The objective of the Money Market Account is to seek as high a level of
current income available from short-term securities as is considered consistent
with preservation of principal and maintenance of liquidity by investing its
assets in a portfolio of money market instruments. These money market
instruments are U.S. Government Securities, U.S. Government Agency Securities,
Bank Obligations, Commercial Paper, Short-term Corporate Debt and Repurchase
Agreements, which are described briefly below and in more detail in the
Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
The Account intends to hold its investments until maturity, but may on
occasion trade securities to take advantage of market variations. Also, revised
valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at times when such sales might otherwise not be
desirable. The Account's right to borrow to facilitate redemptions may reduce
the need for such sales. It is the Account's policy to be as fully invested as
reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the Account
expects to usually transact purchases and sales of portfolio securities with
issuers or dealers on a net basis, it is not anticipated that the Account will
pay any significant brokerage commissions. The Account is free to dispose of
portfolio securities at any time, when changes in circumstances or conditions
make such a move desirable in light of the investment objective.
A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Account invests.
The rate of return and the net asset value will be affected by such other
factors as sales of portfolio securities prior to maturity and the Account's
operating expenses.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Accounts
may use in an effort to achieve their respective investment objectives.
Diversification
Each Account is subject to the diversification requirements of Section
817(h) of the Internal Revenue Code (the "Code") which must be met at the end of
each quarter of the year (or within 30 days thereafter). Regulations issued by
the Secretary of the Treasury have the effect of requiring each Account to
invest no more than 55% of its total assets in securities of any one issuer, no
more than 70% in the securities of any two issuers, no more than 80% in the
securities of any three issuers, and no more than 90% in the securities of any
four issuers. For this purpose, the United States Treasury and each U.S.
Government agency and instrumentality is considered to be a separate issuer.
Thus, the Government Securities Account intends to invest in U.S. Treasury
securities and in securities issued by at least four U.S. Government agencies or
instrumentalities in the amounts necessary to meet those diversification
requirements at the end of each quarter of the year (or within thirty days
thereafter).
In the event any of the Accounts do not meet the diversification
requirements of Section 817(h) of the Code, the contracts funded by shares of
the Accounts will not be treated as annuities or life insurance for Federal
income tax purposes and the owners of the Accounts will be subject to taxation
on their share of the dividends and distributions paid by the Accounts.
Foreign Securities
Each of the following Accounts has adopted investment restrictions that
limit its investments in foreign securities to the indicated percentage of its
assets: International Account - 100%; `Bond and Capital Value Accounts - 20%;
Balanced, Growth and MidCap Accounts - 10%. Debt securities issued in the United
States pursuant to a registration statement filed with the Securities and
Exchange Commission are not considered "foreign securities" for purposes of this
investment limitation. Investment in foreign securities presents certain risks
including those resulting from fluctuations in currency exchange rates,
revaluation of currencies, the imposition of foreign taxes, future political and
economic developments including war, expropriations, nationalization, the
possible imposition of currency exchange controls and other foreign governmental
laws or restrictions, reduced availability of public information concerning
issuers, and the fact that foreign issuers are not generally subject to uniform
accounting, auditing and financial reporting standards or to other regulatory
practices and requirements comparable to those applicable to domestic issuers.
Moreover, securities of many foreign issuers may be less liquid and their prices
more volatile than those of comparable domestic issuers. In addition,
transactions in foreign securities may be subject to higher costs, and the time
for settlement of transactions in foreign securities may be longer than the
settlement period for domestic issuers. An Accounts investment in foreign
securities may also result in higher custodial costs and the costs associated
with currency conversions.
Currency Contracts
The International Account may enter into forward currency contracts,
currency futures contracts and options thereon and options on currencies for
hedging and other non-speculative purposes. A forward currency contract involves
a privately negotiated obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract. The Account will not
enter into a transaction to hedge currency exposure to an extent greater in
effect than the aggregate market value of the securities held or to be purchased
by the Account that are denominated or generally quoted in or currently
convertible into the currency. When the Account enters into a contract to buy or
sell a foreign currency, it generally will hold an amount of that currency,
liquid securities denominated in that currency or a forward contract for such
securities equal to the Account's obligation, or it will segregate liquid high
grade debt obligations equal to the amount of the Account's obligations. The use
of currency contracts involves many of the same risks as transactions in futures
contracts and options as well as the risk of government action through exchange
controls or otherwise that would restrict the ability of the Account to deliver
or receive currency.
Repurchase Agreements and Securities Loans
Each of the Accounts may enter into repurchase agreements with, and each of
the Accounts, except the Capital Value and Money Market Accounts, may lend its
portfolio securities to, unaffiliated broker-dealers and other unaffiliated
qualified financial institutions. These transactions must be fully
collateralized at all times, but involve some credit risk to the Account if the
other party should default on its obligations, and the Account is delayed or
prevented from recovering on the collateral. See the Accounts' Statement of
Additional Information for further information regarding the credit risks
associated with repurchase agreements and the standards adopted by the Fund's
Board of Directors to deal with those risks. None of the Accounts intend either
(i) to enter into repurchase agreements that mature in more than seven days if
any such investment, together with any other illiquid securities held by the
Account, would amount to more than 10% of its total assets or (ii) to loan
securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Accounts may enter into forward commitment
agreements which call for the Accounts to purchase or sell a security on a
future date and at a price fixed at the time the Account enters into the
agreement. Each of the Accounts may also acquire rights to sell its investments
to other parties, either on demand or at specific intervals.
Warrants
Each of the Accounts, except the Money Market and Government Securities
Accounts, may invest in warrants up to 5% of its assets, of which not more than
2% may be invested in warrants that are not listed on the New York or American
Stock Exchange. For the International Account, the 2% limitation also does not
apply to warrants listed on the Toronto Stock Exchange or the Chicago Board
Options Exchange.
Borrowing
As a matter of fundamental policy, each Account may borrow money only for
temporary or emergency purposes. The Balanced, Bond, Capital Value and Money
Market Accounts may borrow only from banks. Further, each may borrow only in an
amount not exceeding 5% of its assets, except the Capital Value Account which
may borrow only in an amount not exceeding the lesser of (i) 5% of the value of
its assets less liabilities other than such borrowings, or (ii) 10% of its
assets taken at cost at the time the borrowing is made, and the Money Market
Account which may borrow only in an amount not exceeding the lesser of (i) 5% of
the value of its assets, or (ii) 10% of the value of its net assets taken at
cost at the time the borrowing is made.
Options
The Balanced, Bond, Government Securities, Growth, International, and
MidCap Accounts may each purchase covered spread options, which would give the
Account the right to sell a security that it owns at a fixed dollar spread or
yield spread in relationship to another security that the Account does not own,
but which is used as a benchmark. These same Accounts may also purchase and sell
financial futures contracts, options on financial futures contracts and options
on securities and securities indices, but will not invest more than 5% of their
assets in the purchase of options on securities, securities indices and
financial futures contracts or in initial margin and premiums on financial
futures contracts and options thereon. The Accounts may write options on
securities and securities indices to generate additional revenue and for hedging
purposes and may enter into transactions in financial futures contracts and
options on those contracts for hedging purposes.
Below Investment Grade Bonds
Below investment-grade bonds are securities rated Ba1 or lower by Moody's
Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("S&P") or unrated securities which the Account's Manager or
Sub-Advisor believes are of comparable quality. These securities are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and to repay principal in accordance with the terms of the
obligation. The Accounts do not intend to invest in securities rated lower than
Ba3 by Moody's or BB by S&P. The Bond Account may not invest more than 35% of
its assets in such securities. The Balanced Account does not intend to invest
more than 5% of its assets in such securities.
The rating services' descriptions of below investment grade securities
rating categories in which the Accounts may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Ba in its bond rating system. The modifier 1
indicates that the security ranks in the high end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB: Debt rated "BB" is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The "BB" rating may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
Below investment-grade securities present special risks to investors. The
market value of lower-rated securities may be more volatile than that of
higher-rated securities and generally tends to reflect the market's perception
of the creditworthiness of the issuer and short-term market developments to a
greater extent than more highly rated securities, which reflect primarily
fluctuations in general levels of interest rates. Periods of economic
uncertainty and change can be expected to result in increased volatility in the
market value of lower-rated securities. Further, such securities may be subject
to greater risks of loss of income and principal, particularly in the event of
adverse economic changes or increased interest rates, because their issuers
generally are not as financially secure or as creditworthy as issuers of
higher-rated securities. Additionally, to the extent that there is not a
national market system for secondary trading of lower-rated securities, there
may be a low volume of trading in such securities which may make it more
difficult to value or sell those securities than higher-rated securities.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield securities,
especially in a thinly traded market.
Investors should recognize that the market for below investment-grade
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the Accounts and the ability of the
issuers of the securities held by the Accounts to pay principal and interest. A
default by an issuer may result in an Account incurring additional expenses to
seek recovery of the amounts due it.
Some of the securities in which the Accounts invest may contain call
provisions. If the issuer of such a security exercises a call provision in a
declining interest rate market, the Account would have to replace the security
with a lower-yielding security, resulting in a decreased return for investors.
Further, a higher-yielding security's value will decrease in a rising interest
rate market, which will be reflected in the Account's net asset value per share.
The Statement of Additional Information includes further information
concerning the Accounts' investment policies and applicable investment
restrictions. Each Account's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for an Account are not fundamental
and may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISOR
The Manager for the Fund is Principal Management Corporation (the
"Manager"), an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the State of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969,
and since that time has managed various mutual funds sponsored by Principal
Mutual Life Insurance Company. As of December 31, 1996, the Manager served as
investment advisor for 26 such funds with assets totaling approximately $4.0
billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced, Capital Value,
Government Securities, Growth, International and MidCap Accounts. The Manager
will reimburse Invista for the cost of providing these services. Invista, an
indirectly wholly-owned subsidiary of Principal Mutual Life Insurance company
and an affiliate of the Manager, was founded in 1985 and manages investments for
institutional investors, including Principal Mutual Life. Assets under
management at December 31, 1996 were approximately $19.6 billion. Invista's
address is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.
The Manager or Invista has assigned certain individuals the primary
responsibility for the day-to-day management of each Account's portfolio. The
persons primarily responsible for the day-to-day management of each Account are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Account Responsible Since Person Primarily Responsible
<S> <C> <C>
Balanced April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President, Invista
Capital Management, Inc. Co-Manager since December, 1997: Martin J. Schafer
(BBA degree, University of Iowa). Vice President, Invista Capital Management,
Inc.
Bond November, 1996 Scott A. Bennett, CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company.
Capital Value November, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice
(Account's inception) President, Invista Capital Management, Inc.; Co-Manager since November, 1996:
Catherine A. Green, CFA, (MBA degree, Drake University). Vice President,
Invista Capital Management, Inc.
Government Securities April, 1987 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
(Account's inception) Capital Management, Inc.
Growth and MidCap May, 1994 Michael R. Hamilton, (BMBA degree, Bellarmine College). Vice President,
(Account's inception) Invista Capital Management, Inc.
and December, 1987
(Account's inception),
respectively
International April, 1994 Scott D. Opsal, CFA (MBA degree, University of Minnesota). Executive Vice
President, Invista Capital Management, Inc.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISOR
Under Maryland law, the business and affairs of the Fund are managed under
the direction of its Board of Directors. The investment services and certain
other services referred to under the heading "Cost of Manager's Services" in the
Statement of Additional Information are furnished to the Fund under the terms of
a Management Agreement between the Fund and the Manager and, for some of the
Accounts, a Sub-Advisory Agreement between the Manager and Invista. The Manager,
or Invista, advises the Accounts on investment policies and on the composition
of the Accounts' portfolios. In this connection, the Manager, or Invista,
furnishes to the Board of Directors of the Fund a recommended investment program
consistent with the Account's investment objective and policies. The Manager, or
Invista, is authorized, within the scope of the approved investment program, to
determine which securities are to be bought or sold, and in what amounts.
The compensation paid by each Account to the Manager for the fiscal year
ended December 31, 1996 was, on an annual basis, equal to the following
percentage of average net assets:
Total
Manager's Annualized
Account Fee Expenses
- ----------------------------------------------------------------------------
Balanced Account .60% .63%
Bond Account .50% .53%
Capital Value Account .48% .49%
Government Securities Account .50% .52%
Growth Account .50% .52%
International Account .75% .90%
MidCap Account .64% .66%
Money Market Account .50% .56%
The compensation being paid by the International Account for investment
management services is higher than that paid by most funds to their advisor, but
it is not higher than the fees paid by many funds with similar investment
objectives and policies.
The Manager and Sub-Advisor may purchase at their own expense statistical
and other information or services from outside sources, including Principal
Mutual Life Insurance Company. An Investment Service Agreement between the
Manager, Principal Mutual Life Insurance Company and the Fund, provides that
Principal Mutual Life Insurance Company will furnish certain personnel, services
and facilities required by the Manager in connection with its performance of the
Management Agreements, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard.
The Accounts may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to Principal Financial
Securities, Inc., a broker-dealer that is an affiliate of the Distributor and
Manager for the Fund.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company.
MANAGERS' COMMENTS
Princor Management Corporation and Invista are staffed with investment
professionals who manage each individual Account. Comments by these individuals
in the following paragraphs summarize in capsule form the general strategy and
results of each Account through 1996. The accompanying charts display results
for the past 10 years or the life of the Account, whichever is shorter. Average
Annual Total Return figures provided for each Account in the graphs below
reflect all expenses of the Account and assume all distributions are reinvested
at net asset value. The figures do not reflect expenses of the variable life
insurance contracts or variable annuity contracts that purchase Account shares;
performance figures for the divisions of the contracts would be lower than
performance figures for the Accounts due to the additional contract expenses.
Past performance is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
The various indices included in the graphs below are unmanaged and do not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.
Growth-Oriented Accounts
Balanced Account
(Judith A. Vogel)
This balanced portfolio combines stocks, bonds and cash in a relatively
conservative mix which seeks to provide both capital appreciation and income to
the shareholder without taking on undue risk. The asset allocation of the
Account generally approximates 60% stocks and 40% bonds. In the year ended
December 31, 1996 the stock market produced exceptional results. Aided by a
healthy economy, continued corporate profit growth, and a good dose of investor
enthusiasm, the S&P 500 Stock Index advanced nearly 23%. Conditions in the bond
market were less supportive over the year. Long-term interest rates rose 0.70%
in 1996, with a lot of volatility along the way, causing the bond returns to
hover between zero and 3% for the year. Demonstrating its balanced nature, the
Account produced a 13% annual return, about midway between stock and bond market
results and very near the Lipper Balanced Fund Average. The bond portion of the
Account's portfolio is comprised of U.S. Government notes and bonds with an
emphasis on safety of principal. The stock portion of the portfolio is
concentrated in companies with stable or growing earnings that are not terribly
sensitive to economic activity. After six years of economic expansion resulting
in high rates of resource utilization, corporate profit growth is likely to come
down, causing a scarcity of earnings growth. Companies that can continue to grow
earnings will be afforded premium valuations. There is no independent market
index against which to measure returns of balanced portfolios, however, we show
the S&P 500 Stock Index for your information.
Total Returns *
As of December 31, 1996
---------------------------------------------------
Since Inception
1 Year 5 Year Date 12/18/87
13.13% 11.57% 12.16%
Comparison of Change in Value of $10,000 Investment in the
Balanced Account, S&P 500 and Lipper Balanced Fund Average
----------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Mid Cap
December 31, Return Index Index
10,000 10,000 10,000
1988 11,637 11,661 11,229
1989 12,982 15,356 13,429
1990 12,147 14,877 13,355
1991 16,321 19,412 16,930
1992 18,410 20,891 18,122
1993 20,447 22,992 20,066
1994 20,019 23,294 19,561
1995 24,941 32,037 24,482
1996 28,215 39,388 27,851
Note: Past performance is not predictive of future performance.
Capital Value Account
(David L. White and Catherine A. Green)
The strategy with this portfolio is to hold common stocks of companies
based on a valuation that is attractive when compared to the market. The
analytical staff looks at companies' current valuations compared to the market,
then at historical information to compare valuations to historical averages. The
focus is on the fundamentals of an industry and the company to determine the
current and future outlook as these potential investments. From there the
portfolio is constructed to provide a diversified set of investments.
The Account outperformed the S&P 500 Index and Lipper Growth and Income
Fund Average for 1996. The strength of the market was in much fewer stocks than
in the past. The volatility between industries was much greater than the overall
results. The Account benefited from several areas of exposure. Banks and health
care were the strongest areas for the Account during the year. The focus has
been away from the more cyclical areas of the economy which also helped during
the year. As the economic cycle progresses, the market places more emphasis on
companies with consistent earnings growth, and we have tended to overweight
these areas of the market. As the market performance continues to narrow,
however, it becomes increasingly difficult to select the correct areas of
overperformance.
Total Returns *
As of December 31, 1996
----------------------------------------
1 Year 5 Year 10 Year
23.50% 14.08% 13.08%
Comparison of Change in Value of $10,000 Investment in the
Capital Value Account, S&P 500 and Lipper Growth and Income Fund Average
----------------------------------------------------------------------------
Fund S&P 500 Lipper
Year Ended Total Stock Growth & Income
December 31, Return Index Fund Average
10,000 10,000 10,000
1987 10,647 10,526 10,184
1988 12,183 12,274 11,814
1989 14,155 16,163 14,596
1990 12,759 15,659 13,946
1991 17,693 20,433 18,002
1992 19,377 21,990 19,618
1993 20,888 24,201 21,884
1994 20,990 24,519 21,678
1995 27,688 33,722 28,360
1996 34,193 41,460 34,253
Note: Past performance is not predictive of future performance.
Growth Account
(Michael R. Hamilton)
The Growth Account struggled against the market in 1996; struggle being
relative as 12.23% return is respectable from a historical perspective. The S&P
500 Index last year was heavily influenced by the top 25 holdings in the Index.
These are very large companies. The Account is more diversified than the Index
and therefore its results were more representative of the broader market. With
the market continuing to struggle against the potential of an economic boom on
one hand, versus a slowing or recession on the other, the market could be
subjected to emotional swings depending on the inflation outlook.
The Account's portfolio still has a large focus on health care given the
demographics of the United States. This was not a strong sector in 1996,
particularly the managed care companies of which the portfolio has a large
exposure. Also, the portfolio has large positions in technology and growth
cyclicals. These companies should do well if the economy continues to move
forward which is indicated by current data.
The portfolio contains many companies that are able to compete on a world
wide basis. This is important as global competition continues.
Total Returns *
As of December 31, 1996
-------------------------------------------------------
1 Year Since Inception Date 5/2/94 10 Year
12.51% 16.12% --
Comparison of Change in Value of $10,000 Investment in the
Growth Account, S&P 500 and Lipper Growth Fund Average
---------------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Growth
December 31, Return Index Index
10,000 10,000 10,000
1994 10,542 10,397 10,090
1995 13,243 14,299 13,197
1996 14,899 17,580 15,736
Note: Past performance is not predictive of future performance.
International Account
(Scott D. Opsal)
The International Account's 26.2% total return in 1996 was driven by broad
based market rallies across Europe. Several European markets have climbed more
than 20% in 1996, with Japan and Italy being the only major markets not
reflecting strong gains. The Account's investment strategy of holding stocks in
smaller European economies produced outperformance as interest rate moves have
been favorable this year. Long bond yields in secondary European markets fell
while rates in the stronger core countries have inched up. The Account's
overexposure to the falling rate markets and underexposure to the rising rate
markets was a significant positive factor producing returns that exceeded EAFE's
6.1% and the average international fund in 1996.
The Account also benefited from non-cyclical stockholdings in Europe. Food,
drug, technology, and stable growth cyclicals have outperformed the heavier
cyclical industries. The Account's move into non-cyclical growth stocks early in
the year proved timely. The Account remains underweighted in Japan due to poor
valuations and a weak economic outlook. Japan has been the worst performing
major market, and the Account's lack of exposure to this market also boosted
relative returns.
Adverse currency changes diminished the Account's returns as measured in
U.S. dollars by an estimated 2%. We believe the EAFE index has suffered a
currency loss exceeding 4%, and the average manager has lost an estimated 3%.
Thus, the Account's investment strategy placed it in markets suffering
relatively small foreign exchange losses thereby aiding relative return
performance.
The Account is subject to specific risks associated with foreign currency
rates, foreign taxation and foreign economies.
Total Returns *
As of December 31, 1996
----------------------------------------------------
1 Year Since Inception Date 5/2/94 10 Year
25.09% 12.83% --
Comparison of Change in Value of $10,000 Investment in the
International Account, EAFE and Lipper International Fund Average
------------------------------------------------------------
Fund Morgan Stanley Lipper
Year Ended Total EAFE International
December 31, Return Index Index
10,000 10,000 10,000
1994 9,663 9,990 9,758
1995 11,032 11,110 10,676
1996 13,800 11,781 11,934
Note: Past performance is not predictive of future performance.
MidCap Account
(Michael R. Hamilton)
The equity market was strong in 1996, but within the market there were two
different trends. Large-cap stocks performed much better than small-cap stocks.
The MidCap Account returned 19.13% compared with the Lipper Mid Cap Average of
17.9%. The Account and the Lipper Average trailed the S&P 500 Index because of
their emphasis on small cap stocks. While both trailed the S&P 500, this was a
good year for the Account.
The financial market continues to grapple with the paradox of strong
economic growth with no apparent inflation. Productivity will be key in 1997 if
inflation is to remain benign. The Account's portfolio continues to be focused
on companies that should enhance productivity of both labor and capital. Several
of the technology, service and cyclical areas support this emphasis. The
portfolio is also overweighted in the financial sector as bank consolidation
continues.
Continued profit growth will be important in 1997 as well. Companies with
more predictable and visible earnings growth are preferred. This continues to be
those that are low cost producers and have competitive barriers to entry.
Selectivity in all sectors will be crucial to outperformance.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
21.11% 16.64% 17.73%
Comparison of Change in Value of $10,000 Investment
in the MidCap Account, S&P 500 and
Lipper Mid Cap Fund Average
-----------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 MID CAP
December 31, Return Index Index
10,000 10,000 10,000
1988 12,369 11,661 11,476
1989 15,070 15,356 14,586
1990 13,186 14,877 14,067
1991 20,240 19,412 21,275
1992 23,264 20,891 23,213
1993 27,750 22,992 26,625
1994 27,967 23,294 26,079
1995 36,080 32,037 34,469
1996 43,697 39,388 40,646
Note: Past performance is not predictive of future performance.
Important Notes of the Growth-Oriented Accounts:
Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Growth Fund Average: This average consists of funds which normally invest
in companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices. The one-year average at December 31, 1996 contained 669 funds.
Lipper Flexible Portfolio Fund Average: This average consists of funds which
allocate their investments across various asset classes, including domestic
common stocks, bonds and money market instruments, with a focus on total return.
The one-year average at December 31, 1996 contained 186 funds.
Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average at December 31, 1996 contained 272 mutual funds.
Lipper Growth & Income Fund Average: this average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one year average at December 31, 1996 contained 522
funds.
Lipper Mid Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average at December 31, 1996 contained 154
funds.
Morgan Stanley Capital International EAFE (Europe, Australia and Far East)
Index: This average reflects an arithmetic, market value weighted average of
performance of 1,920 listed securities which are listed on the stock exchanges
of the following countries: Australia, Austria, Belgium, Denmark, Netherlands,
New Zealand, Norway, Singapore/Malaysia, Spain, Sweden, Switzerland, and the
United Kingdom.
Lipper International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average at December 31, 1996 contained 331 funds.
Income-Oriented Accounts:
Bond Account
(Scott A. Bennett)
The Bond Account's performance in 1996 lagged when compared to 1995. 1995
was a banner year, mainly because of dramatically declining interest rates.
During 1996 interest rates increased throughout most of the year based on fears
of increasing inflation. This hurt the Account's relative performance as the
duration target of 7 years (actual duration at 12/31/96 was 6.98 years) is
longer than the average BBB rated bond fund and the BAA Lehman Corporate Index.
Relative performance was also negatively impacted by the lack of a significant
amount of less than investment grade bonds in the portfolio. High yield (less
than investment grade) debt performed extremely well during 1996, with many of
the top performing funds in the Lipper BAA universe having significant exposures
to this asset class.
Over the long-term, the Account continues to outperform the average BBB
fund. This is attributed to remaining fully invested and not trying to guess
interest rates. The BBB corporate bond class continued to be an attractive asset
class in 1996, outperforming all other taxable investment grade classes. Spreads
continued to narrow during the year with defaults low and a large amount of
funds chasing the available bonds.
Total Returns *
As of December 31, 1996
- --------------------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
2.36% 8.20% 9.55%
Comparison of Change in Value of $10,000 Investment in the Bond Account,
Lehman Brothers BAA Corporate Index and Lipper Corporate Debt BBB Rated Fund
Average
-----------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total BAA BBB
December 31, Return Index Avg
10,000 10,000 10,000
1988 10,991 11,129 10,900
1989 12,514 12,699 12,060
1990 13,167 13,595 12,751
1991 15,369 16,113 15,020
1992 16,810 17,512 16,258
1993 18,771 19,665 18,261
1994 18,227 18,707 17,447
1995 22,268 22,959 20,948
1996 22,794 23,882 21,616
Note: Past performance is not predictive of future performance.
Government Securities Account
(Martin J. Schafer)
Interest rates rose in 1996, which dampened absolute fixed income returns.
The Account underperformed the Lipper U.S. Mortgage Fund Average and the Lehman
MBS Index in 1996 due to its slightly longer duration. However, since the
Account's inception of 4/9/87 it has outperformed the Lipper U.S. Mortgage Fund
Average and is competitive with the Lehman MBS Index.
Results were enhanced last year through identification and selection of
certain undervalued sectors of mortgage-backed securities for a portion of the
portfolio. These securities have now become very popular with Wall Street and
other investors, resulting in their increasing in value.
The current portfolio is well positioned for the period ahead. It has a
number of securities that are "seasoned" (e.g., original 30 year loans that have
been outstanding for three years or more) and therefore valued more highly in
the marketplace. There are few securities priced above par, so prepayment risk
is negligible. If the future continues to be an era of economic prosperity we
should continue to see strong housing markets and housing turnover that will
cause prepayments on our securities to exceed market expectations. These
repayments are welcomed, as the portfolio is priced at a discount and the
Account will be paid-off at par.
Total Returns *
As of December 31, 1996
- --------------------------------------------------
1 Year 5 Year Since Inception Date 4/9/87
3.35% 6.68% 8.63%
Comparison of Change in Value of $10,000 Investment in the Government Securities
Account, Lehman Brothers Mortgage Index and Lipper U.S. Mortgage Fund Average
- --------------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total Mortgage U.S. Mortgage
December 31, Return Index Index
10,000 10,000 10,000
1987 10,099 10,204 10,104
1988 10,939 11,094 10,858
1989 12,645 12,808 12,224
1990 13,852 14,183 13,370
1991 16,200 16,410 15,348
1992 17,308 17,551 16,285
1993 19,051 18,751 17,499
1994 18,188 18,450 16,769
1995 21,656 21,549 19,491
1996 22,381 22,702 20,245
Note: Past performance is not predictive of future performance.
Important Notes of the Income-Oriented Accounts:
Lehman Brothers, BAA Corporate Index: an unmanaged index of all publicly
issued fixed rate nonconvertible, dollar-denominated, SEC-registered corporate
debt rated Baa or BBB by Moody's or S&P.
Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average at
December 31, 1996 contained 102 mutual funds.
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgages/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average at December 31, 1996 contained 59 mutual
funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES
The net asset value of each Account's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange,
except on days on which changes in the value of the Account's portfolio
securities will not materially affect the current net asset value of the
Account's redeemable securities, on days during which an Account receives no
order for the purchase or sale of its redeemable securities and no tender of
such a security for redemption, and on customary national business holidays. The
net asset value per share of each Account is determined by dividing the value of
the Account's securities plus all other assets, less all liabilities, by the
number of Account shares outstanding.
Growth-Oriented and Income-Oriented Accounts
The following valuation information applies to the Growth-Oriented and
Income-Oriented Accounts. Securities for which market quotations are readily
available are valued using those quotations. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.
As previously described, some of the Accounts may purchase foreign
securities whose trading is substantially completed each day at various times
prior to the close of the New York Stock Exchange. The values of such securities
used in computing net asset value per share are usually determined as of such
times. Occasionally, events which affect the values of such securities and
foreign currency exchange rates may occur between the times at which they are
generally determined and the close of the New York Stock Exchange and would
therefore not be reflected in the computation of the Account's net asset value.
If events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the Manager or Sub-Advisor under procedures established and
regularly reviewed by the Board of Directors. To the extent the Account invests
in foreign securities listed on foreign exchanges which trade on days on which
the Account does not determine its net asset value, for example Saturdays and
other customary national U.S. Holidays, the Account's net asset value could be
significantly affected on days when shareholders have no access to the Account.
Money Market Account
The Money Market Account values its securities at amortized cost. For a
description of this calculation procedure see the Fund's Statement of Additional
Information.
PERFORMANCE CALCULATION
From time to time, the Accounts may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Accounts. The Account's yield and total return
figures described below will vary depending upon market conditions, the
composition of the Account's portfolios and operating expenses. These factors
and possible differences in the methods used in calculating yield and total
return should be considered when comparing the Accounts' performance figures to
performance figures published for other investment vehicles. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices. Any performance data quoted for the Accounts represents only
historical performance and is not intended to indicate future performance of the
Accounts. The calculation of average annual total return and yield for the
Accounts does not include fees and charges of the separate accounts that invest
in the Accounts and, therefore, does not reflect the investment performance of
those separate accounts. For further information on how the Accounts calculate
yield and total return figures, see the Statement of Additional Information.
Average Annual Total Return
Each Account may advertise its respective average annual total return.
Average annual total return for each Account is computed by calculating the
average annual compounded rate of return over the stated period that would
equate an initial $1,000 investment to the ending redeemable value assuming the
reinvestment of all dividends and capital gains distributions at net asset
value. The same assumptions are made when computing cumulative total return by
dividing the ending redeemable value by the initial investment. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices.
Yield and Effective Yield
From time to time the Money Market Account may advertise its respective
yield and effective yield. The yield of the Account refers to the income
generated by an investment in the Account over a seven-day period. This income
is then annualized. That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the
Account is assumed to be reinvested. The effective yield will be slightly higher
than the yield because of the compounding effect of this assumed reinvestment.
The yield for the Money Market Account will fluctuate daily as the income
earned on the investments of the Account fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Account is one of a Series of Accounts issued by an
open-end investment company and there is no guarantee that the net asset value
or any stated rate of return will remain constant. A shareholder's investment in
the Account is not insured. Investors comparing results of the Account with
investment results and yields from other sources such as banks or savings and
loan associations should understand these distinctions. Historical and
comparative yield information may, from time to time, be presented by the
Account.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
It is the policy of each Account to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which
the Fund so qualifies it will be exempt from federal income tax upon the amounts
so distributed to investors.
Any dividends from the net investment income of the Accounts (except the
Money Market Account) will normally be payable to the shareholders annually, and
any net realized gains will be distributed annually. All dividends and capital
gains distributions are applied to purchase additional Account shares at net
asset value as of the payment date without the imposition of any sales charge.
Each Account will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Accounts to consult with tax advisors on the federal
and state tax aspects of their investments and redemptions.
Money Market Account
The Money Market Account declares dividends of all its daily net investment
income on each day the Account's net asset value per share is determined.
Dividends are payable daily and are automatically reinvested in full and
fractional shares of the Account at the then current net asset value unless a
shareholder requests payment in cash.
Net investment income, for dividend purposes, consists of (1) accrued
interest income plus or minus accrued discount or amortized premium; plus or
minus (2) all net short-term realized gains and losses; minus (3) all accrued
expenses of the Account. Expenses of the Account are accrued each day. Net
income will be calculated immediately prior to the determination of net asset
value per share of the Account.
Since the Account's policy is, under normal circumstances, to hold
portfolio securities to maturity and to value portfolio securities at amortized
cost, it does not expect any capital gains or losses. If the Account does
experience gains, however, it could result in an increase in dividends. Capital
losses could result in a decrease in dividends. If for some extraordinary reason
the Account realizes net long-term capital gains, it will distribute them once
every 12 months.
Since the net income of the Account (including realized gains and losses on
the portfolio securities) is declared as a dividend each time the net income of
the Account is determined, the net asset value per share of the Account normally
remains at $1.00 immediately after each determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Account,
representing reinvestment of dividend income, is reflected by an increase in the
number of shares of the Account.
Normally the Account will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Account
determined at any time is a negative amount, the net asset value per share will
be reduced below $1.00. If this happens, the Account may endeavor to restore the
net asset value per share to $1.00 by reducing the number of outstanding shares
by redeeming proportionately from shareholders without the payment of any
monetary consideration, such number of full and fractional shares as is
necessary to maintain a net asset value per share of $1.00. Each shareholder
will be deemed to have agreed to such a redemption in these circumstances by
investing in the Account. The Account may seek to achieve the same objective of
restoring the net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share would increase to the extent of positive net income which
is not declared as a dividend, or any other method approved by the Board of
Directors.
The Board of Directors may revise the above dividend policy, or postpone
the payment of dividends, if the Account should have or anticipate any large
presently unexpected expense, loss or fluctuation in net assets which in the
opinion of the Board might have a significant adverse affect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Accounts. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Account shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
Each Account serves as an underlying investment medium for variable annuity
contracts and variable life insurance policies that are funded in separate
accounts established by Principal Mutual Life Insurance Company. It is
conceivable that in the future it may be disadvantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest in
the Accounts simultaneously. Although neither Principal Mutual Life Insurance
Company nor the Accounts currently foresee any such disadvantages either to
variable life insurance policy owners or to variable annuity contract owners,
the Fund's Board of Directors intends to monitor events in order to identify any
material conflicts between such policy owners and contract owners and to
determine what action, if any, should be taken in response thereto. Such action
could include the sale of Account shares by one or more of the separate
accounts, which could have adverse consequences. Material conflicts could result
from, for example, (1) changes in state insurance laws, (2) changes in Federal
income tax law, (3) changes in the investment management of an Account, or (4)
differences in voting instructions between those given by policy owners and
those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Fund. There are no sales charges on the Accounts'
shares. There are no restrictions on amounts to be invested in the Accounts'
shares.
Shareholder accounts for each Account will be maintained under an open
account system. Under this system, an account is automatically opened and
maintained for each new investor. Each investment is confirmed by sending the
investor a statement of account showing the current purchase and the total
number of shares then owned. The statement of account is treated by each Account
as evidence of ownership of Account shares in lieu of stock certificates, and
unless written request is made to the Account, stock certificates will not be
issued or delivered to investors. Certificates, which can be stolen or lost, are
unnecessary except for special purposes such as collateral for a loan.
Fractional interests in the Account's shares are reflected to three decimal
places in the statement of account, but any stock certificates will be issued
only for full shares owned.
If an offer to purchase shares is received by any of the Accounts before
the close of trading on the New York Stock Exchange, the shares will be issued
at the offering price (net asset value of Account shares) computed on that day.
If an offer is received after the close of trading or on a day which is not a
trading day, the shares will be issued at the offering price computed on the
first succeeding day on which a price is determined. Dividends on the Money
Market Account shares will be paid on the next day following the effective date
of a purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each Account of the Principal
Variable Contracts Fund, Inc. Each Account share is entitled to one vote either
in person or by proxy at all shareholder meetings for that Account. This
includes the right to vote on the election of directors, selection of
independent accountants and other matters submitted to meetings of shareholders
of the Account. Each share has equal rights with every other share of the
Account as to dividends, earnings, voting, assets and redemption. Shares are
fully paid and non-assessable, and have no preemptive or conversion rights.
Shares of an Account may be issued as full or fractional shares, and each
fractional share has proportionately the same rights, including voting, as are
provided for a full share. Shareholders of the Fund may remove any director with
or without cause by the vote of a majority of the votes entitled to be cast at a
meeting of all Account shareholders.
The bylaws of the Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of the Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Fund intends to hold shareholder meetings only when required by
law and at such other times as may be deemed appropriate by the Board of
Directors.
Shareholder inquiries should be directed to the Principal Variable
Contracts Fund, Inc. at The Principal Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Fund's shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of the Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Account's shares
allocated to each of its separate accounts registered under the Investment
Company Act of 1940 and attributable to variable annuity contracts or variable
life insurance policies participating therein in accordance with instructions
received from contract or policy holders, participants and annuitants. Other
shares of each Account held by each registered separate account, including those
for which no timely instructions are received, are voted in proportion to the
instructions that are received with respect to contracts or policies
participating in that separate account. Shares of each of the Accounts held in
the general account of Principal Mutual Life Insurance Company or in its
unregistered separate accounts are voted in proportion to the instructions that
are received with respect to contracts and policies participating in its
registered and unregistered separate accounts. If Principal Mutual determines
pursuant to applicable law that an Account's shares held in one or more separate
accounts or in its general account need not be voted pursuant to instructions
received with respect to participating contracts or policies, it then may vote
those Account shares in its own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Account will redeem its shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Account requesting redemption of any part or all of
the shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, the Account will not require a signature guarantee as a part of a
proper endorsement; otherwise the shareholder's signature must be guaranteed by
either a commercial bank, trust company, credit union, savings and loan
association, national securities exchange member, or by a brokerage firm. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Account in proper and complete form. The amount received for
shares upon redemption may be more or less than the cost of such shares
depending upon the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Account may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Account of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Account
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Account. An Account
will redeem only those shares for which it has received good payment. To avoid
the inconvenience of such a delay, shares may be purchased with a certified
check, bank cashier's check or money order. During the period prior to the time
a redemption from the Money Market Account is effective, dividends on such
shares will accrue and be payable and the shareholder will be entitled to
exercise all other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Accounts may be transferred to
an Eligible Purchaser. However, whenever any of the Accounts is requested to
transfer shares to other than an Eligible Purchaser, the Account has the right
at its election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Account must notify the transferee or transferees of such
shares in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Accounts
except the International Account. The custodian for the International Account is
Chase Manhattan Bank, Global Securities Services, Chase Metro Tech Center,
Brooklyn, New York 11245. The custodians perform no managerial or policymaking
functions for the funds.
Organization and Share Ownership: Effective January 1, 1998, an Agreement
and Plan of Reorganization and Liquidation was implemented under which a Series
of the Principal Variable Contracts Fund, Inc. adopted the assets and
liabilities of the corresponding Fund. The Funds were incorporated in the state
of Maryland on the following dates: Balanced Fund - November 26, 1986; Bond Fund
- - November 26, 1986; Capital Accumulation Fund - May 26, 1989 (effective
November 1, 1989 succeeded to the business of a predecessor Fund that had been
incorporated in Delaware on February 6, 1969); Emerging Growth Fund - February
20, 1987; Government Securities Fund - June 7, 1985; Growth Fund - August 20,
1993; Money Market Fund - June 10, 1982; and World Fund - August 20, 1993.
Principal Mutual Life Insurance Company owns 100% of each Fund's outstanding
shares.
Capitalization: The authorized capital stock of each Account consists of
100,000,000 shares of common stock (500,000,000 for Money Market Account), $.01
par value.
Financial Statements: Copies of the financial statements of each Account
will be mailed to each shareholder of that Account semi-annually. At the close
of each fiscal year, each Account's financial statements will be audited by a
firm of independent auditors. The firm of Ernst & Young LLP has been appointed
to audit the financial statements of each Account for their respective present
fiscal years.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the Fund
has filed with the Securities and Exchange Commission. The Funds' Statement of
Additional Information is hereby incorporated by reference into this Prospectus.
A copy of the Statement of Additional Information can be obtained upon request,
free of charge, by writing or telephoning the Fund. You may obtain a copy of
Part C of the Registration Statements filed with the Securities and Exchange
Commission, Washington, D.C., from the Commission upon payment of the prescribed
fees.
Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for the Fund.
This page left blank intentionally.
The Principal Variable Contracts Fund, Inc. described in this prospectus is
a diversified, open-end management investment company which offers a variety of
Accounts each of which was formerly a separately incorporated investment
company. Together the Accounts provide the following range of investment
objectives:
Capital Value Account (formerly known as Principal Capital Accumulation Fund,
Inc.) seeks to achieve primarily long-term capital appreciation and secondarily
growth of investment income through the purchase primarily of common stocks, but
the Account may invest in other securities.
Government Securities Account (formerly known as Principal Government Securities
Fund, Inc.) seeks a high level of current income, liquidity and safety of
principal. The Account seeks to achieve its objective through the purchase of
obligations issued or guaranteed by the United States Government or its
agencies, with emphasis on Government National Mortgage Association Certificates
("GNMA Certificates"). Account shares are not guaranteed by the United States
Government.
Money Market Account (formerly known as Principal Money Market Fund, Inc.) seeks
as high a level of income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
An investment in the Money Market Account is neither insured nor guaranteed
by the U.S. Government. There can be no assurance the Money Market Accounts will
be able to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Variable
Contracts Fund, Inc. that an investor ought to know before investing. It should
be read and retained for future reference.
Additional information about the Fund has been filed with the Securities
and Exchange Commission, including documents called Statements of Additional
Information, dated December 31, 1997. The Statement of Additional Information is
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Variable Contracts Fund, Inc.
a Member of
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is December 31, 1997.
TABLE OF CONTENTS
Page
Summary ........................................................ 2
Financial Highlights............................................. 4
Investment Objectives, Policies and Restrictions................. 6
Certain Investment Policies and Restrictions..................... 9
Manager ......................................................... 10
Duties Performed by the Manager.................................. 10
Managers' Comments............................................... 11
Determination of Net Asset Value of Account Shares............... 12
Performance Calculation.......................................... 13
Income Dividends, Distributions and Tax Status................... 13
Eligible Purchasers and Purchase of Shares....................... 14
Shareholder Rights .............................................. 15
Redemption of Shares............................................. 16
Additional Information............................... ........... 16
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, shares of the Accounts in any jurisdiction in which such sale,
offer to sell, or solicitation may not be lawfully made. No dealer, salesperson,
or other person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund or the Fund's Manager.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Variable Contracts Fund, Inc. ("Fund") is an open-end
diversified management investment company offering multiple Accounts.
Who may purchase shares of the Accounts?
Shares of the Accounts are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Accounts offer investors?
Professional Investment Management: Experienced securities analysts provide
each Account with professional investment management.
Diversification: Each Account will diversify by investing in securities
issued by a number of issuers doing business in a variety of industries, located
in different geographical regions and/or securities which have varying
maturities. Diversification reduces investment risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Accounts creates administrative efficiencies.
Redeemability: Upon request each Account will redeem its shares and
promptly pay the investor the current net asset value of the shares redeemed.
See "Redemption of Shares."
What are the Accounts' investment objectives?
The investment objective of the Capital Value Account is long-term capital
appreciation and its secondary investment objective is growth of investment
income. The Account seeks to achieve its investment objectives through the
purchase primarily of common stocks but the Account may invest in other
securities.
The investment objective of the Government Securities Account is to seek a
high level of current income, liquidity and safety of principal. The Account
seeks to achieve its objective through the purchase of obligations issued or
guaranteed by the United States Government or its agencies, with emphasis on
Government National Mortgage Association Certificates ("GNMA Certificates").
Account shares are not guaranteed by the United States Government.
The investment objective of the Money Market Account is to seek as high a
level of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
There can be no assurance that the investment objectives of any of the
Accounts will be realized. See "Investment Objectives, Policies and
Restrictions."
Who serves as Manager for the Accounts?
Principal Management Corporation (formerly known as Princor Management
Corporation)("Manager"), a corporation organized in 1969 by Principal Mutual
Life Insurance Company, is the Manager for the Fund. It is also the dividend
disbursing and transfer agent for the Fund. See "Manager."
What fees and expenses apply to ownership of shares of the Accounts?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Accounts.
ANNUAL ACCOUNT OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Total
Management Other Operating
Account Fee Expenses Expenses
Capital Value Account .48% .01% .49%
Government Securities Account .50% .02% .52%
Money Market Account .50% .06% .56%
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Period (in years)
Account 1 3 5 10
Capital Value Account $5 $16 $27 $62
Government Securities Account $5 $17 $29 $65
Money Market Account $6 $18 $31 $70
This Example is based on the Annual Account Operating Expenses for each
Account described above. Please remember that the Example should not be
considered a representation of past or future expenses and that actual
expenses may be greater or less than those shown.
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in the Accounts will bear directly or
indirectly. The Fee Table and Example do not reflect expenses and charges of the
Separate Accounts that invest in the Accounts. See "Duties Performed by the
Manager."
FINANCIAL HIGHLIGHTS
The following financial highlights are derived from financial statements
which, for the five years in the period ended December 31, 1996, have been
audited by Ernst & Young LLP, independent auditors whose report has been
incorporated by reference herein. The financial highlights should be read in
conjunction with the financial statements, related notes, and other financial
information incorporated by reference herein. The financial statements may be
obtained by investors, without charge, by telephoning 1-800-451-5447.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
Net Realized Excess
and Distri- Distri-
Net Asset Unrealized Total Dividends butions butions
Value at Net Gain from from Net from from Total
Beginning Investment (Loss) on Investment Investment Capital Capitl Distri-
of Period Income Investments Operations Income Gains Gains(a) butions
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capital Value Account(b)
Six Months Ended June 30, 1997(c) $29.84 $.32 $ 3.81 $4.13 -- $(1.07) -- $(1.07)
Year Ended December 31,
1996 27.80 .57 5.82 6.39 $(.58) (3.77) -- (4.35)
1995 23.44 .60 6.69 7.29 (.60) (2.33) -- (2.93)
1994 24.61 .62 (.49) .13 (.61) (.69) -- (1.30)
1993 25.19 .61 1.32 1.93 (.60) (1.91) -- (2.51)
Six Months Ended December 31, 1992(d) 26.03 .31 1.84 2.15 (.64) (2.35) -- (2.99)
Year Ended June 30,
1992 23.35 .65 2.70 3.35 (.67) -- -- (.67)
1991 22.48 .74 1.22 1.96 (.79) (.30) -- (1.09)
1990 23.63 .79 .14 .93 (.81) (1.27) -- (2.08)
1989 23.23 .77 1.32 2.09 (.68) (1.01) -- (1.69)
1988 27.51 .60 (1.50) (.90) (.69) (2.69) -- (3.38)
1987 25.48 .40 4.46 4.86 (.50) (2.33) -- (2.83)
Government Securities Account(b)
Six Months Ended June 30, 1997(c) 10.31 .33 .01 .34 (.01) -- -- (.01)
Year Ended December 31,
1996 10.55 .59 (.24) .35 (.59) -- -- (.59)
1995 9.38 .60 1.18 1.78 (.61) -- -- (.61)
1994 10.61 .76 (1.24) (.48) (.75) -- -- (.75)
1993 10.28 .71 .33 1.04 (.71) -- -- (.71)
Six Months Ended December 31, 1992(d) 10.93 .40 .04 .44 (.78) -- $(.31) (1.09)
Year Ended June 30,
1992 10.24 .80 .71 1.51 (.81) -- (.01) (.82)
1991 10.05 .80 .24 1.04 (.81) -- (.04) (.85)
1990 10.05 .78 -- .78 (.78) -- -- (.78)
1989 9.37 .80 .34 1.14 (.46) -- -- (.46)
1988 9.47 .78 (.09) .69 (.79) -- -- (.79)
Period Ended June 30, 1987(g) 10.00 .18 (.59) (.41) (.12) -- -- (.12)
Money Market Account(b)
Six Months Ended June 30, 1997(c) 1.000 .025 -- .025 (.025) -- -- (.025)
Year Ended December 31,
1996 1.000 .049 -- .049 (.049) -- -- (.049)
1995 1.000 .054 -- .054 (.054) -- -- (.054)
1994 1.000 .037 -- .037 (.037) -- -- (.037)
1993 1.000 .027 -- .027 (.027) -- -- (.027)
Six Months Ended December 31, 1992(d) 1.000 .016 -- .016 (.016) -- -- (.016)
Year Ended June 30,
1992 1.000 .046 -- .046 (.046) -- -- (.046)
1991 1.000 .070 -- .070 (.070) -- -- (.070)
1990 1.000 .077 -- .077 (.077) -- -- (.077)
1989 1.000 .083 -- .083 (.083) -- -- (.083)
1988 1.000 .064 -- .064 (.064) -- -- (.064)
1987 1.000 .057 -- .057 (.057) -- -- (.057)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Value Account(b)
Six Months Ended June 30, 1997(c) $32.90 14.28%(e) $249,077 .48%(f) 2.22%(f) 29.0%(f) $.0427
Year Ended December 31,
1996 29.84 23.50% 205,019 .49% 2.06% 48.5% .0426
1995 27.80 31.91% 135,640 .51% 2.25% 49.2% N/A
1994 23.44 .49% 120,572 .51% 2.36% 44.5% N/A
1993 24.61 7.79% 128,515 .51% 2.49% 25.8% N/A
Six Months Ended December 31, 1992(d) 25.19 8.81%(e) 105,355 .55%(f) 2.56%(f) 39.7%(f) N/A
Year Ended June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8% N/A
1991 23.35 9.46% 76,537 .53% 3.53% 14.0% N/A
1990 22.48 3.94% 74,008 .56% 3.56% 30.2% N/A
1989 23.63 10.02% 68,132 .57% 3.53% 23.5% N/A
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7% N/A
1987 27.51 22.17% 57,478 .63% 1.99% 16.1% N/A
Government Securities Account(b)
Six Months Ended June 30, 1997(c) 10.64 3.26%(e) 84,656 .53%(f) 6.48%(f) 11.0%(f) N/A
Year Ended December 31,
1996 10.31 3.35% 85,100 .52% 6.46% 8.4% N/A
1995 10.55 19.07% 50,079 .55% 6.73% 9.8% N/A
1994 9.38 (4.53)% 36,121 .56% 7.05% 23.2% N/A
1993 10.61 10.07% 36,659 .55% 7.07% 20.4% N/A
Six Months Ended December 31, 1992(d) 10.28 4.10%(e) 31,760 .59%(f) 7.35%(f) 34.5%(f) N/A
Year Ended June 30,
1992 10.93 15.34% 33,022 .58% 7.84% 38.9% N/A
1991 10.24 10.94% 26,021 .59% 8.31% 4.2% N/A
1990 10.05 8.16% 21,488 .61% 8.48% 18.7% N/A
1989 10.05 12.61% 15,890 .63% 8.68% 3.7% N/A
1988 9.37 7.69% 12,902 .66% 8.47% 2.7% N/A
Period Ended June 30, 1987(g) 9.47 (.94)%(e) 10,778 .64%(f) 8.50%(f) 0.2%(f) N/A
Money Market Account(b)
Six Months Ended June 30, 1997(c) 1.000 2.50%(e) 43,688 .55%(f) 5.06%(f) N/A N/A
Year Ended December 31,
1996 1.000 5.07% 46,244 .56% 5.00% N/A N/A
1995 1.000 5.59% 32,670 .58% 5.32% N/A N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A N/A
Six Months Ended December 31, 1992(d) 1.000 1.54%(e) 27,680 .59%(f) 3.10%(f) N/A N/A
Year Ended June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A N/A
</TABLE>
Notes to financial highlights
(a) Due to the timing of dividend distributions and the differences in
accounting for income and realized gains (losses) for financial statement
and federal income tax purposes, the fiscal year in which amounts are
distributed may differ from the year in which the income and realized gains
(losses) are recorded for financial statement purposes by the fund. The
differences between the income and gains distributed on a book versus tax
basis are shown in the Financial Highlights as excess distributions from net
investment income and from capital gains.
(b) Effective January 1, 1998, the following Fund names were changed:
Principal Capital Accumulation Fund, Inc. became Capital Value Account
Principal Government Securities Fund, Inc. became Government Securities
Account
Principal Money Market Fund, Inc. became Money Market Account
(c) Unaudited.
(d) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(e) Total return amounts have not been annualized.
(f) Computed on an annualized basis.
(g) Period from April 9, 1987, date shares first offered to the public, through
June 30, 1987. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on October 31, 1987 through
December 17, 1987 was recognized, all of which was distributed to the
Account's sole stockholder, Principal Mutual Life Insurance Company. This
represented activity of the Account prior to the initial offering of shares
to eligible purchasers.
Investment Objectives, Policies and Restrictions
The investment objectives and policies of each Account are described below.
There can be no assurance that the objectives of the Accounts will be realized.
Capital Value Account
The objective of Capital Value Account is long-term capital appreciation. A
secondary objective is growth of investment income.
The Account will invest primarily in common stocks, but may invest in other
securities. In making selections for the Account's investment portfolio, the
Account will use an approach described broadly as that of fundamental analysis
which is discussed in the Statement of Additional Information. To achieve the
investment objective, Invista will invest in securities that have "value"
characteristics. This process is known as "value investing." Value investing is
purchasing securities of companies with above average dividend yields and below
average price to earnings (P/E) ratios. Securities chosen for investment may
include those of companies which Invista believes can reasonably be expected to
share in the growth of the nation's economy over the long term.
Government Securities Account
The objective of Government Securities Account is a high level of current
income, liquidity and safety of principal.
The Account will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities include
Government National Mortgage Association ("GNMA") Certificates of the modified
pass-through type, Federal National Mortgage Association ("FNMA") Obligations,
Federal Home Loan Mortgage Corporation ("FHLMC") Certificates and Student Loan
Marketing Association ("SLMA") Certificates and other U.S. Government
Securities. GNMA is a wholly-owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned
corporation, FHLMC, a federal corporation, and SLMA, a government sponsored
stockholder-owned organization, are instrumentalities of the United States. The
securities and guarantees of FNMA, FHLMC and SLMA are not backed, directly or
indirectly, by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Account may maintain reasonable
amounts of cash or short-term debt securities for daily cash management purposes
or pending selection of particular long-term investments.
Cash equivalents in which the Account invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Account to have investment quality.
Depending on market conditions, up to 55% of the assets may be invested in
GNMA Certificates. GNMA is a United States Government corporation within the
Department of Housing and Urban Development. GNMA Certificates are
mortgage-backed securities representing an interest in a pool of mortgage loans.
Such loans are made by lenders such as mortgage bankers, insurance companies,
commercial banks and savings and loan associations. Then, they are either
insured by the Federal Housing Administration (FHA) or they are guaranteed by
the Veterans Administration (VA) or Farmers Home Administration (FmHA). The
lender or other prospective issuer creates a specific pool of such mortgages,
which it submits to GNMA for approval. After approval, a GNMA Certificate is
typically offered by the issuer to investors through securities dealers.
GNMA Certificates differ from bonds in that the principal is scheduled to
be paid back by the borrower on a monthly basis over the life of the loan rather
than returned in a lump sum at maturity. Modified pass-through GNMA
certificates, which are the only kind in which the Account intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of whether or not the mortgagor has made such payment.
The timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government.
Although the payment of interest and principal is guaranteed, the guarantee
does not extend to the value of a GNMA Certificate or the value of the shares of
the Account. The market value of a GNMA Certificate typically will fluctuate to
reflect changes in prevailing interest rates. It falls when rates increase (as
does the market value of other debt securities) and it rises when rates decline
(but it may not rise on a comparable basis with other debt securities because of
its prepayment feature), and, therefore, may be more or less than the face
amount of the GNMA Certificate, which reflects the aggregate principal amount of
the underlying mortgages. As a result, the net asset value of Account shares
will fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Account at prevailing
interest rates which may be less than the rate on the GNMA Certificate.
Prepayments are likely to increase as the interest rate for new mortgages moves
lower than the rate on the GNMA Certificate. Moreover, if the GNMA Certificate
had been purchased at a premium above principal because its rate exceeded
prevailing rates, the premium is not guaranteed and a decline in value to par
may result in a loss of the premium especially in the event of prepayment.
To the extent deemed appropriate by the Account's Manager, the Account
intends to purchase GNMA Certificates directly from Principal Mutual Life
Insurance Company and other issuers as well as from securities dealers. The
Account will purchase directly from issuers only if it can obtain a price
advantage by not paying the commission or mark-up that would be required if the
Certificates were purchased from a securities dealer. The Securities and
Exchange Commission has issued an order under the Investment Company Act of 1940
that permits the Account to purchase GNMA Certificates directly from Principal
Mutual Life Insurance Company subject to certain conditions.
The FNMA and FHLMC securities in which the Account invests are very similar
to GNMA certificates as described above but are not guaranteed by the full faith
and credit of the United States but rather by the agency itself. FNMA and FHLMC
securities are rated Aaa by Moody's and AAA by Standard & Poor's. These ratings
reflect the status of FNMA and FHLMC as federal agencies as well as the
important role each plays in financing purchases of homes in the U.S.
Student Loan Marketing Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Account
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by the agency and is traded regularly in denominations similar to
those in which government obligations are traded.
The Account will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the
Account's investment objective. Accordingly, the Account may sell portfolio
securities in anticipation of a rise in interest rates and purchase securities
for inclusion in its portfolio in anticipation of a decline in interest rates.
As a hedge against changes in interest rates, the Account may enter into
contracts with dealers in GNMA Certificates whereby the Account agrees to
purchase or sell an agreed-upon principal amount of GNMA Certificates at a
specified price on a certain date. The Account may enter into similar purchase
agreements with issuers of GNMA Certificates other than Principal Mutual Life
Insurance Company. The Account may also purchase optional delivery standby
commitments which give the Account the right to sell particular GNMA
Certificates at a specified price on a specified date. Failure of the other
party to such a contract or commitment to abide by the terms thereof could
result in a loss to the Account. To the extent the Account engages in delayed
delivery transactions it will do so for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for the
purpose of investment leverage or to speculate on interest rate changes.
Liability accrues to the Account at the time it becomes obligated to purchase
such securities, although delivery and payment occur at a later date. From the
time the Account becomes obligated to purchase securities on a delayed delivery
basis, the Account has all the rights and risks attendant to the ownership of a
security. At the time the Account enters into a binding obligation to purchase
such securities, Account assets of a dollar amount sufficient to make payment
for the securities to be purchased will be segregated. The availability of
liquid assets for this purpose and the effect of asset segregation on the
Account's ability to meet its current obligations, to honor requests for
redemption and to have its investment portfolio managed properly will limit the
extent to which the Account may engage in forward commitment agreements. Except
as may be imposed by these factors, there is no limit on the percent of the
Account's total assets that may be committed to transactions in such agreements.
Money Market Account
The Fund also includes an Account which invests primarily in short-term
securities, the Money Market Account. Securities in which this Account invests
may not yield as high a level of current income as securities of lower quality
and longer maturities which generally have less liquidity, greater market risk
and more fluctuation.
The Money Market Account will limit its portfolio investments to United
States dollar denominated instruments that the board of directors determines
present minimal credit risks and which at the time of acquisition are "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in respect to
a class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security that at the time of issuance was a long-term security that
has a remaining maturity of 397 calendar days or less, and whose issuer
has received from a nationally recognized statistical rating
organization a rating, with respect to a class of short-term debt
obligations (or any security within that class) that is now comparable
in priority and security with the security, in one of the two highest
rating categories for short-term debt obligations; or
(3) an unrated security that is of comparable quality to a security meeting
the requirements of (1) or (2) above, as determined by the board of
directors.
The Account will not invest more than 5% of its total assets in the
following securities:
(1) Securities which, when acquired by the Account (either initially or
upon any subsequent rollover), are rated below the highest rating
category for short-term debt obligations;
(2) Securities which, at the time of issuance were long-term securities but
when acquired by the Account have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Fund's board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations.
The Account will maintain a dollar-weighted average portfolio maturity of
90 days or less.
The objective of the Money Market Account is to seek as high a level of
income available from short-term securities as is considered consistent with
preservation of principal and maintenance of liquidity by investing all of its
assets in a portfolio of money market instruments. These money market
instruments are U.S. Government Securities, U.S. Government Agency Securities,
Bank Obligations, Commercial Paper, Short-term Corporate Debt and Repurchase
Agreements, which are described briefly below and in more detail in the
Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
The Account intends to hold its investments until maturity. However, it may
attempt from time to time to increase its yield by trading to take advantage of
market variations. Also, revised valuations of an issuer or redemptions may
result in sales of portfolio investments prior to maturity or at times when such
sales might otherwise not be desirable. The Account's right to borrow to
facilitate redemptions may reduce the need for such sales. It is the Account's
policy to be as fully invested as reasonably practical at all times to maximize
current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the Account
expects to usually transact purchases and sales of portfolio securities with
issuers or dealers on a net basis, it is not anticipated that the Account will
pay any significant brokerage commissions. The Account is free to dispose of
portfolio securities at any time, when changes in circumstances or conditions
make such a move desirable in light of the investment objective.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Accounts
may use in an effort to achieve their respective investment objectives.
Diversification
Each Account is subject to the diversification requirements of Section
817(h) of the Internal Revenue Code (the "Code") which must be met at the end of
each quarter of the year (or within 30 days thereafter). Regulations issued by
the Secretary of the Treasury have the effect of requiring the Account to invest
no more than 55% of its total assets in securities of any one issuer, no more
than 70% in the securities of any two issuers, no more than 80% in the
securities of any three issuers, and no more than 90% in the securities of any
four issuers. For this purpose, the United States Treasury and each U.S.
Government agency and instrumentality is considered to be a separate issuer.
Thus, the Government Securities Account intends to invest in U.S. Treasury
securities and in securities issued by at least four U.S. Government agencies or
instrumentalities in the amounts necessary to meet those diversification
requirements at the end of each quarter of the year (or within thirty days
thereafter).
In the event any of the Accounts do not meet the diversification
requirements of Section 817(h) of the Code, the contracts funded by shares of
the Accounts will not be treated as annuities or life insurance for Federal
income tax purposes and the owners of the Accounts will be subject to taxation
on their share of the dividends and distributions paid by the Accounts.
Foreign Securities
The Capital Value Account may invest up to 20% of its assets in foreign
securities. Debt securities issued in the United States pursuant to a
registration statement filed with the Securities and Exchange Commission are not
considered "foreign securities," for purposes of this investment limitation.
Investment in foreign securities presents certain risks including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. The Account's investment in foreign securities may also
result in higher custodial costs and the costs associated with currency
conversions.
Investment Hedges
The Government Securities Account may purchase covered spread options,
which give the Account the right to sell a security that it owns at a fixed
dollar spread or yield spread in relationship to another security that the
Account does not own, but which is used as a benchmark. In addition, the Account
may write call and put options on securities and securities indices to generate
additional income, and it may purchase and sell those kinds of options,
financial futures contracts and options on financial futures contracts in
anticipation of a decline in the value of securities owned by the Account or an
increase in the price of securities the Account plans to purchase. Financial
futures contracts are commodities contracts based on financial instruments such
as U.S. Treasury bonds or bills or on securities indices such as the S&P 500
Index. The Account will not invest more than 5% of its assets in the purchase of
covered spread options and the purchase of put and call options on securities,
securities indices and financial futures contracts. The Account will also not
invest more than 5% of its assets in initial margin and premiums on financial
futures contracts and options thereon. Risks associated with options
transactions include the risk that movements in the market prices of underlying
securities could cause the Account to lose the amount of the premium paid for an
option or to have to sell securities for less than their current market price or
purchase securities for more than their current market price, and the risk that
trading markets could become illiquid thereby precluding closing transactions.
Futures contracts have similar risks and, in addition, are subject to the risk
of imperfect correlation between changes in the prices of futures contracts and
the securities being hedged. A more complete statement of these investment
practices and their associated risks is contained in the Fund's Statement of
Additional Information.
Other Investment Practices
Each of the Accounts may enter into repurchase agreements with, and the
Government Securities Account may lend its portfolio securities to, unaffiliated
broker-dealers and other unaffiliated qualified financial institutions. These
transactions must be fully collateralized at all times, but involve some credit
risk to the Account if the other party should default on its obligations, and
the Account is delayed or prevented from recovering on the collateral. See the
Fund's Statement of Additional Information for further information regarding the
credit risks associated with repurchase agreements and the standards adopted by
the Fund's Board of Directors to deal with those risks. None of the Accounts
intends either (i) to enter into repurchase agreements that mature in more than
seven days if any such investment, together with any other illiquid securities
held by the Account, would amount to more than 10% of its total assets or (ii)
to loan securities in excess of 30% of its total assets.
The Capital Value Account may invest in warrants up to 5% of its assets, of
which 2% may be invested in warrants that are not listed on the New York or
American Stock Exchange.
As a matter of fundamental policy, each of the Accounts may borrow money
only for temporary or emergency purposes. The Capital Value Account and Money
Market Account may borrow only from banks. The Government Securities Account may
borrow only in an amount not exceeding 5% of its assets. The Capital Value
Account may borrow only in an amount not exceeding the lesser of (i) 5% of the
value of the Account's assets less liabilities other than such borrowings, or
(ii) 10% of the Account's assets taken at cost at the time the borrowing is
made. The Money Market Account may borrow only in an amount not exceeding the
lesser of (i) 5% of the value of its assets, or (ii) 10% of the value of its net
assets taken at cost at the time the borrowing is made.
The Capital Value Account from time to time executes transactions for
portfolio securities with, and pays related brokerage commissions to, Principal
Financial Securities, Inc., a broker-dealer that is an affiliate of the Manager
for the Fund.
The Statement of Additional Information includes further information
concerning the Accounts' investment policies and applicable investment
restrictions. Each Account's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for an Account are not fundamental
and may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISOR
The Manager for the Fund is Principal Management Corporation (formerly
known as Princor Management Corporation) (the "Manager"), which is an indirectly
wholly-owned subsidiary of Principal Mutual Life Insurance Company, a mutual
life insurance company organized in 1879 under the laws of the State of Iowa.
The address of the Manager is The Principal Financial Group, Des Moines, Iowa
50392. The Manager was organized on January 10, 1969, and since that time has
managed various mutual funds sponsored by Principal Mutual Life Insurance
Company. As of December 31, 1996, the Manager served as investment advisor for
26 such funds with assets totaling approximately $4.0 billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Capital Value and
Government Securities Accounts. The Manager will reimburse Invista for the cost
of providing these services. Invista, an indirectly wholly-owned subsidiary of
Principal Mutual Life Insurance company and an affiliate of the Manager, was
founded in 1985 and manages investments for institutional investors, including
Principal Mutual Life. Assets under management at December 31, 1996 were
approximately $19.6 billion. Invista's address is 1800 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
The Manager has assigned certain individuals the primary responsibility
for the day-to-day management of each Account's portfolio. The persons primarily
responsible for the day-to-day management of each Account are identified in the
table below:
<TABLE>
<CAPTION>
Primarily
Account Responsible Since Person Primarily Responsible
<S> <C> <C>
Capital Value November, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice
(Account's inception) President, Invista Capital Management, Inc.; Co-Manager since November,
1996: Catherine A. Green, CFA, (MBA degree, Drake University). Vice
President, Invista Capital Management, Inc.
Government Securities April, 1987 Martin J. Schafer (BBA degree, University of Iowa). Vice President,
(Account's inception) Invista Capital Management, Inc.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISOR
Under Maryland law, the business and affairs of the Fund are managed under
the direction of its Board of Directors. The Manager or Invista advises the
Accounts on investment policies and on the composition of the Accounts'
portfolios. In this connection, the Manager or Invista furnishes to the Board of
Directors a recommended investment program consistent with each Account's
investment objective and policies. The Manager is authorized, within the scope
of the approved investment program, to determine which securities are to be
bought or sold, and in what amounts.
The investment services and certain other services referred to under the
heading "Cost of Manager's Services" in the Statements of Additional Information
are furnished to the Accounts under the terms of a Management Agreement between
the Fund and the Manager. The compensation paid by the Government Securities
Account and Money Market Account to the Manager for the year ended December 31,
1996 was equal to .50% of their respective average net assets. The compensation
paid by the Capital Value Account to the Manager for the fiscal year ended
December 31, 1996 was equal to .48% of the Account's average net assets. Total
expenses for the Accounts for the year ended December 31, 1996 were equal to the
following percentage of average net assets: Capital Value Account, .49%;
Government Securities Account, .52%; and Money Market Account, .56%.
The Manager or Invista may purchase at their own expense statistical and
other information or services from outside sources, including Principal Mutual
Life Insurance Company. An Investment Service Agreement between the Fund, the
Manager and Principal Mutual Life Insurance Company provides that Principal
Mutual Life Insurance Company will furnish certain personnel, services and
facilities required by the Manager in connection with its performance of the
Management Agreement, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard.
Among the expenses paid by each Account are its taxes (if any), brokerage
commissions on portfolio transactions, interest, custodial fees, fees and
expenses of unaffiliated directors and the cost of shareholder meetings. The
Manager is the dividend disbursing and transfer agent for the Fund and also
serves as investment advisor and dividend disbursing and transfer agent for each
of the other funds sponsored by Principal Mutual Life Insurance Company.
MANAGERS' COMMENTS
Principal Management Corporation is staffed with investment professionals
who manage each individual Account. Comments by these individuals in the
following paragraphs summarize in capsule form the general strategy and results
of each Account through 1996. The accompanying charts display results for the
past 10 years or the life of the Account, whichever is shorter. Average Annual
Total Return figures provided for each Account in the graphs below reflect all
expenses of the Account and assume all distributions are reinvested at net asset
value. The figures do not reflect expenses of the variable life insurance
contracts or variable annuity contracts that purchase Account shares;
performance figures for the divisions of the contracts would be lower than
performance figures for the Accounts due to the additional contract expenses.
Past performance is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
The various indices included in the following graphs are unmanaged and do
not reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.
CAPITAL VALUE ACCOUNT
David L. White and Catherine A. Green
The strategy with this portfolio is to hold common stocks of companies
based on a valuation that is attractive when compared to the market. The
analytical staff looks at companies' current valuations compared to the market,
then at historical information to compare valuations to historical averages. The
focus is on the fundamentals of an industry and the company to determine the
current and future outlook as these potential investments. From there the
portfolio is constructed to provide a diversified set of investments.
The Account outperformed the S&P 500 Index and Lipper Growth and Income
Fund Average for 1996. The strength of the market was in much fewer stocks than
in the past. The volatility between industries was much greater than the overall
results. The Account benefited from several areas of exposure. Banks and health
care were the strongest areas for the Account during the year. The focus has
been away from the more cyclical areas of the economy which also helped during
the year. As the economic cycle progresses, the market places more emphasis on
companies with consistent earnings growth, and we have tended to overweight
these areas of the market. As the market performance continues to narrow,
however, it becomes increasingly difficult to select the correct areas of
overperformance.
Total Returns *
As of December 31, 1996
----------------------------------------
1 Year 5 Year 10 Year
23.50% 14.08% 13.08%
Comparison of Change in Value of $10,000 Investment in the
Capital Value Account, S&P 500 and Lipper Growth and Income Fund Average
----------------------------------------------------------------------------
Fund S&P 500 Lipper
Year Ended Total Stock Growth & Income
December 31, Return Index Fund Average
10,000 10,000 10,000
1987 10,647 10,526 10,184
1988 12,183 12,274 11,814
1989 14,155 16,163 14,596
1990 12,759 15,659 13,946
1991 17,693 20,433 18,002
1992 19,377 21,990 19,618
1993 20,888 24,201 21,884
1994 20,990 24,519 21,678
1995 27,688 33,722 28,360
1996 34,193 41,460 34,253
Note: Past performance is not predictive of future performance.
Important Notes:
Standard and Poor's 500 Stock Index: an unmanaged index of 500 widely held
common stocks representing industrial, financial, utility and
transportation companies listed on the New York Stock Exchange, American
Stock Exchange and the Over-the-Counter market.
Lipper Growth and Income Fund Average: this average consists of mutual
funds which combine a growth of earnings orientation and an income
requirement for level and/or rising dividends. The one year average at
December 31, 1996 contained 522 mutual funds.
GOVERNMENT SECURITIES ACCOUNT
Martin J. Schafer
Interest rates rose in 1996, which dampened absolute fixed income returns.
The Account underperformed the Lipper U.S. Mortgage Fund Average and the Lehman
MBS Index in 1996 due to its slightly longer duration. However, since the
Account's inception of 4/9/87 it has outperformed the Lipper U.S. Mortgage Fund
Average and is competitive with the Lehman MBS Index.
Results were enhanced last year through identification and selection of
certain undervalued sectors of mortgage-backed securities for a portion of the
portfolio. These securities have now become very popular with Wall Street and
other investors, resulting in their increasing in value.
The current portfolio is well positioned for the period ahead. It has a
number of securities that are "seasoned" (e.g., original 30 year loans that have
been outstanding for three years or more) and therefore valued more highly in
the marketplace. There are few securities priced above par, so prepayment risk
is negligible. If the future continues to be an era of economic prosperity we
should continue to see strong housing markets and housing turnover that will
cause prepayments on our securities to exceed market expectations. These
repayments are welcomed, as the portfolio is priced at a discount and the
Account will be paid-off at par.
Total Returns *
As of December 31, 1996
- --------------------------------------------------
1 Year 5 Year Since Inception Date 4/9/87
3.35% 6.68% 8.63%
Comparison of Change in Value of $10,000 Investment in the Government Securities
Account, Lehman Brothers Mortgage Index and Lipper U.S. Mortgage Fund Average
- --------------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total Mortgage U.S. Mortgage
December 31, Return Index Index
10,000 10,000 10,000
1987 10,099 10,204 10,104
1988 10,939 11,094 10,858
1989 12,645 12,808 12,224
1990 13,852 14,183 13,370
1991 16,200 16,410 15,348
1992 17,308 17,551 16,285
1993 19,051 18,751 17,499
1994 18,188 18,450 16,769
1995 21,656 21,549 19,491
1996 22,381 22,702 20,245
Note: Past performance is not predictive of future performance.
Important Notes:
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed
rate securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgage/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average at December 31, 1996 contained 59 mutual
funds.
DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES
The net asset value of each Account's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange except
on days on which changes in the value of the Account's portfolio securities will
not materially affect the current net asset value of the Account's redeemable
securities, on days during which the Account receives no order for the purchase
or sale of its redeemable securities and no tender of such a security for
redemption, and on customary national business holidays. The net asset value per
share of each Account is determined by dividing the value of the Account's
securities plus all other assets, less all liabilities, by the number of Account
shares outstanding.
The portfolios of the Capital Value Account and Government Securities
Account are valued as follows. Securities for which market quotations are
readily available are valued using those quotations. Other securities are valued
by using market quotations, prices provided by market makers or estimates of
market values obtained from yield data and other factors relating to instruments
or securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board of Directors that amortized cost reflects fair value. Other assets
are valued at fair value as determined in good faith by the Board of Directors
of the Fund.
As previously described, the Capital Value Account may purchase foreign
securities, whose trading is substantially completed each day at various times
prior to the close of the New York Stock Exchange. The values of such securities
used in computing net asset value per share are usually determined as of such
times. Occasionally, events which affect the values of such securities and
foreign currency exchange rates may occur between the times at which they are
generally determined and the close of the New York Stock Exchange and would
therefore not be reflected in the computation of the Account's net asset value.
If events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the Manager under procedures established and regularly reviewed
by the Board of Directors. To the extent the Account invests in foreign
securities listed on foreign exchanges which trade on days on which the Account
does not determine its net asset value, for example Saturdays and other
customary national U.S. Holidays, the Account's net asset value could be
significantly affected on days when shareholders have no access to the Account.
The Money Market Account values its securities at amortized cost. For a
description of this calculation procedure see the Statement of Additional
Information. The Money Market Account reserves the right to calculate or
estimate its net asset value more frequently than once per day if it deems it
desirable.
PERFORMANCE CALCULATION
From time to time, the Accounts may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Accounts. The Accounts' yield and total return
figures described below will vary depending upon market conditions, the
composition of the Accounts' portfolios and operating expenses. These factors
and possible differences in the methods used in calculating yield and total
return should be considered when comparing the Accounts' performance figures to
performance figures published for other investment vehicles. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices. Any performance data quoted for the Accounts represents only
historical performance and is not intended to indicate future performance of the
Accounts. The calculation of average annual total return and yield for the
Accounts does not include fees and charges of the separate accounts that invest
in the Accounts and, therefore, does not reflect the investment performance of
those separate accounts. For further information on how the Accounts calculate
yield and total return figures, see the Statement of Additional Information.
The Capital Value Account and Government Securities Account may advertise
their respective average annual total returns. Average annual total return for
each Account is computed by calculating the average annual compounded rate of
return over the stated period that would equate an initial $1,000 investment to
the ending redeemable value assuming the reinvestment of all dividends and
capital gains distributions at net asset value. The same assumptions are made
when computing cumulative total return by dividing the ending redeemable value
by the initial investment.
The Money Market Account may advertise its "yield" and "effective yield."
The "yield" of the Account refers to the income generated by an investment in
the Account over a seven-day period. This income is then "annualized." That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Account is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment.
The yield for the Money Market Account will fluctuate daily as the income
earned on the investments of the Account fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Account is one of a series of Accounts issued by an
open-end investment company and there is no guarantee that the net asset value
or any stated rate of return will remain constant. A shareholder's investment in
the Account is not insured. Investors comparing results of the Account with
investment results and yields from other sources such as banks or savings and
loan associations should understand these distinctions. Historical and
comparative yield information may, from time to time, be presented by the
Account.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
It is the policy of each Account to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which
the Fund so qualifies it will be exempt from federal income tax upon the amounts
so distributed to investors.
Any dividends from the net investment income of the Accounts (except the
Money Market Account) will normally be payable to the shareholders annually, and
any net realized gains will be distributed annually. All dividends and capital
gains distributions are applied to purchase additional Account shares at net
asset value as of the payment date without the imposition of any sales charge.
Each Account will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Accounts to consult with tax advisors on the federal
and state tax aspects of their investments and redemptions.
Money Market Account
The Money Market Account declares dividends of all its daily net investment
income on each day the Account's net asset value per share is determined.
Dividends are declared and payable daily and are automatically reinvested in
full and fractional shares of the Account at the then current net asset value
unless a shareholder requests payment in cash.
Net investment income, for dividend purposes, consists of (1) accrued
interest income plus or minus accrued discount or amortized premium; plus or
minus (2) all net short-term realized gains and losses; minus (3) all accrued
expenses of the Account. Expenses of the Account are accrued each day. Net
income will be calculated immediately prior to the determination of net asset
value per share of the Account.
Since the Account's policy is, under normal circumstances, to hold
portfolio securities to maturity and to value portfolio securities at amortized
cost, it does not expect any capital gains or losses. If the Account does
experience gains, however, it could result in an increase in dividends. Capital
losses could result in a decrease in dividends. If for some extraordinary reason
the Account realizes net long-term capital gains, it will distribute them once
every 12 months.
Since the net income of the Account (including realized gains and losses on
the portfolio securities) is declared as a dividend each time the net income of
the Account is determined, the net asset value per share of the Account normally
remains at $1.00 immediately after each determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Account,
representing reinvestment of dividend income, is reflected by an increase in the
number of shares of the Account in the account.
Normally the Account will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Account
determined at any time is a negative amount, the net asset value per share will
be reduced below $1.00. The Account may endeavor to restore the net asset value
per share to $1.00 by reducing the number of outstanding shares by redeeming
proportionately from shareholders without the payment of any monetary
consideration, such number of full and fractional shares as is necessary to
maintain a net asset value per share of $1.00. Each shareholder will be deemed
to have agreed to such a redemption in these circumstances by investing in the
Account. The Account may seek to achieve the same objective of restoring the net
asset value per share to $1.00 by not declaring dividends from net income on
subsequent days until restoration, with the result that the net asset value per
share would increase to the extent of positive net income which is not declared
as a dividend, or any other method approved by the Board of Directors.
The Board of Directors may revise the above dividend policy, or postpone
the payment of dividends, if the Account should have or anticipate any large
presently unexpected expense, loss or fluctuation in net assets which in the
opinion of the Board might have a significant adverse effect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Accounts. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Account shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
Each Account serves as an underlying investment medium for variable annuity
contracts and variable life insurance policies that are funded in separate
accounts established by Principal Mutual Life Insurance Company. It is
conceivable that in the future it may be disadvantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest in
the Accounts simultaneously. Although neither Principal Mutual Life Insurance
Company nor the Accounts currently foresee any such disadvantages either to
variable life insurance policy owners or to variable annuity contract owners,
the Board of Directors intends to monitor events in order to identify any
material conflicts between such policy owners and contract owners and to
determine what action, if any, should be taken in response thereto. Such action
could include the sale of Account shares by one or more of the separate
accounts, which could have adverse consequences. Material conflicts could result
from, for example, (1) changes in state insurance laws, (2) changes in Federal
income tax law, (3) changes in the investment management of the Account, or (4)
differences in voting instructions between those given by policy owners and
those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Fund. There are no sales charges on the Accounts'
shares. There are no restrictions on amounts to be invested in the Accounts'
shares.
Shareholder accounts for each Account will be maintained under an open
account system. Under this system, an account is automatically opened and
maintained for each new investor. Each investment is confirmed by sending the
investor a statement of account showing the current purchase and the total
number of shares then owned. The statement of account is treated by each Account
as evidence of ownership of Account shares in lieu of stock certificates, and
unless written request is made to the Account, stock certificates will not be
issued or delivered to investors. Certificates, which can be stolen or lost, are
unnecessary except for special purposes such as collateral for a loan.
Fractional interests in the Accounts' shares are reflected to three decimal
places in the statement of account, but any stock certificates will be issued
only for full shares owned.
If an offer to purchase shares is received by any of the Accounts before
the close of trading on the New York Stock Exchange, the shares will be issued
at the offering price (net asset value of Account shares) computed on that day.
If an offer is received after the close of trading or on a day which is not a
trading day, the shares will be issued at the offering price computed on the
first succeeding day on which a price is determined. Dividends on the Money
Market Account shares will be paid on the next day following the effective date
of a purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each Account of the Principal
Variable Contracts Fund, Inc. Each Account share is entitled to one vote either
in person or by proxy at all shareholder meetings for that Account. This
includes the right to vote for the election of directors, selection of
independent accountants and on other matters submitted to meetings of
shareholders of the Account. Each share of an Account has equal rights with
every other share of the Account as to dividends, earnings, voting, assets and
redemption. Shares are fully paid and non-assessable, and have no preemptive or
conversion rights. Shares may be issued as full or fractional shares, and each
fractional share has proportionately the same rights, including voting, as are
provided for a full share. Shareholders of the Fund may remove any director with
or without cause by the vote of a majority of the votes entitled to be cast at a
meeting of all Account shareholders.
The bylaws of the Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of the Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Fund intends to hold shareholder meetings only when required by
law and at such other times as may be deemed appropriate by the Board of
Directors.
Shareholder inquiries should be directed to the Fund at The Principal
Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Fund's shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of the Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Account's shares
allocated to each of its separate accounts registered under the Investment
Company Act of 1940 and attributable to variable annuity contracts or variable
life insurance policies participating therein in accordance with instructions
received from contract or policy holders, participants and annuitants. Other
shares of each Account held by each registered separate account, including those
for which no timely instructions are received, are voted in proportion to the
instructions that are received with respect to contracts or policies
participating in that separate account. Shares of each of the Accounts held in
the general account of Principal Mutual Life Insurance Company or in its
unregistered separate accounts are voted in proportion to the instructions that
are received with respect to contracts and policies participating in its
registered and unregistered separate accounts. If Principal Mutual determines
pursuant to applicable law that an Account's shares held in one or more separate
accounts or in its general account need not be voted pursuant to instructions
received with respect to participating contracts or policies, it then may vote
those Account shares in its own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Account will redeem shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Account requesting redemption of any part or all of
the shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, the Account will not require a signature guarantee as a part of a
proper endorsement; otherwise the shareholder's signature must be guaranteed by
either a commercial bank, trust company, credit union, savings and loan
association, national securities exchange member, or by a brokerage firm. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Account in proper and complete form. The amount received for
shares upon redemption may be more or less than the cost of such shares
depending upon the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Account may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Account of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Account
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Account. An Account
will redeem only those shares for which it has good payment. To avoid the
inconvenience of such a delay, shares may be purchased with a certified check,
bank cashier's check or money order. During the period prior to the time a
redemption from the Money Market Account is effective, dividends on such shares
will accrue and be payable and the shareholder will be entitled to exercise all
other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Accounts may be transferred to
an Eligible Purchaser. However, whenever any of the Accounts is requested to
transfer shares to other than an Eligible Purchaser, the Account has the right
at its election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Account must notify the transferee or transferees of such
shares in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
Organization: Effective January 1, 1998, an Agreement and Plan of
Reorganization and Liquidation was implemented under which a Series of the
Principal Variable Contracts Fund, Inc. adopted the assets and liabilities of
the corresponding Fund. The Funds were incorporated in the state of Maryland on
the following dates: Capital Accumulation Fund - May 26, 1989 (effective
November 1, 1989 succeeded to the business of a predecessor Fund that had been
incorporated in Delaware on February 6, 1969); Government Securities Fund - June
7, 1985; and Money Market Fund - June 10, 1986.
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Accounts.
The custodian performs no managerial or policymaking functions for the Accounts.
Capitalization: The authorized capital stock of each Account consists of
100,000,000 shares of common stock (500,000,000 for Money Market Account), $.01
par value.
Financial Statements: Copies of the financial statements of each Account
will be mailed to each shareholder of that Account semi-annually. At the close
of each fiscal year, each Account's financial statements will be audited by a
firm of independent auditors. The firm of Ernst & Young LLP has been appointed
to audit the financial statements of each Account for their respective present
fiscal years.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the Fund
has filed with the Securities and Exchange Commission. The Fund's Statement of
Additional Information is hereby incorporated by reference into this Prospectus.
A copy of this Statement of Additional Information can be obtained upon request,
free of charge, by writing or telephoning the Fund. You may obtain a copy of
Part C of the Registration Statements filed with the Securities and Exchange
Commission, Washington, D.C. from the Commission upon payment of the prescribed
fees.
Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for the Fund.
PART B
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
Statement of Additional Information
dated December 31, 1997
This Statement of Additional Information provides information about the
Fund in addition to the information that is contained in the Fund's Prospectus,
dated December 31, 1997.
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Fund's Prospectus, a copy of which can be
obtained free of charge by writing or telephoning:
Principal Variable Contracts Fund, Inc.
The Principal Financial Group
Des Moines, Iowa 50392-0200
Telephone: 1-800-247-4123
TABLE OF CONTENTS
Investment Policies and Restrictions of the Fund...................... 3
Growth-Oriented Accounts....................................... 3
Income-Oriented Accounts....................................... 8
Money Market Account........................................... 11
Account Investments................................................... 13
Directors and Officers of the Fund.................................... 24
Manager and Sub-Advisors ............................................. 26
Cost of Manager's Services ........................................... 27
Brokerage on Purchases and Sales of Securities........................ 29
Determination of Net Asset Value of Account Shares.................... 31
Performance Calculation............................................... 33
Tax Status............................................................ 35
General Information and History....................................... 35
Financial Statements.................................................. 36
Appendix A............................................................ 37
INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND
The following information about the Principal Variable Contracts Fund,
Inc. an incorporated, diversified, open-end management investment company,
commonly called a mutual fund, supplements the information provided in the
Prospectus under the caption "Investment Objectives, Policies and Restrictions."
The Fund offers multiple Accounts.
There are three categories of Accounts: Growth-Oriented Accounts, which
include five Accounts which seek primarily capital appreciation through
investments in equity securities (Aggressive Growth, Capital Value, Growth,
International and MidCap) and two Accounts which seek a total investment return
including both capital appreciation and income through investments in equity and
debt securities (Asset Allocation and Balanced); Income-Oriented Accounts, which
include three Accounts which seek primarily a high level of income through
investments in debt securities (Bond, Government Securities and High Yield) and
a Money Market Account, which seeks primarily a high level of income through
investments in short-term debt securities.
In seeking to achieve its investment objective, each Account has adopted
as matters of fundamental policy certain investment restrictions which cannot be
changed without approval by the holders of the lesser of: (i) 67% of the
Account's shares present or represented at a shareholders' meeting at which the
holders of more than 50% of such shares are present or represented by proxy; or
(ii) more than 50% of the outstanding shares of the Account. Similar shareholder
approval is required to change the investment objective of each of the Accounts.
The following discussion provides for each Account a statement of its investment
objective, a description of its investment restrictions that are matters of
fundamental policy and a description of any investment restrictions it may have
adopted that are not matters of fundamental policy and may be changed without
shareholder approval. For purposes of the investment restrictions, all
percentage and rating limitations apply at the time of acquisition of a
security, and any subsequent change in any applicable percentage resulting from
market fluctuations or in a rating by a rating service will not require
elimination of any security from the portfolio. Unless specifically identified
as a matter of fundamental policy, each investment policy discussed in the
Prospectus or the Statement of Additional Information is not fundamental and may
be changed by the Fund's Board of Directors.
GROWTH-ORIENTED ACCOUNTS
Investment Objectives
Aggressive Growth Account (formerly known as Principal Aggressive
Growth Fund, Inc.) seeks to provide long-term capital appreciation by
investing primarily in growth-oriented common stocks of medium and
large capitalization U.S. corporations and, to a limited extent,
foreign corporations.
Asset Allocation Account (formerly known as Principal Asset Allocation
Fund, Inc.) seeks to generate a total investment return consistent
with the preservation of capital.
Balanced Account (formerly known as Principal Balanced Fund, Inc.)
seeks to generate a total investment return consisting of current
income and capital appreciation while assuming reasonable risks in
furtherance of the investment objective.
Capital Value Account (formerly known as Principal Capital
Accumulation Fund, Inc.) seeks to achieve primarily long-term capital
appreciation and secondarily growth of investment income through the
purchase primarily of common stocks, but the Account may invest in
other securities.
Growth Account (formerly known as Principal Growth Fund, Inc.) seeks
growth of capital through the purchase primarily of common stocks, but
the Account may invest in other securities.
International Account (formerly known as Principal World Fund, Inc.)
seeks long-term growth of capital by investing in a portfolio of
equity securities of companies domiciled in any of the nations of the
world.
MidCap Account (formerly known as Principal Emerging Growth Fund,
Inc.) seeks to achieve capital appreciation by investing primarily in
securities of emerging and other growth-oriented companies.
Investment Restrictions
Aggressive Growth Account, Asset Allocation Account, Balanced Account,
Growth Account, International Account and MidCap Account
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Aggressive
Growth Account, Asset Allocation Account, Balanced Account, Growth Account,
International Account and MidCap Account each may not:
(1) Issue any senior securities as defined in the Investment Company
Act of 1940. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in accordance
with restrictions described below do not involve the issuance of a
senior security.
(2) Purchase or retain in its portfolio securities of any issuer if
those officers or directors of the Account or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(3) Invest in commodities or commodity contracts, but it may purchase
and sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which
are secured by real estate and securities of issuers which invest
or deal in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Account's total assets
at the time of the borrowing. The Balanced Account may borrow only
from banks.
(6) Make loans, except that the Account may (I) purchase and hold debt
obligations in accordance with its investment objective and
policies, (ii) enter into repurchase agreements, and (iii) lend its
portfolio securities without limitation against collateral
(consisting of cash or securities issued or guaranteed by the
United States Government or its agencies or instrumentalities)
equal at all times to not less than 100% of the value of the
securities loaned.
(7) Invest more than 5% of its total assets in the securities of any
one issuer (other than obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities)
except that this limitation shall apply only with respect to 75% of
the total assets of the Aggressive Growth Account, Asset Allocation
Account, Growth Account and International Account; or purchase more
than 10% of the outstanding voting securities of any one issuer.
(8) Act as an underwriter of securities, except to the extent the
Account may be deemed to be an underwriter in connection with the
sale of securities held in its portfolio.
(9) Concentrate its investments in any particular industry or
industries, except that the Account may invest not more than 25% of
the value of its total assets in a single industry.
(10) Sell securities short (except where the Account holds or has the
right to obtain at no added cost a long position in the securities
sold that equals or exceeds the securities sold short) or purchase
any securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
deposit or payment of margin in connection with transactions in
options and financial futures contracts is not considered the
purchase of securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Account may invest in securities
of issuers which invest in or sponsor such programs.
Each of these Accounts has also adopted the following restrictions which
are not fundamental policies and may be changed without shareholder approval. It
is contrary to each Account's present policy to:
(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market, including all covered spread options and the assets used as
cover for any options written in the Over-the-Counter market are
included as part of this 15% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2%
may be invested in warrants that are not listed on the New York or
American Stock Exchange. The 2% limitation for the International
Account does not apply to warrants listed on the Toronto Stock
Exchange or the Chicago Board Options Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Account's investments in
all such issuers to exceed 5% of the value of its total assets.
(4) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on futures contracts are not deemed to be
pledges or other encumbrances.
(5) Invest in companies for the purpose of exercising control or
management.
(6) Invest more than 10% (25% for the Aggressive Growth Account) of its
total assets in securities of foreign issuers. This restriction
does not pertain to the International Account or the Asset
Allocation Account.
(7) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
Options on financial futures contracts and options on securities
indices will be used solely for hedging purposes; not for
speculation.
(8) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(9) Invest in arbitrage transactions.
(10) Invest in real estate limited partnership interests.
The Balanced Account and MidCap Account have also adopted the following
restrictions which are not fundamental policies and may be changed without
shareholder approval. It is contrary to each such Account's present policy to:
(1) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization
or by purchase in the open market of securities of closed-end
companies where no underwriter or dealer's commission or profit,
other than a customary broker's commission, is involved, and if
immediately thereafter not more than 10% of the value of the
Account's total assets would be invested in such securities.
The Aggressive Growth, Asset Allocation, Growth and International
Accounts have also adopted the following restriction which is not a fundamental
policy and may be changed without shareholder approval. It is contrary to each
such Account's present policy to:
(1) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its assets
in securities of other investment companies, invest not more than
5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation or plan of reorganization, and the Account
may purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
Capital Value Account
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Capital Value
Account may not:
(1) Concentrate its investments in any one industry. No more than 25%
of the value of its total assets will be invested in any one
industry.
(2) Purchase the securities of any issuer if the purchase will cause
more than 5% of the value of its total assets to be invested in the
securities of any one issuer (except U. S.
Government securities).
(3) Purchase the securities of any issuer if the purchase will cause
more than 10% of the voting securities, or any other class of
securities of the issuer, to be held by the Account.
(4) Underwrite securities of other issuers, except that the Account may
acquire portfolio securities under circumstances where if sold the
Account might be deemed an underwriter for purposes of the
Securities Act of 1933.
(5) Purchase securities of any company with a record of less than three
years' continuous operation (including that of predecessors) if the
purchase would cause the value of the Account's aggregate
investments in all such companies to exceed 5% of the Account's
total assets.
(6) Engage in the purchase and sale of illiquid interests in real
estate. For this purpose, readily marketable interests in real
estate investment trusts are not interests in real estate.
(7) Engage in the purchase and sale of commodities or commodity
contracts.
(8) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or the Manager owning
beneficially more than one-half of one percent (0.5%) of the
securities of the issuer together own beneficially more than 5% of
such securities.
(9) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
Account will not issue or acquire put and call options.
(10) Invest in companies for the purpose of exercising control or
management.
(11) Invest more than 5% of its assets at the time of purchase in rights
and warrants (other than those that have been acquired in units or
attached to other securities).
(12) Invest more than 20% of its total assets in securities of foreign
issuers.
In addition:
(13) The Account may make loans through the purchase in private
offerings of debentures or other evidences of indebtedness of types
customarily purchased by institutional investors.
(14) The Account does not propose to borrow money except for temporary
or emergency purposes from banks in an amount not to exceed the
lesser of (I) 5% of the value of the Account's assets, less
liabilities other than such borrowings, or (ii) 10% of the
Account's assets taken at cost at the time such borrowing is made.
The Account may not pledge, mortgage, or hypothecate its assets (at
value) to an extent greater than 15% of the gross assets taken at
cost.
(15) It is contrary to the Account's present policy to purchase warrants
in excess of 5% of its total assets of which 2% may be invested in
warrants that are not listed on the New York or American Stock
Exchange.
The Account has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval. It is
contrary to the Account's present policy to:
(1) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its assets
in securities of other investment companies, invest not more than
5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation, or plan of reorganization, and the Account
may purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
(2) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreement maturing in more than seven
days.
INCOME-ORIENTED ACCOUNTS
Investment Objectives
Bond Account seeks to provide as high a level of income as is
consistent with preservation of capital and prudent investment
risk.
Government Securities Account seeks a high level of current income,
liquidity and safety of principal by purchasing obligations issued
or guaranteed by the United States Government or its agencies, with
emphasis on Government National Mortgage Association Certificates
("GNMA Certificates"). The guarantee by the United States
Government extends only to principal and interest; Account shares
are not guaranteed by the United States Government. There are
certain risks unique to GNMA Certificates.
High Yield Account seeks high current income primarily by
purchasing high yielding, lower or non-rated fixed income
securities which are believed to not involve undue risk to income
or principal. Capital growth is a secondary objective when
consistent with the objective of high current income.
Investment Restrictions
Bond Account and High Yield Account
Each of the following numbered restrictions is a matter of
fundamental policy and may not be changed without shareholder approval.
The Bond Account and High Yield Account each may not:
(1) Issue any senior securities as defined in the Investment Company
Act of 1940. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in accordance
with restrictions described below do not involve the issuance of a
senior security.
(2) Purchase or retain in its portfolio securities of any issuer if
those officers or directors of the Account or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(3) Invest in commodities or commodity contracts, but it may purchase
and sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which
are secured by real estate and securities of issuers which invest
or deal in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Account's total assets
at the time of the borrowing. The Bond Account and High Yield
Account may borrow only from banks.
(6) Make loans, except that the Account may (I) purchase and hold debt
obligations in accordance with its investment objective and
policies, (ii) enter into repurchase agreements, and (iii) lend its
portfolio securities without limitation against collateral
(consisting of cash or securities issued or guaranteed by the
United States Government or its agencies or instrumentalities)
equal at all times to not less than 100% of the value of the
securities loaned.
(7) Invest more than 5% of its total assets in the securities of any
one issuer (other than obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities); or
purchase more than 10% of the outstanding voting securities of any
one issuer.
(8) Act as an underwriter of securities, except to the extent the
Account may be deemed to be an underwriter in connection with the
sale of securities held in its portfolio.
(9) Concentrate its investments in any particular industry or
industries, except that the Bond Account and High Yield Account
each may invest not more than 25% of the value of its total assets
in a single industry.
(10) Sell securities short (except where the Account holds or has the
right to obtain at no added cost a long position in the securities
sold that equals or exceeds the securities sold short) or purchase
any securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
deposit or payment of margin in connection with transactions in
options and financial futures contracts is not considered the
purchase of securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Account may invest in securities
of issuers which invest in or sponsor such programs.
Each of these Accounts has also adopted the following restrictions which
are not fundamental policies and may be changed without shareholder approval. It
is contrary to each Account's present policy to:
(1) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market, including all covered spread options and the assets used as
cover for any options written in the Over-the-Counter market are
included as part of this 15% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2%
may be invested in warrants that are not listed on the New York or
American Stock Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Account's investments in
all such issuers to exceed 5% of the value of its total assets.
(4) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization
or by purchase in the open market of securities of closed-end
companies where no underwriter or dealer's commission or profit,
other than a customary broker's commission, is involved, and if
immediately thereafter not more than 10% of the value of the
Account's total assets would be invested in such securities.
(5) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on futures contracts are not deemed to be
pledges or other encumbrances.
(6) Invest in companies for the purpose of exercising
control or management.
(7) Invest more than 20% of its total assets in securities of foreign
issuers.
(8) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
Options on financial futures contracts and options on securities
indices will be used solely for hedging purposes; not for
speculation.
(9) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(10) Invest in arbitrage transactions.
(11) Invest in real estate limited partnership interests.
Government Securities Account
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Government
Securities Account may not:
(1) Issue any senior securities as defined in the Act except insofar as
the Account may be deemed to have issued a senior security by
reason of (a) purchasing any securities on a standby, when-issued
or delayed delivery basis; or (b) borrowing money in accordance
with restrictions described below.
(2) Purchase any securities other than obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities, except
that the Account may maintain reasonable amounts in cash or
commercial paper or purchase short-term debt securities not issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities for daily cash management purposes or pending
selection of particular long-term investments.
(3) Act as an underwriter of securities, except to the extent the
Account may be deemed to be an underwriter in connection with the
sale of GNMA certificates held in its portfolio.
(4) Engage in the purchase and sale of interests in real estate,
including interests in real estate investment trusts (although it
will invest in securities secured by real estate or interests
therein, such as mortgage-backed securities) or invest in
commodities or commodity contracts, oil and gas interests, or
mineral exploration or development programs.
(5) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(6) Sell securities short or purchase any securities on margin, except
it may obtain such short-term credits as are necessary for the
clearance of transactions. The deposit or payment of margin in
connection with transactions in options and financial futures
contracts is not considered the purchase of securities on margin.
(7) Invest in companies for the purpose of exercising control or
management.
(8) Make loans, except that the Account may purchase or hold debt
obligations in accordance with the investment restrictions set
forth in paragraph (2) and may enter into repurchase agreements for
such securities, and may lend its portfolio securities without
limitation against collateral consisting of cash, or securities
issued or guaranteed by the United States Government or its
agencies or instrumentalities, which is equal at all times to 100%
of the value of the securities loaned.
(9) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Account's total assets
at the time of the borrowing.
(10) Enter into repurchase agreements maturing in more than seven days
if, as a result thereof, more than 10% of the value of the
Account's total assets would be invested in such repurchase
agreements and other assets without readily available market
quotations.
(11) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
(12) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
The Government Securities Account has also adopted the following
restrictions which are not a fundamental policy and may be changed without
shareholder approval. It is contrary to the Government Securities Account's
present policy to:
(1) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on future contracts are not deemed to be
pledges or other encumbrances.
(2) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its assets
in securities of other investment companies, invest not more than
5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation, or plan of reorganization, and the Account
may purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
MONEY MARKET ACCOUNT
Investment Objective
Money Market Account seeks as high a level of income available from
short-term securities as is considered consistent with preservation
of principal and maintenance of liquidity by investing in a
portfolio of money market instruments.
Investment Restrictions
Money Market Account
Each of the following numbered restrictions is a matter of
fundamental policy and may not be changed without shareholder approval.
The Money Market Account may not:
(1) Concentrate its investments in any one industry. No more than 25%
of the value of its total assets will be invested in securities of
issuers having their principal activities in any one industry,
other than securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities, or obligations of domestic
branches of U.S. banks and savings institutions. (See "Bank
Obligations").
(2) Purchase the securities of any issuer if the purchase will cause
more than 25% of the value of its total assets to be invested in
the securities of any one issuer (except securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities).
(3) Purchase the securities of any issuer if the purchase will cause
more than 10% of the outstanding voting securities of the issuer to
be held by the Account (other than securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities).
(4) Invest a greater percentage of its total assets in securities not
readily marketable than is allowed by federal securities rules or
interpretations.
(5) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under the federal securities laws.
(6) Purchase securities of any company with a record of less than 3
years continuous operation (including that of predecessors) if the
purchase would cause the value of the Account's aggregate
investments in all such companies to exceed 5% of the value of the
Account's total assets.
(7) Engage in the purchase and sale of illiquid interests in real
estate, including interests in real estate investment trusts
(although it may invest in securities secured by real estate or
interests therein) or invest in commodities or commodity contracts,
oil and gas interests, or mineral exploration or development
programs.
(8) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Account or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(9) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
Account will not issue or acquire put and call options, straddles
or spreads or any combination thereof.
(10) Invest in companies for the purpose of exercising control or
management.
(11) Make loans to others except through the purchase of debt
obligations in which the Account is authorized to invest and by
entering into repurchase agreements (see "Account Investments").
(12) Borrow money, except from banks for temporary or emergency
purposes, including the meeting of redemption requests which might
otherwise require the untimely disposition of securities, in an
amount not to exceed the lesser of (1) 5% of the value of the
Account's assets, or (ii) 10% of the value of the Account's net
assets taken at cost at the time such borrowing is made. The
Account will not issue senior securities except in connection with
such borrowings. The Account may not pledge, mortgage, or
hypothecate its assets (at value) to an extent greater than 10% of
the net assets.
(13) Invest in uncertificated time deposits maturing in more than seven
days; uncertificated time deposits maturing from two business days
through seven calendar days may not exceed 10% of the value of the
Account's total assets.
(14) Enter into repurchase agreements maturing in more than seven days
if, as a result thereof, more than 10% of the value of the
Account's total assets would be invested in such repurchase
agreements and other assets (excluding time deposits) without
readily available market quotations.
The Money Market Account has also adopted the following restriction which
is not a fundamental policy and maybe changed without shareholder approval. It
is contrary to the Money Market Account's present policy to:
(1) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its assets
in securities of other investment companies, invest not more than
5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation, or plan of reorganization, and the Account
may purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
ACCOUNT INVESTMENTS
The following information further supplements the discussion of the
Account's investment objectives and policies in the Prospectus under the caption
"INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS."
Selections of equity securities for the Accounts, except the Aggressive
Growth and Asset Allocation Accounts, are made based upon an approach described
broadly as that of fundamental analysis. Three basic steps are involved in this
analysis. First is the continuing study of basic economic factors in an effort
to conclude what the future general economic climate is likely to be over the
next one to two years. Second, given some conviction as to the likely economic
climate, the Account attempts to identify the prospects for the major
industrial, commercial and financial segments of the economy, by looking at such
factors as demand for products, capacity to produce, operating costs, pricing
structure, marketing techniques, adequacy of raw materials and components,
domestic and foreign competition, and research productivity, to ascertain
prospects for each industry for the near and intermediate term. Finally,
determinations are made regarding earnings prospects for individual companies
within each industry by considering the same types of factors described above.
These earnings prospects are then evaluated in relation to the current price of
the securities of each company.
Although the Accounts may pursue the investment practices described under
the captions Restricted Securities, Foreign Securities, Spread Transactions,
Options on Securities and Securities Indices, and Futures Contracts and Options
on Futures Contracts, Currency Contracts, Repurchase Agreements, Lending of
Portfolio Securities and When Issued and Delay of Delivery Securities, none of
the Accounts either committed during the last fiscal year or currently intends
to commit during the present fiscal year more than 5% of its net assets to any
of the practices, with the following exceptions. Investments in foreign
securities by the Aggressive Growth, Asset Allocation and International Accounts
are expected to exceed 5% of each Account's net assets.
Restricted Securities
Each of the following Accounts has adopted investment restrictions as
non-fundamental policies that limit its investments in restricted securities and
other illiquid securities to 15% of its assets: Aggressive Growth, Asset
Allocation, Balanced, Bond, Capital Value, Growth, High Yield, International and
MidCap Accounts.
Generally, restricted securities are not readily marketable because they
are subject to legal or contractual restrictions upon resale. They may be sold
only in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 or in a transaction which is exempt from
the registration requirements of that act. When registration is required, an
Account may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Account may by permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Account might obtain a less favorable price than prevailed when
it decided to sell. Restricted securities and other securities not readily
marketable will be priced at fair value as determined in good faith by or under
the direction of the Board of Directors.
Foreign Securities
Each of the following Accounts has adopted investment restrictions as
non-fundamental policies that limit its investments in foreign securities to the
indicated percentage of its assets: Asset Allocation and International Accounts
- - 100% ; Aggressive Growth - 25%; Bond, Capital Value, High Yield 20%; Balanced,
Growth and MidCap - 10%. Debt securities issued in the United States pursuant to
a registration statement filed with the Securities and Exchange Commission are
not considered "foreign securities" for purposes of this investment limitation.
Investment in foreign securities presents certain risks, including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. Each Account's investment in foreign securities may also
result in higher custodial costs and the costs associated with currency
conversions.
Spread Transactions, Options on Securities and Securities Indices, and Futures
Contracts and Options on Futures Contracts
The Aggressive Growth, Asset Allocation, Balanced, Bond, Government
Securities, Growth, High Yield, International and MidCap Accounts may each
engage in the practices described under this heading. None of the Accounts will
invest more than 5% of its assets in the purchase of call and put options on
individual securities, securities indices and futures contracts. In the
following discussion, the terms "the Account," "each Account" or "the Accounts"
refer to each of these Accounts.
Spread Transactions
Each Account may purchase from securities dealers covered spread options.
Such covered spread options are not presently exchange listed or traded. The
purchase of a spread option gives the Account the right to put, or sell, a
security that it owns at a fixed dollar spread or fixed yield spread in
relationship to another security that the Account does not own, but which is
used as a benchmark. The risk to the Account in purchasing covered spread
options is the cost of the premium paid for the spread option and any
transaction costs. In addition, there is no assurance that closing transactions
will be available. The purchase of spread options can be used to protect each
Account against adverse changes in prevailing credit quality spreads, i.e., the
yield spread between high quality and lower quality securities. The security
covering the spread option will be maintained in a segregated account by each
Account's custodian. The Accounts do not consider a security covered by a spread
option to be "pledged" as that term is used in the Accounts' policy limiting the
pledging or mortgaging of assets.
Options on Securities and Securities Indices
Each Account may write (sell) and purchase call and put options on
securities in which it may invest and on securities indices based on securities
in which the Account may invest. The Accounts may write call and put options to
generate additional revenue, and may write and purchase call and put options in
seeking to hedge against a decline in the value of securities owned or an
increase in the price of securities which the Account plans to purchase.
Writing Covered Call and Put Options. When an Account writes a call
option, it gives the purchaser of the option, in return for the premium it
receives, the right to buy from the Account the underlying security at a
specified price at any time before the option expires. When an Account writes a
put option, it gives the purchaser of the option, in return for the premium it
receives, the right to sell to the Account the underlying security at a
specified price at any time before the option expires.
The premium received by an Account, when it writes a put or call option,
reflects, among other factors, the current market price of the underlying
security, the relationship of the exercise price to the market price, the time
period until the expiration of the option and interest rates. The premium will
generate additional income for the Account if the option expires unexercised or
is closed out at a profit. By writing a call, an Account limits its opportunity
to profit from any increase in the market value of the underlying security above
the exercise price of the option, but it retains the risk of loss if the price
of the security should decline. By writing a put, an Account assumes the risk
that it may have to purchase the underlying security at a price that may be
higher than its market value at time of exercise.
The Accounts write only covered options and will comply with applicable
regulatory and exchange cover requirements. The Accounts usually will own the
underlying security covered by any outstanding call option that it has written.
With respect to an outstanding put option that it has written, each Account will
deposit and maintain with its custodian cash, U.S. Government securities or
other liquid securities with a value at least equal to the exercise price of the
option.
Once an Account has written an option, it may terminate its obligation,
before the option is exercised, by effecting a closing transaction, which is
accomplished by the Account's purchasing an option of the same series as the
option previously written. The Accounts will have a gain or loss depending on
whether the premium received when the option was written exceeds the closing
purchase price plus related transaction costs.
Purchasing Call and Put Options. When an Account purchases a call
option, it receives, in return for the premium it pays, the right to buy from
the writer of the option the underlying security at a specified price at any
time before the option expires. The Account may purchase call options in
anticipation of an increase in the market value of securities that it intends
ultimately to buy. During the life of the call option, the Account would be able
to buy the underlying security at the exercise price regardless of any increase
in the market price of the underlying security. In order for a call option to
result in a gain, the market price of the underlying security must rise to a
level that exceeds the sum of the exercise price, the premium paid and
transaction costs.
When an Account purchases a put option, it receives, in return for the
premium it pays, the right to sell to the writer of the option the underlying
security at a specified price at any time before the option expires. The Account
may purchase put options in anticipation of a decline in the market value of the
underlying security. During the life of the put option, the Account would be
able to sell the underlying security at the exercise price regardless of any
decline in the market price of the underlying security. In order for a put
option to result in a gain, the market price of the underlying security must
decline, during the option period, below the exercise price sufficiently to
cover the premium and transaction costs.
Once an Account has purchased an option, it may close out its position by
selling an option of the same series as the option previously purchased. The
Account will have a gain or loss depending on whether the closing sale price
exceeds the initial purchase price plus related transaction costs.
Options on Securities Indices. Each Account may purchase and sell
put and call options on any securities index based on securities in which the
Account may invest. Securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Options on securities indices are
similar to options on securities, except that the exercise of securities index
options requires cash payments and does not involve the actual purchase or sale
of securities. The Accounts would engage in transactions in put and call options
on securities indices for the same purposes as they would engage in transactions
in options on securities. When an Account writes call options on securities
indices, it will hold in its portfolio underlying securities which, in the
judgment of the Manager or the Sub-Advisor, correlate closely with the
securities index and which have a value at least equal to the aggregate amount
of the securities index options.
Risks Associated with Options Transactions. An options position may
be closed out only on an exchange which provides a secondary market for an
option of the same series. Although the Accounts will generally purchase or
write only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option, or at any particular time. For some options, no
secondary market on an exchange or elsewhere may exist. If an Account is unable
to effect closing sale transactions in options it has purchased, the Account
would have to exercise its options in order to realize any profit and may incur
transaction costs upon the purchase or sale of underlying securities pursuant
thereto. If an Account is unable to effect a closing purchase transaction for a
covered option that it has written, it will not be able to sell the underlying
securities, or dispose of the assets held in a segregated account, until the
option expires or is exercised. An Account's ability to terminate option
positions established in the over-the-counter market may be more limited than
for exchange-traded options and may also involve the risk 35 that broker-dealers
participating in such transactions might fail to meet their obligations.
Futures Contracts and Options on Futures
Each Account may purchase and sell financial futures contracts and
options on those contracts. Financial futures contracts are commodities
contracts based on financial instruments such as U.S. Treasury bonds or bills or
on securities indices such as the S&P 500 Index. Futures contracts, options on
futures contracts and the commodity exchanges on which they are traded are
regulated by the Commodity Futures Trading Commission ("CFTC"). Through the
purchase and sale of futures contracts and related options, an Account may seek
to hedge against a decline in securities owned by the Account or an increase in
the price of securities which the Account plans to purchase.
Futures Contracts. When an Account sells a futures contract based on a
financial instrument, the Account becomes obligated to deliver that kind of
instrument at a specified future time for a specified price. When an Account
purchases that kind of contract, it becomes obligated to take delivery of the
instrument at a specified time and to pay the specified price. In most
instances, these contracts are closed out by entering into an offsetting
transaction before the settlement date, thereby canceling the obligation to make
or take delivery of specific securities.The Account realizes a gain or loss
depending on whether the price of an offsetting purchase plus transaction costs
are less or more than the price of the initial sale or on whether the price of
an offsetting sale is more or less than the price of the initial purchase plus
transaction costs. Although the Account will usually liquidate futures contracts
on financial instruments in this manner, they may instead make or take delivery
of the underlying securities whenever it appears economically advantageous to do
so.
A futures contract based on a securities index provides for the purchase
or sale of a group of securities at a specified future time for a specified
price. These contracts do not require actual delivery of securities, but result
in a cash settlement based upon the difference in value of the index between the
time the contract was entered into and the time it is liquidated, which may be
at its expiration or earlier if it is closed out by entering into an offsetting
transaction.
When a futures contract is purchased or sold a brokerage commission is
paid, but unlike the purchase or sale of a security or option, no price or
premium is paid or received. Instead, an amount of cash or U.S. Government
securities, which varies, but is generally about 5% of the contract amount, is
deposited by the Account with its custodian for the benefit of the futures
commission merchant through which the Account engages in the transaction. This
amount is known as "initial margin." It does not involve the borrowing of funds
by the Account to finance the transaction, but instead represents a "good faith"
deposit assuring the performance of both the purchaser and the seller under the
futures contract. It is returned to the Account upon termination of the futures
contract, if all the Account's contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin,"
are required to be made on a daily basis as the price of the futures contract
fluctuates, making the long or short positions in the futures contract more or
less valuable, a process known as "marking to market." If the position is closed
out by taking an opposite position prior to the settlement date of the futures
contract, a final determination of variation margin is made, additional cash is
required to be paid to or released by the broker, and the Account realizes a
loss or gain.
In using futures contracts, the Accounts will seek to establish more
certainly than would otherwise be possible the effective price of or rate of
return on portfolio securities or securities that the Account proposes to
acquire. An Account, for example, may sell futures contracts in anticipation of
a rise in interest rates which would cause a decline in the value of its debt
investments. When this kind of hedging is successful, the futures contracts
should increase in value when the Account's debt securities decline in value and
thereby keep the Account's net asset value from declining as much as it
otherwise would. An Account may also sell futures contracts on securities
indices in anticipation of or during a stock market decline in an endeavor to
offset a decrease in the market value of its equity investments. When an Account
is not fully invested and anticipates an increase in the cost of securities it
intends to purchase, it may purchase financial futures contracts. When increases
in the prices of equities are expected, an Account may purchase futures
contracts on securities indices in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of the equity securities it
intends to purchase.
Options on Futures. The Accounts may also purchase and write call
and put options on futures contracts. A call option on a futures contract gives
the purchaser the right, in return for the premium paid, to purchase a futures
contract (assume a long position) at a specified exercise price at any time
before the option expires. A put option gives the purchaser the right, in return
for the premium paid, to sell a futures contract (assume a short position), for
a specified exercise price, at any time before the option expires.
Upon the exercise of a call, the writer of the option is obligated to sell
the futures contract (to deliver a long position to the option holder) at the
option exercise price, which will presumably be lower than the current market
price of the contract in the futures market. Upon exercise of a put, the writer
of the option is obligated to purchase the futures contract (deliver a short
position to the option holder) at the option exercise price, which will
presumably be higher than the current market price of the contract in the
futures market. However, as with the trading of futures, most options are closed
out prior to their expiration by the purchase or sale of an offsetting option at
a market price that will reflect an increase or a decrease from the premium
originally paid.
Options on futures can be used to hedge substantially the same risks as
might be addressed by the direct purchase or sale of the underlying futures
contracts. For example, if an Account anticipated a rise in interest rates and a
decline in the market value of the debt securities in its portfolio, it might
purchase put options or write call options on futures contracts instead of
selling futures contracts.
If an Account purchases an option on a futures contract, it may obtain
benefits similar to those that would result if it held the futures position
itself. But in contrast to a futures transaction, the purchase of an option
involves the payment of a premium in addition to transaction costs. In the event
of an adverse market movement, however, the Account will not be subject to a
risk of loss on the option transaction beyond the price of the premium it paid
plus its transaction costs.
When an Account writes an option on a futures contract, the premium paid
by the purchaser is deposited with the Account's custodian, and the Account must
maintain with its custodian all or a portion of the initial margin requirement
on the underlying futures contract. The Account assumes a risk of adverse
movement in the price of the underlying futures contract comparable to that
involved in holding a futures position. Subsequent payments to and from the
broker, similar to variation margin payments, are made as the premium and the
initial margin requirement are marked to market daily. The premium may partially
offset an unfavorable change in the value of portfolio securities, if the option
is not exercised, or it may reduce the amount of any loss incurred by the
Account if the option is exercised.
Risks Associated with Futures Transactions. There are a number of
risks associated with transactions in futures contracts and related options. An
Account's successful use of futures contracts is subject to the Manager's and
the Sub-Advisor's ability to predict correctly the factors affecting the market
values of the Account's portfolio securities. For example, if an Account was
hedged against the possibility of an increase in interest rates which would
adversely affect debt securities held by the Account and the prices of those
debt securities instead increased, the Account would lose part or all of the
benefit of the increased value of its securities which it hedged because it
would have offsetting losses in its futures positions. Other risks include
imperfect correlation between price movements in the financial instrument or
securities index underlying the futures contract, on the one hand, and the price
movements of either the futures contract itself or the securities held by the
Account, on the other hand. If the prices do not move in the same direction or
to the same extent, the transaction may result in trading losses.
Prior to exercise or expiration, a position in futures may be terminated
only by entering into a closing purchase or sale transaction. This requires a
secondary market on the relevant contract market. The Account will enter into a
futures contract or related option only if there appears to be a liquid
secondary market therefor. There can be no assurance, however, that such a
liquid secondary market will exist for any particular futures contract or
related option at any specific time. Thus, it may not be possible to close out a
futures position once it has been established. Under such circumstances, the
Account would continue to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such situations, if the
Account has insufficient cash, it may be required to sell portfolio securities
to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. In addition, the Account may be required to perform
under the terms of the futures contracts it holds. The inability to close out
futures positions also could have an adverse impact on the Account's ability
effectively to hedge its portfolio.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. This daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
Limitations on the Use of Futures and Options on Futures. Each
Account intends to come within an exclusion from the definition of "commodity
pool operator" provided by CFTC regulations by complying with certain
limitations on the use of futures and related options prescribed by those
regulations.
None of the Accounts will purchase or sell futures contracts or options
thereon if immediately thereafter the aggregate initial margin and premiums
exceed 5% of the fair market value of the Account's assets, after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into (except that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount generally may be excluded in computing
the 5%).
The Accounts will enter into futures contracts and related options
transactions only for bona fide hedging purposes as permitted by the CFTC and
for other appropriate risk management purposes, if any, which the CFTC may deem
appropriate for mutual funds excluded from the regulations governing commodity
pool operators. The Accounts are not permitted to engage in speculative futures
trading. Each Account will determine that the price fluctuations in the futures
contracts and options on futures used for hedging or risk management purposes
are substantially related to price fluctuations in securities held by the
Account or which it expects to purchase. In pursuing traditional hedging
activities, each Account will sell futures contracts or acquire puts to protect
against a decline in the price of securities that the Account owns, and each
Account will purchase futures contracts or calls on futures contracts to protect
the Account against an increase in the price of securities the Account intends
to purchase before it is in a position to do so.
When an Account purchases a futures contract, or purchases a call option
on a futures contract, it will place any asset, including equity securities and
non-investment grade debt, in a segregated account, so long as the asset is
liquid and marked to the market daily. The amount so segregated plus the amount
of initial margin held for the account of its broker equals the market value of
the futures contract.
The Accounts will not maintain open short positions in futures contracts,
call options written on futures contracts, and call options written on
securities indices if, in the aggregate, the value of the open positions (marked
to market) exceeds the current market value of that portion of its securities
portfolio being hedged by those futures and options plus or minus the unrealized
gain or loss on those open positions, adjusted for the historical volatility
relationship between that portion of the portfolio and the contracts (i.e., the
Beta volatility factor). To the extent an Account has written call options on
specific securities in that portion of its portfolio, the value of those
securities will be deducted from the current market value of that portion of the
securities portfolio. If this limitation should be exceeded at any time, the
Account will take prompt action to close out the appropriate number of open
short positions to bring its open futures and options positions within this
limitation.
Currency Contracts
The Aggressive Growth, Asset Allocation and International Accounts each
may engage in currency transactions with securities dealers, financial
institutions or other parties that are deemed creditworthy by the Account's
Sub-Advisor to hedge the value of portfolio securities denominated in particular
currencies against fluctuations in relative value. Currency transactions include
forward currency contracts, exchange-listed currency futures contracts and
options thereon and exchange-listed and over-the-counter options on currencies.
A forward currency contract involves a privately negotiated obligation to
purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract.
The Accounts will engage in currency transactions only for hedging and
other non-speculative purposes, including transaction hedging and position
hedging. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Account, which will generally
arise in connection with the purchase or sale of the Account's portfolio
securities or the receipt of income from them. Position hedging is entering into
a currency transaction with respect to portfolio securities positions
denominated or generally quoted in that currency. The Accounts will not enter
into a transaction to hedge currency exposure to an extent greater, after
netting all transactions intended wholly or partially to offset other
transactions, than the aggregate market value (at the time of entering into the
transaction) of the securities held by the Account that are denominated or
generally quoted in or currently convertible into the currency, other than with
respect to proxy hedging as described below.
The Accounts may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or decline
in value relative to other currencies to which the Account has or in which the
Account expects to have exposure. To reduce the effect of currency fluctuations
on the value of existing or anticipated holdings of its securities, the Account
may also engage in proxy hedging. Proxy hedging is often used when the currency
to which an Account's holding is exposed is difficult to hedge generally or
difficult to hedge against the dollar. Proxy hedging entails entering into a
forward contract to sell a currency, the changes in the value of which are
generally considered to be linked to a currency or currencies in which some or
all of an Account's securities are or are expected to be denominated, and to buy
dollars. The amount of the contract would not exceed the market value of the
Account's securities denominated in linked currencies.
Except when an Account enters into a forward contract in connection with
the purchase or sale of a security denominated in a foreign currency or for
other non-speculative purposes, which requires no segregation, a currency
contract that obligates the Account to buy or sell a foreign currency will
generally require the Account to hold an amount of that currency or liquid
securities denominated in that currency equal to the Account's obligations or to
segregate liquid high grade debt obligations equal to the amount of the
Account's obligations.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to an Account if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, the risk exists that
the perceived linkage between various currencies may not be present or may not
be present during the particular time that an Account is engaging in proxy
hedging. Currency transactions are also subject to risks different from those of
other portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy, purchases
and sale of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to an Account if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless,resulting in
full currency exposure as well as incurring transaction costs. Currency exchange
rates may also fluctuate based on factors extrinsic to a country's economy.
Buyers and sellers of currency futures contracts are subject to the same risks
that apply to the use of futures contracts generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures contracts
is relative new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available.
Repurchase Agreements
All the Accounts may invest in repurchase agreements. None of the
Accounts will enter into repurchase agreements that do not mature within seven
days if any such investment, together with other illiquid securities held by the
Account, would amount to more than 10% of its assets. Repurchase agreements will
typically involve the acquisition by the Account of debt securities from a
selling financial institution such as a bank, savings and loan association or
broker-dealer. A repurchase agreement provides that the Account will sell back
to the seller and that the seller will repurchase the underlying securities at a
specified price and at a fixed time in the future. Repurchase agreements may be
viewed as loans by an Account collateralized by the underlying securities
("collateral"). This arrangement results in a fixed rate of return that is not
subject to market fluctuation during the Account's holding period. Although
repurchase agreements involve certain risks not associated with direct
investments in debt securities, each of the Accounts follows procedures
established by the Board of Directors which are designed to minimize such risks.
These procedures include entering into repurchase agreements only with large,
well-capitalized and well-established financial institutions, which have been
approved by the Board of Directors and which the Manager believes present
minimum credit risks. In addition, the value of the collateral underlying the
repurchase agreement will always be at least equal to the repurchase price,
including accrued interest. In the event of a default or bankruptcy by a selling
financial institution, the affected Account bears a risk of loss. In seeking to
liquidate the collateral, an Account may be delayed in or prevented from
exercising its rights and may incur certain costs. Further to the extent that
proceeds from any sale upon a default of the obligation to repurchase were less
than the repurchase price, the Account could suffer a loss.
Lending of Portfolio Securities
All the Accounts may lend their portfolio securities. None of the
Accounts intends to lend its portfolio securities if as a result the aggregate
of such loans made by the Account would exceed 30% of its total assets.
Portfolio securities may be loaned to unaffiliated broker-dealers and other
unaffiliated qualified financial institutions provided that such loans are
callable at any time on not more than five business days' notice and that cash
or government securities equal to at least 100% of the market value of the
securities loaned, determined daily, is deposited by the borrower with the
Account and is maintained each business day in a segregated account. While such
securities are on loan, the borrower will pay the Account any income accruing
thereon, and the Account may invest any cash collateral, thereby earning
additional income, or may receive an agreed upon fee from the borrower. Borrowed
securities must be returned when the loan is terminated. Any gain or loss in the
market price of the borrowed securities which occurs during the term of the loan
inures to the Account and its shareholders. An Account may pay reasonable
administrative, custodial and other fees in connection with such loans and may
pay a negotiated portion of the interest earned on the cash or government
securities pledged as collateral to the borrower or placing broker. An Account
does not vote securities that have been loaned, but it will call a loan of
securities in anticipation of an important vote.
When-Issued and Delayed Delivery Securities
Each of the Accounts may from time to time purchase securities on a
when-issued basis and may purchase or sell securities on a delayed delivery
basis. The price of such a transaction is fixed at the time of the commitment,
but delivery and payment take place on a later settlement date, which may be a
month or more after the date of the commitment. No interest accrues to the
purchaser during this period, and the securities are subject to market
fluctuation, which involves the risk for the purchaser that yields available in
the market at the time of delivery may be higher than those obtained in the
transaction. Each Account will only purchase securities on a when-issued or
delayed delivery basis with the intention of acquiring the securities, but an
Account may sell the securities before the settlement date, if such action is
deemed advisable. At the time an Account makes the commitment to purchase
securities on a when-issued or delayed delivery basis, it will record the
transaction and thereafter reflect the value, each day, of the securities in
determining its net asset value. Each Account will also establish a segregated
account with its custodian bank in which it will maintain cash or cash
equivalents, United States Government securities and other high grade debt
obligations equal in value to the Account's commitments for such when-issued or
delayed delivery securities. The availability of liquid assets for this purpose
and the effect of asset segregation on an Account's ability to meet its current
obligations, to honor requests for redemption and to have its investment
portfolio managed properly will limit the extent to which the Account may engage
in forward commitment agreements. Except as may be imposed by these factors,
there is no limit on the percent of an Account's total assets that may be
committed to transactions in such agreements.
Money Market Instruments
The Money Market Account will invest all of its available assets in money
market instruments maturing in 397 days or less. The types of instruments which
this Account may purchase are described below.
(1) U.S. Government Securities -- Securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
(2) U.S. Government Agency Securities -- Obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government. U.S. agency
obligations include, but are not limited to, the Student Loan Marketing
Association, Federal Intermediate Credit Banks, and the Federal National
Mortgage Association. U.S. instrumentality obligations include, but are not
limited to, the Export-Import Bank and Farmers Home Administration. Some
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, such as those issued by Federal Intermediate Credit
Banks, are supported by the right of the issuer to borrower from the
Treasury, others such as those issued by the Federal National Mortgage
Association, by discretionary authority of the U.S. Government to purchase
certain obligations of the agency or instrumentality, and others, such as
those issued by the Student Loan Marketing Association, only by the credit
of the agency or instrumentality.
(3) Bank Obligations -- Certificates of deposit, time deposits and bankers'
acceptances of U.S. commercial banks having total assets of at least one
billion dollars, and of the overseas branches of U.S. commercial banks and
foreign banks, which in the Manager's opinion, are of comparable quality,
provided each such bank with its branches has total assets of at least five
billion dollars, and certificates, including time deposits of domestic
savings and loan associations having at least one billion dollars in assets
which are insured by the Federal Savings and Loan Insurance Corporation.
The Account may acquire obligations of U.S. banks which are not members of
the Federal Reserve System or of the Federal Deposit Insurance Corporation.
Any obligations of foreign banks shall be denominated in U.S. dollars.
Obligations of foreign banks and obligations of overseas branches of U.S.
banks are subject to somewhat different regulations and risks than those of
U.S. domestic banks. For example, an issuing bank may be able to maintain
that the liability for an investment is solely that of the overseas branch
which could expose the Account to a greater risk of loss. In addition,
obligations of foreign banks or of overseas branches of U.S. banks may be
affected by governmental action in the country of domicile of the branch or
parent bank. Examples of adverse foreign governmental actions include the
imposition of currency controls, the imposition of withholding taxes on
interest income payable on such obligations, interest limitations, seizure
or nationalization of assets, or the declaration of a moratorium. Deposits
in foreign banks or foreign branches of U.S. banks are not covered by the
Federal Deposit Insurance Corporation. The Account will only buy short-term
instruments where the risks of adverse governmental action are believed by
the Manager to be minimal. The Account will consider these factors along
with other appropriate factors in making an investment decision to acquire
such obligations and will only acquire those which, in the opinion of
management, are of an investment quality comparable to other debt
securities bought by the Account. The Account may invest in certificates of
deposit of selected banks having less than one billion dollars of assets
providing the certificates do not exceed the level of insurance (currently
$100,000) provided by the applicable government agency.
A certificate of deposit is issued against funds deposited in a bank or
savings and loan association for a definite period of time, at a specified
rate of return. Normally they are negotiable. However, the Account may
occasionally invest in certificates of deposit which are not negotiable.
Such certificates may provide for interest penalties in the event of
withdrawal prior to their maturity. A bankers' acceptance is a short-term
credit instrument issued by corporations to finance the import, export,
transfer or storage of goods. They are termed "accepted" when a bank
guarantees their payment at maturity and reflect the obligation of both the
bank and drawer to pay the face amount of the instrument at maturity.
(4) Commercial Paper -- Short-term promissory notes issued by corporations
which at time of purchase are rated A-1 or better by Standard and Poor's
("S&P") or Prime-1 or better by Moody's Investors Service, Inc. ("Moody's")
or, if not rated, issued or guaranteed by a corporation with outstanding
debt rated AA or better by S&P or Aa or better by Moody's. The Account will
not invest in master demand notes. (See Appendix A.)
(5) Short-term Corporate Debt -- Corporate notes, bonds and debentures which at
the time of purchase are rated AA or better by S&P or Aa or better by
Moody's provided such securities have one year or less remaining to
maturity. (See Appendix A.)
(6) Repurchase Agreements -- Instruments under which securities are purchased
from a bank or securities dealer with an agreement by the seller to
repurchase the securities at the same price plus interest at a specified
rate. (See "ACCOUNT INVESTMENTS Repurchase Agreements.")
The ratings of Moody's and S&P, which are described in Appendix A,
represent their opinions as to the quality of the money market instruments which
they undertake to rate. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. These ratings are the initial
criteria for selection of portfolio investments, but the Manager will further
evaluate these securities.
Portfolio Turnover
Portfolio turnover will normally differ for each Account, may vary from
year to year, as well as within a year, and may be affected by portfolio sales
necessary to meet cash requirements for redemptions of Account shares. The
portfolio turnover rate for an Account is calculated by dividing the lesser of
purchases or sales of its portfolio securities during the fiscal year by the
monthly average of the value of its portfolio securities (excluding from the
computation all securities, including options, with maturities at the time of
acquisition of one year or less). A high rate of portfolio turnover generally
involves correspondingly greater brokerage commission expenses, which must be
borne directly by the Account. No portfolio turnover rate can be calculated for
the Money Market Account because of the short maturities of the securities in
which it invests. The portfolio turnover rates for each of the other Accounts
for its most recent and immediately preceding fiscal periods, respectively, were
as follows: Aggressive Growth - 166.9% and 172.9%; Asset Allocation - 108.2% and
47.1%; Balanced - 22.6% and 25.7%; Bond - 1.7% and 5.9%; Capital Value 48.5% and
49.2%; Government Securities - 8.4% and 9.8%; Growth - 2.0% and 6.9%; High Yield
- - 32.0% and 35.1%; International - 12.5% and 15.6%; MidCap - 8.8% and 13.1%.
DIRECTORS AND OFFICERS OF THE FUNDS
The following listing discloses the principal occupations and other
principal business affiliations of the Fund's Officers and Directors during the
past five years. All mailing addresses are The Principal Financial Group, Des
Moines, Iowa 50392, unless otherwise indicated.
@James D. Davis, 63, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.
Roy W. Ehrle, 69, Director. 2424 Jordan Trail, West Des Moines, Iowa. Vice
Chairman, Principal Mutual Life Insurance Company, Retired.
Pamela A. Ferguson, 54, Director. P.O. Box 805, Grinnell, Iowa. Professor
of Mathematics, Grinnell College since 1998. Prior thereto, President, Grinnell
College.
@Richard W. Gilbert, 57, Director. 1357 Asbury Avenue, Winnetka, IL.
President, Gilbert Communications, Inc. since 1993. Prior thereto, President and
Publisher, Pioneer Press.
*&J. Barry Griswell, 48, Director and Chairman of the Board. Executive Vice
President, Principal Mutual Life Insurance Company since 1996. Senior Vice
President 1991-1996. Director and Chairman of the Board, Principal Management
Corporation, Princor Financial Services Corporation.
*&Stephan L. Jones, 62, Director and President. Vice President, Principal
Mutual Life Insurance Company since 1986. Director and President, Princor
Financial Services Corporation and Principal Management Corporation.
*Ronald E. Keller, 61, Director. Executive Vice President, Principal Mutual
Life Insurance Company since 1992. Prior thereto, Senior Vice President,
Principal Mutual Life Insurance Company. Director, Princor Financial Services
Corporation and Principal Management Corporation. Director and Chairman, Invista
Capital Management, Inc.
@Barbara A. Lukavsky, 57, Director. 3920 Grand Avenue, Des Moines, Iowa.
President and CEO, Lu San ELITE USA, L.C.
&Richard G. Peebler, 68, Director. 1916 79th Street, Des Moines, Iowa.
Professor, Drake University, College of Business and Public Administration,
since 1990.
*Craig L. Bassett, 45, Treasurer. Director - Treasury, since 1996. Prior
thereto, Associate Treasurer, Principal Mutual Life Insurance Company since
1988.
*Michael J. Beer, 36, Financial Officer. Senior Vice President and Chief
Operating Officer, Princor Financial Services Corporation and Principal
Management Corporation, since 1997. Prior thereto, Vice President and Chief
Operating Officer 1995-1997. Prior thereto, Financial Officer.
*David J. Brown, 37, Assistant Counsel. Counsel, Principal Mutual Life
Insurance Company since 1995. Attorney 1994-1995. Prior thereto, Attorney,
Dickinson, Mackaman, Tyler & Hogan, P.C. 1986-1994.
*Michael W. Cumings, 46, Assistant Counsel. Counsel, Principal Mutual Life
Insurance Company since 1989.
* Arthur S. Filean, 59, Vice President and Secretary. Vice President,
Princor Financial Services Corporation since 1990. Vice President, Principal
Management Corporation since 1996.
* Ernest H. Gillum, 42, Assistant Secretary. Assistant Vice President,
Registered Products, Princor Financial Services Corporation and Principal
Management Corporation, since 1995. Prior thereto, Product Development and
Compliance Officer.
Jane E. Karli, 40, Assistant Treasurer. Senior Accounting and Custody
Administrator, Principal Mutual Life Insurance Company since 1994; Senior
Investment Cost Accountant 1993- 1994; Senior Investment Accountant 1992-1993;
Prior thereto, Manager-Investment Accounting and Treasury.
*Michael D. Roughton, 46, Counsel. Counsel, Principal Mutual Life Insurance
Company since 1994. Prior thereto, Assistant Counsel. Counsel, Invista Capital
Management, Inc., Princor Financial Services Corporation, Principal Investors
Corporation and Principal Management Corporation.
@ Member of Audit and Nominating Committee.
* Affiliated with the Manager of the Fund or its parent and considered an
"Interested Person," as defined in the Investment Company Act of 1940, as
amended.
& Member of the Executive Committee. The Executive Committee is elected
by the Board of Directors and may exercise all the powers of the Board of
Directors, with certain exceptions, when the Board is not in session and shall
report its actions to the Board.
All Directors and Officers listed above hold similar positions with
nineteen mutual funds sponsored by Principal Mutual Life Insurance Company. In
addition, James D. Davis, Pamela A. Ferguson, Stephan L. Jones, J. Barry
Griswell, Barbara A. Lukavsky, and all of the officers hold similar positions
with one other Fund sponsored by Principal Mutual Life Insurance Company.
The following information relates to compensation paid by each Account
during the fiscal year ended December 31, 1996.
Director Each Account
-------- ------------
James D. Davis $1,200
Roy W. Ehrle $1,200
Pamela A. Ferguson $1,350
Richard W. Gilbert $1,200
Barbara A. Lukavsky $1,350
Richard G. Peebler $1,350*
* Richard G. Peebler received $1,350 from each of the Account. He received an
additional $75 from Aggressive Growth, Asset Allocation, Balanced, Capital
Value, International and MidCap Accounts due to his participation in the
executive committee of each of those Accounts.
The Fund does not provide retirement benefits for any of the directors.
Total compensation from the investment companies included in the fund complex
for the fiscal year ended December 31, 1996 was as follows:
James D. Davis $32,100 Richard W. Gilbert $33,000
Roy W. Ehrle $30,900 Barbara A. Lukavsky $35,850
Pamela A. Ferguson $35,850 Richard G. Peebler $33,525
All of the outstanding shares of the Fund are owned by Principal Mutual
Life Insurance Company and its Separate Accounts B and C and Variable Life
Separate Account. As of December 31, 1996, the Officers and Directors as a group
owned none of the outstanding shares of the Fund.
MANAGER AND SUB-ADVISORS
The Manager of each of the Accounts is Principal Management Corporation
(formerly known as Princor Management Corporation (the "Manager"), a
wholly-owned subsidiary of Princor Financial Services Corporation which is a
wholly-owned subsidiary of Principal Holding Company. Principal Holding Company
is a holding company which is a wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the state of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969 and
since that time has managed various mutual funds sponsored by Principal Mutual
Life Insurance Company.
The Manager has executed an agreement with Invista Capital Management,
Inc. ("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced, Capital Value,
Government Securities, Growth, International and MidCap Accounts. The Manager
will reimburse Invista for the cost of providing these services. Invista, an
indirectly wholly-owned subsidiary of Principal Mutual Life Insurance Company
and an affiliate of the Manager, was founded in 1985 and manages investments for
institutional investors, including Principal Mutual Life. Assets under
management at December 31, 1996 were approximately $19.6 billion. Invista's
address is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.
The Manager has also executed an agreement with Morgan Stanley Asset
Management Inc. ("MSAM") under which MSAM has agreed to assume the obligations
of the Manager to provide investment advisory services for the Aggressive Growth
Account and Asset Allocation Account. The Manager pays MSAM a fee for such
investment advisory services. MSAM, with principal offices at 1221 Avenue of the
Americas, New York, NY 10020, provides a broad range of portfolio management
services to customers in the United States and abroad. At December 31, 1996,
MSAM managed investments totaling approximately $72.6 billion, including
approximately $54.9 billion under active management and $17.7 billion as Named
Fiduciary or Fiduciary Adviser.
Each of the persons affiliated with the Fund who is also an affiliated
person of the Manager or a Sub-Advisor is named below, together with the
capacities in which such person is affiliated:
Office Held With Office Held With
Name The Fund The Manager/Invista
Craig Bassett Treasurer Treasurer (Manager)
Michael J. Beer Financial Officer Senior Vice President &
Chief Operating Officer
(Manager)
Arthur S. Filean Vice President and Secretary Vice President (Manager)
Ernest H. Gillum Assistant Secretary Assistant Vice President,
Registered Products
(Manager)
J. Barry Griswell Director and Chairman Director and Chairman of
of the Board the Board (Manager)
Director (Manager)
Stephan L. Jones Director and Director and President
President (Manager)
Ronald E. Keller Director Director (Manager)
Director and Chairman of
the Board (Invista)
Michael D. Roughton Counsel Counsel (Manager; Invista)
COST OF MANAGER'S SERVICES
For providing the investment advisory services, and specified other
services, the Manager, under the terms of the Management Agreement for the Fund,
is entitled to receive a fee computed and accrued daily and payable monthly, at
the following annual rates:
<TABLE>
<CAPTION>
Aggressive High Yield
Growth and and All
Net Asset Value Asset Allocation International MidCap Balanced Other
of Fund Accounts Account Account Accounts Accounts
-------------------- ---------------------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
First $100,000,000 .80% .75% .65% .60% .50%
Next 100,000,000 .75% .70% .60% .55% .45%
Next 100,000,000 .70% .65% .55% .50% .40%
Next 100,000,000 .65% .60% .50% .45% .35%
Over 400,000,000 .60% .55% .45% .40% .30%
</TABLE>
There is no assurance that any of the Accounts' net assets will reach
sufficient amounts to be able to take advantage of the rate decreases. The net
asset value of each Account on December 31, 1996 and the rate of the fee for
each Account for investment management services as provided in the Management
Agreement for the fiscal year then ended were as follows:
Management Fee
Net Assets as of For Year Ended
Account December 31, 1996 December 31, 1996
--------------------------- ----------------- -----------------
Aggressive Growth $ 90,105,549 .80%
Asset Allocation 61,631,138 .80
Balanced 93,157,669 .60
Bond 63,386,561 .50
Capital Value 205,018,528 .48
Government Securities 85,099,858 .50
Growth 99,611,910 .50
High Yield 13,740,343 .60
International 71,682,015 .75
MidCap 137,160,881 .64
Money Market 46,244,249 .50
Under a Sub-Advisory Agreement between Invista and the Manager, Invista
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the Balanced, Capital Value, Government Securities,
Growth, International and MidCap Accounts and is reimbursed by the Manager for
the cost of providing such services.
Under a Sub-Advisory Agreement between MSAM and the Manager, MSAM
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the Aggressive Growth and Asset Allocation Accounts.
The Manager pays MSAM a fee that is accrued daily and payable monthly.
The fee is based on the net asset value of each Account as follows: first $40
million of net assets - the fee is 0.45%; next $160 million - 0.30%; next $100
million - 0.25%; and net assets over $300 million - 0.20%.
Except for certain Fund expenses set out below, the Manager is
responsible for expenses, administrative duties and services including the
following: Expenses incurred in connection with the registration of the Fund and
Fund shares with the Securities and Exchange Commission and state regulatory
agencies; office space, facilities and costs of keeping the books of the Fund;
compensation of personnel and officers and any directors who are also affiliated
with the Manager; fees for auditors and legal counsel; preparing and printing
Fund prospectuses; administration of shareholder accounts, including issuance,
maintenance of open account system, dividend disbursement, reports to
shareholders, and redemption. However, some or all of these expenses may be
assumed by Principal Mutual Life Insurance Company and some or all of the
administrative duties and services may be delegated by the Manager to Principal
Mutual Life Insurance Company or affiliate thereof.
Each Account pays for certain corporate expenses incurred in its
operation. Among such expenses, the Account pays brokerage commissions on
portfolio transactions, transfer taxes and other charges and fees attributable
to investment transactions, any other local, state or federal taxes, fees and
expenses of all directors of the Fund who are not persons affiliated with the
Manager, interest, fees for Custodian of the Account, and the cost of meetings
of shareholders.
Fees paid for investment management services during the periods indicated
were as follows:
Management Fees For Year Ended December 31,
1996 1995 1994
Aggressive Growth $491,699 $180,022 $ 53,716 *
Asset Allocation 425,427 272,724 127,034 *
Balanced 420,010 206,614 131,488
Bond 260,242 122,783 72,199
Capital Value 816,437 591,891 637,781
Government Securities 360,968 202,554 195,469
Growth 357,833 137,029 24,971 **
High Yield 75,111 64,422 57,369
International 376,123 172,258 38,147 **
MidCap 606,697 264,411 94,644
Money Market 208,822 140,895 125,791
* Period beginning June 1, 1994 and ended December 31, 1994. ** Period beginning
May 1, 1994 and ended December 31, 1994.
The Management Agreements, Sub-Advisory Agreements and Investment Service
Agreements, pursuant to which Principal Mutual Life Insurance Company has agreed
to furnish certain personnel, services and facilities required by the Manager to
enable it to fulfill its investment advisory responsibilities for each of the
Accounts except the Aggressive Growth and Asset Allocation Accounts, were last
approved by the Fund's Board of Directors on September 8, 1997. Each of these
agreements provides for continuation in effect from year to year only so long as
such continuation is specifically approved at least annually either by the Board
of Directors of the Fund or by vote of a majority of the outstanding voting
securities of an Account of the Fund, provided that in either event such
continuation shall be approved by vote of a majority of the Directors who are
not "interested persons" (as defined in the Investment Company Act of 1940) of
the Manager, Principal Mutual Life Insurance Company or its subsidiaries, the
Fund and, in the case of the Sub- Advisory Agreement for each of the Accounts
other than the Aggressive Growth and Asset Allocation Accounts, Invista, and in
the case of the Sub-Advisory Agreement for each of the Aggressive Growth and
Asset Allocation Accounts, MSAM, cast in person at a meeting called for the
purpose of voting on such approval. The Agreements may be terminated at any time
on 60 days written notice to the Manager by the Board of Directors of the Fund
or by a vote of a majority of the outstanding securities of the Fund and by the
Manager, Invista, MSAM or Principal Mutual Life Insurance Company, as the case
may be, on 60 days written notice to the Fund. The Agreements will automatically
terminate in the event of their assignment.
BROKERAGE ON PURCHASES AND SALES OF SECURITIES
In distributing brokerage business arising out of the placement of orders
for the purchase and sale of securities for any Account, the objective of the
Accounts' Manager or Sub-Advisor is to obtain the best overall terms. In
pursuing this objective, the Manager, or Sub-Advisor, considers all matters it
deems relevant, including the breadth of the market in the security, the price
of the security, the financial condition and executing capability of the broker
or dealer and the reasonableness of the commission, if any (for the specific
transaction and on a continuing basis). This may mean in some instances that the
Manager, or Sub-Advisor, will pay a broker commissions that are in excess of the
amount of commission another broker might have charged for executing the same
transaction when the Manager, or Sub-Advisor, believes that such commissions are
reasonable in light of (a) the size and difficulty of transactions (b) the
quality of the execution provided and (c) the level of commissions paid relative
to commissions paid by other institutional investors. (Such factors are viewed
both in terms of that particular transaction and in terms of all transactions
that broker executes for accounts over which the Manager, or Sub-Advisor,
exercises investment discretion. The Manager, or Sub-Advisor, may purchase
securities in the over-the-counter market, utilizing the services of principal
market matters, unless better terms can be obtained by purchases through brokers
or dealers, and may purchase securities listed on the New York Stock Exchange
from non-Exchange members in transactions off the Exchange.) The Manager, or
Sub-Advisor, gives consideration in the allocation of business to services
performed by a broker (e.g. the furnishing of statistical data and research
generally consisting of information of the following types: analyses and reports
concerning issuers, industries, economic factors and trends, portfolio strategy
and performance of client accounts). If any such allocation is made, the primary
criteria used will be to obtain the best overall terms for such transactions.
The Manager, or Sub- Advisor, may pay additional commission amounts for research
services but generally does not do so. Such statistical data and research
information received from brokers or dealers may be useful in varying degrees
and the Manager, or Sub-Advisor, may use it in servicing some or all of the
accounts it manages. Some statistical data and research information may not be
useful to the Manager, or Sub-Advisor, in managing the client account, brokerage
for which resulted in the Manager's, or Sub-Advisor's, receipt of the
statistical data and research information. However, in the Manager's, or
Sub-Advisor's, opinion, the value thereof is not determinable and it is not
expected that the Manager's, or Sub-Advisor's, expenses will be significantly
reduced since the receipt of such statistical data and research information is
only supplementary to the Manager's, or Sub-Advisor's, own research efforts. The
Manager, or Sub-Advisor, allocated portfolio transactions for the Aggressive
Growth Account, Asset Allocation Account, Balanced Account, Capital Value
Account, Growth Account, International Account and MidCap Account to certain
brokers during the fiscal year ended December 31, 1996 due to research services
provided by such brokers. These portfolio transactions resulted in commissions
paid to such brokers by the Funds in the amounts of $15,242, $15,438, $13,692,
$29,405, $500, $3,955 and $2,591, respectively.
Purchases and sales of debt securities and money market instruments
usually will be principal transactions; portfolio securities will normally be
purchased directly from the issuer or from an underwriter or marketmaker for the
securities. Such transactions are usually conducted on a net basis with the
Account paying no brokerage commissions. Purchases from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
the purchases from dealers serving as marketmakers will include the spread
between the bid and asked prices.
The following table shows the brokerage commissions paid during the
periods indicated. In each year, 100% of the commissions paid by each Account
went to broker-dealers which provided research, statistical or other factual
information.
Total Brokerage Commissions Paid
Fiscal Year Ended
December 31,
Account 1996 1995 1994
------- ---- ---- ----
Aggressive Growth $250,591 $102,404 $37,910*
Asset Allocation 109,360 35,476 40,055*
Balanced 46,458 18,780 14,596
Capital Value 183,156 142,577 149,871
Growth 45,131 28,870 7,280**
International 156,842 78,939 43,151**
MidCap 63,355 31,588 7,527
* Period beginning June 1, 1994 and ended December 31, 1994.
** Period beginning May 1, 1994 and ended December 31, 1994.
Brokerage commissions paid to affiliates during the year ended December
31, 1996 were as follows:
Commissions Paid to Principal Financial Securities, Inc.
Total Dollar As Percent of As Percent of Dollar Amount
Account Amount Total Commissions of Commissionable Transactions
Capital Value $ 6,612 3.61% 7.92%
Growth 438 .97% .86%
Commissions Paid to Morgan Stanley and Co.
Total Dollar As Percent of As Percent of Dollar Amount
Account Amount Total Commissions of Commissionable Transactions
------- ------ ----------------- ------------------------------
Balanced $ 1,300 2.80% 1.82%
Capital Value 3,650 1.99% 1.48%
International 3,176 2.02% 1.78%
Morgan Stanley and Co. is affiliated with Morgan Stanley Asset Management,
Inc., which acts as a sub-advisor to two Accounts included in the Fund.
The Manager acts as investment advisor for each of the funds sponsored by
Principal Mutual Life Insurance Company and places orders to trade portfolio
securities for the funds and these Accounts, except the Aggressive Growth
Account and Asset Allocation Account. If, in carrying out the investment
objectives of the Accounts, occasions arise when purchases or sales of the same
equity securities are to be made for two or more of the Accounts or Funds at the
same time, (or, in the case of Accounts managed by Invista, for two or more
Funds and any other accounts managed by Invista), the Manager or Invista may
submit the orders to purchase or, whenever possible, to sell, to a broker/dealer
for execution on an aggregate or "bunched" basis. The Manager (or, in the case
of Accounts managed by Invista, Invista) may create several aggregate or
"bunched" orders relating to a single security at different times during the
same day. On such occasion, the Manager (or, in the case of Accounts managed by
Invista, Invista) will employ a computer program to randomly order the Accounts
whose individual orders for purchase or sale make up each aggregate or "bunched"
order. Securities purchased or proceeds of sales received on each trading day
with respect to each such aggregate or "bunched" orders shall be allocated to
the various Accounts (or, in the case of Invista, the various Accounts or Funds
and other client accounts) whose individual orders for purchase or sale make up
the aggregate or "bunched" order by filling each Account's or Fund's (or, in the
case of Invista, each Account's or Fund's or other client account's) order, in
the sequence arrived at by the random ordering. Securities purchased for funds
(or, in the case of Invista, Accounts, Funds and other clients accounts)
participating in an aggregate or "bunched" order will be placed into those
Accounts and, where applicable, other client accounts at a price equal to the
average of the prices achieved in the course of filling that aggregate or
"bunched" order.
If purchases or sales of the same debt securities are to be made for two
or more of the Accounts or Funds at the same time, the securities will be
purchased or sold proportionately in accordance with the amount of such security
sought to be purchased or sold at that time for each Account or Fund. If the
purchase or sale of securities consistent with the investment objectives of the
Accounts or one or more of the other clients for which MSAM acts as investment
sub-advisor or advisor is to be made at the same time, the securities will be
purchased or sold proportionately in accordance with the amount of such security
sought to be purchased or sold at that time for each Account or client.
DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES
Growth-Oriented and Income-Oriented Accounts
The net asset values of the shares of each of the Growth-Oriented and
Income-Oriented Accounts are determined daily, Monday through Friday, as of the
close of trading on the New York Stock Exchange, except on days on which changes
in the value of an Account's portfolio securities will not materially affect the
current net asset value of that Account's redeemable securities, on days during
which an Account receives no order for the purchase or sale of its redeemable
securities and no tender of such a security for redemption, and on customary
national business holidays. The Accounts treat as customary national business
holidays those days on which the New York Stock Exchange is closed for New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The net
asset value per share for each Account is determined by dividing the value of
securities in the Account's investment portfolio plus all other assets, less all
liabilities, by the number of Account shares outstanding. Securities for which
market quotations are readily available, including options and futures traded on
an exchange, are valued at market value, which is currently determined using the
last reported sale price or, if no sales are reported, as is regularly the case
for some securities traded over-the-counter, the last reported bid price. When
reliable market quotations are not considered to be readily available, which may
be the case, for example, with respect to certain debt securities, preferred
stocks, foreign securities and over-the-counter options, the investments are
valued by using market quotations, prices provided by market makers, which may
include dealers with which the Account has executed transactions, or estimates
of market values obtained from yield data and other factors relating to
instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Directors. Securities with
remaining maturities of 60 days or less are valued at amortized cost. Other
assets are valued at fair value as determined in good faith by the Board of
Directors.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of the New York Stock Exchange. The
values of such securities used in computing net asset value per share are
usually determined as of such times. Occasionally, events which affect the
values of such securities and foreign currency exchange rates may occur between
the times at which they are generally determined and the close of the New York
Stock Exchange and would therefore not be reflected in the computation of the
Account's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Manager under procedures
established and regularly reviewed by the Board of Directors. To the extent the
Account invests in foreign securities listed on foreign exchanges which trade on
days on which the Account does not determine its net asset value, for example
Saturdays and other customary national U.S. holidays, the Account's net asset
value could be significantly affected on days when shareholders have no access
to the Account.
Certain securities issued by companies in emerging market countries may
have more than one quoted valuation at any given point in time, sometimes
referred to as a "local" price and a "premium" price. The premium price is often
a negotiated price which may not consistently represent a price at which a
specific transaction can be effected. It is the policy of International Account
to value such securities at prices at which it is expected those shares may be
sold, and the Manager or any sub-adviser, is authorized to make such
determinations subject to such oversight by the Fund's Board of Directors as may
from time to time be necessary.
Money Market Account
The net asset value of shares of the Money Market Account is determined
at the same time and on the same days as each of the Growth-Oriented Accounts
and Income-Oriented Accounts as described above. The net asset value per share
for the Account is computed by dividing the total value of the Account's
securities and other assets, less liabilities, by the number of Account shares
outstanding.
All securities held by the Money Market Account will be valued on an
amortized cost basis. Under this method of valuation, a security is initially
valued at cost; thereafter, the Account assumes a constant proportionate
amortization in value until maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the security.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price that would be received upon sale of the security.
Use of the amortized cost valuation method by the Money Market Account
requires the Account to maintain a dollar weighted average maturity of 90 days
or less and to purchase only obligations that have remaining maturities of 397
days or less or have a variable or floating rate of interest. In addition, the
Account can invest only in "Eligible Securities" as that term is defined in
Regulations issued under the Investment Company Act of 1940 (see the Fund's
Prospectus for a more complete description) determined by the Board of Directors
to present minimal credit risks.
The Board of Directors has established procedures designed to stabilize, to
the extent reasonably possible, the Account's price per share as computed for
the purpose of sales and redemptions at $1.00. Such procedures include a
directive to the Manager to test price the portfolio or specific securities
thereof upon certain changes in the Treasury Bill auction interest rate for the
purpose of identifying possible deviations in the net asset value per share
calculated by using available market quotations or equivalents from $1.00 per
share. If such deviation exceeds 1/2 of 1%, the Board of Directors will promptly
consider what action, if any, will be initiated. In the event the Board of
Directors determines that a deviation exists which may result in material
dilution or other unfair results to shareholders, the Board will take such
corrective action as it regards as appropriate, including: the sale of portfolio
instruments prior to maturity; the withholding of dividends; redemptions of
shares in kind; the establishment of a net asset value per share based upon
available market quotations; or splitting, combining or otherwise recapitalizing
outstanding shares. The Account may also reduce the number of shares outstanding
by redeeming proportionately from shareholders, without the payment of any
monetary compensation, such value at $1.00 per share.
PERFORMANCE CALCULATION
Each of the Accounts may from time to time advertise its performance in
terms of total return. The figures used for total return and yield are based on
the historical performance of an Account, or its corresponding, predecessor
mutual fund, show the performance of a hypothetical investment and are not
intended to indicate future performance. Total return and yield will vary from
time to time depending upon market conditions, the composition of an Account's
portfolio and operating expenses. These factors and possible differences in the
methods used in calculating performance figures should be considered when
comparing an Account's performance to the performance of some other kind of
investment. The calculations of total return and yield for the Accounts do not
include the fees and charges of the separate accounts that invest in the
Accounts and, therefore, do not reflect the investment performance of those
separate accounts.
Each Account may also include in its advertisements performance rankings
and other performance-related information published by independent statistical
services or publishers, such as Lipper Analytical Services, Weisenberger
Investment Companies Services, Money Magazine, Forbes, The Wall Street Journal,
Barron's and Changing Times, and comparisons of the performance of an Account to
that of various market indices, such as the S&P 500 Index, Lehman Brothers GNMA
Index, Dow Jones Industrials Index, and the Salomon Brothers Investment Grade
Bond Index.
Total Return
When advertising total return figures, each of the Growth-Oriented
Accounts and Income-Oriented Accounts will include its average annual total
return for each of the one, five and ten year periods (or if shorter, the period
during which its corresponding predecessor fund's registration statement has
been in effect) that end on the last day of the most recent calendar quarter.
Average annual total return is computed by calculating the average annual
compounded rate of return over the stated period that would equate an initial
$1,000 investment to the ending redeemable value assuming the reinvestment of
all dividends and capital gains distributions at net asset value. In its
advertising, an Account may also include average annual total return for some
other period or cumulative total return for a specified period. Cumulative total
return is computed by dividing the ending redeemable value (assuming the
reinvestment of all dividends and capital gains distributions at net asset
value) by the initial investment.
The following table shows as of December 31, 1996 average annual total
return for each of the Accounts for the periods indicated:
Account 1-Year 5-Year 10-Year
- --------------------------- ------- ----------- -------
Aggressive Growth 27.43% 28.25%(3) N/A
Asset Allocation 19.53% 14.73%(3) N/A
Balanced 19.32% 12.68% 12.59%(1)
Bond 8.96% 8.03% 9.37%(1)
Capital Value 28.41% 17.02% 11.84%
Government Securities 8.57% 6.81% 8.84%
Growth 23.95% 18.62%(2) N/A
High Yield 16.42% 10.23% 9.95%(1)
International 31.61% 16.34%(2) N/A
MidCap 24.01% 20.45% 18.17%(1)
(1) Period beginning December 18, 1987 and ending June 30, 1997.
(2) Period beginning May 1, 1994 and ending June 30, 1997.
(3) Period beginning June 1, 1994 and ending June 30, 1997.
Yield
Money Market Account
The Money Market Account may advertise its yield and its effective yield.
Yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of one percent.
As of December 31, 1996, the Money Market Account's yield was 5.00%. Because
realized capital gains or losses in an Account's portfolio are not included in
the calculation, the Account's net investment income per share for yield
purposes may be different from the net investment income per share for dividend
purposes, which includes net short-term realized gains or losses on the
Account's portfolio.
Effective yield is computed by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result. The resulting effective yield figure is carried to at least
the nearest hundredth of one percent. As of December 31, 1996, the Money Market
Account's effective yield was 5.13%.
The yield quoted at any time for the Money Market Account represents the
amount that was earned during a specific, recent seven-day period and is a
function of the quality, types and length of maturity of instruments in the
Account's portfolio and the Account's operating expenses. The length of maturity
for the portfolio is the average dollar weighted maturity of the portfolio. This
means that the portfolio has an average maturity of a stated number of days for
its issues. The calculation is weighted by the relative value of each
investment.
The yield for the Money Market Account will fluctuate daily as the income
earned on the investments of the Account fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. There is no guarantee that the net asset value or any stated
rate of return will remain constant. A shareholder's investment in the Account
is not insured. Investors comparing results of the Money Market Account with
investment results and yields from other sources such as banks or savings and
loan associations should understand these distinctions. Historical and
comparative yield information may, from time to time, be presented by the
Account.
TAX STATUS
It is the policy of each Account to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which
the Fund so qualifies, it will be exempt from federal income tax upon the amount
so distributed to investors.
For federal income tax purposes, capital gains and losses on futures
contracts or options thereon, index options or options traded on qualified
exchanges are generally treated at 60% long-term and 40% short-term. In
addition, an Account must recognize any unrealized gains and losses on such
positions held at the end of the fiscal year. An Account may elect out of such
tax treatment, however, for a futures or options position that is part of an
"identified mixed straddle" such as a put option purchased by the Account with
respect to a portfolio security. Gains and losses on figures and options
included in an identified mixed straddle will be considered 100% short-term and
unrealized gain or loss on such positions will not be realized at year end. The
straddle provisions of the Code may require the deferral of realized losses to
the extent that the Account has unrealized gains in certain offsetting positions
at the end of the fiscal year, and may also require recharacterization of all or
a part of losses on certain offsetting positions from short-term to long-term,
as well as adjustment of the holding periods of straddle positions.
The 1986 Tax Reform Act imposes an excise tax on mutual funds which fail
to distribute net investment income and capital gains by the end of the calendar
year in accordance with the provisions of the Act. The Fund intends to comply
with the Act's requirements and to avoid this excise tax.
GENERAL INFORMATION AND HISTORY
Following is a description of a reorganization completed by each of the
Funds on December 31, 1997. The terms of each reorganization were identical,
therefore, the description is intended to apply to each of the funds.
"Liquidating Corporation" as used below means each of the following funds, all
of which were incorporated in the State of Maryland:
Fund Date of Incorporation
Principal Aggressive Growth Fund 08/20/93
Principal Asset Allocation Fund 08/20/93
Principal Balanced Fund 11/26/86
Principal Bond Fund 11/26/86
Principal Capital Accumulation Fund 05/26/89
Principal Emerging Growth Fund 02/20/87
Principal Government Securities Fund 06/07/85
Principal Growth Fund 08/20/93
Principal High Yield Fund 12/02/86
Principal Money Market Fund 06/10/82
Principal World Fund 08/20/93
"Surviving Corporation" refers to Principal Variable Contract Fund, Inc., a
Maryland Corporation, Incorporated on May 27, 1997.
On September 16, 1997, a majority of the outstanding shares of the
Liquidating Corporation approved a proposal to permit the Liquidating
Corporation to transfer all of its assets and liabilities to the Surviving
Corporation in accordance with an Agreement and Plan of Reorganization and
Liquidation dated July 1, 1997 (the "Agreement") between the Liquidating
Corporation and Surviving Corporation (the "Reorganization"). The Agreement was
authorized and approved by the Boards of Directors of the Liquidating
Corporation and the Surviving Corporation in accordance with the laws of
Maryland. The net asset values of the shares were unaffected by the
Reorganization.
The primary purpose for the Reorganization was to develop a "series
company" structure rather than a "multiple fund" structure for the Principal
Funds. Management of the Liquidating Corporation concluded that a series company
form would simplify the operation of and provide greater flexibility in managing
the investment medium used to fund the variable contracts that invested in the
Liquidating Corporation.
By approving the Plan, the shareholders of the Liquidating Corporation
authorized the Liquidating Corporation, as the sole shareholder of the
corresponding series of shares prior to the Reorganization to:
1. Elect as directors of the Surviving Corporation of all the Liquidating
Corporation's Directors at the time of the Reorganization;
2. Ratify the selection of Ernst & Young LLP as the independent auditors
of the Surviving Corporation;
3. Approve the Management Agreement, Investment Service Agreement, and
Sub- Advisory Agreements for the Surviving Corporation; and
4. Approve the transactions required of the Surviving Corporation to
implement the Reorganization.
The shareholders also authorized the liquidation and dissolution of the
Liquidating Corporation
FINANCIAL STATEMENTS
The financial statements for the Accounts for the fiscal period
ended December 31, 1996 appearing in the Annual Report to Shareholders and the
report thereon of Ernst and Young LLP, independent auditors, appearing therein
are incorporated by reference in this Statement of Additional Information. The
Annual Report will be furnished, without charge, to investors who request copies
of the Statement of Additional Information.
APPENDIX A
Description of Bond Ratings:
Moody's Investors Service, Inc. Bond Ratings
Aaa:
Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa:
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A:
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa:
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba:
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa:
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca:
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C:
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
CONDITIONAL RATING: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and a
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
SHORT-TERM NOTES: The four ratings of Moody's for short-term notes are
MIG 1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality...but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk for having protection...and not
distinctly or predominantly speculative."
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's Corporation's Debt Ratings:
A Standard & Poor's debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditor's rights.
AAA:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA:
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A:
Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
BBB:
Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
BB, B, CCC, CC:
Debt rated "BB", "B", "CCC" and "CC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "CC" the highest degree
of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
C:
The rating "C" is reserved for income bonds on which no interest is
being paid.
D:
Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of
the project being financed by the bonds being rated and indicates that
payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of
the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise
his own judgment with respect to such likelihood and risk.
NR:
Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does
not rate a particular type of obligation as a matter of policy.
Standard & Poor's, Commercial Paper Ratings
A Standard & Poor's Commercial Paper Rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Ratings are applicable to
both taxable and tax-exempt commercial paper. The four categories are as
follows:
A:
Issues assigned the highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Issues that
possess overwhelming safety characteristics will be given a "+"
designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the highest designations.
B:
Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C:
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D:
This rating indicates that the issue is either in default or is expected
to be in default upon maturity.
The Commercial Paper Rating is not a recommendation to purchase or sell
a security. The ratings are based on current information furnished
to Standard & Poor's by the issuer and obtained by Standard & Poor's
from other sources it considers reliable. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of,
such information.
Standard & Poor's rates notes with a maturity of less than three years as
follows:
SP-1 A very strong, or strong, capacity to pay principal and
interest. Issues that possess overwhelming safety
characteristics will be given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement
(1) Part A:
Financial Highlights for each of the four years in
the period ended December 31, 1996, for the period
from July 1, 1992 through December 31, 1992, for
each of the five years in the period ended June 30,
1992 and for the period from April 9, 1987 through
June 30, 1987.
(2) Part B:
None
(b) Exhibits
(1a) Articles of Amendment (Filed 4/12/96)
(1b) Articles of Incorporation (Filed 4/12/96)
(2) Bylaws (Filed 4/12/96)
(5a) Management Agreement (Filed 4/12/96)
(5b) Investment Service Agreement (Filed 4/12/96)
(6) Distribution Agreement (Filed 4/12/96)
(8) Custody Agreement (Filed 4/12/96)
(9) Agreement and Plan of Reorganization and
Liquidation (Filed 10/23/97)
(10) Opinion of Counsel (Filed 4/12/96)
(11) Consent of Independent Auditors
(12) Audited Financial Statements as of
December 31, 1996, including the Report of
Ernst & Young LLP, independent auditors for
the Registrant.
(12a) Semiannual Financial Statements as of
June 30, 1997.
(13) Investment Letter (Filed 4/12/96)
(16) Total Return Performance Quotation
(Filed 4/12/96)
(27) Financial Data Schedule
Item 25. Persons Controlled by or Under Common Control with Depositor
Principal Mutual Life Insurance Company (incorporated as a
mutual life insurance company under the laws of Iowa);
Sponsored the organization of the following mutual funds,
some of which it controls by virtue of owning voting
securities:
Principal Asset Allocation Fund, Inc. (a Maryland
Corporation)100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company and its separate accounts on
October 8, 1997.
Principal Aggressive Growth Fund, Inc. (a Maryland Corporation)
100.0% of shares outstanding owned by Principal Mutual Life
Insurance Company and its separate accounts on October 8, 1997.
Princor Balanced Fund, Inc. (a Maryland Corporation) 0.88% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Principal Balanced Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on October 8, 1997.
Princor Blue Chip Fund, Inc. (a Maryland Corporation) 1.30% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Princor Bond Fund, Inc. (a Maryland Corporation) 1.43% of shares
outstanding owned by Principal Mutual Life Insurance Company on
October 8, 1997.
Principal Bond Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on October 8, 1997.
Princor Capital Accumulation Fund, Inc. (a Maryland
Corporation) 29.63% of outstanding shares owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Principal Capital Accumulation Fund, Inc. (a Maryland
Corporation)100.0% of outstanding shares owned by Principal
Mutual Life Insurance Company and its Separate Accounts on
October 8, 1997.
Princor Cash Management Fund, Inc. (a Maryland Corporation) 2.25%
of outstanding shares owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on October 8,
1997.
Princor Emerging Growth Fund, Inc. (a Maryland Corporation) 0.61%
of shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997
Principal Emerging Growth Fund, Inc. (a Maryland Corporation)
100.0% of shares outstanding owned by Principal Mutual Life
Insurance Company and its Separate Accounts on October 8, 1997.
Princor Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.40% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Principal Government Securities Fund, Inc. (a Maryland
Corporation) 100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company and its Separate Accounts on
October 8, 1997.
Princor Growth Fund, Inc. (a Maryland Corporation) 0.51% of
outstanding shares owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Principal Growth Fund, Inc. (a Maryland Corporation) 100.0% of
outstanding shares are owned by Principal Mutual Life Insurance
Company and its Separate Accounts on October 8, 1997.
Princor High Yield Fund, Inc. (a Maryland Corporation) 21.18% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Principal High Yield Fund, Inc. (a Maryland Corporation) 100.0%
of shares outstanding owned by Principal Mutual Life Insurance
Company and its Separate Accounts on October 8, 1997.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 86.90% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 82.32% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Princor Limited Term Bond Fund, Inc. (a Maryland Corporation)
50.89% of shares outstanding owned by Principal Mutual Life
Insurance Company on October 8, 1997.
Principal Money Market Fund, Inc. (a Maryland Corporation) 100.0%
of shares outstanding owned by Principal Mutual Life Insurance
Company and its Separate Accounts on October 8, 1997.
Principal Special Markets Fund, Inc. (a Maryland Corporation)
100.00% of shares outstanding of the International Emerging
Markets Portfolio, 50.72% of the shares outstanding of the
International Securities Portfolio, 100% of shares outstanding of
the International SmallCap Portfolio and 100.00% of the shares
outstanding of the Mortgage-Backed Securities Portfolio were
owned by Principal Mutual Life Insurance Company on November 17,
1997.
Princor Tax-Exempt Bond Fund, Inc. (a Maryland Corporation) 0.57%
of shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Princor Tax-Exempt Cash Management Fund, Inc. (a Maryland
Corporation) 1.03% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Princor Utilities Fund, Inc. (a Maryland Corporation) 1.56% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Princor World Fund, Inc. (a Maryland Corporation) 23.36% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Principal World Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Subsidiaries organized and wholly-owned by Principal Mutual Life
Insurance Company:
a. Principal Holding Company (an Iowa Corporation) A holding
company wholly-owned by Principal Mutual Life Insurance
Company.
b. PT Asuransi Jiwa Principal Egalita Indonesia (an Indonesia
Corporation)
Subsidiaries wholly-owned by Principal Holding Company:
a. Petula Associates, Ltd. (an Iowa Corporation) a real estate
development company.
b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.
c. Principal Development Associates, Inc. (a California
Corporation) a real estate development company.
d. Princor Financial Services Corporation (an Iowa Corporation)
a registered broker-dealer.
e. Invista Capital Management, Inc. (an Iowa Corporation) a
registered investment adviser.
f. Principal Marketing Services, Inc. (a Delaware Corporation)
a corporation formed to serve as an interface between
marketers and manufacturers of financial services products.
g. The Principal Financial Group, Inc. (a Delaware corporation)
a general business corporation established in connection
with the new corporate identity. It is not currently active.
h. Delaware Charter Guarantee & Trust Company (a Delaware
Corporation) a nondepository trust company.
i. Principal Securities Holding Corporation (a Delaware
Corporation) a holding company.
j. Principal Health Care, Inc. (an Iowa Corporation) a
developer and administrator of managed care systems.
k. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.
l. Principal Asset Markets, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
m. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.
n. Principal International, Inc. (an Iowa Corporation) a
company formed for the purpose of international business
development.
o. Principal Spectrum Associates, Inc. (a California
Corporation) a real estate development company.
p. Principal Commercial Advisors, Inc. (an Iowa Corporation) a
company that purchases, manages and sells commercial real
estate assets.
q. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.
r. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
s. Equity FC, Ltd. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited
liability companies.
t. Principal L.L.C. (an Illinois Corporation) a limited
liability company.
Subsidiaries organized and wholly-owned by Princor Financial Services
Corporation:
a. Princor Management Corporation (an Iowa Corporation) a
registered investment advisor.
b. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange
Commission. It is not currently active.
Subsidiary wholly owned by Principal Securities Holding Corporation:
a. Principal Financial Securities, Inc. (a Delaware
Corporation) an investment banking and securities brokerage
firm.
Subsidiary wholly owned by Delaware Charter Guarantee & Trust Company:
a. Trust Consultants, Inc. (a California Corporation) a
Consulting and Administration of Employee Benefit Plans.
Subsidiaries organized and wholly-owned by Principal Health Care,
Inc.:
a. The Admar Group, Inc. (a Florida Corporation) a national
managed care service organization that developes and manages
preferred provider organizations.
b. Principal Health Care Management Corporation (an Iowa
Corporation) provide management services to health
maintenance organizations.
c. Principal Health Care of the Carolinas, Inc. (a North
Carolina Corporation) a health maintenance organization.
d. Principal Health Care of Delaware, Inc. (a Delaware
Corporation) a health maintenance organization.
e. Principal Health Care of Florida, Inc. (a Florida
Corporation) a health maintenance organization.
f. Principal Health Care of Georgia, Inc. (a Georgia
Corporation) a health maintenance organization.
g. Principal Health Care of Illinois, Inc. (an Illinois
Corporation) a health maintenance organization.
h. Principal Health Care of Indiana, Inc. (a Delaware
Corporation) a health maintenance organization.
i. Principal Health Care of Iowa, Inc. (an Iowa Corporation) a
health maintenance organization.
j. Principal Health Care of Kansas City, Inc. (a Missouri
Corporation) a health maintenance organization.
k. Principal Health Care of Louisiana, Inc. (a Louisiana
Corporation) a health maintenance organization.
l. Principal Health Care of the Mid-Atlantic, Inc. (a Virginia
Corporation) a health maintenance organization.
m. Principal Health Care of Nebraska, Inc. (a Nebraska
Corporation) a health maintenance organization.
n. Principal Health Care of Pennsylvania, Inc. (a Pennsylvania
Corporation) a health maintenance organization.
o. Principal Health Care of St. Louis, Inc. (a Delaware
Corporation) a health maintenance organization.
p. Principal Health Care of South Carolina, Inc. (A South
Carolina Corporation) a health maintenance organization.
q. Principal Health Care of Tennessee, Inc. (a Tennessee
Corporation) a health maintenance organization.
r. Principal Health Care of Texas, Inc. ( a Texas Corporation)
a health maintenance organization.
s. United Health Care Services of Iowa, Inc. (an Iowa
Corporation) a health maintenance organization.
Subsidiary owned by The Admar Group, Inc.:
a. Admar Corporation (a California Corporation) a managed care
services organization.
b. Admar Insurance Marketing, Inc. (a California Corporation) a
managed care services organization.
c. Benefit Plan Administrators, Inc. (a Colorado Corporation) a
managed care services organization.
d. SelectCare Management Co., Inc. (a California Corporation) a
managed care services organization.
e. Image Financial & Insurance Services, Inc. (a California
Corporation) a managed care services organization.
f. WM. G. Hofgard & Co., Inc. (a California Corporation) a
managed care services organization.
Subsidiaries owned by Principal International, Inc.:
a. Principal Insurance Company Limited (a Hong Kong
Corporation) sells insurance and pension products.
b. Principal International Argentina, S.A. (an Argentina
services corporation).
c. Principal International Asia Limited (a Hong Kong
Corporation) a corporation operating as a regional
headquarters for Asia.
d. Principal International de Chile, S.A. (a Chile
Corporation) a holding company.
e. Principal International Espana, S.A. de Seguros de Vida (a
Spain Corporation) a life insurance company.
f. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company.
g. Qualitas Medica, S.A. (an Argentina HMO) a health
maintenance organization.
h. Afore Confia-Principal, S.a. de C.V. (a Mexico Corporation).
i. Zao Principal International (a Russia Corporation) inactive.
Subsidiaries owned by Principal International Argentina, S.A.:
a. Ethika-Jacaranda S.A. Administradora de Fondos de
Jubilaciones y Pensions (an Argentina company) a pension
company.
b. Princor Compania de Seguros de Retiro, S.A. (an Argentina
Corporation) an individual annuity/employee benefit company.
c. Prinlife Compania de Seguros de Vida, S.A. (an Argentina
Corporation) a life insurance company.
Subsidiary owned by Principal International de Chile, S.A.:
a. BanRenta Compania de Seguros de Vida, S.A. (a Chile
Corporation).
Subsidiary owned by Principal International Espana, S.A. de Seguros de
Vida:
a. Princor International Espana Sociedad Anonima de Agencia de
Seguros (a Spain Corporation) an insurance agency.
Subsidiary owned by Afore Confia-Principal, S.A. de C.V.:
a. Siefore Confia-Principal, S.A. de C.V. (a Mexico
Corporation) an investment fund company.
Item 26. Number of Holders of Securities - As of: November 30, 1997
(1) (2)
Title of Class Number of Holders
Principal Government Securities Fund, Inc.
Common 1
Item 27. Indemnification
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, the Registrant may
indemnify the corporate representative against judgments, fines, penalties, and
amounts paid in settlement, and against expenses, including attorneys' fees, if
such expenses were actually incurred by the corporate representative in
connection with the proceeding, unless it is established that:
(i) The act or omission of the corporate representative was
material to the matter giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate dishonesty; or
(ii) The corporate representative actually received an improper
personal benefit in money, property, or services; or
(iii) In the case of any criminal proceeding, the corporate
representative had reasonable cause to believe that the act or
omission was unlawful.
If a proceeding is brought by or on behalf of the Registrant, however, the
Registrant may not indemnify a corporate representative who has been adjudged to
be liable to the Registrant. Under the Registrant's Articles of Incorporation
and Bylaws, directors and officers of Registrant are entitled to indemnification
by the Registrant to the fullest extent permitted under Maryland law and the
Investment Company Act of 1940. Reference is made to Article VI, Section 7 of
the Registrant's Articles of Incorporation, Article 12 of Registrant's Bylaws
and Section 2-418 of the Maryland General Corporation Law.
The Registrant has agreed to indemnify, defend and hold the Distributor,
its officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act of 1933, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act of 1933, or under common law or otherwise, arising out of or
based upon any untrue statement of a material fact contained in the Registrant's
registration statement or prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission made in conformity with
information furnished in writing by the Distributor to the Registrant for use in
the Registrant's registration statement or prospectus: provided, however, that
this indemnity agreement, to the extent that it might require indemnity of any
person who is also an officer or director of the Registrant or who controls the
Registrant within the meaning of Section 15 of the Securities Act of 1933, shall
not inure to the benefit of such officer, director or controlling person unless
a court of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent that such result would not be against public
policy as expressed in the Securities Act of 1933, and further provided, that in
no event shall anything contained herein be so construed as to protect the
Distributor against any liability to the Registrant or to its security holders
to which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of its duties,
or by reason of its reckless disregard of its obligations under this Agreement.
The Registrant's agreement to indemnify the Distributor, its officers and
directors and any such controlling person as aforesaid is expressly conditioned
upon the Registrant being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Registrant.
Item 28. Business or Other Connection of Investment Adviser
A complete list of the officers and directors of the investment adviser,
Princor Management Corporation, are set out below. This list includes some of
the same people (designated by an *), who are serving as officers and directors
of the Registrant. For these people the information as set out in the Statement
of Additional Information (See Part B) under the caption "Directors and Officers
of the Fund" is incorporated by reference.
Craig R. Barnes The Principal President and Director
Vice President Financial Group Invista Capital
Des Moines, Iowa Management, Inc.
50392
*Craig L. Bassett See Part B
Treasurer
*Michael J. Beer Same See Part B
Senior Vice President and
Chief Operating Officer
Mary L. Bricker Same Counsel & Assistant
Assistant Corporate Corporate Secretary
Secretary Principal Mutual Life
Insurance Company
Ray S. Crabtree Same Executive Vice President
Director Principal Mutual Life
Insurance Company
David J. Drury Same Chief Executive Officer
Director and Chairman of the Board
Principal Mutual Life
Insurance Company
*Arthur S. Filean Same See Part B
Vice President
Paul N. Germain Same Assistant Vice President-
Assistant Vice President Operations
- Operations Princor Financial Services
Corporation
Michael H. Gersie Same Senior Vice President
Director Principal Mutual Life
Insurance Company
*Ernest H. Gillum Same See Part B
Assistant Vice President
- Registered Products
Thomas J. Graf Same Senior Vice President
Director Principal Mutual Life
Insurance Company
*J. Barry Griswell Same See Part B
Chairman of the Board
and Director
Joyce N. Hoffman Same Vice President and
Vice President and Corporate Secretary
Corporate Secretary Principal Mutual Life
Insurance Company
*Stephan L. Jones Same See Part B
Director and President
Ronald E. Keller Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Gregg R. Narber Same Senior Vice President &
Director General Counsel
Principal Mutual Life
Insurance Company
Layne A. Rasmussen Same Controller
Controller - Mutual Funds Princor Financial Services
Corporation
Elizabeth R. Ring Same Controller
Controller Princor Financial Services
Corporation
*Michael D. Roughton Same See Part B
Counsel
Charles E. Rohm Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Jean B. Schustek Same Product Compliance Officer
Product Compliance Officer Princor Financial Services
- Registered Products Corporation
Dewain A. Sparrgrove Same Vice President- Investment
Vice President Securities
Principal Mutual Life
Insurance Company
Princor Management Corporation serves as investment adviser and dividend
disbursing and transfer agent for, Principal Aggressive Growth Fund, Inc.,
Principal Asset Allocation Fund, Inc., Principal Balanced Fund, Inc., Principal
Bond Fund, Inc., Principal Capital Accumulation Fund, Inc., Principal Emerging
Growth Fund, Inc., Principal Government Securities Fund, Inc., Principal Growth
Fund, Inc., Principal High Yield Fund, Inc., Principal Money Market Fund, Inc.,
Principal Special Markets Fund, Inc., Principal World Fund, Inc., Princor
Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Bond Fund, Inc.,
Princor Capital Accumulation Fund, Inc., Princor Cash Management Fund, Inc.,
Princor Emerging Growth Fund, Inc., Princor Government Securities Income Fund,
Inc., Princor Growth Fund, Inc., Princor High Yield Fund, Inc., Principal
International Emerging Markets Fund, Inc., Principal International SmallCap
Fund, Inc., Princor Limited Term Bond Fund, Inc., Princor Tax-Exempt Bond Fund,
Inc., Princor Tax-Exempt Cash Management Fund, Inc., Princor Utilities Fund,
Inc. and Princor World Fund, Inc. - funds sponsored by Principal Mutual Life
Insurance Company.
Item 29. Principal Underwriters
(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, Principal Aggressive Growth Fund,
Inc., Principal Asset Allocation Fund, Inc., Principal Balanced Fund, Inc.,
Principal Bond Fund, Inc., Principal Capital Accumulation Fund, Inc., Principal
Emerging Growth Fund, Inc., Principal Government Securities Fund, Inc.,
Principal Growth Fund, Inc., Principal High Yield Fund, Inc., Principal Money
Market Fund, Inc., Principal Special Markets Fund, Inc., Principal World Fund,
Inc., Princor Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Bond
Fund, Inc., Princor Capital Accumulation Fund, Inc., Princor Cash Management
Fund, Inc., Princor Emerging Growth Fund, Inc., Princor Government Securities
Income Fund, Inc., Princor Growth Fund, Inc., Princor High Yield Fund, Inc.,
Principal International Emerging Markets Fund, Inc., Principal International
SmallCap Fund, Inc., Princor Limited Term Bond Fund, Inc., Princor Tax-Exempt
Bond Fund, Inc., Princor Tax-Exempt Cash Management Fund, Inc., Princor
Utilities Fund, Inc., Princor World Fund, Inc. and for variable annuity
contracts participating in Principal Mutual Life Insurance Company Separate
Account B, a registered unit investment trust for retirement plans adopted by
public school systems or certain tax-exempt organizations pursuant to Section
403(b) of the Internal Revenue Code, Section 457 retirement plans, Section
401(a) retirement plans, certain non- qualified deferred compensation plans and
Individual Retirement Annuity Plans adopted pursuant to Section408 of the
Internal Revenue Code, and for variable life insurance contracts issued by
Principal Mutual Life Insurance Company Variable Life Separate Account, a
registered unit investment trust.
(b) (1) (2) (3)
Positions
and offices Positions and
Name and principal with principal offices with
business address underwriter registrant
Robert W. Baehr Marketing Services None
The Principal Officer
Financial Group
Des Moines, IA 50392
Craig L. Bassett Treasurer Treasurer
The Principal
Financial Group
Des Moines, IA 50392
Michael J. Beer Senior Vice President and Vice President
The Principal Chief Operating Officer
Financial Group
Des Moines, IA 50392
Mary L. Bricker Assistant Corporate None
The Principal Secretary
Financial Group
Des Moines, IA 50392
Lynn A. Brones Vice President - None
The Principal Investment Network
Financial Group
Des Moines, IA 50392
Ray S. Crabtree Director None
The Principal
Financial Group
Des Moines, IA 50392
David J. Drury Director None
The Principal
Financial Group
Des Moines, IA 50392
Arthur S. Filean Vice President Vice President
The Principal and Secretary
Financial Group
Des Moines, IA 50392
Paul N. Germain Assistant Vice President - None
The Principal Operations
Financial Group
Des Moines, IA 50392
Michael H. Gersie Director None
The Principal
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Assistant Vice President - Assistant
The Principal Registered Products Secretary
Financial Group
Des Moines, IA 50392
William C. Gordon Insurance License Officer None
The Principal
Financial Group
Des Moines, IA 50392
Thomas J. Graf Director None
The Principal
Financial Group
Des Moines, IA 50392
J. Barry Griswell Director and Director and
The Principal Chairman of the Chairman of the
Financial Group Board Board
Des Moines, IA 50392
Joyce N. Hoffman Vice President and None
The Principal Corporate Secretary
Financial Group
Des Moines, IA 50392
Stephan L. Jones Director and Director and
The Principal President President
Financial Group
Des Moines, IA 50392
Ronald E. Keller Director Director
The Principal
Financial Group
Des Moines, IA 50392
John R. Lepley Senior Vice None
The Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392
Gregg R. Narber Director None
The Principal
Financial Group
Des Moines, IA 50392
Mark M. Oswald Compliance Officer None
The Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller - None
The Principal Mutual Funds
Financial Group
Des Moines, IA 50392
Elizabeth R. Ring Controller None
The Principal
Financial Group
Des Moines, IA 50392
Charles E. Rohm Director None
The Principal
Financial Group
Des Moines, IA 50392
Michael D. Roughton Counsel Counsel
The Principal
Financial Group
Des Moines, IA 50392
Jean B. Schustek Product Compliance Officer - None
The Principal Registered Products
Financial Group
Des Moines, IA 50392
Kyle R. Selberg Vice President-Marketing None
The Principal
Financial Group
Des Moines, IA 50392
Susan R. Sorensen Marketing Officer None
The Principal
Financial Group
Des Moines, IA 50392
Roger C. Stroud Assistant Director - None
The Principal Marketing
Financial Group
Des Moines, IA 50392
(c) Inapplicable.
Item 30. Location of Accounts and Records
All accounts, books or other documents of the Registrant are located at the
offices of the Registrant and its Investment Adviser in the Principal Mutual
Life Insurance Company home office building, The Principal Financial Group, Des
Moines, Iowa 50392.
Item 31. Management Services
Inapplicable.
Item 32. Undertakings
Indemnification
Reference is made to Item 27 above, which discusses circumstances under
which directors and officers of the Registrant shall be indemnified by the
Registrant against certain liabilities and expenses incurred by them by reason
of being a director or officer of the Registrant.
Notwithstanding the provisions of Registrant's Articles of Incorporation
and Bylaws, the Registrant hereby makes the following undertaking:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant, in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the Registrant, in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue
Shareholder Communications
Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a director or directors when
requested in writing to do so by the holders of at least 10% of the Registrant's
outstanding shares of common stock and in connection with such meeting to comply
with the provisions of Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications
Delivery of Annual Report to Shareholders
The registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant certifies that it meets all of the
requirments for effectiveness of this Registration Statement and has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Des Moines and State of
Iowa, on the 15th day of December, 1997.
Principal Government Securities Fund, Inc.
(Registrant)
By /s/ S. L. Jones
______________________________________
S. L. Jones
President and Director
Attest:
/s/ A. S. Filean
______________________________________
A. S. Filean
Vice President and Secretary
<PAGE>
Pursuant to the requirement of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
/s/ S. L. Jones
_____________________________ President and Director 12/15/97
S. L. Jones (Principal Executive Officer) __________
(J. B. Griswell)*
_____________________________ Director and 12/15/97
J. B. Griswell Chairman of the Board __________
/s/ M. J. Beer
_____________________________ Financial Officer (Principal 12/15/97
M. J. Beer Financial and Accounting Officer) __________
(J. D. Davis)*
_____________________________ Director 12/15/97
J. D. Davis __________
(R. W. Erhle)*
_____________________________ Director 12/15/97
R. W. Ehrle __________
(P. A. Ferguson)*
_____________________________ Director 12/15/97
P. A. Ferguson __________
(R. W. Gilbert)*
_____________________________ Director 12/15/97
R. W. Gilbert __________
(R. E. Keller)*
_____________________________ Director 12/15/97
R. E. Keller __________
(B. A. Lukavsky)*
_____________________________ Director 12/15/97
B. A. Lukavsky __________
(R. G. Peebler)*
_____________________________ Director 12/15/97
R. G. Peebler __________
*By /s/ S. L. Jones
_____________________________________
S. L. Jones
President and Director
Pursuant to Powers of Attorney
Previously Filed or Included
ERNST & YOUNG LLP Suite 3400 Phone: 515 243 2727
801 Grand Avenue
Des Moines, Iowa 50309-2764
Consent of Independent Auditors
The Board of Directors and Shareholders
Principal Government Securities Fund, Inc.
We consent to the reference to our firm under the captions "Financial
Highlights" and "Additional Information - Financial Statements" in each of the
Prospectuses in Part A and "Financial Statements" in Part B and to the
incorporation by reference in Part B of our report dated January 17, 1997 on the
financial statements and the financial highlights of Principal Aggressive Growth
Fund, Inc., Principal Asset Allocation Fund, Inc., Principal Balanced Fund,
Inc., Principal Bond Fund, Inc., Principal Capital Accumulation Fund, Inc.,
Principal Emerging Growth Fund, Inc., Principal Government Securities Fund,
Inc., Principal Growth Fund, Inc., Principal High Yield Fund, Inc., Principal
Money Market Fund, Inc., and Principal World Fund, Inc., in this Post Effective
Amendment No. 14 to Form N-1A Registration Statement under the Securities Act of
1933 (No. 33-10362) and this Amendment No. 14 to the Registration Statement
under the Investment Company Act of 1940 (No. 811-4916) of Principal Government
Securities Fund, Inc.
/s/ Ernst & Young LLP
Des Moines, Iowa
December 17, 1997
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
A MESSAGE FROM THE PRESIDENT
To Principal Mutual Life Insurance Company Customers
Through year-end, U.S. financial markets turned in positive results. However,
there were some bumps along the way. Mid-year, equity and fixed-income investors
experienced a rather precipitous decline fueled by mixed economic data and
concerns about rising interest rates. These fears were quelled when the Federal
Reserve met December 17 and chose to leave interest rates unchanged. As a
result, both equity and fixed-income markets ended the year well.
Through December 31, 1996, the Dow Jones Industrial Average returned 28.79% and
the Standard & Poor's 500 Index returned 22.96% (the Dow Jones Industrial
Average and the S&P 500 are unmanaged indexes comprised of common stocks. One
cannot invest directly into these or any other index). Markets outside the U.S.
showed mixed results. Included among the regions which posted strongest returns
were Europe, Asia (excluding Japan) and Latin America. Most market experts do
not expect domestic inflation rates to elevate in 1997. Assuming this proves
true, investors should continue to enjoy a relatively stable market environment
though past performance is never a guarantee of future investment results.
The Principal Mutual Funds are used exclusively as underlying investments within
several different Principal Mutual Life Insurance Company variable insurance
products. Please see your contract prospectus for a description of the Funds
specifically available in your contract.
Principal Mutual Life Insurance Company continues to seek to provide our
customers with top-level service and good quality variable annuity and variable
life contracts. We are pleased to have you as a contract owner, and look forward
to a successful 1997.
Sincerely,
/s/ Stephan L. Jones
Stephan L. Jones
President
<PAGE>
CONTENTS
Page
Financial Statements and Financial Highlights
Statements of Assets and Liabilities.......................... 2
Statements of Operations ..................................... 4
Statements of Changes in Net Assets........................... 6
Notes to Financial Statements................................. 10
Schedules of Investments
Principal Aggressive Growth Fund, Inc..................... 18
Principal Asset Allocation Fund, Inc...................... 19
Principal Balanced Fund, Inc.............................. 26
Principal Bond Fund, Inc.................................. 29
Principal Capital Accumulation Fund, Inc.................. 31
Principal Emerging Growth Fund, Inc....................... 33
Principal Government Securities Fund, Inc................. 36
Principal Growth Fund, Inc................................ 36
Principal High Yield Fund, Inc............................ 39
Principal Money Market Fund, Inc.......................... 40
Principal World Fund, Inc................................. 42
Financial Highlights.......................................... 46
Report of Independent Auditors................................ 52
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
STATEMENTS OF ASSETS AND LIABILITIES
Principal Principal
Aggressive Asset Principal Principal
Growth Allocation Balanced Bond
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C> <C>
Investment in securities -- at cost................... $78,439,912 $55,636,193 $84,420,596 $61,453,159
Assets
Investment in securities -- at value (Note 4)......... $86,237,711 $59,227,847 $93,206,906 $62,634,312
Cash ................................................. 4,786,330 4,571,515 10,351 81,407
Receivables:
Dividends and interest........................... 188,774 317,109 751,024 1,223,103
Investment securities sold....................... 179,111 134,816 -- --
Capital Stock sold............................... 384,877 799 214,787 90,272
Total Assets 91,776,803 64,252,086 94,183,068 64,029,094
Liabilities
Accrued expenses...................................... 18,905 18,593 14,885 8,448
Payables:
Dividends and distributions to shareholders...... 1,582,605 2,553,927 1,008,939 633,016
Investment securities purchased.................. 69,744 48,428 -- --
Capital Stock reacquired......................... -- -- 1,575 1,069
Total Liabilities 1,671,254 2,620,948 1,025,399 642,533
Net Assets Applicable to Outstanding Shares ....... $90,105,549 $61,631,138 $93,157,669 $63,386,561
Capital Stock (par value: $.01 a share)
Shares authorized..................................... 100,000,000 100,000,000 100,000,000 100,000,000
Shares issued and outstanding......................... 6,204,681 5,369,370 6,452,156 5,596,601
Net Asset Value Per Share .......................... $14.52 $11.48 $14.44 $11.33
Net Assets Consist of:
Capital Stock......................................... $ 62,047 $ 53,693 $ 64,522 $ 55,966
Additional paid-in capital............................ 79,340,934 56,841,171 84,240,355 62,384,524
Accumulated undistributed net investment income....... 4,793 18,594 23,644 36,471
Accumulated undistributed net realized
gain (loss) from:
Investment transactions ......................... 2,899,976 1,126,026 42,838 (271,553)
Foreign currency transactions.................... -- -- -- --
Net unrealized appreciation of investments............ 7,797,799 3,591,654 8,786,310 1,181,153
Net unrealized appreciation on translation
of assets and liabilities in foreign currencies.. -- -- -- --
Total Net Assets $90,105,549 $61,631,138 $93,157,669 $63,386,561
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
STATEMENTS OF ASSETS AND LIABILITIES
Principal Principal Principal
Capital Emerging Government Principal
Accumulation Growth Securities Growth
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C> <C>
Investment in securities -- at cost................... $174,212,683 $109,056,629 $84,463,498 $86,112,332
Assets
Investment in securities -- at value (Note 4)......... $206,483,512 $136,886,546 $85,325,737 $98,944,796
Cash ................................................. 10,932 16,620 2,332 36,055
Receivables:
Dividends and interest........................... 340,103 99,086 813,492 116,039
Investment securities sold....................... -- -- -- --
Capital Stock sold............................... 484,518 199,597 6,295 543,229
Total Assets 207,319,065 137,201,849 86,147,856 99,640,119
Liabilities
Accrued expenses...................................... 21,554 20,199 11,346 12,189
Payables:
Dividends and distributions to shareholders...... 154,951 20,592 54,266 15,763
Investment securities purchased.................. 2,124,032 -- 981,875 --
Capital Stock reacquired......................... -- 177 511 257
Total Liabilities 2,300,537 40,968 1,047,998 28,209
Net Assets Applicable to Outstanding Shares ....... $205,018,528 $137,160,881 $85,099,858 $99,611,910
Capital Stock (par value: $.01 a share)
Shares authorized..................................... 100,000,000 100,000,000 100,000,000 100,000,000
Shares issued and outstanding......................... 6,869,636 4,611,789 8,255,462 7,222,342
Net Asset Value Per Share .......................... $29.84 $29.74 $10.31 $13.79
Net Assets Consist of:
Capital Stock......................................... $ 68,696$ 46,118 $ 82,555 $ 72,223
Additional paid-in capital............................ 165,254,680 108,816,480 84,726,691 86,696,904
Accumulated undistributed net investment income....... 35,319 13,018 45,745 7,936
Accumulated undistributed net realized
gain (loss) from:
Investment transactions ......................... 7,389,004 455,348 (617,372) 2,383
Foreign currency transactions.................... -- -- -- --
Net unrealized appreciation of investments............ 32,270,829 27,829,917 862,239 12,832,464
Net unrealized appreciation on translation
of assets and liabilities in foreign currencies.. -- -- -- --
Total Net Assets $205,018,528 $137,160,881 $85,099,858 $99,611,910
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
STATEMENT OF NET ASSETS
Principal Principal
High Money Principal
Yield Market World
Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Investment in securities -- at cost................... $12,972,448 $46,091,909 $60,080,919
Assets
Investment in securities -- at value (Note 4)......... $13,432,735 $46,091,909 $71,842,712
Cash ................................................. 19,746 50,823 49,386
Receivables:
Dividends and interest........................... 291,159 135,595 144,486
Investment securities sold....................... -- -- --
Capital Stock sold............................... 243 229,207 57,322
Total Assets 13,743,883 46,507,534 72,093,906
Liabilities
Accrued expenses...................................... 3,540 9,317 33,160
Payables:
Dividends and distributions to shareholders...... -- -- 27,452
Investment securities purchased.................. -- -- 351,045
Capital Stock reacquired......................... -- 253,968 234
Total Liabilities 3,540 263,285 411,891
Net Assets Applicable to Outstanding Shares ....... $13,740,343 $46,244,249 $71,682,015
Capital Stock (par value: $.01 a share)
Shares authorized..................................... 100,000,000 500,000,000 100,000,000
Shares issued and outstanding......................... 1,575,423 46,244,249 5,503,994
Net Asset Value Per Share .......................... $8.72 $1.000 $13.02
Net Assets Consist of:
Capital Stock......................................... $ 15,754 $ 462,443 $ 55,040
Additional paid-in capital............................ 14,248,237 45,781,806 59,603,313
Accumulated undistributed net investment income....... 11,449 -- 24,004
Accumulated undistributed net realized
gain (loss) from:
Investment transactions ......................... (995,384) -- 246,459
Foreign currency transactions.................... -- -- (9,568)
Net unrealized appreciation of investments............ 460,287 -- 11,761,793
Net unrealized appreciation on translation
of assets and liabilities in foreign currencies.. -- -- 974
Total Net Assets $13,740,343 $46,244,249 $71,682,015
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
STATEMENTS OF OPERATIONS
Principal Principal
Aggressive Asset Principal Principal
Growth Allocation Balanced Bond
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
Income:
<S> <C> <C> <C> <C>
Dividends................................ $ 930,715 $ 753,540 $ 934,378 $ --
Less: Withholding tax on foreign dividends -- -- -- --
Interest................................. 237,430 1,547,262 1,923,042 3,923,811
Total Income 1,168,145 2,300,802 2,857,420 3,923,811
Expenses:
Management and investment advisory
fees (Note 3)........................ 491,699 425,427 420,010 260,242
Custodian fees........................... 20,187 29,779 11,314 5,711
Directors' fees.......................... 7,904 7,930 7,927 7,830
Other.................................... 1,331 1,332 1,502 1,327
Total Expenses 521,121 464,468 440,753 275,110
Net Investment Income 647,024 1,836,334 2,416,667 3,648,701
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Net
realized gain (loss) from:
Investment transactions.................. 10,016,661 4,149,766 4,291,386 24,994
Foreign currency transactions............ -- -- -- --
Net increase (decrease) in unrealized
appreciation/depreciation on:
Investments ............................. 5,099,753 715,006 3,030,866 (1,454,206)
Translation of assets and liabilities in
foreign currencies.................. -- -- -- --
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency 15,116,414 4,864,772 7,322,252 (1,429,212)
Net Increase in Net Assets
Resulting from Operations $15,763,438 $6,701,106 $9,738,919 $2,219,489
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
STATEMENTS OF OPERATIONS
Principal Principal Principal
Capital Emerging Government Principal
Accumulation Growth Securities Growth
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
Income:
<S> <C> <C> <C> <C>
Dividends................................ $ 4,025,859 $ 754,816 $ -- $ 971,440
Less: Withholding tax on foreign dividends -- -- -- --
Interest................................. 324,117 879,048 5,055,471 556,688
Total Income 4,349,976 1,633,864 5,055,471 1,528,128
Expenses:
Management and investment advisory
fees (Note 3)........................ 816,437 606,697 360,968 357,833
Custodian fees........................... 6,391 8,735 7,542 4,742
Directors' fees.......................... 7,877 7,905 7,887 7,602
Other.................................... 1,376 1,550 1,351 1,276
Total Expenses 832,081 624,887 377,748 371,453
Net Investment Income 3,517,895 1,008,977 4,677,723 1,156,675
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Net
realized gain (loss) from:
Investment transactions.................. 26,628,772 1,954,051 98,466 242,899
Foreign currency transactions............ -- -- -- --
Net increase (decrease) in unrealized
appreciation/depreciation on:
Investments ............................. 6,846,493 15,461,368 (1,337,219) 7,550,339
Translation of assets and liabilities in
foreign currencies.................. -- -- -- --
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency 33,475,265 17,415,419 (1,238,753) 7,793,238
Net Increase in Net Assets
Resulting from Operations $36,993,160 $18,424,396 $ 3,438,970 $8,949,913
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
STATEMENTS OF OPERATIONS
Principal Principal
High Money Principal
Yield Market World
Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
Income:
<S> <C> <C> <C>
Dividends................................ $ -- $ -- $ 1,385,001
Less: Withholding tax on foreign dividends -- -- (169,435)
Interest................................. 1,241,012 2,321,335 381,561
Total Income 1,241,012 2,321,335 1,597,127
Expenses:
Management and investment advisory
fees (Note 3)........................ 75,111 208,822 376,123
Custodian fees........................... 3,517 13,843 65,966
Directors' fees.......................... 7,851 8,091 7,915
Other.................................... 1,332 1,490 1,357
Total Expenses 87,811 232,246 451,361
Net Investment Income 1,153,201 2,089,089 1,145,766
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Net
realized gain (loss) from:
Investment transactions.................. 210,672 -- 875,641
Foreign currency transactions............ -- -- (9,568)
Net increase (decrease) in unrealized
appreciation/depreciation on:
Investments ............................. 218,620 -- 9,714,799
Translation of assets and liabilities in
foreign currencies.................. -- -- 495
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency 429,292 -- 10,581,367
Net Increase in Net Assets
Resulting from Operations $1,582,493 $2,089,089 $11,727,133
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal
Aggressive Growth Asset Allocation
Fund, Inc. Fund, Inc.
1996 1995 1996 1995
Operations
<S> <C> <C> <C> <C>
Net investment income....................... $ 647,024 $ 302,552 $ 1,836,334 $ 1,387,625
Net realized gain (loss) from
investment transactions 10,016,661 4,905,174 4,149,766 1,628,048
Net increase (decrease) in unrealized appreciation/
depreciation on investments and translation of
assets and liabilities in foreign currencies 5,099,753 2,660,711 715,006 3,340,632
Net Increase in Net Assets
Resulting from Operations 15,763,438 7,868,437 6,701,106 6,356,305
Dividends and Distributions to Shareholders
From net investment income.................. (642,821) (305,795) (1,837,566) (1,398,405)
From net realized gain on investments and foreign
currency transactions................. (8,672,973) (3,377,897) (3,447,188) (1,026,374)
(9,315,794) (3,683,692) (5,284,754) (2,424,779)
Capital Share Transactions (Note 5)
Shares sold................................. 54,678,368 14,807,229 20,370,526 7,552,421
Shares issued in reinvestment of dividends
and distributions...................... 7,733,190 3,683,692 2,730,827 2,424,779
Shares redeemed............................. (12,396,594) (2,803,211) (3,960,605) (875,745)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 50,014,964 15,687,710 19,140,748 9,101,455
Total Increase 56,462,608 19,872,455 20,557,100 13,032,981
Net Assets
Beginning of period......................... 33,642,941 13,770,486 41,074,038 28,041,057
End of period (including undistributed net
investment income as set forth below).. $90,105,549 $33,642,941 $61,631,138 $41,074,038
Undistributed Net Investment Income......... $ 4,793 $ 3,483 $ 18,594 $ 19,826
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal
Balanced Bond
Fund, Inc. Fund, Inc.
1996 1995 1996 1995
Operations
<S> <C> <C> <C> <C>
Net investment income....................... $ 2,416,667 $ 1,419,736 $ 3,648,701 $ 1,790,567
Net realized gain (loss) from
investment transactions 4,291,386 1,509,204 24,994 (178,683)
Net increase (decrease) in unrealized appreciation/
depreciation on investments and translation of
assets and liabilities in foreign currencies 3,030,866 4,627,533 (1,454,206) 3,151,543
Net Increase in Net Assets
Resulting from Operations 9,738,919 7,556,473 2,219,489 4,763,427
Dividends and Distributions to Shareholders
From net investment income.................. (2,404,163) (1,419,914) (3,612,230) (1,807,251)
From net realized gain on investments and foreign
currency transactions................. (5,078,241) (1,126,793) -- --
(7,482,404) (2,546,707) (3,612,230) (1,807,251)
Capital Share Transactions (Note 5)
Shares sold................................. 51,227,505 18,469,155 38,212,107 15,942,301
Shares issued in reinvestment of dividends
and distributions...................... 6,103,434 1,530,787 2,979,214 1,815,744
Shares redeemed............................. (11,833,111) (4,649,589) (12,289,678) (1,944,884)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 45,497,828 15,350,353 28,901,643 15,813,161
Total Increase 47,754,343 20,360,119 27,508,902 18,769,337
Net Assets
Beginning of period......................... 45,403,326 25,043,207 35,877,659 17,108,322
End of period (including undistributed net
investment income as set forth below).. $ 93,157,669 $45,403,326 $ 63,386,561 $35,877,659
Undistributed Net Investment Income......... $ 23,644 $ 11,765 $ 36,471 $ --
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal
Capital Accumulation
Fund, Inc.
1996 1995
Operations
<S> <C> <C>
Net investment income....................... $ 3,517,895 $ 2,706,864
Net realized gain (loss) from
investment transactions 26,628,772 11,294,865
Net increase (decrease) in unrealized appreciation/
depreciation on investments and translation of
assets and liabilities in foreign currencies 6,846,493 19,225,574
Net Increase in Net Assets
Resulting from Operations 36,993,160 33,227,303
Dividends and Distributions to Shareholders
From net investment income.................. (3,541,996) (2,707,756)
From net realized gain on investments and foreign
currency transactions................. (22,300,640) (10,552,706)
(25,842,636) (13,260,462)
Capital Share Transactions (Note 5)
Shares sold................................. 81,833,141 38,113,651
Shares issued in reinvestment of dividends
and distributions...................... 25,659,931 13,137,194
Shares redeemed............................. (49,264,748) (56,149,805)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 58,228,324 (4,898,960)
Total Increase 69,378,848 15,067,881
Net Assets
Beginning of period......................... 135,639,680 120,571,799
End of period (including undistributed net
investment income as set forth below).. $205,018,528 $135,639,680
Undistributed Net Investment Income......... $ 35,319 $ 59,420
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal
Emerging Growth Government Securities
Fund, Inc. Fund, Inc.
1996 1995 1996 1995
Operations
<S> <C> <C> <C> <C>
Net investment income........................................ $ 1,008,977 $ 502,095 $ 4,677,723 $ 2,727,198
Net realized gain (loss) from investment transactions........ 1,954,051 1,202,668 98,466 (41,117)
Net realized (loss) from foreign currency transactions....... -- -- -- --
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and
liabilities in foreign currencies....................... 15,461,368 8,417,614 (1,337,219) 4,199,844
Net Increase in Net Assets Resulting from Operations 18,424,396 10,122,377 3,438,970 6,885,925
Dividends and Distributions to Shareholders
From net investment income................................... (1,000,544) (496,559) (4,644,240) (2,764,369)
Excess distribution of net investment income (Note 1)........ -- -- -- --
From net realized gain on investments
and foreign currency transactions (2,245,806) (473,643) -- --
(3,246,350) (970,202) (4,644,240) (2,764,369)
Capital Share Transactions (Note 5)
Shares sold.................................................. 78,710,392 33,010,562 47,002,706 24,755,653
Shares issued in reinvestment of dividends
and distributions....................................... 3,177,572 825,122 4,589,974 2,708,209
Shares redeemed.............................................. (18,425,569) (8,379,384) (15,367,021) (17,627,312)
Net Increase in Net Assets from
Capital Shares Transactions 63,462,395 25,456,300 36,225,659 9,836,550
Total Increase 78,640,441 34,608,475 35,020,389 13,958,106
Net Assets
Beginning of period.......................................... 58,520,440 23,911,965 50,079,469 36,121,363
End of period (including undistributed (overdistributed) net
investment income as set forth below)................... $137,160,881 $58,520,440 $ 85,099,858 $50,079,469
Undistributed (Overdistributed) Net Investment Income........ $ 13,018 $ 6,354 $ 45,745 $ 16,895
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal
Growth High Yield
Fund, Inc. Fund, Inc.
1996 1995 1996 1995
Operations
<S> <C> <C> <C> <C>
Net investment income........................................ $ 1,156,675 $ 572,297 $ 1,153,201 $ 976,414
Net realized gain (loss) from investment transactions........ 242,899 298,608 210,672 (49,300)
Net realized (loss) from foreign currency transactions....... -- -- -- --
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and
liabilities in foreign currencies....................... 7,550,339 5,280,826 218,620 664,483
Net Increase in Net Assets Resulting from Operations 8,949,913 6,151,731 1,582,493 1,591,597
Dividends and Distributions to Shareholders
From net investment income................................... (1,148,740) (566,536) (1,116,648) (991,915)
Excess distribution of net investment income (Note 1)........ -- -- -- (25,104)
From net realized gain on investments
and foreign currency transactions (240,516) (294,742) -- --
(1,389,256) (861,278) (1,116,648) (1,017,019)
Capital Share Transactions (Note 5)
Shares sold.................................................. 55,634,083 29,355,706 437,560 673,188
Shares issued in reinvestment of dividends
and distributions....................................... 1,373,493 753,669 1,116,648 1,017,019
Shares redeemed.............................................. (7,663,844) (5,778,425) (109,643) (131,664)
Net Increase in Net Assets from
Capital Shares Transactions 49,343,732 24,330,950 1,444,565 1,558,543
Total Increase 56,904,389 29,621,403 1,910,410 2,133,121
Net Assets
Beginning of period.......................................... 42,707,521 13,086,118 11,829,933 9,696,812
End of period (including undistributed (overdistributed) net
investment income as set forth below)................... $99,611,910 $42,707,521 $13,740,343 $11,829,933
Undistributed (Overdistributed) Net Investment Income........ $ 7,936 $ 5,761 $ 11,449 $ (25,104)
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal
Money Market World
Fund, Inc. Fund, Inc.
1996 1995 1996 1995
Operations
<S> <C> <C> <C> <C>
Net investment income........................................ $ 2,089,089 $ 1,502,142 $ 1,145,766 $ 519,182
Net realized gain (loss) from investment transactions........ -- -- 875,641 174,169
Net realized (loss) from foreign currency transactions....... -- -- (9,568) (5,526)
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and
liabilities in foreign currencies....................... -- -- 9,715,294 2,574,265
Net Increase in Net Assets Resulting from Operations 2,089,089 1,502,142 11,727,133 3,262,090
Dividends and Distributions to Shareholders
From net investment income................................... (2,089,089) (1,502,142) (1,149,902) (506,808)
Excess distribution of net investment income (Note 1)........ -- -- -- --
From net realized gain on investments
and foreign currency transactions -- -- (750,235) (23,834)
(2,089,089) (1,502,142) (1,900,137) (530,642)
Capital Share Transactions (Note 5)
Shares sold.................................................. 119,544,896 94,151,329 38,889,383 15,630,379
Shares issued in reinvestment of dividends
and distributions....................................... 1,914,643 1,130,170 1,849,921 530,642
Shares redeemed.............................................. (107,885,209) (91,983,464) (9,449,905) (2,072,943)
Net Increase in Net Assets from
Capital Shares Transactions 13,574,330 3,298,035 31,289,399 14,088,078
Total Increase 13,574,330 3,298,035 41,116,395 16,819,526
Net Assets
Beginning of period.......................................... 32,669,919 29,371,884 30,565,620 13,746,094
End of period (including undistributed (overdistributed) net
investment income as set forth below)................... $ 46,244,249 $32,669,919 $71,682,015 $30,565,620
Undistributed (Overdistributed) Net Investment Income........ $ -- $ -- $ 24,004 $ 12,505
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
December 31, 1996
NOTES TO FINANCIAL STATEMENTS
Principal Aggressive Growth Fund, Inc.
Principal Asset Allocation Fund, Inc.
Principal Balanced Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Accumulation Fund, Inc.
Principal Emerging Growth Fund, Inc.
Principal Government Securities Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal Money Market Fund, Inc.
Principal World Fund, Inc.
Note 1 -- Significant Accounting Policies
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund, Inc.,
Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal High
Yield Fund, Inc., Principal Money Market Fund, Inc. and Principal World Fund,
Inc. (the "Funds") are registered under the Investment Company Act of 1940, as
amended, as open-end diversified management investment companies and operate in
the mutual fund industry.
Principal Money Market Fund, Inc. values its securities at amortized cost, which
approximates market. Under the amortized cost method, a security is valued by
applying a constant amortization to maturity of the difference between the
principal amount due at maturity and the cost of the security to the fund.
The other funds value securities for which market quotations are readily
available at market value, which is determined using the last reported sale
price or, if no sales are reported, as is regularly the case for some securities
traded over-the-counter, the last reported bid price. When reliable market
quotations are not considered to be readily available, which may be the case,
for example, with respect to certain debt securities and preferred stocks, the
investments are valued by using market quotations, prices provided by market
makers or estimates of market values obtained from yield data and other factors
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by each fund's Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market.
With respect to Principal World Fund, Inc., the value of foreign securities in
foreign currency amounts is expressed in U.S. dollars at the closing daily rate
of exchange. The identified cost of the portfolio holdings is translated at
approximate rates prevailing when acquired. Income and expense amounts are
translated at approximate rates prevailing when received or paid, with daily
accruals of such amounts reported at approximate rates prevailing at the date of
valuation.
Since the carrying amount of the foreign securities in the Principal World Fund,
Inc. is determined based on the exchange rate and market values at the close of
the period, it is not practicable to isolate that portion of the results of
operations arising as a result of changes in the foreign exchange rates from the
fluctuations arising from changes in the market prices of securities during the
period.
The Funds record investment transactions generally one day after the trade date.
The identified cost basis has been used in determining the net realized gain or
loss from investment transactions and unrealized appreciation or depreciation of
investments. The Funds record dividend income on the ex-dividend date, except
dividend income from foreign securities whereby the ex-dividend date has passed;
such dividends are recorded as soon as the Funds are informed of the ex-dividend
date. Interest income is recognized on an accrual basis.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amount of dividends and foreign withholding taxes recorded on the fund's books
and the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value of
assets and liabilities other than investments in securities at fiscal year end,
resulting from changes in the exchange rate.
With respect to Principal Money Market Fund, Inc., all net investment income and
any realized gains and losses from investment transactions are declared as
dividends daily to shareholders of record as of that day. Dividends and
distributions to shareholders of the other funds are recorded on the ex-dividend
date.
Dividends and distributions to shareholders from net investment income and net
realized gain from investment and foreign currency transactions are determined
in accordance with federal income tax regulations, which may differ from
generally accepted accounting principles. To the extent these "book/tax"
differences are permanent in nature (i.e. that they result from other than
timing of recognition - "temporary"), such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Reclassifications made for the
years ended December 31, 1996 and 1995 were not material.
Due to the timing of dividend distributions and the differences in accounting
for income and realized gains (losses) for financial statement and federal
income tax purposes, the fiscal year in which amounts are distributed may differ
from the year in which the income and realized gains (losses) are recorded for
financial statement purposes by the fund. The differences between the income and
gains distributed on a book versus tax basis are shown as excess distributions
of net investment income and net realized gain on investments in the
accompanying Statements of Changes in Net Assets.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 -- Federal Income Taxes
No provision for federal income taxes is considered necessary because each fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year, substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments is
approximately the same for both federal income tax and financial reporting
purposes.
At December 31, 1996, Principal Bond Fund, Inc. had a net capital loss
carryforward of approximately $272,000 expiring in 2002 and 2003. Principal
Government Securities Fund, Inc. had a net capital loss carryforward of
approximately $617,000 expiring in 2002 and 2003. Principal High Yield Fund,
Inc. had a net capital loss carryforward of approximately $995,000 expiring in
1999 through 2003.
Note 3 -- Management Agreement and Transactions With Affiliates
The Funds have agreed to pay investment advisory and management fees to Princor
Management Corporation (wholly owned by Princor Financial Services Corporation,
a subsidiary of Principal Mutual Life Insurance Company) (the "Manager"),
computed at an annual percentage rate of each fund's average daily net assets.
The annual rate used in this calculation for Principal Bond Fund, Inc.,
Principal Capital Accumulation Fund, Inc., Principal Government Securities Fund,
Inc., Principal Growth Fund, Inc. and Principal Money Market Fund, Inc. is .50%
of the first $100 million of the fund's average daily net assets, .45% of the
next $100 million of the fund's average daily net assets and .40% of the next
$100 million of the fund's average daily net assets. The annual rate used in
this calculation for Principal Asset Allocation Fund, Inc. and Principal
Aggressive Growth Fund, Inc. is .80% of the first $100 million of the fund's
average daily net assets. With respect to Principal Balanced Fund, Inc. and
Principal High Yield Fund, Inc., the annual rate used is .60% of the first $100
million of the fund's average daily net assets. With respect to Principal
Emerging Growth Fund, Inc. the annual rate used is .65% of the first $100
million of the fund's average daily net assets and .60% of the next $100 million
of the fund's average daily net assets. With respect to Principal World Fund,
Inc., the annual rate used is .75%, of the first $100 million of the fund's
average daily net assets.
Brokerage commissions were paid to affiliates by certain of the funds, as
follows:
Year Ended Year Ended
December 31, December 31,
1996 1995
Principal Balanced Fund, Inc. $ 1,300 $ 219
Principal Capital Accumulation
Fund, Inc. 10,262 3,885
Principal Emerging Growth
Fund, Inc. -- 910
Principal Growth Fund, Inc. 438 4,252
Principal World Fund, Inc. 3,176 2,207
All of the shares of the Funds are owned by Principal Mutual Life Insurance
Company and/or one or more Separate Accounts sponsored by Principal Mutual Life
Insurance Company.
Note 4 -- Investment Transactions
For the year ended December 31, 1996, the cost of investment securities
purchased and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the Funds were as follows:
Purchases Sales
Principal Aggressive Growth Fund, Inc. $133,717,949 $93,952,732
Principal Asset Allocation Fund, Inc. 65,579,307 48,240,538
Principal Balanced Fund, Inc. 37,879,789 13,472,831
Principal Bond Fund, Inc. 29,553,087 573,288
Principal Capital Accumulation Fund, Inc. 115,353,668 79,662,349
Principal Emerging Growth Fund, Inc. 61,139,785 7,036,586
Principal Government Securities Fund, Inc. 22,704,172 3,422,418
Principal Growth Fund, Inc. 45,840,119 1,232,775
Principal High Yield Fund, Inc. 4,387,611 3,785,289
Principal World Fund, Inc. 35,669,393 5,508,800
At December 31, 1996, net unrealized appreciation of investments held by the
Funds was composed of the following:
<TABLE>
<CAPTION>
Gross Unrealized Net Unrealized
------------------------------------ Appreciation
Appreciation (Depreciation) of Investments
<S> <C> <C> <C>
Principal Aggressive Growth Fund, Inc. $ 9,867,696 $ (2,069,897) $ 7,797,799
Principal Asset Allocation Fund, Inc. 5,545,004 (1,953,350) 3,591,654
Principal Balanced Fund, Inc. 10,173,472 (1,387,162) 8,786,310
Principal Bond Fund, Inc. 1,802,455 (621,302) 1,181,153
Principal Capital Accumulation Fund, Inc. 36,534,795 (4,263,966) 32,270,829
Principal Emerging Growth Fund, Inc. 32,122,187 (4,292,270) 27,829,917
Principal Government Securities Fund, Inc. 1,617,334 (755,095) 862,239
Principal Growth Fund, Inc. 17,905,917 (5,073,453) 12,832,464
Principal High Yield Fund, Inc. 518,776 (58,489) 460,287
Principal World Fund, Inc. 13,790,582 (2,028,789) 11,761,793
</TABLE>
Principal Government Securities Fund, Inc. may trade portfolio securities on a
"to-be-announced" (TBA) basis. In a TBA transaction, the fund commits to
purchase or sell securities for which all specific information is not known at
the time of the trade. Securities purchased on a TBA basis are not settled until
they are delivered to the fund, normally 15 to 30 days later. These transactions
are subject to market fluctuations and their current value is determined in the
same manner as for other portfolio securities. As of December 31, 1996, TBA
purchase commitments involved securities with a face amount of $1,000,000, cost
of $981,875 and market value of $978,180. Principal Government Securities Fund,
Inc. has set aside investment securities and other assets in excess of the
commitments to serve as collateral.
At December 31, 1996, Principal Asset Allocation Fund, Inc., Principal Balanced
Fund, Inc., Principal Emerging Growth Fund, Inc., Principal High Yield Fund,
Inc. and Principal World Fund, Inc. held the following securities which may
require registration under the Securities Act of 1933 or an exemption therefrom
in order to effect a sale in the ordinary course of business.
<TABLE>
<CAPTION>
Value at Value as a
Date of Dec. 31, Percentage of
Fund Security Description Acquisition Cost 1996 Net Assets
<S> <C> <C> <C> <C> <C>
Principal Asset Alps 96 1 PT; Pass Through 5/22/96 $ 74,973 $ 77,754 .13%
Allocation Fund, Inc. Certificates
Brooks Fiber Properties; Step-Up
Senior Discount Notes 11/1/96 39,393 44,625 .08%
CIA Brasilia De Distribuicao; 5/30/96 48,825 55,192 .09%
GDR 5/31/96 49,987 57,418 .10%
7/17/96 42,550 40,949 .07%
Centrais Electricas De
Santa Catarin ADR 10/4/96 18,296 19,215 .03%
Cole National Group, Inc.; 11/13/96 29,775 30,900 .05%
Senior Subordinated Notes 11/14/96 24,969 25,750 .04%
First Nationwide 9/13/96 25,000 27,000 .05%
Fomento Economico Mexicano 5/30/96 100,040 111,664 .19%
5/31/96 90,900 102,132 .17%
Globo Communicacoes Part.
Notes 12/10/96 39,776 40,150 .07%
Grupo Financiero Bancomer 5/30/96 99,375 84,832 .14%
SA, ADR 5/31/96 93,125 80,030 .14%
International Home Foods;
Senior Subordinated Notes 10/29/96 30,000 31,200 .05%
Israel Electric Corp.; Senior
Notes 12/11/96 249,525 249,615 .42%
Maxxam Group Holdings, Inc.;
Senior Notes 12/18/96 40,000 40,500 .07%
Netsat Servicos LTDA; Senior 7/26/96 40,000 41,950 .07%
Notes 12/2/96 10,525 10,487 .02%
Paging Network, Inc.; Senior
Subordinated Notes 10/10/96 60,000 60,525 .10%
Parker Drilling Company; Senior 11/5/96 10,038 10,525 .02%
Notes 11/5/96 19,843 21,050 .04%
PTTEP International, Ltd.;
Yankee Dollar Notes 11/8/96 259,810 256,425 .43%
Tevecap SA; Senior Notes 11/21/96 50,000 51,125 .09%
U.S. Can Corp; Senior
Subordinated Notes 10/10/96 15,000 15,750 .03%
12/02/96 15,788 15,750 .03%
1,602,513 2.72%
<CAPTION>
Value at Value as a
Date of Dec. 31, Percentage of
Fund Security Description Acquisition Cost 1996 Net Assets
Principal Balanced Federal-Mogul Corp.; Series D
<S> <C> <C> <C> <C>
Fund, Inc. Convertible 10/15/92 $248,325 $ 260,150 .28%
Principal Emerging Ciba-Geigy Corp.; Exchangeable
Growth Fund, Inc. Subordinated Debentures 3/20/91 150,000 150,000 .11%
Sierra On Line; Convertible
Subordinated Debentures 8/17/94 100,375 345,125 .25%
495,125 .36%
Principal High Yield Cole National Group, Inc.;
Fund, Inc. Senior Subordinated Notes 11/13/96 198,500 206,000 1.50%
Euramax International PLC;
Senior Subordinated Notes 9/18/96 50,000 51,625 .38%
Motors & Gears, Inc.; Series A
Senior Notes 11/1/96 200,000 207,000 1.51%
Parker Drilling Co.; Senior Notes 11/5/96 99,215 105,250 .77%
956,125 4.16%
Principal World Alfa SA; Convertible 9/25/95 398,000 438,000 .61%
Fund, Inc. Subordinated Debentures 11/20/96 329,254 328,500 .46%
Fokus Bank 6/25/96 645,965 818,135 1.14%
Hyundai Motor Co. Ltd. GDR 9/3/96 307,688 173,750 .24%
Kemira OY 12/9/96 314,077 327,185 .46%
12/10/96 131,955 133,391 .19%
12/11/96 241,385 244,131 .34%
Royal Plastics Group 6/25/96 272,357 334,757 .47%
7/2/96 91,512 110,969 .15%
Voest-Alpine Stahl 10/30/95 280,007 326,936 .46%
3/27/96 146,558 159,915 .22%
6/25/96 256,094 273,632 .38%
6/27/96 145,930 152,807 .21%
3,822,108 5.33%
</TABLE>
The Fund's investments are with various issuers in various industries. The
Schedules of Investments contained herein summarize concentrations of credit
risk by industry.
Note 5 -- Capital Share Transactions
Transactions in Capital Stock by fund were as follows:
<TABLE>
<CAPTION>
Principal Aggressive Principal Asset Principal Balanced
Growth Fund, Inc. Allocation Fund, Inc. Fund, Inc.
Year Ended December 31, 1996:
<S> <C> <C> <C>
Shares sold................................... 3,918,263 1,770,239 3,602,550
Shares issued in reinvestment of
dividends and distributions.................. 547,658 239,060 424,022
Shares redeemed............................... (860,656) (337,801) (825,489)
Net Increase 3,605,265 1,671,498 3,201,083
Year Ended December 31, 1995:
Shares sold................................... 1,161,931 692,541 1,392,999
Shares issued in reinvestment of
dividends and distributions.................. 287,452 219,390 115,881
Shares redeemed............................... (211,535) (78,261) (354,061)
Net Increase 1,237,848 833,670 1,154,819
<CAPTION>
Principal Principal Capital Principal Emerging
Bond Fund, Inc. Accumulation Fund, Inc. Growth Fund, Inc.
Year Ended December 31, 1996:
<S> <C> <C> <C>
Shares sold................................... 3,340,011 2,763,121 2,884,710
Shares issued in reinvestment of
dividends and distributions.................. 262,934 868,606 110,728
Shares redeemed............................... (1,065,373) (1,641,040) (693,851)
Net Increase 2,537,572 1,990,687 2,301,587
Year Ended December 31, 1995:
Shares sold................................... 1,388,036 1,462,128 1,443,488
Shares issued in reinvestment of
dividends and distributions.................. 155,537 493,432 32,984
Shares redeemed............................... (174,815) (2,220,452) (363,945)
Net Increase (Decrease) 1,368,758 (264,892) 1,112,527
<CAPTION>
Principal Government Principal Growth Principal High
Securities Fund, Inc. Fund, Inc. Yield Fund, Inc.
Year Ended December 31, 1996:
<S> <C> <C> <C>
Shares sold................................... 4,520,032 4,289,963 50,390
Shares issued in reinvestment of
dividends and distributions.................. 445,172 99,697 128,056
Shares redeemed............................... (1,457,956) (604,413) (12,523)
Net Increase 3,507,248 3,785,247 165,923
Year Ended December 31, 1995:
Shares sold................................... 2,389,165 2,597,297 77,400
Shares issued in reinvestment of
dividends and distributions.................. 258,394 61,037 121,455
Shares redeemed............................... (1,752,028) (517,157) (15,228)
Net Increase 895,531 2,141,177 183,627
<CAPTION>
Principal Money Principal World
Market Fund, Inc. Fund, Inc.
Year Ended December 31, 1996:
<S> <C> <C>
Shares sold................................... 119,544,896 3,308,501
Shares issued in reinvestment of
dividends and distributions.................. 1,914,643 144,196
Shares redeemed............................... (107,885,209) (800,955)
Net Increase 13,574,330 2,651,742
Year Ended December 31, 1995:
Shares sold................................... 94,151,329 1,566,265
Shares issued in reinvestment of
dividends and distributions.................. 1,130,170 49,808
Shares redeemed............................... (91,983,464) (202,182)
Net Increase 3,298,035 1,413,891
</TABLE>
Note 6 -- Line of Credit
The Funds have an unsecured line of credit with a bank which allows each fund to
borrow up to $500,000. Borrowings are made solely to facilitate the handling of
unusual and/or unanticipated short-term cash requirements. Interest is charged
to each fund, based on its borrowings, at a rate equal to the bank's Fed Funds
Unsecured Rate plus 100 basis points. Additionally, a commitment fee is charged
at the annual rate of .25% on the line of credit. At December 31, 1996, the
Funds had no outstanding borrowings under the line of credit.
SCHEDULES OF INVESTMENTS
PRINCIPAL AGGRESSIVE GROWTH FUND, INC.
Shares
Held Value
Common Stocks (95.71%)
Advertising (0.15%)
Catalina Marketing Corp. 2,500(a) $ 137,812
Air Transportation, Scheduled (0.67%)
AMR Corp. 6,800(a) 599,250
Aircraft & Parts (7.33%)
Allied Signal, Inc. 14,100 944,700
Boeing Co. 7,957 846,426
General Dynamics Corp. 7,400 521,700
Gulfstream Aerospace Corp. 7,000(a) 169,750
McDonnell Douglas Corp. 12,300 787,200
Rockwell International Corp. 8,800 535,700
Sunstrand Corp. 2,400 102,000
United Technologies Corp. 40,900 2,699,400
6,606,876
Bakery Products (1.09%)
Einstein/Noah Bagel Corp. 11,900(a) 354,025
Interstate Bakeries 12,700 623,888
977,913
Beverages (0.40%)
Coca-Cola Enterprises 7,500 363,750
Cigars (0.92%)
Consolidated Cigar Holdings, Inc. 33,600(a) 831,600
Congeneration -
Small Power Producer (0.49%)
AES Corp. 9,500(a) 441,750
Commercial Banks (3.91%)
Chase Manhattan Corp. 7,812 697,221
Citicorp 2,100 216,300
Wells Fargo & Co. 9,683 2,611,989
3,525,510
Communications Equipment (1.44%)
Larscom, Inc. 16,000(a) 182,000
U.S. Industries, Inc. 21,000(a) 721,875
U.S. Robotics Corp. 5,500(a) 396,000
1,299,875
Computer & Data Processing
Services (6.56%)
Adobe Systems, Inc. 9,800 366,275
First Data Corp. 13,500 492,750
GTECH Holdings Corp. 85,600(a) 2,739,200
Microsoft Corp. 12,200(a) 1,008,025
Netscape Communications 6,300(a) 358,313
Oracle Systems Corp. 11,100(a) 463,425
Sterling Commerce, Inc. 13,600(a) 479,400
5,907,388
Computer & Office Equipment (4.35%)
Cisco Systems 10,400(a) 661,700
International Business
Machines Corp. 6,300 951,300
International Game Technology 126,400 2,306,800
3,919,800
Consumer Products (13.28%)
Philip Morris Cos., Inc. 42,600 $4,797,825
RJR Nabisco 210,900 7,170,600
11,968,425
Cutlery, Handtools, & Hardware (0.98%)
Gillette Co. 11,300 878,575
Drug Stores & Proprietary Stores (0.43%)
CVS Corp. 9,300 384,787
Drugs (1.26%)
American Home Products Corp. 7,900 463,138
Pfizer, Inc. 5,800 480,675
Schering-Plough Corp. 3,000 194,250
1,138,063
Eating & Drinking Places (3.07%)
Boston Chicken, Inc. 32,600(a) 1,169,525
Brinker International, Inc. 25,200(a) 403,200
Cracker Barrel Old Country
Store, Inc. 43,600 1,106,350
Foodmaker Inc. 9,800(a) 86,975
2,766,050
Electrical Industrial Apparatus (0.47%)
Emerson Electric Co. 4,400 425,700
Electronic Components &
Accessories (1.69%)
Intel Corp. 11,600 1,518,875
Federal & Federally Sponsored
Credit (1.02%)
Student Loan Marketing Association 9,900 921,937
Fire, Marine, & Casualty
Insurance (5.95%)
Aetna, Inc. 15,300 1,224,000
Berkshire Hathaway, Inc. 44(a) 1,500,400
Cigna Corp. 2,650 362,056
Loews Corp. 24,100 2,271,425
5,357,881
Grain Mill Products (0.23%)
Ralston-Ralston Purina Group 2,800 205,450
Grocery Stores (1.68%)
Dominicks Supermarkets, Inc. 20,700(a) 450,225
Food Lion, Inc. 104,600 1,059,075
1,509,300
Hospitals (0.62%)
Columbia/HCA Healthcare Corp. 13,700 558,275
Hotels & Motels (0.71%)
Hilton Hotels Corp. 24,600 642,675
Industrial Inorganic Chemicals (1.32%)
Monsanto Co. 14,300 555,913
Olin Corp. 16,900 635,862
1,191,775
Insurance Agents, Brokers, &
Services (0.52%)
Exel Ltd. 12,300 465,862
Lumber & Other Building
Materials (0.79%)
Home Depot, Inc. 14,200 711,775
Medical Instruments &
Supplies (1.47%)
Acuson Corp. 8,900(a) 216,938
Becton, Dickinson & Co. 19,000 824,125
U.S. Surgical Corp. 7,300 287,437
1,328,500
Miscellaneous Amusement,
Recreation Service (0.44%)
Family Golf Centers, Inc. 13,100(a) 394,637
Miscellaneous Apparel &
Accessories (0.33%)
Designer Holdings, Ltd. 18,200(a) 293,475
Miscellaneous Business
Services (0.74%)
CUC International, Inc. 19,775(a) 469,656
Viad Corp. 12,100 199,650
669,306
Miscellaneous Electrical
Equipment & Supplies (0.27%)
Motorola, Inc. 4,000 245,500
Miscellaneous Food
& Kindred Products (3.87%)
Campbell Soup Co. 41,600 3,338,400
McCormick & Co. 6,200 146,088
3,484,488
Miscellaneous Investing (6.74%)
HFS, Inc. 101,600(a) 6,070,600
Miscellaneous Manufacturers (0.59%)
WMS Industries, Inc. 26,400(a) 528,000
Motion Picture Production &
Services (1.00%)
Film Roman, Inc. 11,400(a) 86,925
Viacom, Inc. 8,100(a) 282,488
Walt Disney Company 7,600 529,150
898,563
Motion Picture Theaters (0.02%)
AMC Entertainment 1,400(a) 20,125
Motor Vehicles & Equipment (0.47%)
Ford Motor Co. 13,300 423,937
Newspapers (1.00%)
Gannett Co. 5,600 419,300
Hollinger International, Inc. 17,100 196,650
New York Times Co. 7,500 285,000
900,950
Periodicals (2.75%)
K III Communications 230,100(a) 2,473,575
Personal Credit Institutions (2.07%)
American Express Co. 23,500 1,327,750
Dean Witter, Discover & Co. 8,200 543,250
1,871,000
Photographic Equipment &
Supplies (0.90%)
Eastman Kodak Co. 10,050 806,513
Plastic Materials & Synthetics (0.39%)
Hercules, Inc. 8,100 350,325
Radio & Television
Broadcasting (3.16%)
Clear Channel Communications 60,100(a) 2,171,113
Heftel Broadcasting Co. 8,200(a) 258,300
Infinity Broadcasting 12,500(a) 417,187
2,846,600
Real Estate Operators &
Lessors (0.28%)
Insignia Financial Group 11,100 249,750
Refrigeration & Service
Machinery (0.01%)
American Standard Inc. 100(a) 3,825
Retail Stores, NEC (0.95%)
PETsMART, Inc. 39,300(a) 859,687
Sanitary Services (0.50%)
WMX Technologies, Inc. 13,800 450,225
Search & Navigation
Equipment (0.58%)
Loral Space Communications 28,600(a) 525,525
Security & Commodity
Services (1.62%)
Franklin Resources, Inc. 21,400 1,463,225
Special Industry Macinery (0.27%)
Applied Materials, Inc. 6,800(a) 244,375
Surety Insurance (2.46%)
Ace Ltd. 21,500 1,292,688
The PMI Group, Inc. 16,800 930,300
2,222,988
Telephone Communication (0.80%)
Airtouch Communications, Inc. 11,300(a) 285,325
Worldcom, Inc. 16,800(a) 437,850
723,175
Tires & Inner Tubes (0.70%)
Goodyear Tire & Rubber Co. 12,300 631,913
Total Portfolio Investments (95.71%) 86,237,711
Cash and receivables, net of
liabilities (4.29%) 3,867,838
Total Net Assets (100.00%) $90,105,549
(a) Non-income producing security - No dividend paid during the past twelve
months.
PRINCIPAL ASSET ALLOCATION FUND, INC.
Shares
Held Value
Common Stocks (68.92%)
Advertising (0.03%)
Catalina Marketing Corp. 300 $ 16,537
Air Transportation, Scheduled (0.90%)
AMR Corp. 1,600(a) 141,000
British Airways PLC ADR 1,400 143,850
Cathay Pacific Airways ADR 8,500 67,033
KLM Royal Dutch Airlines 7,380 205,717
557,600
Aircraft & Parts (2.07%)
Allied Signal, Inc. 1,600 107,200
Boeing Co. 942 100,205
General Dynamics Corp. 800 56,400
Gulfstream Aerospace Corp. 2,200(a) 53,350
McDonnell Douglas Corp. 2,200 140,800
Rockwell International Corp. 2,500 152,188
Sunstrand Corp. 200 8,500
United Technologies Corp. 10,000 660,000
1,278,643
Automotive Rentals, No
Drivers (0.10%)
Ryder Systems, Inc. 2,100 59,063
Bakery Products (0.23%)
Einstein/Noah Bagel Corp. 2,200(a) 65,450
Interstate Bakeries 1,500 73,688
139,138
Beverages (1.34%)
Bass PLC ADR 5,000 138,750
CIA Cervecerias Unidas ADR 4,080 65,790
CIA Cervejaria Brahma ADR 7,750 84,728
Coca-Cola Enterprises 600 29,100
Coca-Cola Femsa S.A. ADR 2,350 67,856
Fomento Economico Mexicano 62,800(c) 213,796
Kirin Brewery 2,300 226,550
826,570
Blast Furnace & Basic Steel
Products (0.37%)
Australian National Industries 8,960 35,582
British Steel PLC ADS 3,500 96,250
Tubos De Acero De Mexico ADR 6,200(a) 98,425
230,257
Books (0.07%)
McGraw-Hill Companies, Inc. 1,000 46,125
Cable & Other Pay TV Services (0.14%)
Multicanal Participacoes ADR 6,800(a) 87,125
Chemicals & Allied Products (1.41%)
Asahi Chemical Industry Co. ADR 4,100(a) 231,722
Bayer AG Sponsored ADR 10,735 437,449
Mitsubishi Chemical Corp. 6,100 197,079
866,250
Cigars (0.30%)
Consolidated Cigar Holdings, Inc. 7,400(a) 183,150
Clay, Ceramic &
Refractory Minerals (0.08%)
English China Clays ADR 5,300 52,338
Congeneration - Small
Power Producer (0.13%)
AES Corp. 1,700(a) 79,050
Combination Utility Services (0.26%)
CIA Energetica De Minas
Cemig ADR 1,880 $ 64,048
NIPSCO Industries, Inc. 2,450 97,081
161,129
Commercial Banks (4.52%)
ABN-AMRO Holdings NV ADR 7,385 479,884
Allied Irish Banks ADR 2,900 113,825
Banco Central ADR 6,500 84,500
Bank of Boston Corp. 1,100 70,675
BankAmerica Corp. 550 54,862
Banker's Trust 950 81,937
Barclays PLC ADS 5,571 383,006
Brierly Investments Ltd. ADR 5,550 102,737
Chase Manhattan 1,940 173,145
Citicorp 600 61,800
Commerzbank AG ADR 3,600 91,337
First of America Bank Corp. 1,700 102,213
HSBC Holdings ADR 600 128,378
Mellon Bank Corp. 1,100 78,100
National Westminster ADR 1,900 132,050
PNC Financial Corp. 2,000 75,250
Wells Fargo & Co. 1,600 431,600
Westpac Banking ADR 4,900 139,650
2,784,949
Commercial Printing (0.31%)
DAI Nippon Printing Co. 1,100 192,384
Communications Equipment (0.84%)
Alcatel Alsthom ADR 4,700 75,200
Hanson PLC ADR 2,950 19,912
Harris Corp. 1,350 92,644
Larscom, Inc. 1,800(a) 20,475
Matsushita Electrical ADR 800 130,600
U.S. Industries, Inc. 3,800(a) 130,625
U.S. Robotics Corp. 700 50,400
519,856
Computer & Data Processing
Services (1.51%)
Adobe Systems, Inc. 1,200 44,850
First Data Corp. 1,600 58,400
GTECH Holdings Corp. 17,800(a) 569,600
Microsoft Corp. 1,400 115,675
Netscape Communications 700 39,812
Oracle Systems Corp. 1,250 52,188
Sterling Commerce, Inc. 1,500(a) 52,875
933,400
Computer & Office Equipment (1.61%)
Apple Computer Inc. 1,400(a) 29,225
Cisco Systems 1,200 76,350
Hitachi Ltd. ADR 2,900 268,250
International Business
Machines Corp. 1,300 196,300
International Game Technology 23,100 421,575
991,700
Concrete, Gypsum & Plaster
Products (0.30%)
Cementos De Mexico SA ADR 16,000 114,837
Italcementi Fabriche S P A ADR 13,000 72,673
187,510
Concrete Work (0.12%)
Pioneer International Ltd. ADR 25,000 74,460
Construction & Related
Machinery (0.63%)
Kajima Corp. ADR 2,900 206,875
Komatsu Ltd. ADR 1,100 180,064
386,939
Consumer Products (4.66%)
American Brands, Inc. 900 44,663
Philip Morris Cos., Inc. 9,850 1,109,356
RJR Nabisco 50,500 1,717,000
2,871,019
Crude Petroleum &
Natural Gas (0.38%)
Broken Hill Proprietary Ltd. ADR 2,200 62,150
Petrofina SA ADR 2,900 92,210
Societe Generale ADR 3,600 77,695
232,055
Cutlery, Handtools &
Hardware (0.16%)
Gillette Co. 1,300 101,075
Department Stores (0.28%)
Marui Corp. ADR 2,800 100,836
Penney (J.C.) Co. 1,500 73,125
173,961
Drug Store & Proprietary Stores (0.07%)
CVS Corp. 1,000 41,375
Drugs (1.03%)
American Home Products Corp. 800 46,900
Hafslund ADR 13,172 90,096
Novo Nordisk ADR 3,200 149,600
Nycomed 13,172 197,580
Pfizer, Inc. 700 58,013
Schering-Plough Corp. 300 19,425
Smithkline Beecham PLC ADR 1,100 74,800
636,414
Drugs, Proprietaries &
Sundries (0.26%)
Amway Japan Ltd. ADS 6,833 113,599
Grupo Casa Autrey ADR 2,500 48,750
162,349
Eating & Drinking Places (1.08%)
Boston Chicken, Inc. 5,900(a) 211,662
Brinker International, Inc. 4,200(a) 67,200
Cracker Barrel Old Country Store, Inc. 7,500 190,313
Foodmaker Inc. 1,100(a) 9,763
Host Marriott Corp. 11,600 185,600
664,538
Electric Services (1.71%)
Centrais Electricas Brasileiras S/A -
Electrobras ADR 4,300 79,867
Centrais Electricas De Santa
Catarin ADR 210(a)(c) 19,215
Centrais Electricas Brasileiras
ADR 16,800 300,723
Empresa Nacional De
Electricidad SA ADR 1,400 98,000
EVN Energie-Vansorgung Nied ADR 3,600 108,270
GPU, Inc. 2,600 87,425
National Power ADR 3,300 111,788
Northeast Utilities, Inc. 1,400 18,550
Pinnacle West Capital Corp. 2,400 76,200
Shangdong Huaneng Power
Development Ltd. ADS 8,000 $ 78,000
Texas Utilities Co. 1,800 73,350
1,051,388
Electrical Industrial Apparatus (0.08%)
Emerson Electric Co. 500 48,375
Electronic Components &
Accessories (0.91%)
Intel Corp. 2,200 288,063
Kyocera Corp. ADR 1,500 183,000
Texas Instruments 1,374 87,592
558,655
Electronic Distribution
Equipment (0.45%)
Phillips NV ADR 6,969 278,760
Family Clothing Stores (0.01%)
Stage Stores, Inc. 500(a) 9,125
Farm & Garden Machinery (0.12%)
Deere & Co. 1,800 73,125
Federal & Federally Sponsored
Credit (0.45%)
Student Loan Marketing Association
(Non-Voting) 3,000 279,375
Ferroalloy Ores, Exept Vanadium (0.27%)
Novartis A G Sponsored ADR 2,879(a) 164,405
Finance Services (0.75%)
Grupo Financiero Bancomer SA ADR 20,600(a)(c) 164,862
Nomura Sec. Co. Ltd. ADR 2,000 299,819
464,681
Fire Marine & Casualty
Insurance (2.30%)
Aetna, Inc. 2,900 232,000
Berkshire Hathaway, Inc. 10,000(a) 341,000
CIGNA Corp. 350 47,819
Loews Corp. 5,400 508,950
St. Paul Cos., Inc. 1,300 76,212
Tokio Marine & Fire Insurance ADR 4,600 214,475
1,420,456
Footwear, Except Rubber (0.23%)
Ollivetti Inc. Cos. 396,825(a) 139,603
General Industrial Machinery (0.66%)
Amer Group Ltd. ADR 5,500 56,682
S K F AB ADR 15,370 359,274
415,956
Grain Mill Products (0.35%)
Grupo Indl Maseca Sade CV ADR 9,636 184,289
Ralston-Ralston Purina Group 400 29,350
213,639
Groceries & Related Products (0.16%)
Fleming Cos., Inc. 5,550 95,738
Grocery Stores (0.71%)
Dominicks Supermarkets, Inc. 2,400(a) 52,200
Food Lion, Inc., Class B 16,900 171,113
Koninklijke Bijenkorf
Beheer NV ADR 2,400 86,371
Santa Isabella SA ADR 5,635 127,492
437,176
Holding Offices (0.59%)
Jardine Strategic Holdings Ltd.
ADR 10,000 $ 72,400
Trizec Hahn Corp. 13,134 288,948
361,348
Hospitals (0.10%)
Columbia/HCA Healthcare Corp. 1,500 61,125
Hotels & Motels (1.31%)
Bristol Hotel Co. 2,300(a) 73,025
Hilton Hotels Corp. 4,300 112,338
John Q. Hammons Hotels, Inc. 17,400(a) 147,900
Ladbroke Group ADR 37,000 146,265
Servico, Inc. 11,500(a) 185,437
Suburban Lodges of America 8,900(a) 142,400
807,365
Household Audio & Video
Equipment (0.27%)
Sony Corp. ADR 2,500 164,063
Individual & Family Services (0.01%)
Assisted Living Concepts, Inc. 600(a) 9,150
Industrial Inorganic Chemicals (0.86%)
AKZO ADR 4,283 289,103
Eastman Chemical Co. 1,050 58,012
Monsanto Co. 1,600 62,200
Olin Corp. 3,200 120,400
529,715
Industrial Organic Chemicals (0.10%)
Nova Corp. ADR 6,700 58,625
Insurance Agents, Brokers &
Services (0.09%)
EXEL Ltd. 1,400 53,025
Investment Offices (0.48%)
American General Hospitality Corp. 12,400 294,500
Iron & Steel Foundries (0.61%)
Kawasaki Steel Corp. ADR 7,900 226,647
Kubota Ltds. ADR 850 81,600
Siderar S.A.I.C. Sponsored
ADR-144A 3,000 69,132
377,379
Life Insurance (0.23%)
American General Corp. 1,700 69,487
Lincoln National 1,400 73,500
142,987
Lumber & Other Building
Materials (0.13%)
Home Depot, Inc. 1,600 80,200
Management & Public
Relations (0.13%)
Ogden Corp. 4,300 80,625
Meat Products (0.49%)
Groupe Danone 10,764 299,394
Medical Instruments &
Supplies (0.31%)
Acuson Corp. 1,000(a) $ 24,375
Baxter International, Inc. 1,500 61,500
Becton, Dickinson & Co. 1,700 73,738
U.S. Surgical Corp. 800 31,500
191,113
Metalworking Machinery (0.30%)
Makita Corp. ADR 13,000 182,000
Miscellaneous Amusement, Recreation
Service (0.11%)
Family Golf Centers, Inc. 2,200(a) 66,275
Miscellaneous Apparel &
Accessories (0.06%)
Designer Holdings, Ltd. 2,200(a) 35,475
Miscellaneous Business
Services (0.12%)
CUC International, Inc. 2,250 53,437
Viad Corp. 1,400 23,100
76,537
Miscellaneous Chemical
Products (0.01%)
Millenium Chemicals, Inc. 196(a) 3,479
Miscellaneous Converted Paper
Products (0.04%)
P. T. Inti Indorayon Utama ADR 10,000 24,531
Miscellaneous Electrical Equipment &
Supplies (0.34%)
Motorola, Inc. 400 24,550
TDK Corp. ADS 2,800 184,100
208,650
Miscellaneous Food & Kindred
Products (1.35%)
Campbell Soup Co. 8,800 706,200
McCormick & Co. 700 16,494
Nestle Reg. ADR 2,000 107,021
829,715
Miscellaneous Investing (8.83%)
Avalon Properties 3,400 97,750
Bedford Property Investors 9,800 171,500
Brandywine Realty Trust 18,000 351,000
Burnham Pacific Properties 19,400 291,000
Capstar Hotel Co. 2,400(a) 47,100
Chateau Properties 6,200 164,300
Duke Realty Investments, Inc. 4,500 173,250
East Group Properties 6,700 183,413
Essex Property Trust 7,500 220,313
Evans Withycombe Residential 1,400 29,400
Healthcare Realty Trust, Inc. 300 7,950
HFS, Inc. 21,300 1,272,675
Irvine Apartment Community 9,800 245,000
Koger Equity, Inc. 1,800(a) 33,750
LTC Properties, Inc. 3,100 57,350
Meridian Industrial Trust 13,500 283,500
Merry Land & Investment Co. 5,100 109,650
Oasis Residential, Inc. 8,400 191,100
Omega Healthcare Investors 5,600 186,200
Paragon Group, Inc. 10,800 191,700
Prentiss Property Trust 10,700 $ 267,500
ROC Communities 9,200 255,300
Shurgard Storage Center 6,300 186,637
South West Property Trust 7,300 123,187
Taubman Centers 2,300 29,612
Urban Shopping Centers 9,300 269,700
5,439,837
Miscellaneous Manufacturers (0.15%)
WMS Industries, Inc. 4,700(a) 94,000
Miscellaneous Non-Durable
Goods (0.46%)
DESC ADR 2,500 55,000
Mitsubishi Corp. ADR 11,000 227,448
282,448
Miscellaneous Special Trade
Contractors (0.17%)
Hang Lung Development Co. ADR 9,400 103,297
Motion Picture Production &
Services (0.16%)
Film Roman, Inc. 1,300(a) 9,913
Viacom, Inc.; Class B 900 31,387
Walt Disney Company 800 55,700
97,000
Motion Picture Theaters (0.01%)
AMC Entertainment 200(a) 2,875
Motor Vehicles & Equipment (1.52%)
Chrysler Corp. 2,100 69,300
Fiat SPA ADR 4,700 71,675
Ford Motor Co. 1,500 47,813
General Motors Corp. 1,400 78,050
Siderurgica Venezuelana Saica ADR 16,000 60,134
Toyota Motor Corp. ADR 8,600 494,500
Volkswagen AG ADR 1,400 116,280
937,752
Newspapers (0.16%)
Gannett Co. 600 44,925
Hollinger International, Inc. 1,800 20,700
New York Times Co. 900 34,200
99,825
Non-Classifiable
Establishments (0.11%)
Keppel Corp. Ltd. ADR 4,300 67,013
Nonresidential Building
Construction (0.03%)
Emprasas ICA Sociedad
Controladora SA ADR 1,170(a) 17,111
Ophthalmic Goods (0.14%)
Bausch & Lomb 2,450 85,750
Paper Mills (0.12%)
Willamette Ind., Inc. 1,100 76,587
Periodicals (0.86%)
K III Communications 49,200(a) 528,900
Personal Credit Institutions (0.41%)
American Express Co. 3,400 192,100
Dean Witter, Discover & Co. 900 59,625
251,725
Petroleum Refining (1.54%)
Ashland, Inc. 4,400 $ 193,050
Atlantic Richfield Co. 1,600 212,000
Exxon Corp. 2,400 235,200
Mobil Corp. 1,600 195,600
Total SA IE Francaise ADR 2,800 112,700
948,550
Photographic Equipment &
Supplies (0.93%)
Eastman Kodak Co. 1,650 132,412
Fuji Photo Film 8,800 290,400
OCE Van Der Grinten NV ADR 1,400 151,200
574,012
Plastic Materials & Synthetics (0.18%)
Hercules, Inc. 800 34,600
Shanghai Petrochemical Co. Ltd. ADR 2,600 76,375
110,975
Primary Nonferrous Metals (0.11%)
Phelps Dodge Corp. 1,050 70,875
Radio & Television
Broadcasting (1.09%)
Clear Channel Communications 11,200 404,600
Grupo Radio Centro SA ADR 1,970(a) 13,544
Grupo Televisa SA GDR 6,200(a) 158,875
Heftel Broadcasting Co. 1,600(a) 50,400
Infinity Broadcasting 1,400 46,725
674,144
Railroads (0.18%)
Nagoya Railroad Co. Ltd. 2,900 111,183
Real Estate Agents & Managers (0.11%)
Atlantic Gulf Communities Co. 15,900(a) 68,569
Real Estate Operators &
Lessors (2.36%)
Alexander Haagen Properties 11,200 165,200
Arden Realty Group, Inc. 9,400 260,850
Catellus Dev. Corp. 9,000(a) 102,375
FAC Realty, Inc. 4,200 27,825
Insignia Financial Group 1,200 27,000
IRT Property Co. 800 9,200
Nationwide Health Properties 10,700 259,475
Pacific Gulf Properties 10,400 202,800
Parkway Properties, Inc. 6,300 163,800
Sekisui House Ltd. ADR 2,300 233,824
1,452,349
Refrigeration & Service
Machinery (0.01%)
American Standard, Inc. 100(a) 3,825
Retail Stores, NEC (0.48%)
CIA Brasileira De Distribuicao GDR 8,625(a)(c) 153,559
PETsMART, Inc. 6,600 144,375
297,934
Sanitary Services (0.08%)
WMX Technologies, Inc. 1,600 52,200
Sawmills & Planning Mills (0.14%)
Louisiana Pacific Corp. 4,000 84,500
Search & Navigation
Equipment (0.18%)
Loral Space Communications 6,200 113,925
Security & Commodity
Services (0.50%)
Franklin Resources, Inc. 4,500 $ 307,687
Soap, Cleaners & Toilet Goods (0.62%)
KAO Corp. ADR 2,200 255,880
Shiseido Co. Ltd. ADR 11,000 126,992
382,872
Special Industry Machinery (0.05%)
Applied Materials, Inc. 800(a) 28,750
Subdividers & Developers (0.10%)
Singapore Land ADR 11,600 64,267
Sugar & Confectionary
Products (0.13%)
Perlis Plantations ADR 25,000 77,705
Surety Insurance (0.69%)
ACE Ltd. 4,200 252,525
The PMI Group, Inc. 3,100 171,662
424,187
Telephone Communication (3.17%)
Airtouch Communications, Inc. 1,300(a) 32,825
AT&T Corp. 2,000 87,000
BCE, Inc. 8,590 410,173
Compania Anonima Telefonos
De Venezuela ADR 5,740(a) 161,438
Sprint Corp. 1,600 63,800
Telebras GDR 18 1,377
Telecommunicacoes
Brasileiras SA ADR 5,080 388,620
Telefonica de Argentina ADR 13,050 337,669
Telefonica de Espana SA ADS 2,500 173,125
Telefonica Del Peru ADR 10,330 194,978
U.S. West Communications Group 1,700 54,825
Worldcom, Inc. 1,900 49,518
1,955,348
Tires & Inner Tubes (0.45%)
Bridgestone ADR 1,100 208,495
Goodyear Tire & Rubber Co. 1,400 71,925
280,420
Variety Stores (0.12%)
Woolworth Corp. 3,350(a) 73,281
Water Transportation of Freight,
NEC (0.18%)
Penninsular & Oriental
Steamships ADR 5,400 109,044
Total Common Stocks 42,475,414
Preferred Stock (0.39%)
Cable & Other Pay TV Services (0.09%)
TCI Pacific 580 52,998
Medical Instruments & Supplies (0.06%)
Fresenius Medical Care Cap 35(a) 35,612
Periodicals (0.24%)
Time Warner; Series M 140(a) $ 151,900
Total Preferred Stocks 240,510
Principal
Amount Value
Bonds (10.36%)
Airports, Flying Fields &
Services (0.13%)
Alps 96 1 PT
Pass Through Certificates;
12.75%; 6/15/06 $ 74,943(c) $ 77,754
Blast Furnace & Basic Steel
Products (0.03%)
Ivaco Senior Notes;
11.50%; 9/15/05 20,000 19,850
Business Credit Institutions (0.53%)
AT&T Capital Corp. Medium-Term
Notes; 5.85%; 1/5/99 330,000 329,472
Cable & Other Pay TV
Services (0.80%)
Cablevision Systems Corp.
Senior Subordinated Notes;
9.25%; 11/1/05 35,000 34,650
9.88%; 5/15/06 105,000 107,756
Comcast Corp. Senior Subordinated
Notes; 9.13%; 10/15/06 20,000 20,450
Marcus Cable Company Step-Up
Senior Discount Notes; 12/15/05 150,000(b)* 107,625
Netsat Servicos LTDA Senior Notes;
12.75%; 8/5/04 50,000(c) 52,437
Rogers Cable Systems Ltd.
Senior Notes; 10.00%; 3/15/05 100,000 106,750
TCI Communications Inc. Debentures;
7.88%; 2/15/26 75,000 64,875
494,543
Chemicals & Allied Products (0.10%)
ISP Holdings Senior Notes;
9.00%; 10/15/03 60,000 60,900
Commercial Banks (0.49%)
First Nationwide Holdings I;
9.13%; 1/15/03 35,000 35,350
First Nationwide; 10.63%; 10/1/03 25,000(c) 27,000
Nationsbank Corp. Senior Notes;
5.70%; 2/9/01 250,000 241,725
304,075
Communications Equipment (0.19%)
Globo Communicacoes Part Note;
10.50%; 12/20/06 40,000(c) 40,150
Rogers Communications, Inc.
Senior Note; 9.13%; 1/15/06 25,000 24,750
Tevecap SA Senior Notes;
12.63%; 11/26/04 50,000(c) 51,125
116,025
Communications Services, NEC (0.49%)
Dial Call Communications, Inc.
Senior Discount Notes, Series B;
12/12/05 $375,000(b) $ 249,375
IXC Communications, Inc. Note;
12/50%; 10/1/05 50,000 55,000
304,375
Computer & Office Equipment (0.03%)
Quest Diagnostic Senior
Subordinated Notes;
10.75%; 12/15/06 20,000 21,000
Crude Petroleum & Natural
Gas (0.21%)
Flores & Rucks Senior Subordinate
Notes; 9.75%; 10/1/06 50,000 52,875
Nuevo Energy Co. Senior
Subordinated Notes;
9.50%; 4/15/06 70,000 74,200
127,075
Electric Services (0.12%)
Midland Cogeneration Debentures;
10.33%; 7/23/02 7,204 7,673
Midland Cogent Debentures;
10.33%; 7/23/02 42,670 45,444
Midland Funding II Notes;
11.75%; 7/23/05 20,000 22,400
75,517
Electronic Components &
Accessories (0.17%)
Advanced Micro Devices, Inc.
Senior Secured Notes;
11.00%; 8/1/03 70,000 75,950
Digital Equipment Debenture Notes;
8.63%; 11/1/12 30,000 29,330
105,280
Electronic Distribution
Equipment (0.41%)
Israel Electric Corp. Senior
Notes; 7.25%; 12/15/06 250,000(c) 249,615
Finance Services (0.93%)
Lehman Brothers, Inc. Senior
Subordinated Notes;
7.25%; 4/15/03 500,000 503,028
TLC Beatrice International
Finance Senior Notes;
11.50%; 10/01/05 65,000 69,063
572,091
Fire, Marine & Casualty
Insurance (0.03%)
Home Holdings Inc. Senior Notes;
8.63%; 12/15/03 80,000 17,600
Gas Production & Distribution (0.15%)
Cleveland Electric Illum Co.;
9.50%; 5/15/05 85,000 91,375
General Government, NEC (0.55%)
Republic of Columbia
8.70%; 2/15/16 95,000 94,461
Republic of Colombia Yankee
Dollar Bond Note;
7.25%; 2/23/04 250,000 241,629
336,090
Glass & Glassware, Pressed or
Blown (0.17%)
Owens-Ill. Inc. Debentures;
11.00%; 12/01/03 $ 95,000 $ 105,925
Hotels & Motels (0.39%)
Boyd Gaming Corp. Senior Notes;
9.25%; 10/1/03 50,000 48,750
Courtyard by Marriott Senior
Notes; 10.75%; 2/1/08 90,000 94,950
Host Marriott Travel Plaza
Senior Notes; 9.50%; 5/15/05 95,000 99,156
242,856
Metal Cans & Shipping
Containers (0.05%)
U.S. Can Corp. Senior Subordinated
Notes; 10.13%; 10/15/06 30,000(c) 31,500
Metal Mining Services (0.42%)
PTTEP International, Ltd. Yankee
Dollar Notes; 7.63%; 10/1/06 250,000(c) 256,425
Miscellaneous Amusement, Recreation
Service (0.19%)
Grand Casinos Inc. First Mortgage;
10.13%; 12/1/03 95,000 95,950
Station Casinos, Inc. Senior
Subordinated Notes;
9.63%; 6/1/03 20,000 19,800
115,750
Miscellaneous Converted Paper
Products (0.12%)
SD Warren Co. Senior Subordinated
Notes; 12.00%; 12/15/04 70,000 75,600
Miscellaneous Food &
Kindred Products (0.05%)
International Home Foods Senior
Subordinated Notes;
10.38%; 11/1/06 30,000(c) 31,200
Miscellaneous Investing (0.17%)
HMC Acquisition Properties Senior
Notes; 9.00%; 12/15/07 65,000 65,975
Maxxam Group Holdings, Inc.
Senior Notes; 12.00%; 8/1/03 40,000(c) 40,500
106,475
Miscellaneous Publishing (0.02%)
Marvel Parent Holding; 4/15/98 100,000(b) 14,000
Miscellaneous Shopping Goods
Stores (0.16%)
Southland Corp. Senior
Subordinated Debentures;
5.00%; 12/15/03 119,000 98,472
Mortgage Bankers & Brokers (0.04%)
Homeside, Inc. Senior Notes;
11.25%; 5/15/03 20,000 22,300
Oil & Gas Field Services (0.05%)
Parker Drilling Company Senior
Notes; 9.75%; 11/15/06 30,000(c) 31,575
Paperboard Mills (0.30%)
Gaylord Container Senior Notes;
11.50%; 5/15/01 $120,000 $ 127,650
Gaylord Container Senior
Subordinated Debentures;
12.75%; 5/15/05 20,000 22,050
Stone Container Financial Co.;
11.50%; 8/15/06 35,000 35,962
185,662
Personal Credit Institutions (0.40%)
GMAC Medium-Term Notes;
6.10%; 12/06/00 250,000 245,925
Radio & Television
Broadcasting (0.55%)
Echostar Satellite Broadcasting
Step-Up Senior Discount
Notes; 3/15/04 190,000(b)* 145,350
Viacom Subordinated Debentures;
8.00%; 7/7/06 200,000 191,365
336,715
Retail Stores, NEC (0.09%)
Cole National Group, Inc. Senior
Subordinated Notes;
9.88%; 12/31/06 55,000(c) 56,650
Sanitary Services (0.18%)
Norcal Waste Systems Inc. Step-Up
Senior Notes; 11/15/05 100,000* 111,000
Soap, Cleaners & Toilet Goods (0.15%)
Revlon Worldwide Corp. Senior
Discount Notes; 3/15/98 105,000(b) 91,087
Surety Insurance (0.06%)
Teleport Communications Step-Up
Bond; 7/1/07 55,000(b) 37,675
Telephone Communication (1.24%)
Brooks Fiber Properties Step-Up
Senior Discount Notes; 11/1/06 70,000(c)(b) 44,625
Comcast Cellular Notes:
3/5/00 100,000(b) 72,000
3/5/00 40,000(b) 28,750
Comcast Corp. Senior Subordinated
Debentures; 9.38%; 5/15/05 115,000 119,313
Lenfest Communications
Senior Notes;
8.38%; 11/1/05 90,000 86,962
MFS Communications Inc. Step-Up
Senior Discount Notes; 1/15/06 190,000(b) 139,888
Occidente Y Carbide Cellular
Step-Up; 3/15/01 130,000(b)* 76,375
Occidente T Carbide Warrants; 520(b)* 0
Paging Network, Inc. Senior
Subordinated Notes;
10.00%; 10/15/08 60,000(c) 60,525
10.13%; 8/1/07 20,000 20,475
Philippine Long Distance Telephone
Co. Notes;
9.25%; 6/30/06 10,000 10,650
9.25%; 6/30/06 25,000 26,625
Telewest PLC Step-Up Debentures;
10/01/07 $110,000(b) $ 76,450
762,638
Variety Stores (0.20%)
DR Structured Finance
Pass thru Certificates;
7.60%; 8/15/07 134,430 120,514
Total Bonds 6,382,581
U.S. Government Treasury Notes (14.88%)
8.00%; 1/15/97 500,000 500,156
6.38%; 5/15/99 2,000,000 2,017,500
6.25%; 5/31/00 3,000,000 3,013,125
6.25%; 4/30/01 2,000,000 2,004,376
7.88%; 11/15/04 1,500,000 1,636,875
Total U.S. Government Treasury Notes 9,172,032
Government National Mortgage Association (GNMA)
Certificates (1.55%)
Description of Issue Principal
Type Rate Maturity Amount Value
GNMA I 6.00% 6/15/11 $991,302 $ 957,310
Total Portfolio Investments (96.10%) 59,227,847
Cash and receivables, net of
liabilities (3.90%) $2,403,291
Total Net Assets (100.00%) $61,631,138
(a) Non-income producing security - No dividend paid during the past twelve
months.
(b) Non-income producing security - zero-and zero-step coupon bonds.
(c) Restricted Security - See Note 4 to the financial statements.
* Variable Rate
PRINCIPAL BALANCED FUND, INC.
Shares
Held Value
Common Stocks (56.09%)
Advertising (0.26%)
Interpublic Group of Cos., Inc. 5,100 $ 242,250
Bakery Products (0.87%)
Sara Lee Corp. 21,700 808,325
Beverages (0.79%)
Pepsico, Inc. 20,100 587,925
Universal Foods Corp. 4,300 151,575
739,500
Combination Utility Services (0.55%)
Cinergy Corp. 15,400 513,975
Commercial Banks (6.13%)
Banc One Corp. 22,013 $ 946,559
Bank of Boston Corp. 13,900 893,075
Corestates Financial Corp. 22,500 1,167,188
First of America Bank Corp. 7,600 456,950
Fleet Financial Group, Inc. 11,600 578,550
KeyCorp. 16,800 848,400
Marshall & Ilsley Corp. 6,000 207,750
Nationsbank Corp. 6,200 606,050
5,704,522
Commercial Printing (0.63%)
R. R. Donnelley & Sons Co. 18,700 586,712
Communications Equipment (1.00%)
Allen Group, Inc. 4,200 93,450
DSC Communications Corp. 15,000(a) 268,125
General Instrument Corp. 26,100(a) 564,413
925,988
Computer & Office Equipment (1.79%)
Hewlett-Packard Co. 9,700 487,425
International Business
Machines Corp. 7,800 1,177,800
1,665,225
Consumer Products (0.36%)
Philip Morris Cos., Inc. 3,000 337,875
Crude Petroleum & Natural
Gas (1.18%)
Texaco, Inc. 11,200 1,099,000
Dairy Products (0.31%)
Dean Foods Co. 9,000 290,250
Drug Stores & Proprietary
Stores (0.61%)
Rite Aid Corp. 14,200 564,450
Drugs (6.22%)
Abbott Labs 17,000 862,750
American Home Products Corp. 11,500 674,188
Bristol-Myers Squibb Co. 5,000 543,750
Merck & Co., Inc. 12,400 982,700
Pharamacia & Upjohn, Inc. 27,000 1,069,875
Schering-Plough Corp. 14,300 925,925
Warner-Lambert Co. 9,800 735,000
5,794,188
Electric Services (2.40%)
Dominion Resources, Inc. 13,600 523,600
FPL Group, Inc. 9,300 427,800
Houston Industries, Inc. 38,100 862,012
Potomac Electric Power Co. 16,400 422,300
2,235,712
Electrical Industrial Apparatus (0.57%)
Emerson Electric Co. 5,500 532,125
Electronic Distribution
Equipment (1.03%)
General Electric Co. 9,700 959,088
Fats & Oils (1.24%)
Archer Daniels Midland Co. 52,695 1,159,290
General Industrial Machinery (0.61%)
BW/IP Holdings, Inc.; Class A 6,400 $ 105,600
Pall Corp. 18,200 464,100
569,700
Grain Mill Products (0.66%)
Ralston-Ralston Purina Group 8,300 609,012
Greeting Cards (0.67%)
American Greetings Corp. 22,100 627,088
Grocery Stores (2.52%)
Albertson's, Inc. 16,800 598,500
American Stores Co. 16,000 654,000
Sysco Corp. 33,500 1,092,937
2,345,437
Household Furniture (1.59%)
Masco Corp. 41,100 1,479,600
Industrial Inorganic Chemicals (0.66%)
Dow Chemical Co. 5,300 415,388
Eastman Chemical Co. 3,550 196,137
611,525
Jewelry, Silverware & Plated
Ware (0.22%)
Jostens, Inc. 9,700 204,913
Management & Public
Relations (1.39%)
ACNielson Corp. 6,966(a) 105,361
Cognizant Corp. 20,900 689,700
Dun & Bradstreet Corp. 20,900 496,375
1,291,436
Meat Products (1.28%)
ConAgra, Inc. 4,141 206,015
Tyson Foods, Inc. 28,900 989,825
1,195,840
Medical Instruments &
Supplies (0.67%)
St. Jude Medical, Inc. 14,750(a) 628,718
Medical Service & Health
Insurance (1.18%)
AON Corp. 8,750 543,593
Foundation Health Corp. 15,800(a) 501,650
Physicians Corp. of America 5,000(a) 50,000
1,095,243
Metal Forgings & Stampings (0.60%)
Newell Co. 17,600 554,400
Metalworking Machinery (0.06%)
Giddings & Lewis 4,600 59,225
Miscellaneous Business
Services (0.24%)
Safety-Kleen Corp. 13,600 222,700
Miscellaneous Converted Paper
Products (1.10%)
Minnesota Mining & Mfg. Co. 12,400 1,027,650
Miscellaneous Electrical Equipment
& Supplies (0.78%)
Motorola, Inc. 11,800 724,225
Miscellaneous Fabricated Metal
Products (0.18%)
Keystone International, Inc. 8,500 $ 171,063
Miscellaneous Plastics Products,
NEC (0.20%)
Rubbermaid, Inc. 8,300 188,825
Miscellaneous Shopping Goods
Stores (1.27%)
Toys 'R' Us, Inc. 39,400(a) 1,182,000
Motor Vehicles, Parts &
Supplies (0.98%)
Grainger (W. W.), Inc. 11,400 914,850
Paper Mills (1.08%)
Kimberly Clark Corp. 10,600 1,009,650
Petroleum Refining (2.87%)
Atlantic Richfield Co. 10,900 1,444,250
Exxon Corp. 12,500 1,225,000
2,669,250
Plastic Materials & Synthetics (0.10%)
Wellman, Inc. 5,600 95,900
Sanitary Services (2.50%)
Browning-Ferris Industries, Inc. 43,600 1,144,500
WMX Technologies, Inc. 36,400 1,187,550
2,332,050
Security Brokers & Dealers (0.34%)
Edwards (A.G.), Inc. 9,500 319,437
Soap, Cleaners & Toilet Goods (2.04%)
Avon Products 19,900 1,136,787
Colgate-Palmolive Co. 8,300 765,675
1,902,462
Telephone Communication (2.50%)
AT&T Corp. 23,400 1,017,900
MCI Communications Corp. 40,100 1,310,769
2,328,669
Variety Stores (1.86%)
Dayton-Hudson Corp. 25,500 1,000,875
Wal-Mart Stores, Inc. 31,800 727,425
1,728,300
Total Common Stocks 52,247,643
Preferred Stocks (1.39%)
Motor Vehicles & Equipment (1.39%)
Federal-Mogul Corp.
Series D Convertible 4,300(b) 260,150
Ford Motor Co.
Series A Convertible 10,000 1,037,500
Total Preferred Stocks 1,297,650
Bonds (1.64%)
Blast Furnace & Basic Steel
Products (0.22%)
Quanex Corp. Convertible
Subordinated Debentures;
6.88%; 6/30/07 $200,000 $ 204,000
Electric Lighting & Wiring
Equipment (0.24%)
Cooper Industries, Inc.
Convertible Subordinated
Debentures; 7.05%; 1/1/15 208,000 222,560
Electric Industrial Apparatus (0.31%)
Liebert Co. Convertible Subordinated
Debentures; 8.00%; 11/15/10 80,000 289,100
Engines & Turbines (0.21%)
Outboard Marine Corp. Convertible
Subordinated Debentures;
7.00%; 7/1/02 200,000 195,250
Lumber & Other Building
Materials (0.16%)
Hechinger Co. Convertible
Subordinated Debentures;
5.50%; 4/1/12 425,000 148,219
Petroleum Refining (0.33%)
Pennzoil Co. Senior Exchangeable
Debentures; 6.50%; 1/15/03 200,000 308,500
Trucking & Courier Services, Ex.,
Air (0.17%)
Builders Transport, Inc.
Convertible Subordinated
Debentures; 6.50%; 5/1/11 306,000 162,945
Total Bonds 1,530,574
U.S. Government Treasury Notes & Bonds (37.02%)
5.13%; 2/28/98 2,500,000 2,476,563
5.13%; 11/30/98 3,000,000 2,957,814
6.38%; 1/15/00 1,900,000 1,916,625
5.50%; 4/15/00 3,500,000 3,440,937
6.13%; 9/30/00 3,500,000 3,497,813
6.25%; 4/30/01 3,000,000 3,006,564
6.38%; 8/15/02 2,000,000 2,013,126
6.25%; 2/15/03 3,000,000 2,997,189
5.75%; 8/15/03 4,800,000 4,656,000
7.25%; 8/15/04 1,500,000 1,579,219
7.50%; 2/15/05 800,000 855,750
5.63%; 2/15/06 2,000,000 1,892,500
7.25%; 5/15/16 1,000,000 1,055,938
7.50%; 11/15/16 1,000,000 1,082,188
7.25%; 8/15/22 1,000,000 1,057,813
Total U. S. Government Treasury
Notes & Bonds 34,486,039
Commercial Paper (3.91%)
Business Credit Institutions (2.94%)
General Electric Capital Corp.;
6.65%; 1/2/97 $2,740,000 $2,740,000
Personal Credit Institutions (0.97%)
Ford Motor Credit Co. ;
5.91%; 1/2/97 905,000 905,000
Total Commercial Paper 3,645,000
Total Portfolio Investments (100.05%) 93,206,906
Liabilities, net of cash and receivables (-0.05%) (49,237)
Total Net Assets (100.00%) $93,157,669
(a) Non-income producing security - No dividend paid during the past twelve
months.
(b) Restricted Security - See Note 4 to the financial statements.
PRINCIPAL BOND FUND, INC.
Principal
Amount Value
Bonds (95.83%)
Air Transportation, Scheduled (1.59%)
Federal Express Corp.,
Pass-Through Cert.;
7.96%; 3/28/17 $500,000 $ 514,735
7.58%; 7/2/19 500,000 491,800
1,006,535
Aircraft & Parts (0.52%)
Textron, Inc. Medium-Term Notes,
Series C; 9.55%; 3/19/01 300,000 331,469
Auto & Home Supply Stores (0.94%)
Pep Boys-Manny, Moe & Jack Notes;
7.00%; 6/1/05 600,000 597,691
Bakery Products (1.47%)
Nabisco, Inc. Notes;
7.05%; 7/15/07 950,000 930,984
Beverages (2.71%)
Joseph E. Seagram & Sons
Guaranteed Debentures;
8.88%; 9/15/11 1,500,000 1,714,734
Broadwoven Fabric Mills,
Cotton (2.32%)
Burlington Industries, Inc. Notes;
7.25%; 9/15/05 1,500,000 1,472,342
Cable & Other Pay TV
Services (1.55%)
TCI Communications, Inc. Senior
Notes; 8.00%; 8/1/05 1,000,000 982,799
Combination Utility Services (0.43%)
Public Service Electric & Gas
Medium-Term Notes;
8.16%; 5/26/09 $250,000 $ 270,577
Consumer Products (1.25%)
Philip Morris Cos. Notes;
6.80%; 12/1/03 500,000 492,748
RJR Nabisco Capital Corp. Senior
Notes; 8.75%; 4/15/04 300,000 302,625
795,373
Copper Ores (0.48%)
Asarco, Inc. Notes; 7.38%; 2/1/03 300,000 306,900
Crude Petroleum & Natural
Gas (1.26%)
Occidental Petroleum Corp.
Medium-Term Notes;
9.73%; 6/15/01 250,000 278,929
Union Oil of California
Medium-Term Notes;
7.77%; 4/19/05 500,000 522,791
801,720
Deep Sea Foreign Transportation of
Freight (1.54%)
American President Cos., Ltd.
Senior Notes; 7.13%; 11/15/03 1,000,000 978,094
Department Stores (4.07%)
Dillard Investment Co. Notes;
9.25%; 5/1/97 200,000 202,202
Harcourt General, Inc. Subordinated
Notes; 9.50%; 3/15/00 350,000 376,948
J. C. Penney Co., Inc. Medium-
Term Notes, Series A;
6.88%; 10/15/15 1,500,000 1,414,743
Sears Roebuck Co. Medium-Term
Notes; 9.05%; 2/6/12 500,000 586,503
2,580,396
Drug Stores & Proprietary
Stores (2.17%)
Rite Aid Corp. Senior Debentures;
6.88%; 8/15/13 1,500,000 1,373,653
Eating & Drinking Places (2.44%)
Marriott International, Inc.
Notes; 6.75%; 12/15/03 200,000 196,846
Senior Notes; 7.88%; 4/15/05 1,300,000 1,350,384
1,547,230
Electric Services (2.16%)
Cleveland Electric Illuminating Co.
First Mortgage Bonds;
8.75%; 11/15/05 400,000 409,000
Southern California Edison Co.
Notes; 6.38%; 1/15/06 1,000,000 957,500
1,366,500
Engines & Turbines (1.53%)
Brunswick Corp. Debentures;
7.38%; 9/1/23 1,000,000 972,673
Fabricated Rubber Products,
NEC (0.44%)
M. A. Hanna Co. Senior Notes;
9.38%; 9/15/03 250,000 279,712
Farm & Garden Machinery (2.26%)
Case Corp. Notes; 7.25%; 1/15/16 $1,500,000 $1,431,972
Gas Production & Distribution (2.52%)
Enron Corp. Notes;
7.13%; 5/15/07 750,000 754,409
Tennessee Gas Pipeline Co. Notes;
9.00%; 1/15/97 400,000 400,319
Transco Energy Co. Notes;
9.38%; 8/15/01 400,000 440,197
1,594,925
General Government, NEC (1.67%)
Ontario Hydro Debentures;
7.45%; 3/31/13 500,000 516,525
Province of Saskatchewan, Canada
Global Notes; 8.00%; 2/1/13 500,000 538,930
1,055,455
Gold & Silver Ores (1.17%)
Placer Dome, Inc. Notes;
7.13%; 6/15/07 750,000 741,332
Grain Mill Products (1.60%)
Ralston Purina Co. Debentures;
7.75%; 10/1/15 1,000,000 1,012,928
Groceries & Related Products (2.27%)
Supervalu, Inc. Medium-Term Notes,
Series B; 6.49%; 12/12/05 1,500,000 1,436,113
Highway & Street
Construction (2.91%)
Foster Wheeler Corp. Notes;
6.75%; 11/15/05 1,900,000 1,842,021
Hospitals (0.88%)
Columbia/HCA Healthcare Corp.
Medium-Term Notes;
8.70%; 2/10/10 500,000 559,390
Hotels & Motels (2.43%)
Hilton Hotels Corp. Notes;
7.70%; 7/15/02 1,500,000 1,539,246
Household Appliances (0.88%)
Maytag Corp. Medium-Term Notes;
8.62%; 11/15/07 500,000 556,271
Household Furniture (0.77%)
Masco Corp. Debentures;
7.13%; 8/15/13 500,000 486,540
Industrial Inorganic Chemicals (3.57%)
FMC Corp. Senior Notes;
6.38%; 9/1/03 200,000 191,316
7.75%; 7/1/11 1,500,000 1,541,657
Grace (W.R.) & Co. Guaranteed
Notes; 8.00%; 8/15/04 500,000 527,870
2,260,843
Lumber & Construction
Materials (2.61%)
Crane Co. Notes; 8.50%; 3/15/04 1,524,000 1,655,833
Machinery, Equipment &
Supplies (1.15%)
AAR Corp. Notes; 7.25%; 10/15/03 $750,000 $ 729,422
Metalworking Machinery (0.31%)
Black & Decker Corp. Notes;
7.00%; 2/1/06 200,000 198,156
Millwork, Plywood & Structural
Members (1.75%)
Georgia-Pacific Corp.
Debentures; 9.50%; 12/1/11 100,000 118,281
Senior Debentures; 7.70%; 6/15/15 1,000,000 990,371
1,108,652
Miscellaneous Chemical
Products (0.63%)
Ferro Corp. Senior Debentures;
7.63%; 5/1/13 400,000 399,922
Miscellaneous Investing (2.76%)
Washington Real Estate Investment
Trust Senior Notes;
7.25%; 8/13/06 1,000,000 985,787
Weingarten Realty Investors
Medium-Term Notes;
7.29%; 5/23/05 750,000 762,774
1,748,561
Miscellaneous Metal Ores (1.84%)
Amax, Inc. Notes; 9.88%; 6/13/01 100,000 111,490
Cyprus Amax Minerals Notes;
7.38%; 5/15/07 650,000 655,273
Cyprus Minerals Co. Notes;
10.13%; 4/1/02 350,000 397,742
1,164,505
Motion Picture Production &
Services (0.57%)
Columbia Pictures Entertainment, Inc.
Senior Subordinated Notes;
9.88%; 2/1/98 350,000 363,499
Motor Vehicles & Equipment (1.31%)
TRW, Inc. Medium-Term Notes;
9.25%; 12/30/11 700,000 827,859
Newpapers (2.54%)
News America Holdings, Inc.
Guaranteed Senior Notes;
8.50%; 2/15/05 1,500,000 1,609,261
Operative Builders (2.44%)
Pulte Corp. Senior Notes;
8.38%; 8/15/04 1,000,000 1,054,329
7.30%; 10/24/05 500,000 492,016
1,546,345
Paper Mills (5.30%)
Bowater, Inc. Debentures;
9.38%; 12/15/21 200,000 238,208
Champion International Corp. Notes;
9.88%; 6/1/00 250,000 274,675
7.10%; 9/1/05 875,000 872,241
Chesapeake Corp. Notes;
7.20%; 3/15/05 1,400,000 1,403,112
Potlatch Corp. Medium-Term Notes;
8.75%; 1/14/22 $500,000 $ 572,901
3,361,137
Personal Credit Institutions (1.62%)
General Motors Acceptance Corp.
Medium-Term Notes;
8.25%; 2/24/04 500,000 539,421
Notes; 6.63%; 10/15/05 500,000 485,609
1,025,030
Petroleum Refining (4.43%)
Ashland Oil, Inc. Medium-Term Notes;
7.71%; 5/11/07 500,000 523,198
7.73%; 7/15/13 250,000 257,824
Series F; 8.54%; 1/13/05 250,000 274,043
Pennzoil Co. Debentures;
10.13%; 11/15/09 325,000 380,621
Phillips Petroleum Co. Notes;
9.38%; 2/15/11 500,000 601,111
Sun Co., Inc.
Debentures; 9.00%; 11/1/24 500,000 573,617
Notes; 7.13%; 3/15/04 200,000 199,148
2,809,562
Plastic Materials & Synthetics (3.06%)
Geon Company Notes;
6.88%; 12/15/05 2,000,000 1,939,110
Primary Nonferrous Metals (1.06%)
Reynolds Metals Co.
Medium-Term Notes;
8.34%; 5/22/07 500,000 544,565
7.65%; 2/4/08 125,000 129,958
674,523
Pulp Mills (0.35%)
International Paper Co. Medium-Term
Notes; 9.70%; 8/15/00 200,000 220,139
Railroads (1.51%)
Union Pacific Corp. Notes;
6.40%; 2/1/06 1,000,000 954,162
Refrigeration & Service
Machinery (0.55%)
Westinghouse Electric Corp.
Debentures; 8.63%; 8/1/12 350,000 351,264
Rental of Railroad Cars (1.73%)
Gatx Capital Corp. Medium-Term
Notes, Series C; 6.86%; 10/13/05 1,000,000 984,838
Signal Capital Corp. Equipment Trust
Cert.; 9.95%; 2/1/06 109,000 114,360
1,099,198
Sanitary Services (1.72%)
Laidlaw, Inc. Senior Notes;
7.88%; 4/15/05 1,045,000 1,092,578
Sawmills & Planning Mills (1.26%)
MacMillan Bloedel Delaware
Guaranteed Notes; 8.50%; 1/15/04 750,000 798,000
Telephone Communication (2.38%)
Sprint Corp. Notes; 8.13%; 7/15/02 500,000 531,471
U.S. West Capital Funding, Inc.
Medium-Term Notes;
6.83%; 11/15/07 1,000,000 978,829
1,510,300
Variety Stores (1.15%)
Dayton-Hudson Corp. Debentures;
9.63%; 2/1/08 $150,000 $ 176,937
Dayton-Hudson Corp. Sinking Fund
Debentures; 9.50%; 10/15/16 55,000 57,476
Shopko Stores, Inc. Senior Notes;
9.00%; 11/15/04 500,000 496,463
730,876
Total Bonds 60,744,312
Commercial Paper (2.98%)
Business Credit Institutions (2.98%)
General Electric Capital;
6.65%; 1/2/97 1,890,000 1,890,000
Total Portfolio Investments (98.84%) 62,634,312
Cash and receivables, net of liabilities (1.19%) 752,249
Total Net Assets (100.00%) $63,386,561
PRINCIPAL CAPITAL ACCUMULATION
FUND, INC.
Shares
Held Value
Common Stocks (98.79%)
Beverages (2.95%)
Anheuser Busch Cos., Inc. 100,000 $ 4,000,000
Pepsico, Inc. 49,000 1,433,250
Universal Foods Corp. 17,200 606,300
6,039,550
Combination Utility Services (1.73%)
Cinergy Corp. 58,200 1,942,425
Montana Power Co. 75,000 1,603,125
3,545,550
Commercial Banks (10.69%)
Banc One Corp. 123,940 5,329,420
Bank of Boston Corp. 38,300 2,460,775
Corestates Financial Corp. 104,000 5,395,000
First of America Bank Corp. 28,700 1,725,588
KeyCorp 103,000 5,201,500
Nationsbank Corp. 18,400 1,798,600
21,910,883
Commercial Printing (2.56%)
R. R. Donnelley & Sons Co. 167,000 5,239,625
Communications Equipment (1.61%)
Allen Group, Inc. 16,000(a) 356,000
DSC Communications Corp. 52,800(a) 943,800
General Instrument Corp. 92,800(a) 2,006,800
3,306,600
Computer & Office Equipment (2.37%)
Hewlett-Packard Co. 33,400 1,678,350
International Business
Machines Corp. 21,000 3,171,000
4,849,350
Crude Petroleum & Natural
Gas (1.89%)
Texaco, Inc. 39,400 $ 3,866,125
Dairy Products (0.67%)
Dean Foods Co. 42,500 1,370,625
Drug Stores & Proprietary Stores (1.12%)
Rite Aid Corp. 58,000 2,305,500
Drugs (9.02%)
Abbott Labs 66,000 3,349,500
American Home Products Corp. 45,000 2,638,125
Bristol-Myers Squibb Co. 18,000 1,957,500
Merck & Co., Inc. 37,000 2,932,250
Pharmacia & Upjohn, Inc. 137,000 5,428,625
Warner-Lambert Co. 29,200 2,190,000
18,496,000
Electric Services (4.81%)
Dominion Resources, Inc. 44,400 1,709,400
FPL Group, Inc. 38,500 1,771,000
Houston Industries, Inc. 231,000 5,226,375
Potomac Electric Power Co. 45,000 1,158,750
9,865,525
Electrical Industrial Apparatus (1.28%)
Emerson Electric Co. 27,090 2,620,958
Electronic Distribution
Equipment (1.40%)
General Electric Co. 29,000 2,867,375
Farm & Garden Machinery (2.24%)
Tenneco, Inc. 101,600 4,584,700
Fats & Oils (1.99%)
Archer Daniels Midland Co. 185,010 4,070,220
Gas Production & Distribution (0.23%)
El Paso Natural Gas 9,448 477,124
General Industrial Machinery (0.56%)
BW/IP Holdings, Inc., Class A 23,000 379,500
Pall Corp. 30,100 767,550
1,147,050
Grain Mill Products (1.02%)
Ralston-Ralston Purina Group 28,600 2,098,525
Greeting Cards (2.48%)
American Greetings Corp. 179,000 5,079,125
Grocery Stores (3.23%)
Albertson's, Inc. 40,600 1,446,375
American Stores Co. 60,000 2,452,500
Sysco Corp. 83,400 2,720,925
6,619,800
Household Furniture (2.60%)
Masco Corp. 148,200 5,335,200
Industrial Inorganic
Chemicals (1.24%)
Dow Chemical Co. 22,000 $ 1,724,250
Eastman Chemical Co. 14,900 823,225
2,547,475
Industrial Organic Chemicals (0.70%)
Ethyl Corp. 150,000 1,443,750
Jewelry, Silverware & Plated
Ware (0.33%)
Jostens, Inc. 31,700 669,662
Life Insurance (2.55%)
American General Corp. 128,000 5,232,000
Management & Public
Relations (1.35%)
ACNielson Corp. 14,966(a) 226,361
Cognizant Corp. 44,900 1,481,700
Dun & Bradstreet Corp. 44,900 1,066,375
2,774,436
Meat Products (1.47%)
Tyson Foods, Inc. 88,000 3,014,000
Medical Instruments &
Supplies (1.10%)
St. Jude Medical, Inc. 53,100(a) 2,263,388
Medical Service & Health
Insurance (1.63%)
AON Corp. 31,050 1,928,981
Foundation Health Corp. 37,400(a) 1,187,450
Physicians Corp. of America 22,900(a) 229,000
3,345,431
Metal Forgings & Stampings (0.98%)
Newell Co. 64,000 2,016,000
Metalworking Machinery (0.14%)
Giddings & Lewis 23,000 296,125
Miscellaneous Business
Services (0.35%)
Safety-Kleen Corp. 43,500 712,312
Miscellaneous Converted Paper
Products (1.27%)
Minnesota Mining & Mfg. Co. 31,400 2,602,275
Miscellaneous Electrical Equipment &
Supplies (0.94%)
Motorola, Inc. 31,400 1,927,175
Miscellaneous Fabricated Metal
Products (0.27%)
Keystone International, Inc. 27,300 549,413
Miscellaneous Shopping Goods
Stores (1.59%)
Toys 'R' Us, Inc. 108,700(a) 3,261,000
Motor Vehicles, Parts &
Supplies (1.42%)
Grainger (W. W.), Inc. 36,400 2,921,100
Newspapers (2.48%)
Dow Jones & Co., Inc. 150,000 $ 5,081,250
Paper Mills (1.72%)
Kimberly Clark Corp. 37,000 3,524,250
Petroleum Refining (4.35%)
Atlantic Richfield Co. 40,000 5,300,000
Exxon Corp. 37,000 3,626,000
8,926,000
Plastic Materials & Synthetics (0.19%)
Wellman, Inc. 23,000 393,875
Sanitary Services (4.37%)
Browning-Ferris Industries, Inc. 203,900 5,352,375
WMX Technologies, Inc. 110,600 3,608,325
8,960,700
Security Brokers & Dealers (0.59%)
Edwards (A.G.), Inc. 36,015 1,211,004
Ship & Boats Building &
Repairing (0.15%)
Newport News Shipbuilding, Inc. 20,320(a) 304,800
Soap, Cleaners, & Toilet Goods (2.99%)
Avon Products 63,600 3,633,150
Colgate-Palmolive Co. 27,000 2,490,750
6,123,900
Telephone Communication (5.21%)
AT&T Corp. 52,000 2,262,000
MCI Communications Corp. 101,500 3,317,781
US West Communications Group 158,000 5,095,500
10,675,281
Variety Stores (2.96%)
Dayton-Hudson Corp. 81,000 3,179,250
Wal-Mart Stores, Inc. 126,000 2,882,250
6,061,500
Total Common Stocks 202,533,512
Principal
Amount Value
Commercial Paper (1.92%)
Business Credit Institutions (0.83%)
General Electric Capital;
6.65%; 1/2/97 $1,710,000 $ 1,710,000
Personal Credit Institutions (1.09%)
Ford Motor Credit Co.;
5.91%; 1/2/97 2,240,000 2,240,000
Total Commercial Paper 3,950,000
Total Portfolio Investments (100.71%) 206,483,512
Liabilities, net of cash and receivables (-0.71%) (1,464,984)
Total Net Assets (100.00%) $205,018,528
(a) Non-income producing security - No dividend paid during the past twelve
months.
PRINCIPAL EMERGING GROWTH FUND, INC.
Shares
Held Value
Common Stocks (85.53%)
Blast Furnace & Basic Steel
Products (0.99%)
Lukens, Inc. 67,300 $ 1,354,413
Carpets & Rugs (0.85%)
Shaw Industries, Inc. 99,300 1,166,775
Chemicals & Allied Products (0.46%)
Sigma-Aldrich Corp. 10,000 624,375
Commercial Banks (6.55%)
Boatmen's Bancshares, Inc. 6,100 393,450
First Commerce Corp. 15,600 606,450
First Federal Capital Corp. 40,665 955,627
Independent Bank Corp. Michigan 26,460 893,025
Mercantile Bancorp., Inc. 20,960 1,076,820
Merchants Bancorp., Inc. 21,500 666,500
National City Corp. 20,100 901,988
North Fork Bancorp., Inc. 33,700 1,200,562
Peoples Heritage Financial
Group, Inc. 33,300 932,400
Princeton National Bancorp., Inc. 36,000 666,000
Summit Bancorp. 15,900 695,625
8,988,447
Commercial Printing (0.37%)
Merrill Corp. 22,300 512,900
Computer & Data Processing
Services (7.71%)
American Management Systems, Inc. 84,500(a) 2,070,250
Bitstream 102,000(a) 663,000
Cerner Corp. 116,200(a) 1,801,100
HBO & Co. 31,500 1,870,312
Microsoft Corp. 29,600(a) 2,445,700
National Processing, Inc. 21,300(a) 340,800
Sunquest Information Systems, Inc. 97,300(a) 1,386,525
10,577,687
Computer & Office Equipment (3.09%)
EMC Corp. 81,700(a) 2,706,312
Optika Imaging Systems 75,000(a) 376,172
Seagate Technology 4,000(a) 158,000
Systemsoft Corporation 67,000(a) 996,625
4,237,109
Construction & Related
Machinery (2.26%)
Energy Ventures, Inc. 61,000(a) 3,103,375
Crude Petroleum & Natural
Gas (1.52%)
Devon Energy Corp. 60,000 2,085,000
Dairy Products (0.39%)
Dreyer's Grand Ice Cream, Inc. 18,200 527,800
Drugs (2.36%)
Alliance Pharmaceutical Corp. 30,000(a) $ 408,750
Forest Laboratories, Inc. 17,400(a) 569,850
Genzyme Corp. - General Division 7,182 156,208
Genzyme Corp. - Tissue Repair 255(a) 1,817
Merck & Co., Inc. 10,000 792,500
Pharmacia & Upjohn, Inc. 32,400 1,283,850
Seragen, Inc. 20,000(a) 20,000
3,232,975
Electronic Components &
Accessories (7.18%)
Intel Corp. 37,900 4,962,531
Linear Technology Corp. 46,800 2,053,350
Solectron Corp. 53,100(a) 2,834,213
9,850,094
Engineering & Architectural
Services (1.14%)
Paychex, Inc. 30,400 1,563,700
Finance Services (1.31%)
First Financial Corp. 73,250 1,794,625
Fire, Marine, & Casualty
Insurance (2.19%)
Avemco Corp. 35,000 546,875
Berkley W.R. Corp. 48,500 2,461,375
3,008,250
Footwear, Except Rubber (0.78%)
Nine West Group, Inc. 22,900(a) 1,061,988
General Industrial Machinery (5.00%)
Flow International Corp. 101,500(a) 926,187
Kaydon Corp. 45,600 2,148,900
Pentair, Inc. 54,600 1,760,850
Roper Industries, Inc. 51,500 2,014,938
6,850,875
Grocery Stores (0.88%)
Casey's General Stores, Inc. 64,500 1,209,375
Hardware Stores (0.91%)
Central Tractor Farm & Country, Inc. 90,500(a) 1,244,375
Holding Offices (0.46%)
ISB Financial Corp. 35,400 637,200
Hose, Belting, Gaskets &
Packing (0.97%)
Mark IV Industries 58,875 1,332,047
Hospitals (1.91%)
Humana, Inc. 62,300(a) 1,191,488
Universal Health Services, Inc.;
Class B 50,000(a) 1,431,250
2,622,738
Insurance Agents, Brokers &
Services (1.33%)
Equifax, Inc. 59,400 1,819,125
Investment Offices (1.21%)
Invesco PLC ADS 31,300 $ 1,388,938
Invesco FDG LLC Sponsored ADR 6,260 272,310
1,661,248
Iron & Steel Foundries (0.39%)
Atchison Casting Corp. 30,000(a) 540,000
Laundry, Cleaning & Garment
Services (1.02%)
G & K Services, Inc.; Class A 37,225 1,405,244
Management & Public Relations (0.68%)
Complete Management, Inc. 72,000 927,000
Measuring & Controlling
Devices (1.68%)
ISCO, Inc. 22,513 202,612
Millipore Corp. 37,100 1,535,013
Photon Dynamics 73,600(a) 561,200
2,298,825
Meat Products (0.88%)
Michael Foods, Inc. 95,200 1,213,800
Medical Instruments &
Supplies (4.65%)
Boston Scientific Corp. 35,200(a) 2,112,000
Nellcor Puritan Bennett 84,000(a) 1,837,500
Steris Corp. 55,700(a) 2,422,950
6,372,450
Medical Service & Health
Insurance (4.65%)
Alternative Living Services 93,700(a) 1,358,650
Foundation Health Corp. 40,500(a) 1,285,875
Health System International, Inc. 52,200(a) 1,291,950
Orthofix International NV 77,600(a) 640,200
Patient Info Systems 59,000(a) 545,750
United Healthcare Corp. 27,900 1,255,500
6,377,925
Metal Services, NEC (1.88%)
BMC Industries, Inc. 81,900 2,579,850
Miscellaneous Chemical
Products (3.67%)
Cytec Industries 48,200(a) 1,958,125
H. B. Fuller Co. 20,000 940,000
Loctite Corp. 35,100 2,136,712
5,034,837
Office Furniture (1.28%)
Chromcraft Revington, Inc. 36,200(a) 1,004,550
Kimball International, Inc.; Class B 18,200 753,025
1,757,575
Office & Clinics of Medical
Doctors (0.09%)
FHP International Corp. 3,400(a) 126,225
Oil & Gas Field Services (1.40%)
Diamond Offshore Drilling 33,700(a) 1,920,900
Operative Builders (1.32%)
D. R. Horton, Inc. 131,200 1,426,800
Pulte Corp. 12,621 388,096
1,814,896
Paints & Allied Products (0.89%)
RPM, Inc. 71,700 1,218,900
Plastic Materials & Synthetics (0.91%)
A. Schulman, Inc. 51,000 $ 1,249,500
Plumbing, Heating,
Air-Conditioning (1.71%)
Apogee Enterprises, Inc. 57,000 2,265,750
Metalclad Corp. 45,600(a) 82,650
2,348,400
Refrigeration & Service
Machinery (0.60%)
Tecumseh Products Co.; Class A 14,400 826,200
Sanitary Services (1.03%)
Browning-Ferris Industries, Inc. 46,600 1,223,250
USA Waste Services, Inc. 5,847(a) 186,373
1,409,623
Savings Institutions (1.08%)
North Side Savings Bank 15,000 817,500
Sterling Financial Corp. 46,900(a) 662,463
1,479,963
Screw Machine Products, Bolts,
Etc. (1.00%)
TriMas Corp. 57,500 1,372,812
Security Brokers & Dealers (0.66%)
Jefferies Group, Inc. 22,400 904,400
Telephone Communication (0.83%)
McLeod, Inc. 44,500(a) 1,134,750
Toys & Sporting Goods (1.05%)
Mattel, Inc. 51,700 1,434,675
Trucking & Courier Services, Ex.
Air (0.36%)
J. B. Hunt Transport Services, Inc. 35,500 497,000
Total Common Stocks 117,312,246
Preferred Stock (0.44%)
Offices & Clinics of Medical
Doctors (0.44%)
FHP International Corp.
Series A Convertible 20,000(a) 610,000
Principal
Amount Value
Bonds (1.55%)
Computer & Data Processing
Services (0.25%)
Sierra On Line Convertible
Subordinated Debentures;
6.50%; 4/1/01 $110,000(b) $ 345,125
Industrial Inorganic Chemicals (0.35%)
Ciba-Geigy Corp. Exchangeable
Subordinated Debentures;
6.25%; 3/15/16 150,000(b) 150,000
ICN Pharmaceuticals, Inc. Convertible
Subordinated Debentures;
8.50%; 11/15/99 $300,000 $ 325,500
475,500
Management & Public
Relations (0.73%)
Complete Management, Inc. Convertible
Debentures; 8.00%; 12/15/03 1,000,000 1,005,000
Nursing & Personal Care
Facilities (0.14%)
Greenery Rehabilitation Group, Inc.
Convertible Senior Subordinated
Notes; 8.75%; 4/1/15 250,000 192,187
Sanitary Services (0.08%)
Enclean, Inc. Convertible Subordinated
Debentures; 7.50%; 8/1/01 100,000 102,339
Total Bonds 2,120,151
Commercial Paper (12.28%)
Business Credit Institutions (4.27%)
American Express Credit Corp.;
5.50%; 1/10/97 2,850,000 2,846,517
General Electric Capital Corp.;
5.78%; 1/7/97 3,015,000 3,012,579
5,859,096
Personal Credit Institutions (2.97%)
Beneficial Corp;
5.80%; 1/8/97 1,460,000 1,458,589
Household Finance Corp.;
5.62%; 1/6/97 2,610,000 2,608,370
4,066,959
Security Brokers & Dealers (5.04%)
Merrill Lynch & Co.;
5.85%; 1/3/97 2,830,000 2,829,540
5.95%; 1/9/97 1,250,000 1,248,554
Smith Barney, Inc.;
5.60%; 1/2/97 2,840,000 2,840,000
6,918,094
Total Commercial Paper 16,844,149
Total Portfolio Investments (99.80%) 136,886,546
Cash and Receivables, net of liabilities (0.20%) 274,335
Total Net Assets (100.00%) $137,160,881
(a) Non-income producing security - No dividend paid during the past twelve
months.
(b) Restricted Security - See Note 4 to the financial statements.
PRINCIPAL GOVERNMENT SECURITIES
FUND, INC.
Description of Issue Principal
Type Rate Maturity Amount Value
Government National Mortgage Association (GNMA)
Certificates (32.28%)
GNMA I 6.50% 5/15/26 $1,000,000 $ 955,380
GNMA I 7.00 1/15/24 844,300 830,107
GNMA I 8.00 10/15/16-6/15/17 1,916,985 1,985,086
GNMA I 8.50 2/15/17-5/15/21 1,862,038 1,962,849
GNMA II 6.00 6/20/24-9/20/26 19,468,917 17,972,068
GNMA II 6.50 12/20/25-2/20/26 3,958,038 3,770,587
Total GNMA Certificates 27,476,077
Federal National Mortgage Association (FNMA)
Certificates (18.45%)
FNMA 5.50 5/1/24 1,177,323 1,051,491
FNMA 6.00 11/1/23-3/1/26 4,062,985 3,779,118
FNMA 6.50 11/1/23-6/1/26 6,613,120 6,323,071
FNMA 7.00 TBA* 1,000,000 978,180
FNMA 7.00 8/1/23 786,901 772,926
FNMA 7.50 4/1/22 1,051,299 1,058,395
FNMA 8.00 6/1/17-11/1/21 793,649 816,254
FNMA GL 6.50 8/15/25 963,731 920,642
Total FNMA Certificates 15,700,077
Federal Home Loan Mortgage Corporation (FHLMC) Certificates (16.69%)
FHLMC 5.50 2/1/24-3/1/24 1,511,637 1,378,673
FHLMC 6.00 12/1/23-1/1/26 2,819,464 2,627,584
FHLMC 6.50 4/1/24-5/1/26 5,298,220 5,078,155
FHLMC 7.00 9/1/23-1/1/24 2,565,534 2,530,318
FHLMC 7.50 2/1/22-6/1/24 1,499,723 1,509,795
FHLMC 8.00 11/1/21 752,170 772,531
FHLMC GL 7.50 3/1/23 301,178 302,910
Total FHLMC Certificates 14,199,966
Principal
Amount Value
Student Loan Marketing Association (SLMA)
Certificates (16.19%)
Student Loan Marketing Association
Debentures;
7.30%; 8/1/12 $10,000,000 $10,316,899
8.47%; 12/1/08 1,000,000 1,136,995
9.15%; 12/1/04 1,200,000 1,381,893
Notes; 6.13%; 12/1/05 560,000 537,816
Notes; 9.25%; 6/1/04 350,000 403,353
Total SLMA Certificates 13,776,956
Private Export Funding Corporation (PEFCO)
Certificates (15.60%)
Private Export Funding Corp.
Secured Notes;
6.62%; 10/1/05 $2,000,000 $1,985,080
9.45%; 12/31/99 4,500,000 4,894,200
Series SS, Senior Secured Notes;
5.50%; 3/15/01 3,325,000 3,225,849
5.80%; 2/1/04 2,200,000 2,140,292
7.03%; 10/31/03 1,000,000 1,027,240
Total PEFCO Certificates 13,272,661
Federal Agency Short-Term Obligations (1.06%)
Federal Home Loan Mortgage Corp.;
1/2/97 900,000 900,000
Total Portfolio Investments (100.27%) 85,325,737
Liabilities, net of cash and receivables (-0.27%) (225,879)
Total Net Assets (100.00%) $85,099,858
* Securities purchased on a to-be-announced basis.
PRINCIPAL GROWTH FUND, INC.
Shares
Held Value
Common Stocks (91.96%)
Advertising (1.20%)
Interpublic Group of Cos., Inc. 25,300 $1,201,750
Beverages (1.70%)
Coca-Cola Co. 8,800 463,100
Pepsico, Inc. 42,100 1,231,425
1,694,525
Blast Furnace & Basic Steel
Products (0.68%)
Lukens, Inc. 33,600 676,200
Carpets & Rugs (0.64%)
Shaw Industries, Inc. 54,800 643,900
Cash Grains (1.92%)
Pioneer Hi-Bred International 27,400 1,918,000
Commercial Banks (6.21%)
Banc One Corp. 16,500 709,500
Bank of Boston Corp. 11,000 706,750
Barnett Banks Inc. 10,000 411,250
Boatmen's Bancshares, Inc. 18,700 1,206,150
CoreStates Financial Corp. 12,300 638,063
First of America Bank Corp. 11,700 703,462
Firstar Corp. 15,000 787,500
Firstmerit Corp. 14,600 518,300
Princeton National Bancorp., Inc. 27,300 505,050
6,186,025
Communications Equipment (3.99%)
General Instrument Corp. 75,800(a) $1,639,175
Northern Telecom Ltd. 18,700 1,157,063
Octel Communications Corp. 67,200(a) 1,176,000
3,972,238
Computer & Data Processing
Services (3.01%)
GTECH Holdings Corp. 47,800(a) 1,529,600
Microsoft Corp. 17,800(a) 1,470,725
3,000,325
Computer & Office Equipment (6.12%)
Automatic Data Processing, Inc. 20,000 857,500
Bay Networks 45,600(a) 951,900
Ceridian Corp. 37,400(a) 1,514,700
Digital Equipment Corp. 30,800(a) 1,120,350
Hewlett-Packard Co. 27,500 1,381,875
Pitney Bowes, Inc. 5,000 272,500
6,098,825
Department Stores (0.60%)
May Department Stores 12,800 598,400
Drugs (7.52%)
Alliance Pharmaceutical Corp. 10,000(a) 136,250
Bristol-Myers Squibb Co. 10,000 1,087,500
Genzyme Corp. - General Division 9,500(a) 206,625
Johnson & Johnson 20,000 995,000
Lilly (Eli) & Co. 20,000 1,460,000
Merck & Co., Inc. 14,600 1,157,050
Pharmacia & Upjohn, Inc. 27,500 1,089,687
Smithkline Beecham PLC ADR 20,000 1,360,000
7,492,112
Eating & Drinking Places (0.32%)
McDonald's Corp. 7,000 316,750
Electrical Goods (0.73%)
Avnet, Inc. 12,500 728,125
Electronic Components &
Accessories (3.94%)
Intel Corp. 17,300 2,265,219
Linear Technology Corp. 37,800 1,658,475
3,923,694
Electronic Distribution
Equipment (0.50%)
General Electric Co. 5,000 494,375
Federal & Federally Sponsored
Credit (0.41%)
Federal National Mortgage Association11,000 409,750
Footwear, Except Rubber (1.70%)
Stride Rite Corp. 169,300 1,693,000
General Industrial Machinery (2.85%)
Flow International Corp. 42,100(a) 384,163
Ingersoll-Rand Co. 20,400 907,800
Tyco International Ltd. 29,200 1,543,950
2,835,913
Grain Mill Products (1.39%)
Ralcorp Holdings, Inc. 15,000(a) 316,875
Ralston-Ralston Purina Group 14,600 1,071,275
1,388,150
Grocery Stores (0.40%)
Casey's General Stores, Inc. 21,200 $ 397,500
Hose, Belting, Gaskets &
Packing (1.33%)
Mark IV Industries 58,500 1,323,562
Hospitals (2.75%)
Columbia/HCA Healthcare Corp. 24,900 1,014,675
Humana, Inc. 45,500(a) 870,188
Universal Health Services, Inc.;
Class B 30,000(a) 858,750
2,743,613
Household Furniture (1.26%)
Masco Corp. 34,900 1,256,400
Investment Offices (1.12%)
Invesco FDG LLC Sponsored ADR 4,200(a) 182,700
Invesco PLC ADS 21,000 931,875
1,114,575
Knitting Mills (0.30%)
Russell Corp. 10,000 297,500
Lumber & Other Building
Materials (1.38%)
Home Depot, Inc. 27,400 1,373,425
Management & Public
Relations (2.37%)
ACNielson Corp. 1,666(a) 25,198
Cognizant Corp. 5,000 165,000
Dun & Bradstreet Corp. 5,000 118,750
Medaphis Corp. 183,000(a) 2,047,313
2,356,261
Medical Instruments &
Supplies (4.89%)
Becton, Dickinson & Co. 20,000 867,500
Boston Scientific Corp. 41,100(a) 2,466,000
Nellcor Puritan Bennett 70,200(a) 1,535,625
4,869,125
Medical Service & Health
Insurance (3.43%)
AON Corp. 11,700 726,862
Foundation Health Corp. 31,600(a) 1,003,300
Health System International, Inc. 21,000(a) 519,750
United Healthcare Corp. 15,000 675,000
Value Health, Inc. 25,000(a) 487,500
3,412,412
Millwork, Plywood & Structural
Members (1.01%)
Georgia-Pacific Corp. 14,000 1,008,000
Miscellaneous Chemical
Products (0.61%)
Loctite Corp. 10,000 608,750
Miscellaneous Converted Paper
Products (0.54%)
Minnesota Mining & Mfg. Co. 6,500 538,687
Miscellaneous Electrical Equipment &
Supplies (1.68%)
Motorola, Inc. 27,300 1,675,537
Miscellaneous Fabricated
Metal Products (0.95%)
Parker-Hannifin Corp. 24,300 $ 941,625
Miscellaneous Plastics Products,
NEC (0.23%)
Rubbermaid, Inc. 10,000 227,500
Miscellaneous Shopping Goods
Stores (0.45%)
Toys 'R' Us, Inc. 15,000(a) 450,000
Motor Vehicles & Equipment (3.35%)
Chrysler Corp. 60,200 1,986,600
Dana Corp. 41,300 1,347,413
3,334,013
Offices & Clinics of Medical
Doctors (0.98%)
FHP International Corp. 26,200(a) 972,675
Office Furniture (0.42%)
Chromcraft Revington, Inc. 15,100(a) 419,025
Operative Builders (0.60%)
Pulte Corp. 19,300 593,475
Paints & Allied Products (0.43%)
RPM, Inc. 25,000 425,000
Petroleum Refining (2.23%)
Atlantic Richfield Co. 5,800 768,500
Exxon Corp. 14,800 1,450,400
2,218,900
Photographic Equipment &
Supplies (0.01%)
Imation Corp. 380(a) 10,688
Plastic Materials & Synthetics (0.83%)
A. Schulman, Inc. 33,600 823,200
Preserved Fruits & Vegetables (0.86%)
CPC International, Inc. 11,100 860,250
Radio, Television & Computer
Stores (0.22%)
Tandy Corp. 5,000 220,000
Radio & Television
Broadcasting (0.91%)
Sinclair Broadcasting Group 35,000(a) 910,000
Refrigeration & Service
Machinery (0.97%)
Tecumseh Products Co.; Class A 16,800 963,900
Rubber & Plastics Footwear (1.20%)
Nike, Inc. 20,000 1,195,000
Sanitary Services (1.26%)
Browning-Ferris Industries, Inc. 29,300 769,125
WMX Technologies, Inc. 15,000 489,375
1,258,500
Security Brokers & Dealers (0.97%)
Salomon, Inc. 20,400 $ 961,350
Shoe Stores (0.06%)
Payless Shoesource Inc. 1,600(a) 60,000
Soap, Cleaners & Toilet Goods (3.11%)
Colgate-Palmolive Co. 11,700 1,079,325
Ecolab, Inc. 46,400 1,745,800
International Flavors & Fragrances, Inc. 6,000 270,000
3,095,125
Toys & Sporting Goods (1.00%)
Mattel, Inc. 35,950 997,612
Variety Stores (0.34%)
Wal-Mart Stores, Inc. 15,000 343,125
Women's & Children's
Undergarments (2.08%)
Warnaco Group; Class A 69,800 2,067,825
Total Common Stock 91,596,192
Preferred Stock (0.37%)
Offices & Clinics of Medical
Doctors (0.37%)
FHP International Corp.;
Series A Convertible 12,182 371,551
Principal
Amount Value
Commercial Paper (7.00%)
Business Credit Institutions (1.90%)
American Express Credit Corp.;
5.80%; 1/7/97 $1,900,000 $1,898,469
Personal Credit Institutions (3.34%)
Beneficial Corp.;
5.95%; 1/3/97 1,255,000 1,254,793
Ford Motor Credit Co.;
5.91%; 1/2/97 2,070,000 2,070,000
3,324,793
Security Brokers & Dealers (1.76%)
Merrill Lynch & Co., Inc.
6.20%; 1/6/97 1,755,000 1,753,791
Total Commercial Paper 6,977,053
Total Portfolio Investments (99.33%) 98,944,796
Cash and receivables, net of liabilities (0.67%) 667,114
Total Net Assets (100.00%) $99,611,910
(a) Non-income producing security - No dividend paid during the past twelve
months.
PRINCIPAL HIGH YIELD FUND, INC.
Principal
Amount Value
Bonds (90.48%)
Aircraft & Parts (2.03%)
Rohr Industries, Inc. Subordinated
Debentures; 9.25%; 3/1/17 $300,000 $ 279,000
Blast Furnace & Basic Steel
Products (3.24%)
Ivaco Senior Notes;
11.50%; 9/15/05 150,000 148,875
Weirton Steel Corp. Senior Notes;
10.75%; 6/1/05 300,000 297,000
445,875
Broadwoven Fabric Mills,
Cotton (2.21%)
J.P. Stevens & Co. Inc.
Sinking Fund Debentures;
9.00%; 3/1/17 300,000 303,750
Cable & Other Pay TV
Services (3.72%)
Jones Intercable, Inc. Senior Notes;
9.63%; 3/15/02 300,000 315,000
TCI Communications, Inc. Debentures;
8.75%; 8/1/15 200,000 196,656
511,656
Cogeneration - Small Power
Producer (3.50%)
AES Corp. Senior Subordinated
Notes; 10.25%; 7/15/06 300,000 322,500
California Energy Co., Inc.
Ltd. Resource Senior Secured
Notes; 9.88%; 6/30/03 150,000 158,250
480,750
Computer & Data Processing
Services (2.41%)
Tenet Healthcare Corp.
Senior Subordinated Notes;
10.13%; 3/1/05 300,000 331,500
Consumer Products (2.92%)
RJR Nabisco, Inc. Senior Notes;
8.75%; 8/15/05 400,000 401,641
Crude Petroleum & Natural
Gas (4.22%)
Chesapeake Energy Corp.
Senior Notes; 9.13%; 4/15/06 150,000 155,625
Nuevo Energy Co.
Senior Subordinated Notes;
9.50%; 4/15/06 400,000 424,000
579,625
Electric Services (1.15%)
El Paso Electric Co.
First Mortgage Bonds, Series D;
8.90%; 2/1/06 150,000 158,250
Electrical Industrial Apparatus (1.51%)
Motors & Gears, Inc.,
Series A Senior Notes;
10.75%; 11/15/06 200,000(a) 207,000
Electronic Components &
Accessories (2.37%)
Advanced Micro Devices, Inc.;
11.00%; 8/1/03 $300,000 $ 325,500
Engines & Turbines (2.03%)
Outboard Marine Corp. Debentures;
9.13%; 4/15/17 300,000 279,000
Footwear, Except Rubber (0.73%)
Brown Group, Inc. Senior Notes;
9.50%; 10/15/06 100,000 100,750
Forest Products (2.04%)
Doman Industries, Ltd. Senior Notes;
8.75%; 3/15/04 300,000 279,750
Fuel Dealers (2.23%)
Petroleum Heat & Power Co., Inc.
Subordinated Notes;
10.13%; 4/1/03 300,000 306,000
General Government, NEC (1.04%)
Republic of Argentina Global Bonds;
8.38%; 12/20/03 150,000 142,500
Groceries & Related Products (2.07%)
Rykoff-Sexton, Inc. Senior
Subordinated Notes;
8.88%; 11/1/03 300,000 285,000
Grocery Stores (3.51%)
Dominick's Finer Foods, Inc.
Senior Subordinated Notes;
10.88%; 5/1/05 150,000 166,500
Ralph's Grocery Co.
Senior Subordinated Notes;
11.00%; 6/15/05 300,000 315,750
482,250
Hotels & Motels (2.17%)
John Q. Hammons Hotels, L.P. &
Finance Corp. First Mortgage
Notes; 8.88%; 2/15/04 300,000 297,750
Industrial Inorganic Chemicals (1.51%)
PT Tri Polyta Indonesia TBK;
11.38%; 12/1/03 200,000 208,000
Knitting Mills (2.36%)
Tultex Corp. Senior Notes;
10.63%; 3/15/05 300,000 324,750
Miscellaneous Amusement, Recreation
Service (1.15%)
Rio Hotel & Casino, Inc.
Senior Subordinated Notes;
10.63%; 7/15/05 150,000 157,500
Miscellaneous Plastics Products,
NEC (2.17%)
Congoleum Corp. Senior Notes;
9.00%; 2/1/01 300,000 298,500
Motor Vehicles & Equipment (2.58%)
Blue Bird Body Company Senior
Subordinated Notes;
10.75%; 11/15/06 $50,000 $ 52,500
Lear Seating Corp. Subordinated
Notes; 8.25%; 2/1/02 300,000 302,250
354,750
Nonferrous Foundries
(Casting) (1.19%)
Howmet Corp. Senior Subordinated
Notes; 10.00%; 12/1/03 150,000 163,500
Nursing & Personal Care
Facilities (2.14%)
Mariner Health Group, Inc. Senior
Subordinated Notes; 9.50%; 4/1/06 300,000 294,000
Oil & Gas Field Services (0.77%)
Parker Drilling Company Senior Notes;
9.75%; 11/15/06 100,000(a) 105,250
Petroleum Refining (2.23%)
Crown Central Petroleum Corp.
Senior Notes; 10.88%; 2/1/05 300,000 306,750
Primary Nonferrous Metals (0.38%)
Euramax International PLC Senior
Subordinated Notes;
11.25%; 10/1/06 50,000(a) 51,625
Pulp Mills (2.64%)
Magnetek, Inc. Senior Subordinated
Debentures; 10.75%; 11/15/98 350,000 363,125
Radio, Television & Computer
Stores (2.24%)
Compusa, Inc. Senior Subordinated
Notes; 9.50%; 6/15/00 300,000 307,500
Radio & Television
Broadcasting (3.24%)
American Radio Systems
Senior Subordinated Notes;
9.00%; 2/1/06 300,000 295,500
Sullivan Broadcasting Inc.
Senior Subordinated Notes;
10.25%; 12/15/05 150,000 150,375
445,875
Retail Stores, NEC (1.50%)
Cole National Group, Inc. Senior
Subordinated Notes;
9.88%; 12/31/06 200,000(a) 206,000
School Buses (1.51%)
Lamar Advertising Company Senior
Subordinated Notes;
9.63%; 12/1/06 200,000 207,000
Soap, Cleaners & Toilet Goods (2.32%)
Coty, Inc. Senior Subordinated
Notes; 10.25%; 5/1/05 300,000 318,750
Telephone Communication (10.79%)
360 Communications Co.
Senior Notes; 7.50%; 3/1/06 $150,000 $ 148,813
Paging Network, Inc. Senior
Debentures; 8.88%; 2/1/06 300,000 286,125
Rogers Cablesystems Ltd. Senior
Secured Second Priority Notes;
9.63%; 8/1/02 250,000 261,250
Rogers Cantel Inc. Senior Secured
Debentures; 9.75%; 6/1/16 300,000 315,000
Telecom Argentina Stet-France
Telecom SA Senior Notes;
12.00%; 11/15/02 150,000 168,375
Vanguard Cellular Systems, Inc.
Senior Debentures; 9.38%; 4/15/06 300,000 303,000
1,482,563
Textile Finishing, Except Wool (2.23%)
Dominion Textile (USA) Inc.
Guaranteed Senior Notes;
9.25%; 4/1/06 300,000 306,000
Water Supply (2.43%)
California Energy Casecnan Water &
Energy Co., Inc. Senior Secured
Bonds Series B; 11.95%; 11/15/10 300,000 333,750
Total Bonds 12,432,735
Commercial Paper (7.28%)
Federal & Federally Sponsored
Credit (7.28%)
FHLMC Commercial Paper;
5.40%; 1/2/97 1,000,000 1,000,000
Total Portfolio Investments (97.76%) 13,432,735
Cash and receivables, net of liabilities (2.24%) 307,608
Total Net Assets (100.00%) $13,740,343
(a) Restricted Security - See Note 4 to the financial statements.
PRINCIPAL MONEY MARKET FUND, INC.
Principal
Amount Value
Commercial Paper (84.65%)
Asset Backed Securities (8.89%)
Corporate Asset Funding Co.;
5.55%; 1/28/97 $500,000 $ 497,996
5.55%; 1/29/97 275,000 273,855
Retailer Funding Corp. Notes;
5.65%; 1/23/97 500,000 498,352
5.60%; 1/30/97 750,000 746,733
Ciesco L.P.;
5.50%; 1/16/97 850,000 848,182
5.65%; 1/22/97 500,000 498,431
5.60%; 1/31/97 750,000 746,617
4,110,116
Business Credit Institutions (7.74%)
AON Corp.;
5.31%; 1/17/97 $750,000 $ 748,340
5.30%; 2/7/97 600,000 596,820
CIT Group Holdings, Inc.;
5.31%; 2/28/97 400,000 396,637
5.28%; 6/2/97 750,000 733,390
General Electric Capital Corp.;
5.29%; 1/24/97 500,000 498,384
International Lease Finance Corp.;
5.55%; 1/17/97 605,000 603,601
3,577,172
Computer & Office Equipment (3.83%)
Xerox Credit Corp.;
5.38%; 1/24/97 180,000 179,409
5.65%; 1/22/97 475,000 473,509
5.32%; 2/4/97 125,000 124,390
5.50%; 2/5/97 1,000,000 994,806
1,772,114
Department Stores (1.49%)
Sears Roebuck Acceptance Corp.;
5.31%; 3/11/97 350,000 346,489
5.39%; 5/19/97 350,000 342,821
689,310
Drugs (0.79%)
Abbott Laboratories;
5.95%; 1/9/97 365,000 364,578
Electric Services (5.75%)
AES Shady Point, Inc.;
5.42%; 1/10/97 500,000 499,398
5.42%; 1/13/97 150,000 149,751
Commed Fuel Co., Inc.;
LOC Canadian Imperial Bank of
Commerce;
5.31%; 2/26/97 125,000 123,986
5.32%; 2/25/97 400,000 396,749
5.31%; 2/25/97 400,000 396,814
LOC Credit Suisse; 5/37%; 2/11/97 750,000 745,525
Florida Power Corp.;
5.55%; 1/28/97 350,000 348,597
2,660,820
Finance Services (4.62%)
Mitsubishi International Corp.;
5.34%; 1/27/97 700,000 697,404
5.40%; 2/10/97 500,000 497,075
5.32%; 3/3/97 325,000 322,118
5.35%; 3/3/97 375,000 371,656
5.43%; 3/17/97 250,000 247,210
2,135,463
Foregin Banks, Branches &
Agencies (2.97%)
Barclays U.S. Funding;
5.73%; 1/3/97 625,000 624,901
5.50%; 1/21/97 750,000 747,823
1,372,724
Forest Products (2.15%)
Weyerhaeuser Co.;
5.50%; 2/6/97 1,000,000 994,653
Gas Production & Distribution (0.99%)
Washingtron Gas Light Co.;
5.65%; 2/7/97 460,000 457,401
Investment Offices (3.99%)
Morgan Stanley Group, Inc.;
5.43%; 1/7/97 $500,000 $ 499,623
5.43%; 1/15/97 600,000 598,824
5.37%; 2/12/97 750,000 745,413
1,843,860
Miscellaneous Investing (1.62%)
MLTC Funding, Inc.;
LOC Citibank, N.A.;
5.32%; 1/21/97 400,000 398,877
5.33%; 1/24/97 350,000 348,860
747,737
Mortgage Bankers & Brokers (0.56%)
Countrywide Home Loan, Inc.;
5.46%; 1/15/97 260,000 259,487
Motor Vehicles & Equipment (4.73%)
Echlin, Inc.;
5.40%; 1/6/97 250,000 249,850
5.34%; 1/16/97 350,000 349,273
5.38%; 1/16/97 300,000 299,372
5.42%; 1/29/97 400,000 398,374
5.36%; 3/14/97 500,000 494,715
5.41%; 3/18/97 400,000 395,492
2,187,076
Personal Credit Institutions (7.77%)
Comoloco Inc.;
5.40%; 2/10/97 500,000 497,075
5.32%; 2/27/97 500,000 495,862
5.50%; 5/23/97 250,000 244,615
5.38%; 7/24/97 500,000 484,831
Ford Motor Credit Co.;
5.34%; 1/30/97 250,000 248,962
General Motors Acceptance Corp.;
5.35%; 1/17/97 150,000 149,666
5.45%; 1/24/97 150,000 149,501
5.60%; 3/3/97 125,000 123,833
5.67%; 3/7/97 400,000 395,968
5.70%; 3/10/97 200,000 197,878
5.68%; 3/14/97 250,000 247,199
Norwest Financial, Inc.;
5.30%; 2/18/97 360,000 357,509
3,592,899
Real Estate Operators &
Lessors (3.02%)
Towson Town Center, Inc.; LOC
Bank of Tokyo-Mitsubishi, Ltd.;
5.60%; 1/16/97 400,000 399,128
5.40%; 1/17/97 200,000 199,550
5.40%; 1/17/97 300,000 299,325
5.55%; 2/19/97 500,000 496,300
1,394,303
Security Brokers & Dealers (14.42%)
Bear Stearns Cos.;
5.50%; 1/31/97 700,000 696,899
Goldman Sachs Group, L.P.;
5.45%; 1/8/97 575,000 574,478
5.35%; 2/14/97 825,000 819,728
5.37%; 2/14/97 400,000 397,434
5.32%; 3/21/97 375,000 370,677
Security Brokers & Dealers (Con't)
Merrill Lynch & Co., Inc.;
5.45%; 1/9/97 $500,000 $ 499,470
5.34%; 1/13/97 150,000 149,755
5.33%; 1/22/97 225,000 224,334
5.33%; 1/23/97 500,000 498,445
5.33%; 1/23/97 200,000 199,378
5.35%; 2/13/97 575,000 571,411
Smith Barney Inc.;
5.42%; 1/2/97 700,000 700,000
5.40%; 1/3/97 500,000 499,925
5.45%; 1/3/97 300,000 299,955
5.55%; 1/3/97 170,000 169,974
6,671,863
Soap, Cleaners & Toilet Goods (0.49%)
Procter & Gamble Co.;
5.55%; 1/7/97 225,000 224,827
Subdividers & Developers (4.41%)
Hartz 667 Commercial Paper Corp.;
LOC Bank of Tokyo-Mitsubishi, Ltd.;
5.42%; 1/14/97 1,000,000 998,193
5.67%; 2/3/97 750,000 746,220
5.40%; 2/3/97 300,000 298,560
2,042,973
Tires & Inner Tubes (4.42%)
Bridgestone/Firestone;
LOC Sumitomo Bank Ltd.;
5.55%; 1/6/97 750,000 749,538
5.50%; 1/8/97 400,000 399,633
6.00%; 1/9/97 400,000 399,533
5.37%; 1/13/97 500,000 499,180
2,047,884
Total Commercial Paper 39,147,310
Bank Notes (4.00%)
Commercial Banks (4.00%)
LaSalle National Bank;
5.56%; 3/6/97 300,000 300,000
5.47%; 3/15/97 300,000 300,000
5.77%; 4/25/97 350,000 350,000
5.72%; 4/30/97 400,000 400,000
6.20%; 8/21/97 500,000 500,000
Total Bank Notes 1,850,000
Bonds (9.61%)
Business Credit Institutions (2.16%)
John Deere Capital Corp.
Medium-Term Notes, Series C;
5.95%; 6/30/97 1,000,000 999,444
Electric Services (1.09%)
Southern California Edison Co. Ref.
Mortgage; 6.13%; 7/15/97 500,000 501,335
Personal Credit Institutions (6.36%)
American General Finance Corp.;
7.70%; 11/15/97 $500,000 $ 508,455
Associates Corp. of North America
Senior Notes;
8.63%; 6/15/97 1,000,000 1,012,035
6.75%; 7/15/97 500,000 502,280
Ford Motor Credit Co.;
5.63%; 3/3/97 415,000 415,074
Household Finance Corp. Notes;
6.25%; 10/15/97 500,000 501,899
2,939,743
Total Bonds 4,440,522
U.S. Government Treasury Bill (1.41%)
Treasury Bill (1.41%)
U.S. Government Treasury Bill;
5.09%; 3/6/97 660,000 654,077
Total Portfolio Investments (99.67%) 46,091,909
Cash and receivables, net of liabilities (0.33%) 152,340
Total Net Assets (100.00%) $46,244,249
PRINCIPAL WORLD FUND, INC.
Shares
Held Value
Common Stocks (94.61%)
Aircraft & Parts (0.03%)
Cemex SA 6,936 $ 24,891
Beverages (1.21%)
Lion Nathan 362,000 867,047
Blast Furnace & Basic Steel
Products (1.27%)
Voest-Alpine Stahl 25,700(b) 913,290
Cement, Hydraulic (0.06%)
Apasco SA 6,320 43,354
Central Reserve Depositories (5.23%)
Banco Totta & Acores 23,000 433,185
Barclays PLC 83,048 1,421,911
Ergo Bank 3,800 192,611
Union Bank of Norway 12,800 400,916
Wing Hang Bank 286,000 1,297,816
3,746,439
Combination Utility Services (2.51%)
ABB AG 905 1,122,218
Iberdrola 1 SA 47,600 673,334
1,795,552
Commercial Banks (7.62%)
ABN-AMRO Holdings NV 12,235 795,042
Bank of Ireland 116,449 1,063,155
Fokus Bank 119,000(b) $ 818,135
Grupo Financiero Bancomer;
Series B 235,000(a) 94,036
National Australia Bank Ltd. 89,885 1,056,606
Siam City Bank 555,000 519,500
Svenska Handelsbanken AB Free 40,500 1,115,110
5,461,584
Communications Services,
NEC (1.03%)
KPN Royal PTT Nederland 19,389 738,688
Computer & Office Equipment (0.12%)
Canon, Inc. 4,000 88,222
Concrete, Gypsum & Plaster
Products (0.02%)
Cementos de Mexico SA 3,200 12,439
Construction & Related
Machinery (0.78%)
Powerscreen International PLC 58,100 561,760
Consumer Products (1.90%)
Imasco Ltd. 55,700 1,365,422
Crude Petroleum & Natural
Gas (0.62%)
Hardy Oil & Gas 86,200 443,280
Deap Sea Foreign Transportation
of Freight (0.50%)
Van Ommeren NV 7,900 356,239
Department Stores (0.75%)
Vendex International 12,500 534,041
Drugs (4.05%)
Elan Corp. PLC ADR 23,400(a) 778,050
Galenica Holdings AG 480 170,877
Roussel-Uclaf 2,970 872,364
Teva Pharmaceutical ADR 21,500 1,080,375
2,901,666
Electric Light & Wiring
Equipment (0.33%)
Clipsal Industries Holdings 25,000 91,000
Otra NV 8,300 142,513
233,513
Electric Services (1.12%)
Korea Electric Power Corp. 8,100 235,671
Korea Mobil Telecommunications
Corp. 290 156,404
Northern Ireland Electric 63,400 413,372
805,447
Electronic Components &
Accessories (2.71%)
Amtek Engineering 391,250 777,567
Elec & Eltek International 268,000 1,018,400
Murata Mfg. 1,000 33,170
Varitronix 63,000 114,027
1,943,164
Electronic Distribution
Equipment (3.42%)
Amper SA 38,000 869,114
Phillips Electronics 28,900 $1,169,542
Techtronic Industries Co. 2,800 416,290
2,454,946
Engines & Turbines (2.38%)
Mabuchi Motor 1,400 70,320
PT United Tractors 372,000 779,428
Scapa Group PLC 204,000 855,308
1,705,056
Farm & Garden Machinery (1.31%)
New Holland NV 45,000(a) 939,375
Finance Services (1.34%)
MBF Capital Berhad 592,000 961,075
Foreign Banks, Branches &
Agencies (0.05%)
Shinhan Bank 2,740(a) 37,268
Forest Products (0.17%)
Metsa-Serla 16,000 119,765
Functions Closely Related to
Banking (0.87%)
Liechtenstein Global Trust AG 1,225 625,856
Gas Production & Distribution (1.62%)
Hafslund ASA 5,467 37,415
OMV AG 9,950 1,120,800
1,158,215
Highway & Street
Construction (0.38%)
BAU Holdings AG 3,030 151,227
Edrasis Psallidas 14,664 124,820
276,047
Holding Offices (1.21%)
First Pacific Co. Ltd. 666,382 865,824
Household Appliances (1.00%)
Fisher & Paykel 182,086 714,012
Household Audio & Video
Equipment (0.88%)
SKF 'B' Free 26,800 633,888
Industrial Inorganic Chemicals (2.12%)
Bayer AG 20,100 814,507
Kemira OY 56,000(a)(b) 704,707
1,519,214
Investment Offices (1.41%)
Invesco Funding 37,800(a) 167,863
Invesco PLC 189,000 839,316
1,007,179
Meat Products (7.06%)
AFFCO Holdings 1,147,265 502,562
Danisco AS 22,000 1,335,163
Davomas Abadi 780,000 701,587
Orkla B Ordinary Shares 21,300 1,350,977
Unilever NV 6,630 1,171,350
5,061,639
Medical Instruments &
Supplies (0.12%)
Nycomed 5,467 83,905
Miscellaneous Chemical
Products (3.43%)
Hoechst AG 22,500 $1,040,971
Novartis AG 1,238 1,414,204
2,455,175
Miscellaneous Durable Goods (1.02%)
Hagemeyer NV 9,175 732,520
Miscellaneous Equipment Rental &
Leasing (1.36%)
Insituto Mobiliane Italian 114,000 974,679
Miscellaneous Food & Kindred
Products (0.57%)
Burns, Philp & Co., Ltd. 230,631 410,322
Miscellaneous Furniture &
Fixtures (0.08%)
Pt Surya Toto 29,000 57,693
Miscellaneous Manufacturers (0.57%)
Carter Holt Harvey Ltd. 181,000 410,504
Miscellaneous Non-Durable
Goods (1.97%)
Grand Metropolitan PLC 179,500 1,409,949
Miscellaneous Plastics Products,
NEC (0.62%)
Royal Plastics Group 24,100(b) 445,725
Miscellaneous Textile Goods (0.72%)
Espirit Asia 1,158,000 512,754
Miscellaneous Transportation
Equipment (0.54%)
Autoliv AB 8,900 389,732
Miscellaneous Transportation
Services (0.23%)
Koninklijke Pakhoed NV 5,281 164,865
Miscellaneous Wood Products (0.25%)
Enso OY 22,300 179,019
Motor Vehicles & Equipment (1.74%)
E.C.I.A. Equipment & Composants 4,600 709,634
Hyundai Motor Co. Ltd. GDR 25,000(b) 173,750
Volvo AB 16,450 362,583
1,245,967
Motor Vehicles, Parts &
Supplies (1.06%)
Dahl International AB 36,000(a) 756,588
Newspapers (1.57%)
Marcoiberica Distribucion de
Edicioues 58,500 618,393
Publishing & Broadcasting Ltd. 104,000 505,527
1,123,920
Oil & Gas Field Services (1.55%)
Repsol Petroleo SA 28,960 1,108,751
Personal Credit Institutions (0.28%)
Manhattan Card Co. 402,000 $ 203,988
Plastic Materials & Synthetics (1.21%)
Astra AB 18,000 867,308
Primary Nonferrous Metals (0.46%)
British Steel PLC 121,300 333,167
Pulp Mills (1.65%)
Lassila & Tikanoja Ltd. OY 10,700 677,890
UPM-Kymmene OY 24,140 505,425
1,183,315
Railroad Equipment (0.23%)
Vae AG 1,470 166,670
Security Brokers & Dealers (1.27%)
Peregrine Investment Holdings 526,000 901,035
Peregrine Investment - Warrants 38,800(a) 12,415
913,450
Security & Commodity
Services (1.62%)
Corporacion Bancaria de Espania SA 26,000 1,161,330
Ship & Boat Building &
Repairing (0.21%)
Unitor Ships Service 11,930 153,203
Soap, Cleaners, & Toilet Goods (1.29%)
Reckitt & Colman PLC 74,350 921,183
Special Industry Machinery (1.21%)
Bobst SA 205 276,342
IHC Caland NV 7,700 439,367
Sulzer AG 290 154,641
870,350
Sugar & Confectionary
Products (3.23%)
Nestle 1,125 1,203,992
Tate & Lyle 137,000 1,111,284
2,315,276
Telephone Communication (6.69%)
Cable & Wireless PLC 64,000 531,735
Investec Consultadoria
Internacional 8,600(a) 265,894
Nokia Corp.; Class A ADR 23,800 1,371,475
Tele Danmark B 8,500 468,307
Telecom Italia-DI 448,200 872,523
Telefonica de Espana SA 49,700 1,151,993
Telefonos de Mexico SA ADR 4,050 133,650
4,795,577
Water Supply (0.26%)
Wessex Water PLC 28,596 184,005
Water Transportation of Freight,
NEC (0.52%)
ICB Shipping AB 'B' Free 32,000 374,925
Total Common Stocks 67,821,212
Bonds (1.07%)
Fire, Marine & Casualty
Insurance (1.07%)
Alfa SA Convertible Subordinated
Debentures; 8.00%; 9/15/00 $700,000(b) $ 766,500
Commercial Paper (4.54%)
Business Credit Institutions (2.93%)
General Electric Capital Corp.;
6.65%; 1/2/97 2,100,000 2,100,000
Personal Credit Institutions (1.61%)
Ford Motor Credit Co.;
5.91%; 1/2/97 1,155,000 1,155,000
Total Commercial Paper 3,255,000
Total Portfolio Investments (100.22%) 71,842,712
Liabilities, net of cash and receivables (-0.22%) (160,697)
Total Net Assets (100.00%) $71,682,015
(a) Non-Income producing security - No dividend paid during the period.
(b) Restricted security - See Note 4 to the financial statements.
Principal World Fund, Inc. Investments by Country
Total Market Percentage of Total
Country Value Market Value
Australia $ 1,972,456 2.75%
Austria 2,351,987 3.27
Canada 1,811,148 2.52
Denmark 1,803,470 2.51
Finland 3,558,281 4.95
France 1,581,998 2.20
Germany 1,855,478 2.58
Greece 317,431 0.45
Hong Kong 4,324,148 6.02
Indonesia 1,538,708 2.14
Israel 1,080,375 1.50
Italy 1,847,203 2.57
Japan 191,712 0.27
Korea 603,094 0.84
Malaysia 961,075 1.34
Mexico 1,074,869 1.50
Netherlands 7,183,542 10.00
New Zealand 2,494,126 3.47
Norway 2,844,551 3.96
Portugal 699,079 0.97
Singapore 1,886,967 2.63
Spain 5,582,915 7.77
Sweden 4,500,134 6.26
Switzerland 4,968,129 6.92
Thailand 519,500 0.72
United Kingdom 11,035,336 15.36
United States 3,255,000 4.53
Total Market Value $71,842,712 100.00%
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from
Investment Operations Less Distributions
---------------------------------------- ---------------------------------
Net Realized
and
Net Asset Net Unrealized Total Dividends
Value at Invest- Gain from from Net Distributions
Beginning ment (Loss) on Investment Investment from
of Period Income Investments Operations Income Capital Gains
PRINCIPAL AGGRESSIVE GROWTH FUND INC.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
1996 $12.94 $.11 $3.38 $3.49 $(.11) $(1.80)
1995 10.11 .13 4.31 4.44 (.13) (1.48)
Period Ended December 31, 1994(d) 9.92 .05 .24 .29 (.05) (.05)
PRINCIPAL ASSET ALLOCATION FUND, INC.
Year Ended December 31,
1996 11.11 .36 1.06 1.42 (.36) (.69)
1995 9.79 .40 1.62 2.02 (.40) (.30)
Period Ended December 31, 1994(d) 9.98 .23 (.18) .05 (.23) --
PRINCIPAL BALANCED FUND, INC.
Year Ended December 31,
1996 13.97 .40 1.41 1.81 (.40) (.94)
1995 11.95 .45 2.44 2.89 (.45) (.42)
1994 12.77 .37 (.64) (.27) (.37) (.18)
1993 12.58 .42 .95 1.37 (.42) (.76)
Six Months Ended December 31, 1992(a) 12.93 .23 .75 .98 (.47) (.86)
Year Ended June 30, 1992 11.33 .47 1.61 2.08 (.48) --
PRINCIPAL BOND FUND, INC.
Year Ended December 31,
1996 11.73 .68 (.40) .28 (.68) --
1995 10.12 .62 1.62 2.24 (.63) --
1994 11.16 .72 (1.04) (.32) (.72) --
1993 10.77 .88 .38 1.26 (.87) --
Six Months Ended December 31, 1992(a) 11.08 .45 .13 .58 (.89) --
Year Ended June 30, 1992 10.64 .91 .46 1.37 (.93) --
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
Year Ended December 31,
1996 27.80 .57 5.82 6.39 (.58) (3.77)
1995 23.44 .60 6.69 7.29 (.60) (2.33)
1994 24.61 .62 (.49) .13 (.61) (.69)
1993 25.19 .61 1.32 1.93 (.60) (1.91)
Six Months Ended December 31, 1992(a) 26.03 .31 1.84 2.15 (.64) (2.35)
Year Ended June 30, 1992 23.35 .65 2.70 3.35 (.67) --
PRINCIPAL EMERGING GROWTH FUND, INC.
Year Ended December 31,
1996 25.33 .22 5.07 5.29 (.22) (.66)
1995 19.97 .22 5.57 5.79 (.22) (.21)
1994 20.79 .14 .03 .17 (.14) (.85)
1993 18.91 .17 3.47 3.64 (.17) (1.59)
Six Months Ended December 31, 1992(a) 15.97 .10 3.09 3.19 (.21) (.04)
Year Ended June 30, 1992 13.93 .21 2.04 2.25 (.21) --
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
Ratios/Supplemental Data
---------------------------- -------------------------------
Excess Net Asset Ratio of
Distributions Value at Net Assets at Expenses to
from Total End of Total End of Period Average
Capital Gains Distributions Period Return (in thousands) Net Assets
PRINCIPAL AGGRESSIVE GROWTH FUND INC.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
1996 $ -- $(1.91) $14.52 28.05% $90,106 .85%
1995 -- (1.61) 12.94 44.19% 33,643 .90%
Period Ended December 31, 1994(d) -- (.10) 10.11 2.59%(c) 13,770 1.03%(b)
PRINCIPAL ASSET ALLOCATION FUND, INC.
Year Ended December 31,
1996 -- (1.05) 11.48 12.92% 61,631 .87%
1995 -- (.70) 11.11 20.66% 41,074 .89%
Period Ended December 31, 1994(d) (.01) (.24) 9.79 .52%(c) 28,041 .95%(b)
PRINCIPAL BALANCED FUND, INC.
Year Ended December 31,
1996 -- (1.34) 14.44 13.13% 93,158 .63%
1995 -- (.87) 13.97 24.58% 45,403 .66%
1994 -- (.55) 11.95 (2.09)% 25,043 .69%
1993 -- (1.18) 12.77 11.06% 21,399 .69%
Six Months Ended December 31, 1992(a) -- (1.33) 12.58 8.00%(c) 18,842 .73%(b)
Year Ended June 30, 1992 -- (.48) 12.93 18.78% 17,344 .72%
PRINCIPAL BOND FUND, INC.
Year Ended December 31,
1996 -- (.68) 11.33 2.36% 63,387 .53%
1995 -- (.63) 11.73 22.17% 35,878 .56%
1994 -- (.72) 10.12 (2.90)% 17,108 .58%
1993 -- (.87) 11.16 11.67% 14,387 .59%
Six Months Ended December 31, 1992(a) -- (.89) 10.77 5.33%(c) 12,790 .62%(b)
Year Ended June 30, 1992 -- (.93) 11.08 13.57% 12,024 .62%
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
Year Ended December 31,
1996 -- (4.35) 29.84 23.50% 205,019 .49%
1995 -- (2.93) 27.80 31.91% 135,640 .51%
1994 -- (1.30) 23.44 .49% 120,572 .51%
1993 -- (2.51) 24.61 7.79% 128,515 .51%
Six Months Ended December 31, 1992(a) -- (2.99) 25.19 8.81%(c) 105,355 .55%(b)
Year Ended June 30, 1992 -- (.67) 26.03 14.53% 94,596 .54%
PRINCIPAL EMERGING GROWTH FUND, INC.
Year Ended December 31,
1996 -- (.88) 29.74 21.11% 137,161 .66%
1995 -- (.43) 25.33 29.01% 58,520 .70%
1994 -- (.99) 19.97 .78% 23,912 .74%
1993 -- (1.76) 20.79 19.28% 12,188 .78%
Six Months Ended December 31, 1992(a) -- (.25) 18.91 20.12%(c) 9,693 .81%(b)
Year Ended June 30, 1992 -- (.21) 15.97 16.19% 7,829 .82%
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
-------------------------------
Ratio of Net
Investment
Income to Portfolio Average
Average Turnover Commission
Net Assets Rate Rate
PRINCIPAL AGGRESSIVE GROWTH FUND INC.
Year Ended December 31,
<S> <C> <C> <C>
1996 1.05% 166.9% $.0541
1995 1.34% 172.9% N/A
Period Ended December 31, 1994(d) 1.06%(b) 105.6%(b) N/A
PRINCIPAL ASSET ALLOCATION FUND, INC.
Year Ended December 31,
1996 3.45% 108.2% .0497
1995 4.07% 47.1% N/A
Period Ended December 31, 1994(d) 4.27%(b) 60.7%(b) N/A
PRINCIPAL BALANCED FUND, INC.
Year Ended December 31,
1996 3.45% 22.6% .0417
1995 4.12% 25.7% N/A
1994 3.42% 31.5% N/A
1993 3.30% 15.8% N/A
Six Months Ended December 31, 1992(a) 3.71%(b) 38.4%(b) N/A
Year Ended June 30, 1992 3.80% 26.6% N/A
PRINCIPAL BOND FUND, INC.
Year Ended December 31,
1996 7.00% 1.7% N/A
1995 7.28% 5.9% N/A
1994 7.86% 18.2% N/A
1993 7.57% 14.0% N/A
Six Months Ended December 31, 1992(a) 8.10%(b) 6.7%(b) N/A
Year Ended June 30, 1992 8.47% 6.1% N/A
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
Year Ended December 31,
1996 2.06% 48.5% .0426
1995 2.25% 49.2% N/A
1994 2.36% 44.5% N/A
1993 2.49% 25.8% N/A
Six Months Ended December 31, 1992(a) 2.56%(b) 39.7%(b) N/A
Year Ended June 30, 1992 2.65% 34.8% N/A
PRINCIPAL EMERGING GROWTH FUND, INC.
Year Ended December 31,
1996 1.07% 8.8% .0379
1995 1.23% 13.1% N/A
1994 1.15% 12.0% N/A
1993 .89% 22.4% N/A
Six Months Ended December 31, 1992(a) 1.24%(b) 8.6%(b) N/A
Year Ended June 30, 1992 1.33% 10.1% N/A
<FN>
See accompanying notes.
</FN>
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (Continued)
Selected data for a share of Capital Stock outstanding throughout each period:
Income from
Investment Operations Less Distributions
--------------------------------------- -------------------------------
Net Realized
and
Net Asset Net Unrealized Total Dividends
Value at Invest- Gain from from Net Distributions
Beginning ment (Loss) on Investment Investment from
of Period Income Investments Operations Income Capital Gains
PRINCIPAL GOVERNMENT SECURITIES FUND, INC.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
1996 $10.55 $.59 $ (.24) $ .35 $(.59) $ --
1995 9.38 .60 1.18 1.78 (.61) --
1994 10.61 .76 (1.24) (.48) (.75) --
1993 10.28 .71 .33 1.04 (.71) --
Six Months Ended December 31, 1992(a) 10.93 .40 .04 .44 (.78) --
Year Ended June 30, 1992 10.24 .80 .71 1.51 (.81) --
PRINCIPAL GROWTH FUND, INC.
Year Ended December 31,
1996 12.43 .16 1.39 1.55 (.16) (.03)
1995 10.10 .17 2.42 2.59 (.17) --
Period Ended December 31, 1994(e) 9.60 .07 .51 .58 (.08) --
PRINCIPAL HIGH YIELD FUND, INC.
Year Ended December 31,
1996 8.39 .80 .30 1.10 (.77) --
1995 7.91 .76 .51 1.27 (.77) (.02)
1994 8.62 .77 (.72) .05 (.76) --
1993 8.38 .80 .23 1.03 (.79) --
Six Months Ended December 31, 1992(a) 8.93 .45 (.10) .35 (.90) --
Year Ended June 30, 1992 8.28 .92 .66 1.58 (.93) --
PRINCIPAL MONEY MARKET FUND, INC.
Year Ended December 31,
1996 1.000 .049 -- .049 (.049) --
1995 1.000 .054 -- .054 (.054) --
1994 1.000 .037 -- .037 (.037) --
1993 1.000 .027 -- .027 (.027) --
Six Months Ended December 31, 1992(a) 1.000 .016 -- .016 (.016) --
Year Ended June 30, 1992 1.000 .046 -- .046 (.046) --
PRINCIPAL WORLD FUND, INC.
Year Ended December 31,
1996 10.72 .22 2.46 2.68 (.22) (.16)
1995 9.56 .19 1.16 1.35 (.18) --
Period Ended December 31, 1994(e) 9.94 .03 (.33) (.30) (.05) (.02)
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
---------------------------------
Excess Net Asset
Distributions Value at
from Total End of Total
Capital Gains Distributions Period Return
PRINCIPAL GOVERNMENT SECURITIES FUND, INC.
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $ -- $ (.59) $10.31 3.35%
1995 -- (.61) 10.55 19.07%
1994 -- (.75) 9.38 (4.53)%
1993 -- (.71) 10.61 10.07%
Six Months Ended December 31, 1992(a) (.31) (1.09) 10.28 4.10%(c)
Year Ended June 30, 1992 (.01) (.82) 10.93 15.34%
PRINCIPAL GROWTH FUND, INC.
Year Ended December 31,
1996 -- (.19) 13.79 12.51%
1995 (.09) (.26) 12.43 25.62%
Period Ended December 31, 1994(e) -- (.08) 10.10 5.42%(c)
PRINCIPAL HIGH YIELD FUND, INC.
Year Ended December 31,
1996 -- (.77) 8.72 13.13%
1995 -- (.79) 8.39 16.08%
1994 -- (.76) 7.91 .62%
1993 -- (.79) 8.62 12.31%
Six Months Ended December 31, 1992(a) -- (.90) 8.38 4.06%(c)
Year Ended June 30, 1992 -- (.93) 8.93 20.70%
PRINCIPAL MONEY MARKET FUND, INC.
Year Ended December 31,
1996 -- (.049) 1.000 5.07%
1995 -- (.054) 1.000 5.59%
1994 -- (.037) 1.000 3.76%
1993 -- (.027) 1.000 2.69%
Six Months Ended December 31, 1992(a) -- (.016) 1.000 1.54%(c)
Year Ended June 30, 1992 -- (.046) 1.000 4.64%
PRINCIPAL WORLD FUND, INC.
Year Ended December 31,
1996 -- (.38) 13.02 25.09%
1995 (.01) (.19) 10.72 14.17%
Period Ended December 31, 1994(e) (.01) (.08) 9.56 (3.37)%(c)
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
Ratios/Supplemental Data
--------------------------------------------------------------
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio Average
End of Period Average Average Turnover Commission
(in thousands) Net Assets Net Assets Rate Rate
PRINCIPAL GOVERNMENT SECURITIES FUND, INC.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
1996 $85,100 .52% 6.46% 8.4% N/A
1995 50,079 .55% 6.73% 9.8% N/A
1994 36,121 .56% 7.05% 23.2% N/A
1993 36,659 .55% 7.07% 20.4% N/A
Six Months Ended December 31, 1992(a) 31,760 .59%(b) 7.35%(b) 34.5%(b) N/A
Year Ended June 30, 1992 33,022 .58% 7.84% 38.9% N/A
PRINCIPAL GROWTH FUND, INC.
Year Ended December 31,
1996 99,612 .52% 1.61% 2.0% $.0401
1995 42,708 .58% 2.08% 6.9% N/A
Period Ended December 31, 1994(e) 13,086 .75%(b) 2.39%(b) 0.9%(b) N/A
PRINCIPAL HIGH YIELD FUND, INC.
Year Ended December 31,
1996 13,740 .70% 9.21% 32.0% N/A
1995 11,830 .73% 9.09% 35.1% N/A
1994 9,697 .73% 9.02% 30.6% N/A
1993 9,576 .74% 8.80% 28.7% N/A
Six Months Ended December 31, 1992(a) 8,924 .77%(b) 10.33%(b) 20.6%(b) N/A
Year Ended June 30, 1992 8,556 .77% 11.00% 31.3% N/A
PRINCIPAL MONEY MARKET FUND, INC.
Year Ended December 31,
1996 46,244 .56% 5.00% N/A N/A
1995 32,670 .58% 5.32% N/A N/A
1994 29,372 .60% 3.81% N/A N/A
1993 22,753 .60% 2.64% N/A N/A
Six Months Ended December 31, 1992(a) 27,680 .59%(b) 3.10%(b) N/A N/A
Year Ended June 30, 1992 25,194 .57% 4.54% N/A N/A
PRINCIPAL WORLD FUND, INC.
Year Ended December 31,
1996 71,682 .90% 2.28% 12.5% .0120
1995 30,566 .95% 2.26% 15.6% N/A
Period Ended December 31, 1994(e) 13,746 1.24%(b) 1.31%(b) 14.4%(b) N/A
<FN>
See accompanying notes.
</FN>
</TABLE>
Notes to Financial Highlights
(a) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(b) Computed on an annualized basis.
(c) Total return amounts have not been annualized.
(d) Period from June 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Aggressive Growth Fund, Inc. and $.01 per share for Principal
Asset Allocation Fund, Inc. for the period from the initial purchase of
shares on May 23, 1994 through May 31, 1994, was recognized, none of which
was distributed to the sole stockholder, Principal Mutual Life Insurance
Company, during the period. Additionally, Principal Aggressive Growth Fund,
Inc. and Principal Asset Allocation Fund, Inc. incurred unrealized losses
on investments of $.09 and $.03 per share, respectively, during the initial
interim period. This represented activities of each fund prior to the
initial public offering of fund shares.
(e) Period from May 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Growth Fund, Inc. and $.04 per share for Principal World Fund,
Inc. for the period from the initial purchase of shares on March 23, 1994
through April 30, 1994, was recognized, none of which was distributed to
the sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, Principal Growth Fund, Inc. and Principal World Fund,
Inc. incurred unrealized losses on investments of $.41 and $.10 per share,
respectively, during the initial interim period. This represented
activities of each fund prior to the initial public offering of fund
shares.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors and Shareholders
Principal Aggressive Growth Fund, Inc.
Principal Asset Allocation Fund, Inc.
Principal Balanced Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Accumulation Fund, Inc.
Principal Emerging Growth Fund, Inc.
Principal Government Securities Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal Money Market Fund, Inc.
Principal World Fund, Inc.
We have audited the accompanying statements of assets and liabilities of
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund, Inc.,
Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal High
Yield Fund, Inc., Principal Money Market Fund, Inc., and Principal World Fund,
Inc., including the schedules of investments, as of December 31, 1996, and the
related statements of operations for the year then ended, the statements of
changes in net assets for the period of two years then ended and the financial
highlights for each of the periods indicated therein. These financial statements
and financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund, Inc.,
Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal High
Yield Fund, Inc., Principal Money Market Fund, Inc., and Principal World Fund,
Inc. at December 31, 1996, and the results of their operations for the year then
ended, the changes in their net assets for the period of two years then ended
and the financial highlights for each of the periods indicated therein, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Des Moines, Iowa
January 17, 1997
To Principal Mutual Life Insurance Company Customers
Equity and fixed income markets showed continued strength in 1997. A robust
economy and few, if any, inflationary worries have resulted in large stock gains
and stable bond prices so far this year.
However, investors should recognize that this extraordinary stock market rise
cannot be expected to continue indefinitely. To prepare for this potential
decline, you are reminded of the three, time-tested tools used by most
successful investors. These tools include: maintaining a long-term focus,
investing regularly and consistently and diversifying among asset classes.
As you may already know, the Principal Mutual Funds act as underlying investment
options with several different Principal Mutual Life Insurance Company variable
annuity and variable life products. See your contract prospectus for a
description of the Funds.
Recently, you were sent a proxy mailing for the Principal Mutual Funds. The
Board of Directors of the Funds has reviewed several issues and asked that they
be placed on a ballot for your consideration. The issues were explained in
greater detail in the proxy statement. Fund directors are recommending a "yes"
vote. Every vote is important. So, please complete and return your proxy card(s)
promptly.
We thank you for helping us to enjoy another successful year and look forward to
serving your future investment and insurance needs. We hope that you find the
information contained within this Semiannual Report both useful and informative.
CONTENTS
Page
Financial Statements and Financial Highlights
Statements of Assets and Liabilities................................ 2
Statements of Operations ........................................... 4
Statements of Changes in Net Assets................................. 6
Notes to Financial Statements....................................... 10
Schedules of Investments
Principal Aggressive Growth Fund, Inc............................ 18
Principal Asset Allocation Fund, Inc............................. 19
Principal Balanced Fund, Inc..................................... 25
Principal Bond Fund, Inc......................................... 27
Principal Capital Accumulation Fund, Inc......................... 29
Principal Emerging Growth Fund, Inc.............................. 31
Principal Government Securities Fund, Inc........................ 33
Principal Growth Fund, Inc....................................... 34
Principal High Yield Fund, Inc................................... 36
Principal Money Market Fund, Inc................................. 38
Principal World Fund, Inc........................................ 40
Financial Highlights................................................ 44
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997
STATEMENTS OF ASSETS AND LIABILITIES
(unaudited)
Principal Principal
Aggressive Asset Principal Principal
Growth Allocation Balanced Bond
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C> <C>
Investment in securities -- at cost................... $ 89,799,677 $59,014,380 $100,020,999 $69,466,629
Assets
Investment in securities -- at value (Note 4)......... $103,974,021 $65,779,589 $112,427,518 $70,370,487
Cash ................................................. 6,964,282 5,823,943 2,000 2,001
Receivables:
Dividends and interest........................... 115,103 372,000 829,247 1,490,973
Investment securities sold....................... 597,008 471,029 -- --
Capital Stock sold............................... 164,471 28,015 86,186 5,560
Total Assets 111,814,885 72,474,576 113,344,951 71,869,021
Liabilities
Accrued expenses...................................... 77,634 49,148 56,873 30,068
Payables:
Investment securities purchased.................. 1,222,825 533,356 -- --
Capital Stock reacquired......................... 1,000,000 -- -- 27,188
Total Liabilities 2,300,459 582,504 56,873 57,256
Net Assets Applicable to Outstanding Shares........... $109,514,426 $71,892,072 $113,288,078 $71,811,765
Capital Stock (par value: $.01 a share)
Shares authorized..................................... 100,000,000 100,000,000 100,000,000 100,000,000
Shares issued and outstanding......................... 6,844,217 5,719,959 7,152,926 6,151,944
Net Asset Value Per Share............................. $16.00 $12.57 $15.84 $11.67
Net Assets Consist of:
Capital Stock......................................... $ 68,442 $ 57,200 $ 71,529 $ 61,519
Additional paid-in capital............................ 88,827,082 60,975,705 94,771,465 68,693,109
Accumulated undistributed net investment income....... 157,768 934,669 1,613,211 2,365,568
Accumulated undistributed net realized
gain (loss) from:
Investment transactions ......................... 6,286,790 3,159,289 4,425,354 (212,289)
Foreign currency transactions.................... -- -- -- --
Net unrealized appreciation of investments............ 14,174,344 6,765,209 12,406,519 903,858
Net unrealized depreciation on translation
of assets and liabilities in foreign currencies.. -- -- -- --
Total Net Assets $109,514,426 $71,892,072 $113,288,078 $71,811,765
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997
STATEMENTS OF ASSETS AND LIABILITIES
(unaudited)
Principal Principal Principal
Capital Emerging Government Principal
Accumulation Growth Securities Growth
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C> <C>
Investment in securities -- at cost................... $192,527,762 $135,533,823 $82,856,423 $103,267,836
Assets
Investment in securities -- at value (Note 4)......... $244,616,393 $179,886,922 $83,504,953 $132,164,273
Cash ................................................. 4,028,777 27,656 1,501,455 16,347
Receivables:
Dividends and interest........................... 334,449 104,876 789,671 125,799
Investment securities sold....................... -- -- -- --
Capital Stock sold............................... 192,417 145,474 6,296 6,105
Total Assets 249,172,036 180,164,928 85,802,375 132,312,524
Liabilities
Accrued expenses...................................... 94,931 92,039 36,526 53,097
Payables:
Investment securities purchased.................. -- -- 990,938 --
Capital Stock reacquired......................... -- 1,075 118,803 705
Total Liabilities 94,931 93,114 1,146,267 53,802
Net Assets Applicable to Outstanding Shares........... $249,077,105 $180,071,814 $84,656,108 $132,258,722
Capital Stock (par value: $.01 a share)
Shares authorized..................................... 100,000,000 100,000,000 100,000,000 100,000,000
Shares issued and outstanding......................... 7,571,281 5,403,552 7,955,503 8,324,965
Net Asset Value Per Share............................. $32.90 $33.32 $10.64 $15.89
Net Assets Consist of:
Capital Stock......................................... $ 75,713 $ 54,036 $ 79,555 $ 83,250
Additional paid-in capital............................ 186,288,379 133,043,110 81,660,821 102,864,422
Accumulated undistributed net investment income....... 2,493,934 815,094 2,638,842 772,279
Accumulated undistributed net realized
gain (loss) from:
Investment transactions ......................... 8,130,448 1,806,475 (371,640) (357,666)
Foreign currency transactions.................... -- -- -- --
Net unrealized appreciation of investments............ 52,088,631 44,353,099 648,530 28,896,437
Net unrealized depreciation on translation
of assets and liabilities in foreign currencies.. -- -- -- --
Total Net Assets $249,077,105 $180,071,814 $84,656,108 $132,258,722
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997
STATEMENTS OF ASSETS AND LIABILITIES
(unaudited)
Principal Principal
High Money Principal
Yield Market World
Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Investment in securities -- at cost................... $13,247,496 $43,925,599 $ 85,443,453
Assets
Investment in securities -- at value (Note 4)......... $13,680,640 $43,925,599 $109,302,144
Cash ................................................. 371,699 43,815 38,039
Receivables:
Dividends and interest........................... 315,748 202,639 355,006
Investment securities sold....................... 560,496 -- 210,122
Capital Stock sold............................... 2,229 72,432 116,004
Total Assets 14,930,812 44,244,485 110,021,315
Liabilities
Accrued expenses...................................... 7,129 21,866 64,828
Payables:
Investment securities purchased.................. 398,354 519,596 2,861,257
Capital Stock reacquired......................... -- 15,396 --
Total Liabilities 405,483 556,858 2,926,085
Net Assets Applicable to Outstanding Shares........... $14,525,329 $43,687,627 $107,095,230
Capital Stock (par value: $.01 a share)
Shares authorized..................................... 100,000,000 500,000,000 100,000,000
Shares issued and outstanding......................... 1,582,754 43,687,627 7,055,323
Net Asset Value Per Share............................. $9.18 $1.000 $15.18
Net Assets Consist of:
Capital Stock......................................... $ 15,828 $ 436,876 $ 70,553
Additional paid-in capital............................ 14,311,269 43,250,751 81,010,614
Accumulated undistributed net investment income....... 601,181 -- 1,265,045
Accumulated undistributed net realized
gain (loss) from:
Investment transactions ......................... (836,093) -- 911,252
Foreign currency transactions.................... -- -- (19,233)
Net unrealized appreciation of investments............ 433,144 -- 23,858,691
Net unrealized depreciation on translation
of assets and liabilities in foreign currencies.. -- -- (1,692)
Total Net Assets $14,525,329 $43,687,627 $107,095,230
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
STATEMENTS OF OPERATIONS
(unaudited)
Principal Principal
Aggressive Asset Principal Principal
Growth Allocation Balanced Bond
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
Income:
<S> <C> <C> <C> <C>
Dividends........................................ $ 477,219 $ 533,881 $ 628,227 $ --
Less: Withholding tax on foreign dividends...... -- -- -- --
Interest......................................... 87,889 666,444 1,269,706 2,501,727
Total Income 565,108 1,200,325 1,897,933 2,501,727
Expenses:
Management and investment advisory
fees (Note 3)................................ 395,273 258,634 298,358 164,684
Custodian fees................................... 9,609 20,571 3,725 2,488
Directors' fees.................................. 3,885 3,860 3,837 3,883
Other............................................ 3,366 1,085 2,446 1,575
Total Expenses 412,133 284,250 308,366 172,630
Net Investment Income 152,975 916,075 1,589,567 2,329,097
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Net realized gain (loss) from:
Investment transactions.......................... 6,286,602 3,159,705 4,425,625 59,264
Foreign currency transactions.................... -- -- -- --
Net increase (decrease) in unrealized
appreciation/depreciation on:
Investments...................................... 6,376,545 3,173,555 3,620,209 (277,295)
Translation of assets and liabilities in
foreign currencies.......................... -- -- -- --
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency 12,663,147 6,333,260 8,045,834 (218,031)
Net Increase in Net Assets
Resulting from Operations $12,816,122 $7,249,335 $9,635,401 $2,111,066
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
STATEMENTS OF OPERATIONS
(unaudited)
Principal Principal Principal
Capital Emerging Government Principal
Accumulation Growth Securities Growth
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
Income:
<S> <C> <C> <C> <C>
Dividends........................................ $ 2,782,821 $ 532,462 $ -- $ 635,179
Less: Withholding tax on foreign dividends...... -- -- -- --
Interest......................................... 202,287 761,317 2,853,198 415,311
Total Income 2,985,108 1,293,779 2,853,198 1,050,490
Expenses:
Management and investment advisory
fees (Note 3)................................ 515,926 481,083 203,761 276,767
Custodian fees................................... 2,946 3,526 3,734 3,045
Directors' fees.................................. 3,897 3,885 3,932 3,914
Other............................................ 3,724 3,209 2,533 2,421
Total Expenses 526,493 491,703 213,960 286,147
Net Investment Income 2,458,615 802,076 2,639,238 764,343
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Net realized gain (loss) from:
Investment transactions.......................... 8,130,616 1,806,428 245,732 (360,049)
Foreign currency transactions.................... -- -- -- --
Net increase (decrease) in unrealized
appreciation/depreciation on:
Investments ..................................... 19,817,802 16,523,182 (213,709) 16,063,973
Translation of assets and liabilities in
foreign currencies.......................... -- -- -- --
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency 27,948,418 18,329,610 32,023 15,703,924
Net Increase in Net Assets
Resulting from Operations $30,407,033 $19,131,686 $2,671,261 $16,468,267
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
STATEMENTS OF OPERATIONS
(unaudited)
Principal Principal
High Money Principal
Yield Market World
Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
Income:
<S> <C> <C> <C>
Dividends........................................ $ -- $ -- $ 1,594,412
Less: Withholding tax on foreign dividends...... -- -- 191,675
Interest......................................... 649,103 1,215,820 195,648
Total Income 649,103 1,215,820 1,598,385
Expenses:
Management and investment advisory
fees (Note 3)................................ 41,720 108,424 317,653
Custodian fees................................... 1,714 5,141 33,805
Directors' fees.................................. 3,874 3,755 3,869
Other............................................ 684 1,372 2,017
Total Expenses 47,992 118,692 357,344
Net Investment Income 601,111 1,097,128 1,241,041
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency
Net realized gain (loss) from:
Investment transactions.......................... 159,291 -- 927,800
Foreign currency transactions.................... -- -- (19,233)
Net increase (decrease) in unrealized
appreciation/depreciation on:
Investments ..................................... (27,143) -- 12,096,898
Translation of assets and liabilities in
foreign currencies.......................... -- -- (2,666)
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency 132,148 -- 13,002,799
Net Increase in Net Assets
Resulting from Operations $733,259 $1,097,128 $14,243,840
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)
Principal Principal
Aggressive Growth Asset Allocation
Fund, Inc. Fund, Inc.
Six Months Year Six Months Year
Ended Ended Ended Ended
June 30, December 31, June 30, December 31,
1997 1996 1997 1996
Operations
<S> <C> <C> <C> <C>
Net investment income............................... $ 152,975 $ 647,024 $ 916,075 $ 1,836,334
Net realized gain from investment transactions...... 6,286,602 10,016,661 3,159,705 4,149,766
Net increase (decrease) in unrealized appreciation/
depreciation on investments and translation of
assets and liabilities in foreign currencies... 6,376,545 5,099,753 3,173,555 715,006
Net Increase in Net Assets
Resulting from Operations 12,816,122 15,763,438 7,249,335 6,701,106
Dividends and Distributions to Shareholders
From net investment income.......................... -- (642,821) -- (1,837,566)
From net realized gain on investments and foreign
currency transactions......................... (2,899,788) (8,672,973) (1,126,442) (3,447,188)
(2,899,788) (9,315,794) (1,126,442) (5,284,754)
Capital Share Transactions (Note 5)
Shares sold......................................... 24,352,887 54,678,368 5,815,893 20,370,526
Shares issued in reinvestment of dividends
and distributions.............................. 2,359,966 7,733,190 554,955 2,730,827
Shares redeemed..................................... (17,220,310) (12,396,594) (2,232,807) (3,960,605)
Net Increase in Net Assets from
Capital Share Transactions 9,492,543 50,014,964 4,138,041 19,140,748
Total Increase 19,408,877 56,462,608 10,260,934 20,557,100
Net Assets
Beginning of period................................. 90,105,549 33,642,941 61,631,138 41,074,038
End of period (including undistributed net
investment income as set forth below).......... $109,514,426 $90,105,549 $71,892,072 $61,631,138
Undistributed Net Investment Income................. $ 157,768 $ 4,793 $ 934,669 $ 18,594
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)
Principal Principal
Balanced Bond
Fund, Inc. Fund, Inc.
Six Months Year Six Months Year
Ended Ended Ended Ended
June 30, December 31, June 30, December 31,
1997 1996 1997 1996
Operations
<S> <C> <C> <C> <C>
Net investment income............................... $ 1,589,567 $ 2,416,667 $ 2,329,097 $ 3,648,701
Net realized gain from investment transactions...... 4,425,625 4,291,386 59,264 24,994
Net increase (decrease) in unrealized appreciation/
depreciation on investments and translation of
assets and liabilities in foreign currencies... 3,620,209 3,030,866 (277,295) (1,454,206)
Net Increase in Net Assets
Resulting from Operations 9,635,401 9,738,919 2,111,066 2,219,489
Dividends and Distributions to Shareholders
From net investment income.......................... -- (2,404,163) -- (3,612,230)
From net realized gain on investments and foreign
currency transactions......................... (43,109) (5,078,241) -- --
(43,109) (7,482,404) -- (3,612,230)
Capital Share Transactions (Note 5)
Shares sold......................................... 19,199,044 51,227,505 8,781,926 38,212,107
Shares issued in reinvestment of dividends
and distributions.............................. 37,483 6,103,434 -- 2,979,214
Shares redeemed..................................... (8,698,410) (11,883,111) (2,467,788) (12,289,678)
Net Increase in Net Assets from
Capital Share Transactions 10,538,117 45,497,828 6,314,138 28,901,643
Total Increase 20,130,409 47,754,343 8,425,204 27,508,902
Net Assets
Beginning of period................................. 93,157,669 45,403,326 63,386,561 35,877,659
End of period (including undistributed net
investment income as set forth below).......... $113,288,078 $93,157,669 $71,811,765 $63,386,561
Undistributed Net Investment Income................. $ 1,613,211 $ 23,644 $ 2,365,568 $ 36,471
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
(unaudited)
Principal
Capital Accumulation
Fund, Inc.
Six Months Year
Ended Ended
June 30, December 31,
1997 1996
Operations
<S> <C> <C>
Net investment income............................... $ 2,458,615 $ 3,517,895
Net realized gain from investment transactions...... 8,130,616 26,628,772
Net increase (decrease) in unrealized appreciation/
depreciation on investments and translation of
assets and liabilities in foreign currencies... 19,817,802 6,846,493
Net Increase in Net Assets
Resulting from Operations 30,407,033 36,993,160
Dividends and Distributions to Shareholders
From net investment income.......................... -- (3,541,996)
From net realized gain on investments and foreign
currency transactions......................... (7,389,172) (22,300,640)
(7,389,172) (25,842,636)
Capital Share Transactions (Note 5)
Shares sold......................................... 33,967,608 81,833,141
Shares issued in reinvestment of dividends
and distributions.............................. 7,344,259 25,659,961
Shares redeemed..................................... (20,271,151) (49,264,748)
Net Increase in Net Assets from
Capital Share Transactions 21,040,716 58,228,324
Total Increase 44,058,577 69,378,848
Net Assets
Beginning of period................................. 205,018,528 135,639,680
End of period (including undistributed net
investment income as set forth below).......... $249,077,105 $205,018,528
Undistributed Net Investment Income................. $ 2,493,934 $ 35,319
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
(unaudited)
Principal Principal
Emerging Growth Government Securities
Fund, Inc. Fund, Inc.
Six Months Year Six Months Year
Ended Ended Ended Ended
June 30, December 31, June 30, December 31,
1997 1996 1997 1996
Operations
<S> <C> <C> <C> <C>
Net investment income............................................. $ 802,076 $ 1,008,977 $ 2,639,238 $ 4,677,723
Net realized gain (loss) from investment transactions............. 1,806,428 1,954,051 245,732 98,466
Net realized (loss) from foreign currency transactions............ -- -- -- --
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and
liabilities in foreign currencies............................ 16,523,182 15,461,368 (213,709) (1,337,219)
Net Increase in Net Assets Resulting from Operations 19,131,686 18,424,396 2,671,261 3,438,970
Dividends and Distributions to Shareholders
From net investment income........................................ -- (1,000,544) (46,141) (4,644,240)
From net realized gain on investments and foreign
currency transactions......................................... (455,301) (2,245,806) -- --
(455,301) (3,246,350) (46,141) (4,644,240)
Capital Share Transactions (Note 5)
Shares sold....................................................... 27,055,917 78,710,392 5,357,708 47,002,706
Shares issued in reinvestment of dividends
and distributions........................................... 451,711 3,177,572 45,610 4,589,974
Shares redeemed................................................... (3,273,080) (18,425,569) (8,471,688) (15,367,021)
Net Increase (Decrease) in Net Assets from
Capital Shares Transactions 24,234,548 63,462,395 (3,068,870) 36,225,659
Total Increase (Decrease) 42,910,933 78,640,441 (443,750) 35,020,389
Net Assets
Beginning of period............................................... 137,160,881 58,520,440 85,099,858 50,079,469
End of period (including undistributed net investment
income as set forth below)................................... $180,071,814 $137,160,881 $84,656,108 $85,099,858
Undistributed Net Investment Income............................... $ 815,094 $ 13,018 $ 2,638,842 $ 45,745
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
(unaudited)
Principal Principal
Growth High Yield
Fund, Inc. Fund, Inc.
Six Months Year Six Months Year
Ended Ended Ended Ended
June 30, December 31, June 30, December 31,
1997 1996 1997 1996
Operations
<S> <C> <C> <C> <C>
Net investment income............................................. $ 764,343 $ 1,156,675 $ 601,111 $ 1,153,201
Net realized gain (loss) from investment transactions............. (360,049) 242,899 159,291 210,672
Net realized (loss) from foreign currency transactions............ -- -- -- --
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and
liabilities in foreign currencies............................ 16,063,973 7,550,339 (27,143) 218,620
Net Increase in Net Assets Resulting from Operations 16,468,267 8,949,913 733,259 1,582,493
Dividends and Distributions to Shareholders
From net investment income........................................ -- (1,148,740) (11,379) (1,116,648)
From net realized gain on investments and foreign
currency transactions......................................... -- (240,516) -- --
-- (1,389,256) (11,379) (1,116,648)
Capital Share Transactions (Note 5)
Shares sold....................................................... 17,289,857 55,634,083 290,077 437,560
Shares issued in reinvestment of dividends
and distributions........................................... -- 1,373,493 11,379 1,116,648
Shares redeemed................................................... (1,111,312) (7,663,844) (238,350) (109,643)
Net Increase (Decrease) in Net Assets from
Capital Shares Transactions 16,178,545 49,343,732 63,106 1,444,565
Total Increase (Decrease) 32,646,812 56,904,389 784,986 1,910,410
Net Assets
Beginning of period............................................... 99,611,910 42,707,521 13,740,343 11,829,933
End of period (including undistributed net investment
income as set forth below)................................... $132,258,722 $99,611,910 $14,525,329 $13,740,343
Undistributed Net Investment Income............................... $ 772,279 $ 7,936 $ 601,181 $ 11,449
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS (Continued)
(unaudited)
Principal Principal
Money Market World
Fund, Inc. Fund, Inc.
Six Months Year Six Months Year
Ended Ended Ended Ended
June 30, December 31, June 30, December 31,
1997 1996 1997 1996
Operations
<S> <C> <C> <C> <C>
Net investment income............................................. $ 1,097,128 $ 2,089,089 $ 1,241,041 $ 1,145,766
Net realized gain (loss) from investment transactions............. -- -- 927,800 875,641
Net realized (loss) from foreign currency transactions............ -- -- (19,233) (9,568)
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and
liabilities in foreign currencies............................ -- -- 12,094,232 9,715,294
Net Increase in Net Assets Resulting from Operations 1,097,128 2,089,089 14,243,840 11,727,133
Dividends and Distributions to Shareholders
From net investment income........................................ (1,097,128) (2,089,089) -- (1,149,902)
From net realized gain on investments and foreign
currency transactions......................................... -- -- (253,439) (750,235)
(1,097,128) (2,089,089) (253,439) (1,900,137)
Capital Share Transactions (Note 5)
Shares sold....................................................... 35,998,262 119,544,896 22,050,225 38,889,383
Shares issued in reinvestment of dividends
and distributions........................................... 1,073,081 1,914,643 249,699 1,849,921
Shares redeemed................................................... (39,627,965) (107,885,209) (877,110) (9,449,905)
Net Increase (Decrease) in Net Assets from
Capital Shares Transactions (2,556,622) 13,574,330 21,422,814 31,289,399
Total Increase (Decrease) (2,556,622) 13,574,330 35,413,215 41,116,395
Net Assets
Beginning of period............................................... 46,244,249 32,669,919 71,682,015 30,565,620
End of period (including undistributed net investment
income as set forth below)................................... $43,687,627 $ 46,244,249 $107,095,230 $71,682,015
Undistributed Net Investment Income............................... $ -- $ -- $ 1,265,045 $ 24,004
See accompanying notes.
</TABLE>
<PAGE>
June 30, 1997
NOTES TO FINANCIAL STATEMENTS
(unaudited)
Principal Aggressive Growth Fund, Inc.
Principal Asset Allocation Fund, Inc.
Principal Balanced Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Accumulation Fund, Inc.
Principal Emerging Growth Fund, Inc.
Principal Government Securities Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal Money Market Fund, Inc.
Principal World Fund, Inc.
Note 1 -- Significant Accounting Policies
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund, Inc.,
Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal High
Yield Fund, Inc., Principal Money Market Fund, Inc. and Principal World Fund,
Inc. (the "Funds") are registered under the Investment Company Act of 1940, as
amended, as open-end diversified management investment companies and operate in
the mutual fund industry.
Principal Money Market Fund, Inc. values its securities at amortized cost, which
approximates market. Under the amortized cost method, a security is valued by
applying a constant amortization to maturity of the difference between the
principal amount due at maturity and the cost of the security to the fund.
The other funds value securities for which market quotations are readily
available at market value, which is determined using the last reported sale
price or, if no sales are reported, as is regularly the case for some securities
traded over-the-counter, the last reported bid price. When reliable market
quotations are not considered to be readily available, which may be the case,
for example, with respect to certain debt securities and preferred stocks, the
investments are valued by using market quotations, prices provided by market
makers or estimates of market values obtained from yield data and other factors
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by each fund's Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market.
With respect to Principal World Fund, Inc., the value of foreign securities in
foreign currency amounts are expressed in U.S. Dollars at the closing daily rate
of exchange. Shares listed on the Korean Stock Exchange (KSE) which are traded
by foreign investors in foreign over-the-counter transactions generally are
valued at prices the Manager believes would be obtained if such shares were
sold, provided that the Board determines that such valuations are accurate;
otherwise such KSE shares will be valued using the procedures for listed
securities. The identified cost of the portfolio holdings is translated at
approximate rates prevailing when acquired. Income and expense amounts are
translated at approximate rates prevailing when received or paid, with daily
accruals of such amounts reported at approximate rates prevailing on valuation
date.
Since the carrying amount of the foreign securities in the Principal World Fund,
Inc. is determined based on the exchange rate and market values at the close of
the period, it is not practicable to isolate that portion of the results of
operations arising as a result of changes in the foreign exchange rates from the
fluctuations arising from changes in the market prices of securities during the
period.
The Funds may, pursuant to an exemptive order issued by the Securities and
Exchange Commission, transfer uninvested funds into a joint trading account. The
order permits the Funds' cash balances to be deposited into a single joint
account along with the cash of other registered investment companies managed by
Princor Management Corporation. These balances may be invested in one or more
short-term instruments.
The Funds record investment transactions generally one day after the trade date.
The identified cost basis has been used in determining the net realized gain or
loss from investment transactions and unrealized appreciation or depreciation of
investments. The Funds record dividend income on the ex-dividend date, except
dividend income from foreign securities whereby the ex-dividend date has passed;
such dividends are recorded as soon as the Funds are informed of the ex-dividend
date. Interest income is recognized on an accrual basis.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amount of dividends and foreign withholding taxes recorded on the fund's books
and the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value of
assets and liabilities other than investments in securities at fiscal year end,
resulting from changes in the exchange rate.
With respect to Principal Money Market Fund, Inc., all net investment income and
any realized gains and losses from investment transactions are declared as
dividends daily to shareholders of record as of that day. Dividends and
distributions to shareholders of the other funds are recorded on the ex-dividend
date.
Dividends and distributions to shareholders from net investment income and net
realized gain from investments and foreign currency transactions are determined
in accordance with federal income tax regulations, which may differ from
generally accepted accounting principles. Permanent book and tax basis
differences are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Reclassifications made for the year ended December 31, 1996 were not material.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 -- Federal Income Taxes
No provision for federal income taxes is considered necessary because each fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments for
federal income tax reporting purposes is approximately the same as that for
financial reporting purposes.
Note 3 -- Management Agreement and Transactions With Affiliates
The Funds have agreed to pay investment advisory and management fees to Princor
Management Corporation (wholly owned by Princor Financial Services Corporation,
a subsidiary of Principal Mutual Life Insurance Company) (the "Manager")
computed at an annual percentage rate of each fund's average daily net assets.
The annual rate used in this calculation for the Funds is as follows:
Net Assets Value of Funds
(in millions)
First Next Next Next Over
Funds $100 $100 $100 $100 $400
Principal Aggressive
Growth Fund, Inc. .80% .75% .70% .65% .60%
Principal Asset Allocation
Fund, Inc. .80 .75 .70 .65 .60
Principal Balanced
Fund, Inc. .60 .55 .50 .45 .40
Principal Bond Fund, Inc. .50 .45 .40 .35 .30
Principal Capital
Accumulation Fund, Inc. .50 .45 .40 .35 .30
Principal Emerging
Growth Fund, Inc. .65 .60 .55 .50 .45
Principal Government
Securities Fund, Inc. .50 .45 .40 .35 .30
Principal Growth
Fund, Inc. .50 .45 .40 .35 .30
Principal High Yield
Fund, Inc. .60 .55 .50 .45 .40
Principal Money Market
Fund, Inc. .50 .45 .40 .35 .30
Principal World Fund, Inc. .75 .70 .65 .60 .55
Brokerage commissions were paid to affiliates by certain of the funds, as
follows:
Six Months Ended Year Ended
June 30, December 31,
1997 1996
Principal Asset Allocation
Fund, Inc. $ 2,012 $ --
Principal Balanced Fund, Inc. 14,616 1,300
Principal Capital Accumulation
Fund, Inc. 4,560 10,262
Principal Growth Fund, Inc. 1,898 438
Principal World Fund, Inc. 8,398 3,176
All of the shares of the Funds are owned by Principal Mutual Life Insurance
Company and/or one or more Separate Accounts sponsored by Principal Mutual Life
Insurance Company.
Note 4 -- Investment Transactions
For the six months ended June 30, 1997, the cost of investment securities
purchased and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the Funds were as follows:
Purchases Sales
Principal Aggressive Growth Fund, Inc. $90,894,886 $85,821,723
Principal Asset Allocation Fund, Inc. 33,098,234 37,559,662
Principal Balanced Fund, Inc. 19,594,921 16,144,132
Principal Bond Fund, Inc. 10,388,135 2,182,527
Principal Capital Accumulation Fund, Inc. 41,825,563 31,309,453
Principal Emerging Growth Fund, Inc. 25,935,701 7,082,328
Principal Government Securities Fund, Inc. 1,956,652 2,554,067
Principal Growth Fund, Inc. 5,649,927 3,673,560
Principal High Yield Fund, Inc. 3,966,041 3,000,007
Principal World Fund, Inc. 31,897,809 10,335,250
At June 30, 1997, net unrealized appreciation of investments held by the Funds
was composed of the following:
<TABLE>
<CAPTION>
Net Unrealized
Gross Unrealized Appreciation
Appreciation (Depreciation) of Investments
<S> <C> <C> <C>
Principal Aggressive Growth Fund, Inc. $15,781,478 $(1,607,134) $14,174,344
Principal Asset Allocation Fund, Inc. 8,199,042 (1,433,833) 6,765,209
Principal Balanced Fund, Inc. 13,835,948 (1,429,429) 12,406,519
Principal Bond Fund, Inc. 1,587,697 (683,839) 903,858
Principal Capital Accumulation Fund, Inc. 54,758,067 (2,669,436) 52,088,631
Principal Emerging Growth Fund, Inc. 50,022,271 (5,669,172) 44,353,099
Principal Government Securities Fund, Inc. 1,354,369 (705,839) 648,530
Principal Growth Fund, Inc. 32,442,033 (3,545,596) 28,896,437
Principal High Yield Fund, Inc. 496,413 (63,269) 433,144
Principal World Fund, Inc. 25,286,948 (1,428,257) 23,858,691
</TABLE>
The Funds may trade U.S. Government securities on a "to-be-announced" (TBA)
basis. In a TBA transaction, the fund commits to purchase or sell securities for
which all specific information is not known at the time of the trade. Securities
purchased on a TBA basis are not settled until they are delivered to the fund,
normally 15 to 30 days later. These transactions are subject to market
fluctuations and their current value is determined in the same manner as for
other portfolio securities. As of June 30, 1997, Principal Government Securities
Fund, Inc. had TBA commitments involving securities with a face amount of
$1,000,000, cost of $990,938 and market value of $1,002,720. The Fund has set
aside investment securities and other assets in excess of the commitments to
serve as collateral.
At June 30, 1997, Principal Asset Allocation Fund, Inc., Principal Balanced
Fund, Inc., Principal Bond Fund, Inc., Principal Emerging Growth Fund, Inc.,
Principal High Yield Fund, Inc. and Principal World Fund, Inc. held the
following securities which were purchased in a private placement transaction and
may require registration in order to effect a sale in the ordinary course of
business.
<PAGE>
<TABLE>
<CAPTION>
Value at Value as a
Date of June 30, Percentage of
Fund Security Description Acquisition Cost 1997 Net Assets
<S> <C> <C> <C> <C> <C>
Principal Asset Florida Residential Property & 5/5/97 $249,620 $ 250,618 .35%
Allocation Fund, Inc. Casualty; Notes
Fomento Economico Mexicano 5/31/96 71,402 140,125 .19
2/19/97 29,700 47,095 .07
2/21/97 24,025 36,867 .05
3/13/97 24,766 34,488 .05
Grupo Financiero Bancomer SA, 5/30/96 63,875 61,887 .09
ADR 5/31/96 10,333 10,041 .01
4/25/97 23,503 33,454 .05
4/29/97 25,200 34,757 .05
5/6/97 12,272 15,931 .02
Israel Electric Corp.; Senior
Notes 12/11/96 249,525 247,301 .34
Lojas Arapua SA GDR; 2/7/97 11,125 8,291 .01
2/14/97 16,088 10,943 .02
2/26/97 73,954 50,405 .07
PTTEP International, Ltd.;
Yankee Dollar Notes 11/8/96 259,810 254,176 .35
Wellsford Real Properties, Inc. 6/2/97 162,501 173,547 .24
6/18/97 1,115 1,100 .00
1,411,026 1.96
Principal Balanced Federal-Mogul Corp.; Series D
Fund, Inc. Convertible 10/15/92 248,325 417,100 .37
Principal Bond John Hancock Mutual Life
Fund, Inc. Insurance Co.; Surplus Notes 1/8/97 958,440 952,495 1.33
Principal Emerging Ciba-Geigy Corp.; Exchangeable
Growth Fund, Inc. Subordinated Debentures 3/20/91 150,000 150,187 .08
Sierra On Line; Convertible
Subordinated Debentures 8/17/94 100,375 368,638 .20
518,825 .28
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Value at Value as a
Date of June 30, Percentage of
Fund Security Description Acquisition Cost 1997 Net Assets
<S> <C> <C> <C> <C> <C>
Principal High Yield Fage Dairy Industry S.A.;
Fund, Inc. Senior Notes 2/6/97 $294,000 $ 291,000 2.00%
Fairchild Semiconducter;
Senior Subordinated Notes 3/6/97 125,000 132,500 .91
Indah Kiat Finance Mauritius Lt;
Guaranteed Senior Notes 6/26/97 198,694 198,454 1.37
Navistar Financial;
Senior Subordinated Notes 5/22/97 25,000 25,719 .18
Ocean Energy, Inc.;
Senior Subordinated Notes 6/26/97 199,660 199,250 1.37
Outdoor Systems;
Senior Subordinated Notes 6/25/97 196,000 194,250 1.34
Pen-Tab Industries;
Senior Subordinated Notes 1/30/97 50,000 50,875 .35
Quality Food Centers;
Senior Subordinated Notes 3/13/97 200,000 198,500 1.37
Specialty Retailers, Inc.;
Senior Notes 6/12/97 50,000 50,375 .35
Sun Media Corp.;
Senior Subordinated Notes 2/13/97 50,000 50,500 .35
1,391,423 9.59
Principal World Alfa SA; Convertible 9/25/95 398,000 581,000 .54
Fund, Inc. Subordinated Debentures 11/20/96 329,254 435,750 .41
Fokus Bank 6/25/96 347,410 542,018 .51
Hyundai Motor Co. Ltd. GDR 9/3/96 307,688 243,750 .23
Kemira OY 12/9/96 314,077 245,271 .23
12/10/96 131,955 99,995 .09
12/11/96 241,385 183,010 .17
2/26/97 322,301 264,138 .25
4/10/97 294,742 264,138 .25
Royal Group Technologies Ltd. 6/25/96 272,357 485,445 .45
7/2/96 91,512 160,921 .15
Voest-Alpine Stahl 10/30/95 280,007 416,817 .39
3/27/96 146,558 203,878 .19
6/25/96 256,094 348,858 .33
6/27/96 145,930 194,817 .18
4,669,806 4.37
</TABLE>
The Funds' investments are with various issuers in various industries. The
Schedules of Investments contained herein summarize concentrations of credit
risk by issuer and industry.
<PAGE>
Note 5 -- Capital Share Transactions
Transactions in Capital Stock by fund were as follows:
<TABLE>
<CAPTION>
Principal Aggressive Principal Asset Principal Balanced
Growth Fund, Inc. Allocation Fund, Inc. Fund, Inc.
Six Months Ended June 30, 1997:
<S> <C> <C> <C>
Shares sold................................... 1,617,616 491,624 1,281,540
Shares issued in reinvestment of
dividends and distributions.................. 160,542 48,173 2,562
Shares redeemed............................... (1,138,622) (189,208) (583,332)
Net Increase 639,536 350,589 700,770
Year Ended December 31, 1996:
Shares sold................................... 3,918,263 1,770,239 3,602,550
Shares issued in reinvestment of
dividends and distributions.................. 547,658 239,060 424,022
Shares redeemed............................... (860,656) (337,801) (825,489)
Net Increase 3,605,265 1,671,498 3,201,083
</TABLE>
<TABLE>
<CAPTION>
Principal Principal Capital Principal Emerging
Bond Fund, Inc. Accumulation Fund, Inc. Growth Fund, Inc.
Six Months Ended June 30, 1997:
<S> <C> <C> <C>
Shares sold................................... 772,077 1,113,522 883,025
Shares issued in reinvestment of
dividends and distributions.................. -- 250,401 14,928
Shares redeemed............................... (216,734) (662,278) (106,190)
Net Increase 555,343 701,645 791,763
Year Ended December 31, 1996:
Shares sold................................... 3,340,011 2,763,121 2,884,710
Shares issued in reinvestment of
dividends and distributions.................. 262,934 868,606 110,728
Shares redeemed............................... (1,065,373) (1,641,040) (693,851)
Net Increase 2,537,572 1,990,687 2,301,587
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Government Principal Growth Principal High
Securities Fund, Inc. Fund, Inc. Yield Fund, Inc.
Six Months Ended June 30, 1997:
<S> <C> <C> <C>
Shares sold................................... 516,773 1,178,487 32,348
Shares issued in reinvestment of
dividends and distributions.................. 4,394 -- 1,287
Shares redeemed............................... (821,126) (75,864) (26,304)
Net Increase (Decrease) (299,959) 1,102,623 7,331
Year Ended December 31, 1996:
Shares sold................................... 4,520,032 4,289,963 50,390
Shares issued in reinvestment of
dividends and distributions.................. 445,172 99,697 128,056
Shares redeemed............................... (1,457,956) (604,413) (12,523)
Net Increase 3,507,248 3,785,247 165,923
</TABLE>
<TABLE>
<CAPTION>
Principal Money Principal World
Market Fund, Inc. Fund, Inc.
Six Months Ended June 30, 1997:
<S> <C> <C>
Shares sold................................... 35,998,262 1,596,085
Shares issued in reinvestment of
dividends and distributions.................. 1,073,081 18,817
Shares redeemed............................... (39,627,965) (63,573)
Net Increase (Decrease) (2,556,622) 1,551,329
Year Ended December 31, 1996:
Shares sold................................... 119,544,896 3,308,501
Shares issued in reinvestment of
dividends and distributions.................. 1,914,643 144,196
Shares redeemed............................... (107,885,209) (800,955)
Net Increase 13,574,330 2,651,742
</TABLE>
Note 6 -- Line of Credit
The Funds have an unsecured line of credit with a bank which allows each fund to
borrow up to $500,000. Borrowings are made solely to facilitate the handling of
unusual and/or unanticipated short-term cash requirements. Interest is charged
to each fund, based on its borrowings, at a rate equal to the bank's Fed Funds
Unsecured Rate plus 100 basis points. Additionally, a commitment fee is charged
at the annual rate of .25% on the line of credit. At June 30, 1997, the Funds
had no outstanding borrowings under the line of credit.
<PAGE>
SCHEDULES OF INVESTMENTS
PRINCIPAL AGGRESSIVE GROWTH FUND, INC.
Shares
Held Value
Common Stocks (94.94%)
Advertising (0.31%)
Snyder Communications, Inc. 12,800(a) $ 344,800
Aerospace Industries (0.95%)
Thiokol Corp. 14,800 1,036,000
Air Transportation, Scheduled (2.16%)
AMR Corp. 13,600(a) 1,258,000
US Air Group, Inc. 31,600(a) 1,106,000
2,364,000
Aircraft & Parts (11.49%)
Allied Signal, Inc. 24,700 2,074,800
Boeing Co. 26,800 1,422,075
Gulfstream Aerospace Corp. 15,300(a) 451,350
McDonnell Douglas Corp. 25,000 1,712,500
Textron, Inc. 27,000 1,792,125
United Technologies Corp. 62,000 5,146,000
12,598,850
Auto & Home Supply Stores (0.52%)
O'Reilly Automotive, Inc. 14,700(a) 565,950
Bakery Products (0.27%)
Einstein/Noah Bagel Corp. 25,100(a) 299,631
Beverages (1.98%)
Coca-Cola Enterprises 94,100 2,164,300
Cogeneration - Small Power
Producer (0.44%)
AES Corp. 6,800(a) 481,100
Commercial Banks (6.79%)
Bankamerica Corp. 26,600 1,717,363
Chase Manhattan Corp. 11,512 1,117,383
Citicorp 10,800 1,302,075
Wells Fargo & Co. 12,233 3,296,793
7,433,614
Communications Services, NEC (0.15%)
Globalstar Telecommunication Ltd. 5,400(a) 165,375
Computer & Data Processing (5.34%)
America Online Inc. 9,100(a) 506,187
Aris Corp. 3,800(a) 83,125
GTECH Holdings Corp. 80,600(a) 2,599,350
Microsoft Corp. 13,000(a) 1,642,875
Oracle Systems Corp. 12,800(a) 644,800
Sterling Commerce, Inc. 11,400(a) 374,775
5,851,112
Computer & Office Equipment (3.98%)
Compaq Computer Corp. 7,200(a) 714,600
Dell Computer Corp. 4,600(a) 540,213
International Business
Machines Corp. 20,600 1,857,863
International Game Technology 55,300 981,575
Seagate Technology 7,400(a) 260,387
4,354,638
Consumer Products (6.75%)
Philip Morris Cos., Inc. 166,500 7,388,438
Crude Petroleum & Natural Gas (0.34%)
British Petroleum Co. PLC 5,000 374,375
Eating & Drinking Places (2.42%)
Cracker Barrel Old Country Store, Inc. 59,100 1,566,150
McDonald's Corp. 22,400 1,082,200
2,648,350
Electronic Components &
Accessories (1.56%)
Intel Corp. 5,500 779,969
Linear Technology Corp. 9,600 496,800
Texas Instruments 5,100 428,719
1,705,488
Federal & Federally Sponsored
Credit (1.06%)
Student Loan Marketing Association 9,100 1,155,700
Fire, Marine, & Casualty
Insurance (9.27%)
Aetna, Inc. 19,600 2,006,550
Berkshire Hathaway, Inc. 74(a) 3,492,800
Cigna Corp. 1,050 186,375
CNA Financial Corp. 8,600(a) 906,762
Loews Corp. 21,900 2,192,738
Progressive Corp. 6,900 600,300
USF&G Corp. 32,200 772,800
10,158,325
Grocery Stores (0.22%)
Dominicks Supermarkets, Inc. 9,100(a) 242,287
Hospitals (0.49%)
Columbia/HCA Healthcare Corp. 13,700 538,581
Household Audio & Video
Equipment (0.53%)
Time Warner Inc. 12,000 579,000
Industrial Inorganic Chemicals (0.56%)
Monsanto Co. 14,300 615,794
Life Insurance (0.41%)
Equitable of Iowa Cos. 8,100 453,600
Lumber & Other Building
Materials (2.34%)
Home Depot, Inc. 37,100 2,557,581
Medical Instruments &
Supplies (1.14%)
Becton, Dickinson & Co. 24,600 1,245,375
Miscellaneous Business
Services (0.76%)
Viad Corp. 43,100 829,675
Miscellaneous Electrical Equipment &
Supplies (0.61%)
Motorola, Inc. 8,800 668,800
Miscellaneous Furniture & Fixtures (0.78%)
Hillenbrand Industries 17,900 850,250
Miscellaneous Food & Kindred
Products (1.15%)
Campbell Soup Co. 25,100 1,255,000
Miscellaneous Investing (8.57%)
HFS, Inc. 161,900(a) 9,390,200
Miscellaneous Manufacturers (0.27%)
WMS Industries, Inc. 11,900(a) 298,244
Motor Vehicles & Equipment (1.54%)
Ford Motor Co. 13,300 502,075
ITT Industries Inc. 46,100 1,187,075
1,689,150
Newspapers (0.50%)
Gannett Co. 5,600 553,000
Oil & Gas Field Services (1.22%)
Diamond Offshore Drilling 10,100(a) 789,062
Schlumberger Ltd. 4,400 550,000
1,339,062
Periodicals (2.16%)
K-III Communications Corp. 197,300(a) 2,367,600
Personal Credit Institutions (1.47%)
American Express Co. 21,600 1,609,200
Petroleum Refining (0.62%)
Amoco Corp. 7,800 678,113
Photographic Equipment &
Supplies (0.68%)
Xerox Corp. 9,400 741,425
Plastic Materials & Synthetics (0.55%)
DuPont 9,500 597,313
Radio & Television Broadcasting (2.57%)
Clear Channel Communications 35,200(a) 2,164,800
Heftel Broadcasting Co. 11,800(a) 651,950
2,816,750
Savings Institutions (0.67%)
Ahmanson & Co. 11,400 490,200
Ocwen Financial Corp. 7,400(a) 241,425
731,625
Search & Navigation Equipment (0.84%)
Litton Industries Inc. 19,100(a) 922,769
Security & Commodity Services (0.93%)
Franklin Resources, Inc. 14,000 1,015,875
Security Brokers & Dealers (1.66%)
Charles Schwab Corp. 17,100 695,756
Merrill Lynch & Co., Inc. 18,800 1,120,950
1,816,706
Special Industry Machinery (0.63%)
Applied Materials, Inc. 9,800(a) 693,962
Surety Insurance (4.36%)
Ace Ltd. 25,600 1,891,200
CMAC Investment Corp. 48,700 2,325,425
MGIC Investment Corp. 11,600 556,075
4,772,700
Telephone Communication (0.62%)
Iridium World Communications 7,500(a) 135,938
Worldcom, Inc. 16,800(a) 537,600
673,538
Variety Stores (0.31%)
Woolworth Corp. 14,200(a) 340,800
Total Portfolio Investments (94.94%) 103,974,021
Cash and receivables, net of liabilities (5.06%) 5,540,405
Total Net Assets (100.00%) $109,514,426
(a) Non-income producing security - No dividend paid during the past
twelve months.
PRINCIPAL ASSET ALLOCATION FUND, INC.
Shares
Held Value
Common Stocks (67.23%)
Aerospace Industries (0.23%)
Thiokol Corp. 2,400 $ 168,000
Air Transportation, Scheduled (1.31%)
AMR Corp. 3,500(a) 323,750
British Airways PLC ADR 1,400 160,912
Cathay Pacific Airways ADR 8,500 88,046
KLM Royal Dutch Airlines 7,380 227,858
US Air Group, Inc. 4,000(a) 140,000
940,566
Aircraft & Parts (3.10%)
Allied Signal, Inc. 3,200 268,800
Boeing Co. 3,800 201,638
Gulfstream Aerospace Corp. 2,200(a) 64,900
McDonnell Douglas Corp. 3,700 253,450
Rockwell International Corp. 2,600 153,400
Textron, Inc. 5,000 331,875
United Technologies Corp. 11,500 954,500
2,228,563
Auto & Home Supply Stores (0.05%)
O'Reilly Automotive, Inc. 900(a) 34,650
Automotive Rentals, No Drivers (0.10%)
Ryder Systems, Inc. 2,200 72,600
Bakery Products (0.06%)
Einstein/Noah Bagel Corp. 3,700(a) 44,169
Beverages (2.24%)
Bass PLC ADR 5,000 123,125
CIA Cervecerias Unidas ADR 3,380 74,149
CIA Cervejaria Brahma ADR 13,710 209,934
Coca-Cola Enterprises 25,200 579,600
Coca-Cola FEMSA SA ADR 1,170 60,401
Embotelladora Andina ADR B 900 18,788
Fomento Economico Mexicano 43,485(b) 258,575
Kirin Brewery 2,300 239,200
Panamerican Beverages 909 29,883
Quilmes Industrial Quins SA ADR 1,707 19,844
1,613,499
Blast Furnace & Basic Steel
Products (0.24%)
Australian National Industries 8,960 43,495
British Steel PLC ADS 3,500 88,375
Hylsamex Sponsored GDR 730 22,539
Tubos de Acero de Mexico ADR 1,289(a) 23,766
178,175
Books (0.09%)
McGraw-Hill Companies, Inc. 1,100 64,694
Bus Terminal & Service
Facilities (0.06%)
Brasileiros SA GDR 1,230(a) 45,664
Cash Grains (0.01%)
Delta & Pine Land Co. 200 7,125
Cement, Hydraulic (0.16%)
Cementos de Mexico ADR 11,940 114,922
Chemicals & Allied Products (1.19%)
Asahi Chemical Industry Co. ADR 4,100 245,434
Bayer AG Sponsored ADR 10,735 412,881
Mitsubishi Chemical Corp. 6,100 199,370
857,685
Clay, Ceramic & Refractory
Minerals (0.07%)
English China Clays ADR 5,300 54,644
Colleges and Universities (0.02%)
DeVRY, Inc. 500(a) 13,500
Combination Utility Services (0.40%)
CIA Energetica de Minas Cemig ADR 3,615 182,000
NIPSCO Industries, Inc. 2,550 105,347
287,347
Commercial Banks (5.40%)
ABN-AMRO Holdings NV ADR 30,024 560,845
Allied Irish Banks ADR 2,900 135,394
Banco Central ADR 6,500 118,625
Banco Galicia Y Buenos 1,250 32,969
Banco Wiese Ltd. ADR 4,505 29,282
BankAmerica Corp. 4,500 290,531
BankBoston Corp. 1,200 86,475
Banker's Trust 1,350 117,450
Barclays PLC ADS 5,571 441,502
Brierly Investments Ltd. ADR 5,550 108,328
Chase Manhattan 1,840 178,595
Citicorp 2,300 277,294
Commerzbank AG ADR 3,600 102,058
Credicorp Ltd. 370 8,140
First of America Bank Corp. 2,700 123,525
HSBC Holdings ADR 600 180,450
Mellon Bank Corp. 2,400 108,300
National Westminster ADR 1,900 154,138
PNC Financial Corp. 2,100 87,412
Texas Regional Bancshares 100 4,200
Wells Fargo & Co. 2,200 592,900
Westpac Banking ADR 4,900 146,694
3,885,107
Commercial Printing (0.34%)
DAI Nippon Printing Co. 1,100 248,973
Communications Equipment (0.81%)
ADC Telecommunications, Inc. 1,000(a) 33,375
Advanced Fibre Communication 700(a) 42,263
Alcatel Alsthom ADR 4,700 118,675
Glenayre Technologies, Inc. 700(a) 11,462
Hanson PLC ADR 368 9,200
Harris Corp. 1,450 121,800
Matsushita Electrical ADR 800 163,600
Octel Communications Corp. 700(a) 16,406
Premisys Communication, Inc. 500(a) 7,875
Tekelec, Inc. 300(a) 10,612
Tellabs, Inc. 900(a) 50,288
585,556
Communications Services (0.02%)
Globalstar Telecommunication Ltd. 600(a) 18,375
Computer & Data Processing
Services (1.31%)
Acxiom Corp. 700(a) 14,350
America Online, Inc. 100(a) 5,562
Aris Corp. 600(a) 13,125
Autodesk, Inc. 300 11,494
Avant Corp. 500(a) 16,156
BA Merchant Services, Inc. 400(a) 7,625
Baan Company 100(a) 6,887
Bisys Group, Inc. 1100(a) 45,925
Citrix Systems, Inc. 300(a) 13,163
Compuware Corp. 500(a) 23,875
Electronic Arts 400(a) 13,450
GTECH Holdings Corp. 15,600(a) 503,100
Incyte Pharmaceuticals, Inc. 100(a) 6,700
LHS Group 100(a) 4,381
Ontrack Data International 300(a) 6,900
Peoplesoft, Inc. 600(a) 31,650
Sterling Commerce, Inc. 2,100(a) 69,038
Sungard Data Systems, Inc. 800(a) 37,200
Symantec Corp. 700(a) 13,650
Transaction Systems Architect, Inc. 600(a) 20,700
USCS International, Inc. 1,700(a) 55,675
Vantive Corp. 800(a) 22,600
943,206
Computer & Office Equipment (0.76%)
Ascend Communications 1,300(a) 51,188
Hitachi Ltd. ADR 2,900 327,700
International Game Technology 9,400 166,850
545,738
Concrete, Gypsum & Plaster
Products (0.22%)
Cementos de Mexico SA ADR 8,800 76,334
Italcementi Fabriche SPA ADR 13,000 80,986
157,320
Concrete Work (0.13%)
Pioneer International Ltd. ADR 25,000 95,890
Construction & Related
Machinery (0.51%)
Camco International 100 5,475
EVI, Inc. 400(a) 16,800
Kajima Corp. ADR 2,900 170,051
Komatsu Ltd. ADR 5,500 178,799
371,125
Consumer Products (1.99%)
Philip Morris Cos., Inc. 26,350 1,169,281
RJR Nabisco Holdings Corp. 7,900 260,700
1,429,981
Credit Reporting & Collection (0.02%)
First USA Paymentech Inc. 500(a) 14,469
Crude Petroleum & Natural Gas (0.57%)
Broken Hill Proprietary Ltd. ADR 2,200 65,450
Forcenergy Inc. 300(a) 9,112
Newfield Exploration Co. 100(a) 2,000
Occidental Petroleum Corp. 1,800 45,113
Ocean Energy, Inc. 200(a) 9,250
Petrofina SA ADR 2,900 109,910
Societe Generale ADR 3,600 80,450
USX-Marathon Group, Inc. 3,200 92,400
413,685
Department Stores (0.35%)
Marui Corp. ADR 2,800 104,238
Penney (J.C.) Co. 2,900 151,344
255,582
Drug Stores & Proprietary
Stores (0.01%)
Omnicare, Inc. 200 6,275
Drugs (1.19%)
Agouron Pharmaceuticals, Inc. 100(a) 8,087
Arqule, Inc. 500(a) 8,687
Aviron 400(a) 4,900
Dura Pharmaceuticals, Inc. 300(a) 11,962
Elan Corp. PLC ADR 400(a) 18,100
Genzyme Corp. - General Division 1,000(a) 27,750
Human Genome Sciences, Inc. 100(a) 3,325
Inhale Therapeutic Systems 300(a) 7,425
Jones Medical Industries, Inc. 300 14,250
Medicis Pharmaceutical Corp. 300(a) 14,963
Novartis AG Sponsored ADR 2,879 230,462
Novo Nordisk ADR 3,200 175,600
Nycomed 13,172 189,348
Sangstat Medical Corp. 800(a) 18,500
Smithkline Beecham PLC ADR 1,100 100,788
Vertex Pharmaceuticals 200(a) 7,650
Zonagen, Inc. 500(a) 10,937
852,734
Drugs, Proprietaries & Sundries (0.16%)
Amway Japan Ltd. ADS 6,833 118,296
Eating & Drinking Places (0.64%)
Boston Chicken, Inc. 900(a) 12,600
Cracker Barrel Old Country Store, Inc. 8,200 217,300
Host Marriott Corp. 8,200(a) 147,063
McDonald's Corp. 1,800 86,962
462,925
Electric Services (1.52%)
Centrais Electricas Brasileiras SA -
Electrobras ADR 1,655 49,117
Centrais Electricas Brasileiras ADR 10,165 284,210
Chilectra SA 2,223 63,965
Empresa Nacional de
Electricidad SA ADR 1,400 119,088
Enersis SA ADR 631 22,440
EVN Energie-Vansorgung Nied ADR 3,600 92,782
GPU, Inc. 2,100 75,338
National Power ADR 3,300 116,119
Pinnacle West Capital Corp. 4,100 123,256
Shangdong Huaneng Power
Development Ltd. ADS 8,000 86,000
Texas Utilities Co. 1,900 65,431
1,097,746
Electrical Goods (0.03%)
Kent Electronics Corp. 700(a) 25,681
Electronic Components &
Accessories (0.77%)
Altera Corp. 200(a) 10,100
Kyocera Corp. ADR 1,500 238,500
Level One Communications 500(a) 19,219
Linear Technology Corp. 1,600 82,800
Maxim Integrated Products, Inc. 400(a) 22,750
Molex, Inc., Class A 1,100 38,363
PMC Sierra, Inc. 1,100(a) 28,875
Semtech Corp. 100(a) 3,650
Texas Instruments 974 81,877
Xilinx, Inc. 600(a) 29,437
555,571
Electronic Distribution
Equipment (0.82%)
Phillips NV ADR 6,969 500,897
Watkins-Johnson Co. 2,900 89,175
590,072
Engineering & Architectural
Services (0.08%)
Gartner Group, Inc. 500(a) 17,969
Paychex, Inc. 1,100 41,800
59,769
Farm & Garden Machinery (0.15%)
Deere & Co. 1,900 104,263
Federal & Federally Sponsored
Credit (0.57%)
Student Loan Marketing Association
(Non-Voting) 3,200 406,400
Finance Services (0.60%)
Grupo Financiero Bancomer SA ADR 16,165(a)(b) 156,070
Nomura Sec. Co. Ltd. ADR 2,000 276,151
432,221
Fire Marine & Casualty
Insurance (3.26%)
Aetna, Inc. 2,900 296,888
Berkshire Hathaway, Inc. 15(a) 708,000
CIGNA Corp. 250 44,375
CNA Financial Corp. 3,100(a) 326,856
Loews Corp. 3,700 370,463
Mutual Risk Management Ltd. 300 13,762
Progressive Corp. 1,100 95,700
St. Paul Cos., Inc. 1,400 106,750
Tokio Marine & Fire Insurance ADR 4,600 297,850
USF&G Corp. 3,600 86,400
2,347,044
Footwear, Except Rubber (0.16%)
Ollivetti Inc. Cos. 396,825(a) 112,262
Fruit & Vegetable Markets (0.09%)
CIFRA Unsponsored ADR 34,623 63,547
General Industrial Machinery (0.63%)
AmerGroup Ltd. ADR 5,500 49,502
SKF AB ADR 15,370 401,541
451,043
Grain Mill Products (0.07%)
Grupo Industrial Maseca Sade CV ADR 2,885 47,602
Groceries & Related Products (0.15%)
Fleming Cos., Inc. 5,850 105,300
Grocery Stores (0.40%)
Disco SA ADS 633(a) 25,084
Koninklijke Bijenkorf
Beheer NV ADR 2,400 84,090
Santa Isabella SA ADR 5,527 178,245
287,419
Hardware, Plumbing & Heating
Equipment (0.02%)
Wilmar Industries, Inc. 700(a) 17,062
Health & Allied Services, NEC (0.07%)
Healthsouth Corp. 800(a) 19,950
Renal Care Group, Inc. 100(a) 4,169
Renal Treatment Centers, Inc. 300(a) 8,062
Total Renal Care Holdings, Inc. 400(a) 16,075
48,256
Holding Offices (0.42%)
Jardine Strategic Holdings Ltd. ADR 10,000 75,600
Quinenco SA 1,150(a) 21,275
Trizec Hahn Corp. 9,534 203,789
300,664
Home Health Care Services (0.03%)
Pediatrix Medical Group, Inc. 500(a) 22,906
Hospitals (0.02%)
Health Management Association, Inc. 500(a) 14,250
Hotels & Motels (0.74%)
Extended Stay of America 8,700(a) 137,025
John Q. Hammons Hotels, Inc. 17,400(a) 160,950
La Quinta Motor Inns 400 8,750
Ladbroke Group ADR 37,000 144,711
Servico, Inc. 5,300(a) 78,837
530,273
Household Audio & Video
Equipment (0.41%)
Sony Corp. ADR 2,500 220,000
Time Warner, Inc. 1,500 72,375
292,375
Individual & Family Services (0.08%)
ARV Assisted Living, Inc. 5,400(a) 59,400
Industrial Inorganic Chemicals (0.64%)
AKZO ADR 4,283 296,062
Eastman Chemical Co. 1,150 73,025
Olin Corp. 2,300 89,844
458,931
Industrial Organic Chemicals (0.08%)
Nova Corp. ADR 6,700 56,950
Investment Offices (0.51%)
American General Hospitality Corp. 14,700 363,825
Iron & Steel Foundries (0.64%)
Kawasaki Steel Corp. ADR 7,900 257,511
Kubota Corp. ADR 850 83,300
Siderar S.A.I.C. Sponsored ADR 3,630 118,497
459,308
Iron Ores (0.07%)
Cia Vale Do Rio Doce 2,140 47,708
Laundry, Cleaning & Garment
Services (0.02%)
G&K Services, Inc. 400 14,900
Life Insurance (0.32%)
American General Corp. 1,800 85,950
Lincoln National Corp. 2,200 141,625
227,575
Lumber & Other Building
Materials (0.52%)
Home Depot, Inc. 5,400 372,262
Management & Public Relations (0.24%)
Advanced Health Corp. 200(a) 3,675
Corrections Corp. of America 700(a) 27,825
Ogden Corp. 4,300 93,525
Whitman-Hart, Inc. 1,600(a) 45,000
170,025
Measuring & Controlling Devices (0.05%)
Applied Imaging Corp. 800(a) 5,000
Kla-Tencor Corp. 600(a) 29,250
34,250
Meat Products (0.50%)
Groupe Danone 10,764 356,053
Medical Instruments & Supplies (0.13%)
Arterial Vascular Engingeering 200(a) 6,438
Baxter International, Inc. 1,100 57,475
Mentor Corp. 400 11,850
Nitinol Medical Tech. 800(a) 12,100
Novoste Corp. 100(a) 1,637
Vivus, Inc. 200(a) 4,762
94,262
Metalworking Machinery (0.27%)
JLK Direct Distribution 200(a) 5,125
Makita Corp. ADR 13,000 190,125
195,250
Miscellaneous Business Services (0.27%)
Teletech Holdings, Inc. 700(a) 18,375
Viad Corp. 9,100 175,175
193,550
Miscellaneous Converted Paper
Products (0.42%)
Kimberly Clark Mexico ADR 14,600 277,400
P. T. Inti Indorayon Utama ADR 10,000 20,974
298,374
Miscellaneous Electrical Equipment &
Supplies (0.39%)
Motorola, Inc. 900 68,400
TDK Corp. ADS 2,800 209,475
277,875
Miscellaneous Food & Kindred
Products (0.22%)
Nestle Reg. ADR 2,000 132,112
Starbucks Corp. 600(a) 23,363
155,475
Miscellaneous Food Stores (0.04%)
General Nutrition Cos. 1,000(a) 28,000
MAV 415 4,202
32,202
Miscellaneous Investing (10.36%)
Alexandria Real Estate 2,500 54,844
AMLI Residential Property 1,000 23,625
Associated Estates Realty Co. 4,500 105,750
Avalon Properties 7,100 203,238
Bay Apartments Communities 6,600 244,200
Boston Properties, Inc. 3,600(a) 99,000
Brandywine Realty Trust 13,200 267,300
Brookfield Properties I/R 5,900(a) 41,484
Burnham Pacific Properties 13,700 188,375
Carr Realty Corp. 5,500 158,125
Chateau Properties 14,253 407,992
Columbus Realty Trust 200 4,550
Cornerstone Properties 3,500 53,812
East Group Properties 1,000 20,125
Essex Property Trust 9,200 295,550
Federal Realty Investments 2,300 62,100
First Union Real Estate 14,700 207,638
Gables Residential Trust 4,000 101,000
Great Lakes REIT, Inc. 8,100 133,144
Grupo Carso Sponsored ADR 5,040 70,076
Health Care Property Investors, Inc. 2,600 91,650
HFS, Inc. 40,300(a) 2,337,400
Kilroy Realty Corp. 2,600 65,650
Koger Equity, Inc. 3,600 65,700
LTC Properties, Inc. 900 16,312
Manufactured Home Communities 6,100 140,681
Meridian Industrial Trust 2,900 68,150
Merry Land & Investment Co. 5,900 127,956
Oasis Residential, Inc. 5,000 117,500
Omega Healthcare Investors 7,900 258,231
Prentiss Property Trust 2,700 69,188
Price REIT, Inc. 100 3,637
Ramco-Gershenson Properties 100 1,762
Security Capital Atlantic, Inc. 6,200 148,413
Shurgard Storage Center 4,300 120,400
Starwood Lodging Trust 4,800 204,900
Summit Properties, Inc. 1,000 20,625
Taubman Centers 10,300 136,475
Urban Shopping Centers 8,700 277,313
Wellsford Real Properties, Inc. 15,877(a)(b) 174,647
Western Investment Real Estate Trust 3,900 54,113
Westfield America, Inc. 12,000(a) 202,500
7,445,131
Miscellaneous Non-Durable
Goods (0.38%)
Mitsubishi Corp. ADR 11,000 274,927
Miscellaneous Special Trade
Contractors (0.12%)
Hang Lung Development Co. ADR 9,400 86,146
Mortgage Bankers & Brokers (0.03%)
Homeside, Inc. 900(a) 19,688
Motor Vehicles & Equipment (1.68%)
Chrysler Corp. 3,300 108,281
Fiat SPA ADR 4,700 85,775
Ford Motor Co. 1,500 56,625
General Motors Corp. 1,500 83,531
ITT Industries, Inc. 5,800 149,350
Toyota Motor Corp. ADR 8,600 509,550
Volkswagen AG ADR 1,400 214,837
1,207,949
Nonferrous Foundries (Casting) (0.02%)
Matthews Intl. Corp. 300 10,950
Non-Classifiable Establishments (0.07%)
Keppel Corp. Ltd. ADR 5,375 47,741
Non-Store Retailers (0.00%)
Henry Schein, Inc. 100(a) 3,125
Nursing & Personal Care
Facilities (0.00%)
Manor Care, Inc. 100 3,263
Offices & Clinics of Medical
Doctors (0.07%)
Horizon Mental Health Mgmt. 400(a) 9,000
Occusystems, Inc. 500(a) 14,500
Phycor, Inc. 800(a) 27,550
51,050
Oil & Gas Field Services (0.61%)
Diamond Offshore Drilling 2,500(a) 195,313
Ensco International, Inc. 400(a) 21,100
Petroleo Brasileiro SA 5,700 156,193
Schlumberger Ltd. 500 62,500
435,106
Ophthalmic Goods (0.17%)
Bausch & Lomb 2,550 120,169
Paper Mills (0.15%)
Willamette Industries, Inc. 1,500 105,000
Periodicals (0.55%)
K III Communications Corp. 32,900(a) 394,800
Personal Credit Institutions (0.38%)
Advanta Corp. 500 18,375
American Express Co. 3,300 245,850
Firstplus Financial Group 200(a) 6,800
271,025
Personnel Supply Services (0.13%)
Data Processing Resources 500(a) 11,688
Emcare Holdings, Inc. 100(a) 3,662
Robert Half International, Inc. 800(a) 37,650
Romac International, Inc. 1,300(a) 42,575
95,575
Petroleum Refining (1.43%)
Amoco Corp. 900 78,244
Ashland, Inc. 4,600 213,325
Atlantic Richfield Co. 3,200 225,600
Exxon Corp. 1,000 61,500
Mobil Corp. 3,400 237,575
Total SA IE Francaise ADR 2,800 141,750
YPF Sociedad Anonima ADR 2,175 66,881
1,024,875
Photographic Equipment &
Supplies (0.88%)
Eastman Kodak Co. 550 42,212
Fuji Photo Film 8,800 355,300
OCE NV 1,400 179,725
Xerox Corp. 700 55,213
632,450
Plastic Materials & Synthetics (0.19%)
Du Pont (E.I.) De Nemour 1,200 75,450
Shanghai Petrochemical Co. Ltd. ADR 2,600 63,700
139,150
Primary Nonferrous Metals (0.14%)
Phelps Dodge Corp. 1,150 97,966
Radio, Television & Computer
Stores (0.10%)
Lojas Arapua SA GDR 4,200(b) 69,639
Radio & Television Broadcasting (0.66%)
Clear Channel Communications 5,300(a) 325,950
Grupo Televisa SA GDR 4,785(a) 145,344
471,294
Railroads (0.17%)
Nagoya Railroad Co. Ltd. 2,900 119,619
Real Estate Agents & Managers (0.16%)
Atlantic Gulf Communities Co. 15,900(a) 101,363
Crescent Real Estate Equities 400 11,862
Crescent Operating 40 1,318
114,543
Real Estate Operators & Lessors (1.81%)
Alexander Haagen Properties 4,100 66,625
Arden Realty Group, Inc. 6,300 163,800
Beacon Properties Corp. 6,800 226,950
Catellus Dev. Corp. 4,500(a) 81,563
CRA Managed Care, Inc. 300(a) 15,656
IRT Property Co. 900 10,575
Nationwide Health Properties 14,400 316,800
Pacific Gulf Properties 8,400 184,800
Sekisui House Ltd. ADR 2,300 233,155
1,299,924
Research & Testing Services (0.01%)
Parexel International Corp. 100(a) 3,175
Quintiles Transnational Corp. 100(a) 6,962
10,137
Retail Stores, NEC (0.09%)
CIA Brasileira de Distribuicao
Acucar GDR 1,960 44,970
Supermercados Unimac SA 1,190(a) 22,312
67,282
Savings Institutions (0.00%)
Ocwen Financial Corp. 100(a) 3,263
Sawmills & Planning Mills (0.14%)
Louisiana Pacific Corp. 4,700 99,288
Search & Navigation Equipment (0.22%)
Litton Industries, Inc. 3,200(a) 154,600
Security & Commodity Services (0.21%)
Franklin Resources, Inc. 2,050 148,753
Security Brokers & Dealers (0.05%)
Charles Schwab Corp. 900 36,619
Soap, Cleaners & Toilet Goods (0.68%)
KAO Corp. ADR 2,200 305,689
Shiseido Co. Ltd. ADR 11,000 181,683
487,372
Special Industry Machinery (0.02%)
Fusion Systems Corp. 300(a) 11,869
Subdividers & Developers (0.07%)
Singapore Land ADR 11,600 52,732
Sugar & Confectionary Products (0.10%)
Perlis Plantations ADR 25,000 73,295
Surety Insurance (0.95%)
ACE Ltd. 3,200 236,400
CMAC Investment Corp. 6,400 305,600
MGIC Investment Corp. 2,900 139,019
Triad Guaranty, Inc. 100(a) 4,537
685,556
Telephone Communication (3.34%)
AT&T Corp. 3,500 122,719
BCE, Inc. 17,180 481,040
Compania Anonima Telefonos
de Venezuela 1,485 64,041
LCI International, Inc. 500(a) 10,937
Mobile Telecommunications
Technologies 900(a) 12,881
Sprint Corp. 1,700 89,463
Telebras GDR 18 2,731
Telecommunicacoes Brasileiras SA ADR 6,220 943,885
Telefonica de Argentina ADR 2,885 99,893
Telefonica de Espana SA ADS 2,500 215,625
Telefonica Del Peru ADR 1,865 48,840
Telefonos de Mexico SA ADR 3,865 184,554
Teleport Communication 600(a) 20,475
U.S. West Communications Group 2,700 101,756
2,398,840
Tires & Inner Tubes (0.36%)
Bridgestone ADR 1,100 255,702
Variety Stores (0.38%)
Wal-Mart Stores, Inc. 2,800 94,675
Woolworth Corp. 7,350(a) 176,400
271,075
Vocational Schools (0.02%)
Apollo Group, Inc. 500(a) 17,625
Water Transportation of Freight,
NEC (0.15%)
Penninsular & Oriental
Steamships ADR 5,400 107,847
Total Common Stocks 48,333,901
Preferred Stock (0.19%)
Miscellaneous Investing (0.10%)
First Washington Realty Trust; Series A 2,400 73,200
Periodicals (0.05%)
Time Warner; Series M 31(a) 34,149
Real Estate Agents & Managers (0.04%)
Atlantic Gulf Communities 2,772(a) 27,725
Total Preferred Stocks 135,074
Principal
Amount Value
Bonds (3.51%)
Business Credit Institutions (0.46%)
AT&T Capital Corp. Medium-Term
Notes; 5.85%; 1/5/99 $ 330,000 $ 327,749
Commercial Banks (0.34%)
NationsBank Corp. Senior Notes;
5.70%; 2/9/01 250,000 241,558
Electronic Distribution
Equipment (0.34%)
Israel Electric Corp. Senior Notes;
7.25%; 12/15/06 250,000(b) 247,301
Finance Services (0.98%)
First Plus Home Loan Trust Notes;
7.60%; 4/10/30 150,000 151,289
Lehman Brothers Holdings, Inc.
Senior Notes; 7.38%; 5/15/04 300,000 302,260
Team Fleet Finance Corp. Notes;
7.35%; 5/15/03 250,000 254,903
708,452
Metal Mining Services (0.35%)
PTTEP International, Ltd. Yankee
Dollar Notes; 7.63%; 10/1/06 250,000(b) 254,176
Miscellaneous Investing (0.35%)
Florida Residential Property &
Casualty Notes; 7.25%; 7/1/02 250,000(b) 250,618
Personal Credit Institutions (0.69%)
Ford Motor Credit Unsubordinated;
7.20%; 6/15/07 250,000 250,792
GMAC Medium-Term Notes;
6.10%; 12/06/00 250,000 245,545
496,337
Total Bonds 2,526,191
U.S. Government Treasury Notes (20.57%)
6.38%; 5/15/99 2,000,000 2,010,000
6.38%; 5/15/00 4,500,000 4,516,875
6.25%; 5/31/00 1,500,000 1,500,938
6.25%; 4/30/01 1,750,000 1,745,625
6.63%; 4/30/02 1,350,000 1,362,235
7.25%; 8/15/04 3,500,000 3,648,750
Total U.S. Government Treasury Notes 14,784,423
Total Portfolio Investments (91.50%) 65,779,589
Cash and receivables, net of liabilities (8.50%) 6,112,483
Total Net Assets (100.00%) $71,892,072
(a) Non-income producing security - No dividend paid during the past
twelve months.
(b) Restricted Security - See Note 4 to the financial statements.
PRINCIPAL BALANCED FUND, INC.
Shares
Held Value
Common Stocks (56.65%)
Auto & Home Supply Stores (0.51%)
Autozone, Inc. 24,900(a)$ 586,706
Bakery Products (0.63%)
Sara Lee Corp. 17,100 711,788
Beverages (1.21%)
Pepsico, Inc. 32,000 1,202,000
Universal Foods Corp. 4,300 163,937
1,365,937
Commercial Banks (4.94%)
BankBoston Corp. 16,600 1,196,238
Corestates Financial Corp. 16,400 881,500
First of America Bank Corp. 11,400 521,550
Fleet Financial Group, Inc. 16,000 1,012,000
NationsBank Corp. 16,500 1,064,250
PNC Financial Corp. 22,000 915,750
5,591,288
Commercial Printing (0.53%)
R. R. Donnelley & Sons Co. 16,400 600,650
Communications Equipment (1.10%)
Allen Telecom, Inc. 4,200(a) 87,150
DSC Communications Corp. 17,400(a) 387,150
General Instrument Corp. 30,700(a) 767,500
1,241,800
Computer & Data Processing
Services (2.67%)
Computer Associates International, Inc. 14,700 818,606
Electronic Data Systems Corp. 32,700 1,340,700
First Data Corp. 19,600 861,175
3,020,481
Computer & Office Equipment (1.57%)
Hewlett-Packard Co. 12,400 694,400
International Business
Machines Corp. 12,000 1,082,250
1,776,650
Consumer Products (0.35%)
Philip Morris Cos., Inc. 9,000 399,375
Crude Petroleum & Natural Gas (1.35%)
Texaco, Inc. 14,100 1,533,375
Department Stores (0.82%)
Dillard, Inc., Class A 26,900 931,412
Drug Stores & Proprietary
Stores (0.97%)
Rite Aid Corp. 22,000 1,097,250
Drugs (4.78%)
Abbott Labs 9,600 640,800
American Home Products Corp. 15,900 1,216,350
Johnson & Johnson 12,400 798,250
Merck & Co., Inc. 10,700 1,107,450
Pharmacia & Upjohn, Inc. 35,300 1,226,675
Schering-Plough Corp. 9,000 430,875
5,420,400
Electric Services (2.97%)
Central & Southwest 42,600 905,250
Dominion Resources, Inc. 13,600 498,100
FPL Group, Inc. 11,600 534,325
Houston Industries, Inc. 32,200 690,287
Potomac Electric Power Co. 16,400 379,250
Southern Co. 16,500 360,938
3,368,150
Electrical Industrial Apparatus (1.02%)
Emerson Electric Co. 20,900 1,150,806
Electronic Distribution
Equipment (0.88%)
General Electric Co. 15,200 993,700
Fats & Oils (1.34%)
Archer Daniels Midland Co. 64,595 1,517,983
General Industrial Machinery (0.71%)
BW/IP Holdings, Inc., Class A 6,400 130,000
Pall Corp. 28,900 671,925
801,925
Grain Mill Products (0.89%)
Ralston-Ralston Purina Group 12,200 1,002,687
Greeting Cards (0.81%)
American Greetings Corp. 24,700 916,988
Grocery Stores (3.47%)
Albertson's, Inc. 38,400 1,401,600
American Stores Co. 22,600 1,115,875
Sysco Corp. 38,600 1,408,900
3,926,375
Household Furniture (1.12%)
Masco Corp. 30,500 1,273,375
Industrial Inorganic Chemicals (0.81%)
Dow Chemical Co. 6,600 575,025
Eastman Chemical Co. 5,450 346,075
921,100
Jewelry, Silverware & Plated
Ware (0.23%)
Jostens, Inc. 9,700 259,475
Life Insurance (0.73%)
Lincoln National 12,900 830,437
Management & Public Relations (1.36%)
Cognizant Corp. 20,900 846,450
Dun & Bradstreet Corp. 26,600 698,250
1,544,700
Meat Products (0.74%)
Tyson Foods, Inc. 43,600 833,850
Medical Instruments & Supplies (0.99%)
St. Jude Medical, Inc. 28,850(a) 1,125,150
Medical Service & Health
Insurance (1.49%)
AON Corp. 13,125 679,219
Foundation Health Systems, Inc., Class A 32,340(a) 980,306
Physicians Corp. of America 5,000(a) 31,875
1,691,400
Metal Forgings & Stampings (0.54%)
Newell Co. 15,500 614,188
Miscellaneous Business Services (0.20%)
Safety-Kleen Corp. 13,600 229,500
Miscellaneous Electrical Equipment
& Supplies (0.79%)
Motorola, Inc. 11,800 896,800
Miscellaneous Shopping Goods
Stores (1.22%)
Toys 'R' Us, Inc. 39,400(a) 1,379,000
Motor Vehicles, Parts & Supplies (1.04%)
Grainger (W. W.), Inc. 15,000 1,172,812
Paper Mills (1.20%)
Kimberly Clark Corp. 27,400 1,363,150
Petroleum Refining (3.57%)
Amoco Corp. 6,800 591,175
Atlantic Richfield Co. 23,200 1,635,600
Exxon Corp. 29,600 1,820,400
4,047,175
Plastic Materials & Synthetics (0.11%)
Wellman, Inc. 7,400 128,575
Sanitary Services (2.36%)
Browning-Ferris Industries, Inc. 32,900 1,093,925
Waste Management, Inc. 49,100 1,577,338
2,671,263
Soap, Cleaners & Toilet Goods (0.98%)
Avon Products 15,700 1,107,831
Telephone Communication (1.78%)
AT&T Corp. 32,700 1,146,544
MCI Communications Corp. 22,600 865,156
2,011,700
Variety Stores (1.87%)
Dayton-Hudson Corp. 15,200 808,450
Wal-Mart Stores, Inc. 38,700 1,308,544
2,116,994
Total Common Stocks 64,174,201
Preferred Stocks (1.49%)
Motor Vehicles & Equipment (1.49%)
Federal-Mogul Corp.
Series D Convertible 4,300(b) 417,100
Ford Motor Co.
Series A Convertible 10,000 1,270,000
Total Preferred Stocks 1,687,100
Principal
Amount Value
Bonds (0.77%)
Blast Furnace & Basic Steel
Products (0.19%)
Quanex Corp. Convertible
Subordinated Debentures;
6.88%; 6/30/07 $ 200,000 $ 213,500
Engines & Turbines (0.17%)
Outboard Marine Corp. Convertible
Subordinated Debentures;
7.00%; 7/1/02 200,000 198,500
Petroleum Refining (0.31%)
Pennzoil Co. Senior Exchangeable
Debentures; 6.50%; 1/15/03 200,000 350,000
Trucking & Courier Services, Ex.,
Air (0.10%)
Builders Transport, Inc. Convertible
Subordinated Debentures;
6.50%; 5/1/11 306,000(c) 116,663
Total Bonds 878,663
U.S. Government Treasury Notes & Bonds (36.13%)
5.13%; 2/28/98 $2,500,000 $ 2,489,845
5.13%; 11/30/98 3,000,000 2,966,250
6.00%; 8/15/99 1,100,000 1,097,250
6.38%; 1/15/00 1,900,000 1,910,094
5.50%; 4/15/00 3,500,000 3,437,658
6.13%; 9/30/00 3,500,000 3,483,595
6.25%; 4/30/01 4,000,000 3,990,000
6.38%; 9/30/01 2,000,000 2,000,626
6.38%; 8/15/02 3,000,000 2,998,125
6.25%; 2/15/03 3,000,000 2,976,564
5.75%; 8/15/03 4,800,000 4,635,000
7.25%; 8/15/04 1,500,000 1,563,750
7.50%; 2/15/05 800,000 846,500
5.63%; 2/15/06 3,600,000 3,380,627
7.25%; 5/15/16 1,000,000 1,042,813
7.50%; 11/15/16 1,000,000 1,068,750
7.25%; 8/15/22 1,000,000 1,043,438
Total U. S. Government Treasury Notes & Bonds 40,930,885
Commercial Paper (4.20%)
Personal Credit Institutions (4.20%)
Investment in Joint Trade Account;
Associates Corp.;
6.25%; 7/1/97 4,756,669 4,756,669
Total Portfolio Investments (99.24%) 112,427,518
Cash and receivables, net of liabilities (0.76%) 860,560
Total Net Assets (100.00%) $113,288,078
(a) Non-income producing security - No dividend paid during the past
twelve months.
(b) Restricted Security - See Note 4 to the financial statements.
(c) Non-income producing security - Security in default.
PRINCIPAL BOND FUND, INC.
Principal
Amount Value
Bonds (94.92%)
Air Transportation, Scheduled (1.38%)
Federal Express Corp.,
Pass-Through Cert.;
7.96%; 3/28/17 $ 500,000 $ 509,265
7.58%; 7/2/19 500,000 484,455
993,720
Aircraft & Parts (0.45%)
Textron, Inc. Medium-Term Notes,
Series C; 9.55%; 3/19/01 300,000 326,524
Auto & Home Supply Stores (0.83%)
Pep Boys-Manny, Moe & Jack Notes;
7.00%; 6/1/05 600,000 596,289
Bakery Products (1.30%)
Nabisco, Inc. Notes;
7.05%; 7/15/07 950,000 931,507
Beverages (2.38%)
Joseph E. Seagram & Sons
Guaranteed Debentures;
8.88%; 9/15/11 1,500,000 1,709,430
Broadwoven Fabric Mills,
Cotton (2.05%)
Burlington Industries, Inc. Notes;
7.25%; 9/15/05 1,500,000 1,469,439
Cable & Other Pay TV
Services (1.41%)
TCI Communications, Inc. Senior
Notes; 8.00%; 8/1/05 1,000,000 1,016,296
Combination Utility Services (0.37%)
Public Service Electric & Gas
Medium-Term Notes;
8.16%; 5/26/09 250,000 267,922
Computer & Office Equipment (2.80%)
Seagate Technology, Inc.
Senior Notes;
7.37%; 3/1/07 2,000,000 2,014,682
Consumer Products (1.11%)
Philip Morris Cos. Notes;
6.80%; 12/1/03 500,000 491,617
RJR Nabisco Capital Corp. Senior
Notes; 8.75%; 4/15/04 300,000 306,375
797,992
Copper Ores (0.43%)
Asarco, Inc. Notes; 7.38%; 2/1/03 300,000 305,980
Crude Petroleum & Natural Gas (1.10%)
Occidental Petroleum Corp.
Medium-Term Notes;
9.73%; 6/15/01 250,000 274,540
Union Oil of California
Medium-Term Notes;
7.77%; 4/19/05 500,000 518,362
792,902
Deep Sea Foreign Transportation of
Freight (1.36%)
American President Cos., Ltd.
Senior Notes; 7.13%; 11/15/03 1,000,000 976,233
Department Stores (3.26%)
Harcourt General, Inc. Subordinated
Notes; 9.50%; 3/15/00 350,000 372,753
J. C. Penney Co., Inc. Medium-
Term Notes, Series A;
6.88%; 10/15/15 1,500,000 1,382,101
Sears Roebuck Co. Medium-Term
Notes; 9.05%; 2/6/12 500,000 584,339
2,339,193
Drug Stores & Proprietary
Stores (1.89%)
Rite Aid Corp. Senior Debentures;
6.88%; 8/15/13 1,500,000 1,359,607
Eating & Drinking Places (2.15%)
Marriott International, Inc.
Notes; 6.75%; 12/15/03 200,000 196,802
Senior Notes; 7.88%; 4/15/05 1,300,000 1,347,573
1,544,375
Electric Services (1.89%)
Cleveland Electric Illuminating Co.
First Mortgage Bonds;
8.75%; 11/15/05 400,000 404,584
Southern California Edison Co.
Notes; 6.38%; 1/15/06 1,000,000 954,700
1,359,284
Engines & Turbines (1.33%)
Brunswick Corp. Debentures;
7.38%; 9/1/23 1,000,000 954,353
Fabricated Rubber Products,
NEC (0.39%)
M. A. Hanna Co. Senior Notes;
9.38%; 9/15/03 250,000 277,063
Farm & Garden Machinery (1.96%)
Case Corp. Notes; 7.25%; 1/15/16 1,500,000 1,410,456
Gas Production & Distribution (1.65%)
Enron Corp. Notes;
7.13%; 5/15/07 750,000 751,553
Transco Energy Co. Notes;
9.38%; 8/15/01 400,000 435,292
1,186,845
General Government, NEC (1.45%)
Ontario Hydro Debentures;
7.45%; 3/31/13 500,000 510,865
Province of Saskatchewan, Canada
Global Notes; 8.00%; 2/1/13 500,000 532,445
1,043,310
Gold & Silver Ores (1.03%)
Placer Dome, Inc. Notes;
7.13%; 6/15/07 750,000 737,158
Grain Mill Products (1.40%)
Ralston Purina Co. Debentures;
7.75%; 10/1/15 1,000,000 1,007,847
Groceries & Related Products (1.99%)
Supervalu, Inc. Medium-Term Notes,
Series B; 6.49%; 12/12/05 1,500,000 1,430,448
Grocery Stores (1.43%)
Food Lion, Inc. Notes;
7.55%; 4/15/07 1,000,000 1,025,108
Highway & Street Construction (2.57%)
Foster Wheeler Corp. Notes;
6.75%; 11/15/05 1,900,000 1,846,811
Hospitals (0.77%)
Columbia/HCA Healthcare Corp.
Medium-Term Notes;
8.70%; 2/10/10 500,000 550,214
Hotels & Motels (2.13%)
Hilton Hotels Corp. Notes;
7.70%; 7/15/02 1,500,000 1,526,481
Household Appliances (0.77%)
Maytag Corp. Medium-Term Notes;
8.62%; 11/15/07 500,000 550,332
Household Furniture (0.68%)
Masco Corp. Debentures;
7.13%; 8/15/13 500,000 486,560
Industrial Inorganic Chemicals (3.16%)
FMC Corp.
Debentures; 7.75%; 7/1/11 1,500,000 1,553,754
Senior Notes; 6.38%; 9/1/03 200,000 194,695
Grace (W.R.) & Co. Guaranteed
Notes; 8.00%; 8/15/04 500,000 523,950
2,272,399
Life Insurance (1.33%)
John Hancock Mutual Life Insurance Co.
Surplus Notes; 7.38%; 2/15/24 1,000,000(a) 952,495
Lumber & Construction
Materials (2.29%)
Crane Co. Notes; 8.50%; 3/15/04 1,524,000 1,642,581
Machinery, Equipment &
Supplies (1.02%)
AAR Corp. Notes; 7.25%; 10/15/03 750,000 732,981
Millwork, Plywood & Structural
Members (1.54%)
Georgia-Pacific Corp.
Debentures; 9.50%; 12/1/11 100,000 118,060
Senior Debentures; 7.70%; 6/15/15 1,000,000 988,501
1,106,561
Miscellaneous Amusement, Recreation
Services (1.98%)
Circus Circus Enterprises Senior Notes;
6.45%; 2/1/06 1,500,000 1,418,856
Miscellaneous Chemical
Products (0.55%)
Ferro Corp. Senior Debentures;
7.63%; 5/1/13 400,000 396,990
Miscellaneous Investing (2.44%)
Washington Real Estate Investment
Trust Senior Notes;
7.25%; 8/13/06 1,000,000 997,947
Weingarten Realty Investors
Medium-Term Notes;
7.29%; 5/23/05 750,000 757,543
1,755,490
Miscellaneous Metal Ores (1.61%)
Amax, Inc. Notes; 9.88%; 6/13/01 100,000 109,915
Cyprus Amax Minerals Notes;
7.38%; 5/15/07 650,000 654,540
Cyprus Minerals Co. Notes;
10.13%; 4/1/02 350,000 393,984
1,158,439
Motion Picture Production &
Services (0.50%)
Columbia Pictures Entertainment, Inc.
Senior Subordinated Notes;
9.88%; 2/1/98 350,000 357,490
Motor Vehicles & Equipment (1.15%)
TRW, Inc. Medium-Term Notes;
9.25%; 12/30/11 700,000 823,317
Newpapers (2.23%)
News America Holdings, Inc.
Guaranteed Senior Notes;
8.50%; 2/15/05 1,500,000 1,599,129
Oil & Gas Field Services (2.82%)
Petroleum Geo-Services ASA
Notes; 7.50%; 3/31/07 2,000,000 2,023,044
Operative Builders (2.15%)
Pulte Corp. Senior Notes;
8.38%; 8/15/04 1,000,000 1,050,536
7.30%; 10/24/05 500,000 492,583
1,543,119
Paper Mills (2.71%)
Bowater, Inc. Debentures;
9.38%; 12/15/21 200,000 235,073
Champion International Corp. Notes;
9.88%; 6/1/00 250,000 271,106
7.10%; 9/1/05 875,000 876,035
Potlatch Corp. Medium-Term Notes;
8.75%; 1/14/22 500,000 563,155
1,945,369
Personal Credit Institutions (1.42%)
General Motors Acceptance Corp.
Medium-Term Notes;
8.25%; 2/24/04 500,000 533,056
Notes; 6.63%; 10/15/05 500,000 483,703
1,016,759
Petroleum Refining (3.90%)
Ashland Oil, Inc. Medium-Term Notes;
7.71%; 5/11/07 500,000 517,125
7.73%; 7/15/13 250,000 254,112
Series F; 8.54%; 1/13/05 250,000 270,928
Pennzoil Co. Debentures;
10.13%; 11/15/09 325,000 397,427
Phillips Petroleum Co. Notes;
9.38%; 2/15/11 500,000 595,241
Sun Co., Inc.
Debentures; 9.00%; 11/1/24 500,000 562,308
Notes; 7.13%; 3/15/04 200,000 200,445
2,797,586
Plastic Materials & Synthetics (2.70%)
Geon Co. Notes;
6.88%; 12/15/05 2,000,000 1,937,094
Primary Nonferrous Metals (0.93%)
Reynolds Metals Co.
Medium-Term Notes;
8.34%; 5/22/07 500,000 538,030
7.65%; 2/4/08 125,000 128,476
666,506
Pulp Mills (0.30%)
International Paper Co. Medium-Term
Notes; 9.70%; 8/15/00 200,000 216,817
Railroads (1.33%)
Union Pacific Corp. Notes;
6.40%; 2/1/06 1,000,000 955,604
Refrigeration & Service
Machinery (0.52%)
Westinghouse Electric Corp.
Debentures; 8.63%; 8/1/12 350,000 370,629
Rental of Railroad Cars (1.45%)
Gatx Capital Corp. Medium-Term
Notes, Series C; 6.86%; 10/13/05 1,000,000 978,639
Signal Capital Corp. Equipment Trust
Cert.; 9.95%; 2/1/06 64,000 66,044
1,044,683
Sanitary Services (1.51%)
Laidlaw, Inc. Senior Notes;
7.88%; 4/15/05 1,045,000 1,084,410
Sawmills & Planning Mills (1.10%)
MacMillan Bloedel Delaware
Guaranteed Notes; 8.50%; 1/15/04 750,000 789,240
Security Brokers & Dealers (2.77%)
Lehman Brothers, Inc.
Senior Subordinated Notes;
7.38%; 1/15/07 2,000,000 1,989,016
Telephone Communication (3.48%)
Sprint Corp. Notes; 8.13%; 7/15/02 500,000 526,706
U.S. West Capital Funding, Inc.
Medium-Term Notes;
6.83%; 11/15/07 1,000,000 970,544
Notes; 7.30%; 1/15/07 1,000,000 1,001,596
2,498,846
Variety Stores (0.32%)
Dayton-Hudson Corp. Debentures;
9.63%; 2/1/08 150,000 175,903
Dayton-Hudson Corp. Sinking Fund
Debentures; 9.50%; 10/15/16 55,000 55,909
231,812
Total Bonds 68,161,623
Commercial Paper (3.07%)
Personal Credit Institutions (3.07%)
Investment in Joint Trade Account;
Associates Corp.;
6.25%; 7/1/97 2,208,864 2,208,864
Total Portfolio Investments (97.99%) 70,370,487
Cash, receivables and other assets,
net of liabilities (2.01%) 1,441,278
Total Net Assets (100.00%) $71,811,765
(a) Restricted Security - See Note 4 to the financial statements.
PRINCIPAL CAPITAL ACCUMULATION
FUND, INC.
Shares
Held Value
Common Stocks (96.76%)
Beverages (3.28%)
Anheuser Busch Cos., Inc. 135,000 $ 5,661,563
Pepsico, Inc. 49,000 1,840,562
Universal Foods Corp. 17,200 655,750
8,157,875
Combination Utility Services (1.51%)
Cinergy Corp. 58,200 2,026,088
Montana Power Co. 75,000 1,739,062
3,765,150
Commercial Banks (14.88%)
Banc One Corp. 123,940 6,003,344
BankBoston Corp. 38,300 2,759,994
Comerica, Inc. 95,000 6,460,000
Corestates Financial Corp. 111,000 5,966,250
First of America Bank Corp. 43,050 1,969,537
KeyCorp 103,000 5,755,125
NationsBank Corp. 36,800 2,373,600
Summit Bancorp. 115,000 5,764,375
37,052,225
Commercial Printing (1.47%)
R. R. Donnelley & Sons Co. 100,000 3,662,500
Communications Equipment (1.54%)
Allen Telecom, Inc. 16,000(a) 332,000
DSC Communications Corp. 52,800(a) 1,174,800
General Instrument Corp. 92,800(a) 2,320,000
3,826,800
Computer & Office Equipment (2.27%)
Hewlett-Packard Co. 33,400 1,870,400
International Business
Machines Corp. 42,000 3,787,875
5,658,275
Crude Petroleum & Natural Gas (1.72%)
Texaco, Inc. 39,400 4,284,750
Drug Stores & Proprietary
Stores (1.16%)
Rite Aid Corp. 58,000 2,892,750
Drugs (6.70%)
Abbott Labs 48,000 3,204,000
American Home Products Corp. 45,000 3,442,500
Merck & Co., Inc. 37,000 3,829,500
Pharmacia & Upjohn, Inc. 179,000 6,220,250
16,696,250
Electric Services (3.77%)
Dominion Resources, Inc. 44,400 1,626,150
FPL Group, Inc. 38,500 1,773,406
Houston Industries, Inc. 231,000 4,952,063
Potomac Electric Power Co. 45,000 1,040,625
9,392,244
Electrical Industrial Apparatus (1.20%)
Emerson Electric Co. 54,180 2,983,286
Electronic Distribution
Equipment (1.31%)
General Electric Co. 50,000 3,268,750
Farm & Garden Machinery (2.39%)
Tenneco, Inc. 131,600 5,946,675
Fats & Oils (1.75%)
Archer Daniels Midland Co. 185,010 4,347,735
General Industrial Machinery (1.68%)
Pall Corp. 180,100 4,187,325
Grain Mill Products (0.94%)
Ralston-Ralston Purina Group 28,600 2,350,562
Greeting Cards (2.67%)
American Greetings Corp. 179,000 6,645,375
Grocery Stores (3.01%)
Albertson's, Inc. 40,600 1,481,900
American Stores Co. 60,000 2,962,500
Sysco Corp. 83,400 3,044,100
7,488,500
Household Furniture (2.49%)
Masco Corp. 148,200 6,187,350
Industrial Inorganic
Chemicals (1.15%)
Dow Chemical Co. 22,000 1,916,750
Eastman Chemical Co. 14,900 946,150
2,862,900
Industrial Organic Chemicals (0.56%)
Ethyl Corp. 150,000 1,387,500
Jewelry, Silverware & Plated
Ware (0.34%)
Jostens, Inc. 31,700 847,975
Life Insurance (2.45%)
American General Corp. 128,000 6,112,000
Management & Public
Relations (2.94%)
Cognizant Corp. 44,900 1,818,450
Dun & Bradstreet Corp. 209,900 5,509,875
7,328,325
Meat Products (1.01%)
Tyson Foods, Inc. 132,000 2,524,500
Medical Instruments &
Supplies (0.83%)
St. Jude Medical, Inc. 53,100(a) 2,070,900
Medical Service & Health
Insurance (1.56%)
AON Corp. 46,575 2,410,256
Foundation Health Systems, Inc.,
Class A 48,620(a) 1,473,794
3,884,050
Metal Forgings & Stampings (1.02%)
Newell Co. 64,000 2,536,000
Miscellaneous Electrical Equipment &
Supplies (0.96%)
Motorola, Inc. 31,400 2,386,400
Miscellaneous Shopping Goods
Stores (1.53%)
Toys 'R' Us, Inc. 108,700(a) 3,804,500
Motor Vehicles, Parts &
Supplies (1.14%)
Grainger (W. W.), Inc. 36,400 2,846,025
Newspapers (0.81%)
Dow Jones & Co., Inc. 50,000 2,009,375
Paper Mills (1.25%)
Kimberly Clark Corp. 62,800 3,124,300
Petroleum Refining (4.98%)
Atlantic Richfield Co. 80,000 5,640,000
Chevron Corp. 30,000 2,218,125
Exxon Corp. 74,000 4,551,000
12,409,125
Photographic Equipment &
Supplies (2.31%)
Eastman Kodak Co. 75,000 5,756,250
Rental of Railroad Cars (2.55%)
GATX Corp. 110,000 6,352,500
Sanitary Services (3.75%)
Browning-Ferris Industries, Inc. 173,900 5,782,175
Waste Management, Inc. 110,600 3,553,025
9,335,200
Soap, Cleaners, & Toilet Goods (1.60%)
Avon Products 56,600 3,993,838
Telephone Communication (5.27%)
AT&T Corp. 52,000 1,823,250
Southern New England Telecom 125,000 4,859,375
US West Communications Group 171,000 6,444,562
13,127,187
Variety Stores (3.01%)
Dayton-Hudson Corp. 61,000 3,244,438
Wal-Mart Stores, Inc. 126,000 4,260,375
7,504,813
Total Common Stocks 240,998,040
Principal
Amount Value
Commercial Paper (1.45%)
Personal Credit Institutions (1.45%)
Investment in Joint Trade Account;
Associates Corp.; 6.25%; 7/1/97 $3,618,353 $ 3,618,353
Total Portfolio Investments (98.21%) 244,616,393
Cash and receivables, net of liabilities (1.79%) 4,460,712
Total Net Assets (100.00%) $249,077,105
(a) Non-income producing security - No dividend paid during the past
twelve months.
PRINCIPAL EMERGING GROWTH FUND, INC.
Shares
Held Value
Common Stocks (86.05%)
Blast Furnace & Basic Steel
Products (0.70%)
Lukens, Inc. 67,300 $ 1,266,081
Carpets & Rugs (0.59%)
Shaw Industries, Inc. 99,300 1,055,063
Chemicals & Allied Products (0.39%)
Sigma-Aldrich Corp. 20,000 701,250
Commercial Banks (7.34%)
First Commerce Corp. 17,600 774,400
First Federal Capital Corp. 60,997 1,494,426
Independent Bank Corp. Michigan 39,690 1,136,126
Mercantile Bancorp., Inc. 20,960 1,273,320
Merchants Bancorp., Inc. 21,500 822,375
National City Corp. 20,100 1,055,250
NationsBank Corp. 7,960 513,420
North Fork Bancorp., Inc. 118,080 2,523,960
Peoples Heritage Financial
Group, Inc. 48,000 1,818,000
Princeton National Bancorp., Inc. 36,000 666,000
Summit Bancorp. 22,900 1,147,863
13,225,140
Commercial Printing (0.45%)
Merrill Corp. 22,300 811,163
Computer & Data Processing
Services (10.25%)
American Management Systems, Inc. 50,000(a) 1,337,500
Bitstream 102,000(a) 280,500
Cadence Design Systems, Inc. 80,000(a) 2,680,000
Cerner Corp. 116,200(a) 2,440,200
HBO & Co. 35,500 2,445,062
Microsoft Corp. 29,600(a) 3,740,700
National Processing, Inc. 21,300(a) 218,325
Sunquest Information Systems, Inc. 97,300(a) 1,459,500
Synopsys, Inc. 105,000(a) 3,858,750
18,460,537
Computer & Office Equipment (4.24%)
Ascend Communications 70,000(a) 2,756,250
EMC Corp. 81,700(a) 3,186,300
Optika Imaging Systems 75,000(a) 375,000
Seagate Technology 4,000(a) 140,750
Systemsoft Corp. 110,000(a) 1,182,500
7,640,800
Construction & Related
Machinery (2.85%)
EVI, Inc. 122,000(a) 5,124,000
Crude Petroleum & Natural
Gas (1.22%)
Devon Energy Corp. 60,000 2,205,000
Dairy Products (0.40%)
Dreyer's Grand Ice Cream, Inc. 18,200 718,900
Drugs (1.89%)
Alliance Pharmaceutical Corp. 30,000(a) 301,875
Forest Laboratories, Inc. 17,400(a) 721,013
Genzyme Corp. - General Division 7,182(a) 199,300
Merck & Co., Inc. 10,000 1,035,000
Pharmacia & Upjohn, Inc. 32,400 1,125,900
Seragen, Inc. 20,000(a) 20,000
3,403,088
Electronic Components &
Accessories (6.40%)
Intel Corp. 37,900 5,374,694
Linear Technology Corp. 46,800 2,421,900
Solectron Corp. 53,100(a) 3,720,319
11,516,913
Engineering & Architectural
Services (0.96%)
Paychex, Inc. 45,600 1,732,800
Family Clothing Stores (0.05%)
Gadzooks, Inc. 5,000(a) 97,500
Finance Services (1.39%)
First Financial Corp. 85,250 2,504,219
Fire, Marine, & Casualty
Insurance (1.59%)
Berkley W.R. Corp. 48,500 2,855,437
Footwear, Except Rubber (0.61%)
Nine West Group, Inc. 28,900(a) 1,103,619
General Industrial Machinery (4.37%)
Flow International Corp. 101,500(a) 989,625
Kaydon Corp. 45,600 2,262,900
Pentair, Inc. 54,600 1,794,975
Roper Industries, Inc. 54,500 2,827,188
7,874,688
Grocery Stores (0.77%)
Casey's General Stores, Inc. 64,500 1,388,766
Holding Offices (0.76%)
ISB Financial Corp. 52,400 1,362,400
Hose, Belting, Gaskets &
Packing (1.09%)
Mark IV Industries 81,818 1,963,632
Hospitals (1.87%)
Humana, Inc. 62,300(a) 1,440,687
Universal Health Services, Inc.,
Class B 50,000(a) 1,925,000
3,365,687
Household Appliances (1.02%)
Maytag Corp. 70,000 1,828,750
Industrial Machinery, NEC (1.08%)
Coltec Industries 100,000(a) 1,950,000
Insurance Agents, Brokers &
Services (1.23%)
Equifax, Inc. 59,400 2,208,937
Investment Offices (1.21%)
AMVESCAP PLC Sponsored ADS 37,560 2,187,870
Iron & Steel Foundries (0.28%)
Atchison Casting Corp. 30,000(a) 498,750
Laundry, Cleaning & Garment
Services (0.77%)
G & K Services, Inc., Class A 37,225 1,386,631
Measuring & Controlling
Devices (1.57%)
ISCO, Inc. 22,513 196,984
Millipore Corp. 49,100 2,160,400
Photon Dynamics 73,600(a) 478,400
2,835,784
Meat Products (0.98%)
Michael Foods, Inc. 95,200 1,761,200
Medical Instruments & Supplies (3.20%)
Boston Scientific Corp. 35,200(a) 2,162,600
Nellcor Puritan Bennett 84,000(a) 1,522,500
Steris Corp. 55,700(a) 2,081,787
5,766,887
Medical Service & Health
Insurance (5.07%)
Alternative Living Services 93,700(a) 2,102,394
Foundation Health Systems, Inc.,
Class A 104,850(a) 3,178,266
Orthofix International NV 77,600(a) 805,100
Pacificare Health Systems, Inc., Class A 190(a) 11,507
Pacificare Health Systems, Inc., Class B 20,598(a) 1,315,697
Patient InfoSystems, Inc. 59,000(a) 265,500
United Healthcare Corp. 27,900 1,450,800
9,129,264
Metal Services, NEC (1.56%)
BMC Industries, Inc. 81,900 2,805,075
Miscellaneous Apparel &
Accessories (0.63%)
Designer Holdings, Ltd. 112,000(a) 1,141,000
Miscellaneous Chemical
Products (1.70%)
Cytec Industries 48,200(a) 1,801,475
H. B. Fuller Co. 23,000 1,265,000
3,066,475
Mortgage Bankers & Brokers (1.19%)
Money Store, Inc. 75,000 2,151,562
Non-Store Retailers (1.19%)
U.S. Office Products Co. 70,000(a) 2,139,375
Office Furniture (0.98%)
Chromcraft Revington, Inc. 36,200(a) 1,036,225
Kimball International, Inc., Class B 18,200 732,550
1,768,775
Oil & Gas Field Services (1.59%)
Diamond Offshore Drilling 36,700(a) 2,867,188
Operative Builders (1.12%)
D. R. Horton, Inc. 151,200 1,568,700
Pulte Corp. 12,621 436,213
2,004,913
Paints & Allied Products (0.73%)
RPM, Inc. 71,700 1,317,488
Plastic Materials & Synthetics (0.70%)
A. Schulman, Inc. 51,000 1,255,875
Plumbing, Heating,
Air-Conditioning (1.40%)
Apogee Enterprises, Inc. 114,000 2,451,000
Metalclad Corp. 45,600(a) 69,825
2,520,825
Refrigeration & Service
Machinery (0.48%)
Tecumseh Products Co., Class A 14,400 862,200
Sanitary Services (0.99%)
Browning-Ferris Industries, Inc. 46,600 1,549,450
USA Waste Services, Inc. 5,847(a) 225,840
1,775,290
Savings Institutions (0.52%)
Sterling Financial Corp. 49,900(a) 929,388
Screw Machine Products, Bolts,
Etc. (0.90%)
TriMas Corp. 57,500 1,617,187
Security Brokers & Dealers (0.84%)
Jefferies Group, Inc. 26,400 1,504,800
Telephone Communication (1.53%)
McLeod, Inc. 81,500(a) 2,750,625
Toys & Sporting Goods (0.97%)
Mattel, Inc. 51,700 1,751,338
Trucking & Courier Services, Ex.
Air (0.44%)
J. B. Hunt Transport Services, Inc. 53,500 795,812
Total Common Stocks 154,955,947
Preferred Stock (0.15%)
Medical Service & Health
Insurance (0.15%)
Pacificare Health Systems, Inc.
Series A Convertible 10,000 268,750
Principal
Amount Value
Bonds (1.12%)
Computer & Data Processing
Services (0.20%)
Sierra On Line Convertible
Subordinated Debentures;
6.50%; 4/1/01 $ 110,000(b) $ 368,638
Industrial Inorganic Chemicals (0.30%)
Ciba-Geigy Corp. Exchangeable
Subordinated Debentures;
6.25%; 3/15/16 150,000(b) 150,187
ICN Pharmaceuticals, Inc. Convertible
Subordinated Debentures;
8.50%; 11/15/99 300,000 388,500
538,687
Management & Public Relations (0.56%)
Complete Management, Inc. Convertible
Debentures; 8.00%; 12/15/03 1,000,000 995,000
Sanitary Services (0.06%)
Enclean, Inc. Convertible Subordinated
Debentures; 7.50%; 8/1/01 100,000 102,426
Total Bonds 2,004,751
Commercial Paper (12.58%)
Business Credit Institutions (3.10%)
American Express Credit Corp.;
5.55%; 7/16/97 400,000 399,075
5.54%; 7/21/97 5,200,000 5,183,996
5,583,071
Personal Credit Institutions (8.60%)
Investment in Joint Trade Account;
Associates Corp.; 6.25%; 7/1/97 8,959,254 8,959,254
Ford Motor Credit Co.;
5.47%; 7/2/97 4,325,000 4,324,343
5.45%; 7/7/97 975,000 974,114
5.54%; 7/28/97 1,225,000 1,219,910
15,477,621
Security Brokers & Dealers (0.88%)
Merrill Lynch & Co., Inc.;
5.57%; 7/14/97 1,600,000 1,596,782
Total Commercial Paper 22,657,474
Total Portfolio Investments (99.90%) 179,886,922
Cash and receivables, net of liabilities (0.10%) 184,892
Total Net Assets (100.00%) $180,071,814
(a) Non-income producing security - No dividend paid during the past
twelve months.
(b) Restricted Security - See Note 4 to the financial statements.
PRINCIPAL GOVERNMENT SECURITIES
FUND, INC.
Description of Issue Principal
Type Rate Maturity Amount Value
Government National Mortgage Association (GNMA)
Certificates (32.10%)
GNMA I 6.50% 5/15/26 $ 988,983 $ 946,892
GNMA I 7.00 1/15/24-2/15/27 1,835,482 1,807,245
GNMA I 7.50 1/15/27 988,383 995,905
GNMA I 8.00 10/15/16-6/15/17 1,357,455 1,409,495
GNMA II 6.00 5/20/24-3/20/27 19,833,224 18,342,727
GNMA II 6.50 12/20/25-2/20/26 3,848,516 3,670,885
Total GNMA Certificates 27,173,149
Federal National Mortgage Association (FNMA)
Certificates (19.51%)
FNMA 5.50 5/1/24 1,166,590 1,043,363
FNMA 6.00 11/1/23-3/1/26 3,924,532 3,656,724
FNMA 6.50 11/1/23-6/1/26 7,393,495 7,094,031
FNMA 7.00 8/1/23-2/1/27 2,738,226 2,688,031
FNMA 7.50 4/1/22 1,021,754 1,030,919
FNMA 7.50 TBA* 1,000,000 1,002,720
Total FNMA Certificates 16,515,788
Federal Home Loan Mortgage Corporation (FHLMC) Certificates (15.23%)
FHLMC 5.50 2/1/24-3/1/24 $ 1,392,860 $ 1,269,262
FHLMC 6.00 12/1/23-1/1/26 2,776,930 2,591,983
FHLMC 6.50 4/1/24-5/1/26 5,172,481 4,970,007
FHLMC 7.00 9/1/23-1/1/24 2,497,922 2,466,473
FHLMC 7.50 2/1/22-6/1/24 1,583,695 1,599,496
Total FHLMC Certificates 12,897,221
Principal
Amount Value
Student Loan Marketing Association (SLMA)
Certificates (16.24%)
Student Loan Marketing Association
Debentures;
7.30%; 8/1/12 $10,000,000 $10,318,450
8.47%; 12/1/08 1,000,000 1,127,978
9.15%; 12/1/04 1,200,000 1,364,346
Notes; 6.13%; 12/1/05 560,000 535,754
Notes; 9.25%; 6/1/04 350,000 397,706
Total SLMA Certificates 13,744,234
Private Export Funding Corporation (PEFCO)
Certificates (15.56%)
Private Export Funding Corp.
Secured Notes;
6.62%; 10/1/05 2,000,000 1,975,240
9.45%; 12/31/99 4,500,000 4,824,810
Series SS, Senior Secured Notes;
5.50%; 3/15/01 3,325,000 3,219,331
5.80%; 2/1/04 2,200,000 2,136,090
7.03%; 10/31/03 1,000,000 1,019,090
Total PEFCO Certificates 13,174,561
Total Portfolio Investments (98.64%) 83,504,953
Cash and receivables, not of liabilities (1.36%) 1,151,155
Total Net Assets (100.00%) $84,656,108
* Securities purchased on a to-be-announced basis.
PRINCIPAL GROWTH FUND, INC.
Shares
Held Value
Common Stocks (82.78%)
Advertising (1.17%)
Interpublic Group of Cos., Inc. 25,300 $ 1,551,206
Beverages (1.64%)
Coca-Cola Co. 8,800 594,000
Pepsico, Inc. 42,100 1,581,381
2,175,381
Blast Furnace & Basic Steel
Products (0.48%)
Lukens, Inc. 33,600 632,100
Carpets & Rugs (0.44%)
Shaw Industries, Inc. 54,800 582,250
Cash Grains (1.66%)
Pioneer Hi-Bred International 27,400 2,192,000
Commercial Banks (5.50%)
Banc One Corp. 16,500 799,219
BankBoston Corp. 11,000 792,687
Barnett Banks Inc. 10,000 525,000
CoreStates Financial Corp. 12,300 661,125
First of America Bank Corp. 17,550 802,913
Firstar Corp. 30,000 915,000
FirstMerit Corp. 14,600 700,800
NationsBank Corp. 24,402 1,573,929
Princeton National Bancorp., Inc. 27,300 505,050
7,275,723
Communications Equipment (3.91%)
General Instrument Corp. 75,800(a) 1,895,000
Northern Telecom Ltd. 18,700 1,701,700
Octel Communications Corp. 67,200(a) 1,575,000
5,171,700
Computer & Data Processing
Services (2.87%)
GTECH Holdings Corp. 47,800(a) 1,541,550
Microsoft Corp. 17,800(a) 2,249,475
3,791,025
Computer & Office Equipment (4.16%)
Automatic Data Processing, Inc. 20,000 940,000
Ceridian Corp. 37,400(a) 1,580,150
Digital Equipment Corp. 30,800(a) 1,091,475
Hewlett-Packard Co. 27,500 1,540,000
Pitney Bowes, Inc. 5,000 347,500
5,499,125
Department Stores (0.46%)
May Department Stores 12,800 604,800
Drugs (8.40%)
Alliance Pharmaceutical Corp. 10,000(a) 100,625
Bristol-Myers Squibb Co. 20,000 1,620,000
Forest Laboratories, Inc. 32,600(a) 1,350,863
Genzyme Corp. - General Division 9,500(a) 263,625
Johnson & Johnson 20,000 1,287,500
Lilly (Eli) & Co. 20,000 2,186,250
Merck & Co., Inc. 14,600 1,511,100
Pharmacia & Upjohn, Inc. 27,500 955,625
Smithkline Beecham PLC ADR 20,000 1,832,500
11,108,088
Eating & Drinking Places (1.42%)
Marriott International, Inc. 25,000 1,534,375
McDonald's Corp. 7,000 338,187
1,872,562
Electrical Goods (0.54%)
Avnet, Inc. 12,500 718,750
Electronic Components &
Accessories (3.33%)
Intel Corp. 17,300 2,453,356
Linear Technology Corp. 37,800 1,956,150
4,409,506
Electronic Distribution
Equipment (0.49%)
General Electric Co. 10,000 653,750
Federal & Federally Sponsored
Credit (0.36%)
Federal National Mortgage Association 11,000 479,875
Footwear, Except Rubber (1.65%)
Stride Rite Corp. 169,300 2,179,738
General Industrial Machinery (2.77%)
Ingersoll-Rand Co. 20,400 1,259,700
Tyco International Ltd. 34,500 2,399,906
3,659,606
Grain Mill Products (1.03%)
General Mills, Inc. 2,445 159,231
Ralston-Ralston Purina Group 14,600 1,199,937
1,359,168
Grocery Stores (0.35%)
Casey's General Stores, Inc. 21,200 456,463
Hose, Belting, Gaskets &
Packing (1.11%)
Mark IV Industries 61,425 1,474,200
Hospitals (2.41%)
Columbia/HCA Healthcare Corp. 24,900 978,881
Humana, Inc. 45,500(a) 1,052,188
Universal Health Services, Inc.,
Class B 30,000(a) 1,155,000
3,186,069
Household Furniture (1.10%)
Masco Corp. 34,900 1,457,075
Investment Offices (1.11%)
AMVESCAP PLC Sponsored ADS 25,200 1,467,900
Knitting Mills (0.22%)
Russell Corp. 10,000 296,250
Lumber & Other Building
Materials (1.43%)
Home Depot, Inc. 27,400 1,888,888
Management & Public Relations (1.49%)
Dun & Bradstreet Corp. 5,000 131,250
Medaphis Corp. 183,000(a) 1,841,437
1,972,687
Medical Instruments & Supplies (3.64%)
Becton, Dickinson & Co. 20,000 1,012,500
Boston Scientific Corp. 41,100(a) 2,525,081
Nellcor Puritan Bennett 70,200(a) 1,272,375
4,809,956
Medical Service & Health
Insurance (3.37%)
AON Corp. 17,550 908,212
Foundation Health Systems, Inc.,
Class A 62,080(a) 1,881,800
Pacificare Health Systems, Inc., Class A 1,467 88,845
Pacificare Health Systems, Inc., Class B 4,611 294,528
United Healthcare Corp. 15,000 780,000
Value Health, Inc. 25,000(a) 506,250
4,459,635
Millwork, Plywood & Structural
Members (0.90%)
Georgia-Pacific Corp. 14,000 1,195,250
Miscellaneous Converted Paper
Products (0.50%)
Minnesota Mining & Mfg. Co. 6,500 663,000
Miscellaneous Electrical Equipment &
Supplies (1.57%)
Motorola, Inc. 27,300 2,074,800
Miscellaneous Fabricated Metal
Products (1.12%)
Parker-Hannifin Corp. 24,300 1,474,706
Miscellaneous Investing (1.10%)
HFS, Inc. 25,000(a) 1,450,000
Miscellaneous Plastics Products,
NEC (0.22%)
Rubbermaid, Inc. 10,000 297,500
Miscellaneous Shopping Goods
Stores (0.40%)
Toys 'R' Us, Inc. 15,000(a) 525,000
Motor Vehicles & Equipment (2.68%)
Chrysler Corp. 60,200 1,975,313
Dana Corp. 41,300 1,569,400
3,544,713
Operative Builders (0.50%)
Pulte Corp. 19,300 667,056
Paints & Allied Products (0.35%)
RPM, Inc. 25,000 459,375
Petroleum Refining (1.99%)
Atlantic Richfield Co. 11,600 817,800
Exxon Corp. 29,600 1,820,400
2,638,200
Plastic Materials & Synthetics (0.63%)
A. Schulman, Inc. 33,600 827,400
Preserved Fruits & Vegetables (0.77%)
CPC International, Inc. 11,100 1,024,669
Radio, Television & Computer
Stores (0.21%)
Tandy Corp. 5,000 280,000
Radio & Television Broadcasting (0.82%)
Sinclair Broadcasting Group 35,000 1,080,625
Refrigeration & Service
Machinery (0.76%)
Tecumseh Products Co., Class A 16,800 1,005,900
Rubber & Plastics Footwear (0.88%)
Nike, Inc. 20,000 1,167,500
Sanitary Services (1.10%)
Browning-Ferris Industries, Inc. 29,300 974,225
Waste Management, Inc. 15,000 481,875
1,456,100
Security Brokers & Dealers (0.86%)
Salomon, Inc. 20,400 1,134,750
Soap, Cleaners & Toilet Goods (2.83%)
Colgate-Palmolive Co. 23,400 1,526,850
Ecolab, Inc. 46,400 2,215,600
3,742,450
Telephone Communication (1.09%)
WorldCom, Inc. 45,000(a) 1,440,000
Toys & Sporting Goods (0.92%)
Mattel, Inc. 35,950 1,217,806
Variety Stores (0.39%)
Wal-Mart Stores, Inc. 15,000 507,188
Women's & Children's
Undergarments (1.68%)
Warnaco Group, Class A 69,800 2,224,875
Total Common Stock 109,484,339
Preferred Stock (0.12%)
Medical Service & Health
Insurance (0.12%)
Pacificare Health Systems, Inc.,
Series A Convertible 6,091 163,695
Principal
Amount Value
Commercial Paper (17.03%)
Business Credit Institutions (4.46%)
American Express Credit Corp.;
5.50%; 7/7/97 $ 2,950,000 $ 2,947,296
5.55%; 7/14/97 2,950,000 2,944,088
5,891,384
Personal Credit Institutions (9.15%)
Investment in Joint Trade Account;
Associates Corp.;
6.25%; 7/1/97 6,619,662 6,619,662
Ford Motor Credit Co.;
5.54%; 7/21/97 3,475,000 3,464,305
5.54%; 7/28/97 2,025,000 2,016,586
12,100,553
Security Brokers & Dealers (3.42%)
Merrill Lynch & Co., Inc.
5.55%; 7/2/97 4,525,000 4,524,302
Total Commercial Paper 22,516,239
Total Portfolio Investments (99.93%) 132,164,273
Cash and receivables, net of liabilities (0.07%) 94,449
Total Net Assets (100.00%) $ 132,258,722
(a) Non-income producing security - No dividend paid during the past
twelve months.
PRINCIPAL HIGH YIELD FUND, INC.
Principal
Amount Value
Bonds (93.19%)
Advertising (2.75%)
Lamar Advertising Company Senior
Subordinated Notes; 9.63%; 12/1/06 $ 200,000 $ 205,000
Outdoor Systems Senior Subordinated
Notes; 8.88%; 6/15/07 200,000(a) 194,250
399,250
Aircraft & Parts (1.94%)
Rohr Industries, Inc. Subordinated
Debentures; 9.25%; 3/1/17 300,000 281,250
Blast Furnace & Basic Steel
Products (5.36%)
Ivaco Senior Notes;
11.50%; 9/15/05 150,000 160,875
Titan Wheel International Senior
Subordinated Notes; 8.75%; 4/1/07 300,000 306,000
Weirton Steel Corp. Senior Notes;
10.75%; 6/1/05 300,000 312,000
778,875
Broadwoven Fabric Mills,
Cotton (2.02%)
J.P. Stevens & Co., Inc. Sinking Fund
Debentures; 9.00%; 3/1/17 300,000 293,250
Business Credit Institutions (0.18%)
Navistar Financial Corp. Senior
Subordinated Notes; 9.00%; 6/1/02 25,000(a) 25,719
Cable & Other Pay TV Services (3.60%)
Jones Intercable, Inc. Senior Notes;
9.63%; 3/15/02 300,000 314,250
TCI Communications, Inc. Debentures;
8.75%; 8/1/15 200,000 209,810
524,060
Cogeneration - Small Power
Producer (3.35%)
AES Corp. Senior Subordinated
Notes; 10.25%; 7/15/06 300,000 327,750
California Energy Co., Inc.
Ltd. Resource Senior Secured
Notes; 9.88%; 6/30/03 150,000 159,000
486,750
Crude Petroleum & Natural Gas (6.87%)
Chesapeake Energy Corp. Senior Notes;
8.50%; 3/15/12 200,000 182,000
Nuevo Energy Co. Senior Subordinated
Notes; 9.50%; 4/15/06 400,000 420,000
Ocean Energy, Inc. Senior Subordianted
Notes; 8.88%; 7/15/07 200,000 199,250
Snyder Oil Company Senior
Subordinated Notes; 8.75%; 6/15/07 200,000 198,250
999,500
Dairy Farms (2.00%)
Fage Dairy Industry S.A. Senior Notes;
9.00%; 2/1/07 300,000(a) 291,000
Electrical Industrial Apparatus (1.44%)
Motors & Gears, Inc., Series A Senior
Notes; 10.75%; 11/15/06 200,000 209,000
Electronic Components &
Accessories (3.22%)
Advanced Micro Devices, Inc.; Senior
Secured Notes; 11.00%; 8/1/03 300,000 335,250
Fairchild Semiconductor Corp. Senior
Subordinated Notes; 10.13%; 3/15/07 125,000(a) 132,500
467,750
Engines & Turbines (1.90%)
Outboard Marine Corp. Debentures;
9.13%; 4/15/17 300,000 276,000
Family Clothing Stores (0.35%)
Specialty Retailers, Inc. Senior Notes;
8.50%; 7/15/05 50,000(a) 50,375
Finance Services (1.38%)
DVI, Inc. Senior Notes; 9.88%; 2/1/04 200,000 200,000
Footwear, Except Rubber (1.41%)
Brown Group, Inc. Senior Notes;
9.50%; 10/15/06 200,000 205,000
Forest Products (2.00%)
Doman Industries, Ltd. Senior Notes;
8.75%; 3/15/04 300,000 291,000
Fuel Dealers (2.02%)
Petroleum Heat & Power Co., Inc.
Subordinated Notes; 10.13%; 4/1/03 300,000 294,000
Groceries & Related Products (2.04%)
Rykoff-Sexton, Inc. Senior
Subordinated Notes; 8.88%; 11/1/03 300,000 297,000
Grocery Stores (1.37%)
Quality Food Centers Senior
Subordinated Notes; 8.70%; 3/15/07 200,000(a) 198,500
Hotels & Motels (2.09%)
John Q. Hammons Hotels, L.P. &
Finance Corp. First Mortgage
Notes; 8.88%; 2/15/04 300,000 303,000
Industrial Inorganic Chemicals (1.38%)
PT Tri Polyta Indonesia TBK;
Guaranteed Securited Notes;
11.38%; 12/1/03 200,000 200,500
Knitting Mills (2.26%)
Tultex Corp. Senior Notes;
10.63%; 3/15/05 300,000 327,750
Lumber & Other Building
Materials (0.53%)
Central Tractor Farm & Country, Inc.
Senior Notes; 10.63%; 4/1/07 75,000 77,625
Miscellaneous Amusement, Recreation
Service (3.49%)
Rio Hotel & Casino, Inc. Senior
Subordinated Notes; 9.50%; 4/15/07 300,000 308,250
Station Casinos, Inc. Senior
Subordinated Notes, Series B
9.63%; 6/1/03 200,000 198,000
506,250
Miscellaneous Plastics Products,
NEC (2.09%)
Congoleum Corp. Senior Notes;
9.00%; 2/1/01 300,000 303,000
Motor Vehicles & Equipment (0.37%)
Blue Bird Body Co. Senior Subordinated
Notes; 10.75%; 11/15/06 50,000 53,125
Newspapers (1.74%)
Hollinger International Publishing, Inc.
Senior Notes; 8.63%; 3/15/05 200,000 202,000
Sun Media Corp. Senior Subordinated
Notes; 9.50%; 2/15/07 50,000(a) 50,500
252,500
Nursing & Personal Care
Facilities (2.09%)
Mariner Health Group, Inc. Senior
Subordinated Notes; 9.50%; 4/1/06 300,000 303,375
Oil & Gas Field Services (2.82%)
Dawson Production Services Senior
Notes; 9.38%; 2/1/07 300,000 304,500
Parker Drilling Co. Senior Notes,
Series B; 9.75%; 11/15/06 100,000 105,250
409,750
Paper Mills (1.37%)
Indah Kiat Finance Mauritius Ltd.
Guaranteed Senior Notes;
10.00%; 7/1/07 200,000 198,454
Petroleum Refining (2.17%)
Crown Central Petroleum Corp.
Senior Notes; 10.88%; 2/1/05 300,000 315,000
Primary Nonferrous Metals (0.37%)
Euramax International PLC Senior
Subordinated Notes; 11.25%; 10/1/06 50,000 53,750
Pulp Mills (0.35%)
Pen-Tab Industries, Inc. Senior
Subordinated Debentures;
10.88%; 2/1/07 50,000(a) 50,875
Radio, Television & Computer
Stores (2.13%)
Compusa, Inc. Senior Subordinated
Notes; 9.50%; 6/15/00 300,000 309,750
Radio & Television Broadcasting (3.14%)
American Radio Systems Senior
Subordinated Notes; 9.00%; 2/1/06 300,000 303,750
Sullivan Broadcasting, Inc. Senior
Subordinated Notes; 10.25%; 12/15/05 150,000 153,000
456,750
Retail Stores, NEC (1.44%)
Cole National Group, Inc. Senior
Subordinated Notes; 9.88%; 12/31/06 200,000 209,500
Search & Navigation Equipment (2.10%)
Amresco, Inc. Senior Subordinated
Notes; 10.00%; 3/15/04 300,000 304,500
Soap, Cleaners & Toilet Goods (2.23%)
Coty, Inc. Senior Subordinated Notes;
10.25%; 5/1/05 300,000 323,250
Telephone Communication (9.33%)
Lenfest Communications Senior Notes;
8.38%; 11/1/05 200,000 196,750
Paging Network, Inc. Senior
Debentures; 8.88%; 2/1/06 300,000 273,750
Rogers Cablesystems, Ltd. Senior
Secured Second Priority Notes;
9.63%; 8/1/02 250,000 263,125
Rogers Cantel, Inc. Senior Secured
Debentures; 9.75%; 6/1/16 300,000 318,000
Vanguard Cellular Systems, Inc.
Senior Debentures; 9.38%; 4/15/06 300,000 303,000
1,354,625
Textile Finishing, Except Wool (2.15%)
Dominion Textile (USA), Inc.
Guaranteed Senior Notes;
9.25%; 4/1/06 300,000 312,750
Water Supply (2.35%)
California Energy Casecnan Water &
Energy Co., Inc. Senior Secured
Bonds, Series B; 11.95%; 11/15/10 300,000 342,000
Total Bonds 13,536,358
Commercial Paper (0.99%)
Personal Credit Institutions (0.99%)
Investment in Joint Trade Account;
Associates Corp.; 6.25%; 7/1/97 144,282 144,282
Total Portfolio Investments (94.18%) 13,680,640
Cash and receivables, net of liabilities (5.82%) 844,689
Total Net Assets (100.00%) $14,525,329
(a) Restricted Security - See Note 4 to the financial statements.
PRINCIPAL MONEY MARKET FUND, INC.
Principal
Amount Value
Commercial Paper (81.26%)
Advertising (1.88%)
Omnicom Finance, Inc.;
LOC ABN-AMRO Bank N.V.
5.58%; 7/14/97 $ 825,000 $ 823,337
Asset Backed Securities (3.71%)
Retailer Funding Corp.;
5.57%; 7/15/97 500,000 498,917
Sheffield Receivables Corp.;
5.55%; 7/16/97 625,000 623,555
5.57%; 7/22/97 500,000 498,375
1,620,847
Business Credit Institutions (8.13%)
American Express Credit Corp.;
5.54%; 8/19/97 850,000 843,591
Golden Gate Management, Inc.;
LOC Sumitomo Bank;
5.63%; 7/3/97 1,000,000 999,687
5.67%; 7/25/97 900,000 896,598
General Electric Capital Corp.;
5.85%; 1/23/98 500,000 483,262
International Lease Finance Corp.;
5.65%; 7/17/97 329,000 328,174
3,551,312
Department Stores (4.96%)
Sears Roebuck Acceptance Corp.;
5.55%; 7/28/97 275,000 273,855
5.57%; 7/30/97 675,000 671,971
5.56%; 7/31/97 550,000 547,452
5.56%; 8/4/97 675,000 671,456
2,164,734
Electric Services (5.88%)
AES Shady Point, Inc.;
LOC Bank of Tokyo-Mitsubishi, Ltd.;
5.68%; 7/10/97 1,225,000 1,223,260
CommEd Fuel Co., Inc.;
LOC Credit Suisse;
5.58%; 7/21/97 750,000 747,675
5.54%; 7/25/97 600,000 597,784
2,568,719
Finance Services (6.33%)
Mitsubishi International Corp.;
5.58%; 7/2/97 300,000 299,954
5.56%; 7/9/97 500,000 499,382
5.54%; 7/17/97 500,000 498,769
5.60%; 7/28/97 800,000 796,640
PHH Corp.;
5.61%; 7/25/97 350,000 348,691
5.57%; 8/18/97 325,000 322,586
2,766,022
Forest Products (1.72%)
Weyerhaeuser Co.;
5.55%; 7/18/97 755,000 753,021
Mortgage Bankers & Brokers (4.91%)
Countrywide Home Loan, Inc.;
5.55%; 7/2/97 1,000,000 999,846
5.57%; 7/21/97 675,000 672,911
5.60%; 8/6/97 475,000 472,340
2,145,097
Motor Vehicles & Equipment (7.29%)
Echlin, Inc.;
5.61%; 7/16/97 500,000 498,831
5.60%; 7/23/97 850,000 847,091
5.64%; 7/30/97 400,000 398,183
5.65%; 9/12/97 325,000 321,277
Paccar Financial Corp.;
5.55%; 7/28/97 1,125,000 1,120,317
3,185,699
Paperboard Mills (1.60%)
Sonoco Products Co.;
5.53%; 7/1/97 700,000 700,000
Personal Credit Institutions (9.44%)
Beneficial Corp.;
5.55%; 8/5/97 950,000 944,874
Comoloco, Inc.;
5.38%; 7/24/97 500,000 498,281
5.72%; 12/12/97 500,000 486,971
Ford Motor Credit Co.;
5.54%; 7/28/97 675,000 672,195
General Motors Acceptance Corp.;
5.58%; 7/3/97 500,000 499,845
Norwest Financial, Inc.;
5.55%; 7/29/97 1,025,000 1,020,576
4,122,742
Real Estate Operators &
Lessors (4.27%)
Towson Town Center, Inc.; LOC
Bank of Tokyo-Mitsubishi, Ltd.;
5.63%; 7/7/97 300,000 299,719
5.63%; 7/10/97 500,000 499,296
5.60%; 7/14/97 500,000 498,989
5.67%; 8/1/97 400,000 398,047
5.75%; 8/4/97 172,000 171,066
1,867,117
Security Brokers & Dealers (11.28%)
Bear Stearns Cos., Inc.;
5.55%; 7/17/97 500,000 498,767
Goldman Sachs Group, L.P.;
5.55%; 7/7/97 1,000,000 999,075
5.57%; 7/11/97 750,000 748,840
5.73%; 1/23/98 500,000 483,606
Merrill Lynch & Co., Inc.;
5.55%; 7/14/97 850,000 848,296
5.55%; 7/16/97 500,000 498,844
5.29%; 11/18/97 375,000 367,285
5.80%; 2/2/98 500,000 482,600
4,927,313
Subdividers & Developers (2.29%)
Hartz 667 Commercial Paper Corp.;
LOC Bank of Tokyo-Mitsubishi, Ltd.;
5.63%; 7/2/97 1,000,000 999,844
Telephone Communication (3.00%)
Bell Atlantic Financial Services, Inc.;
5.55%; 7/1/97 310,000 310,000
5.55%; 7/8/97 1,000,000 998,921
1,308,921
Tires & Inner Tubes (4.57%)
Bridgestone/Firestone, Inc.;
LOC Sumitomo Bank Ltd.;
5.60%; 7/8/97 500,000 499,456
5.63%; 7/9/97 1,000,000 998,749
5.63%; 7/11/97 500,000 499,218
1,997,423
Total Commercial Paper 35,502,148
Bank Notes (1.14%)
Commercial Banks (1.14%)
LaSalle National Bank;
6.20%; 8/21/97 500,000 500,000
Bonds (18.14%)
Beverages (1.15%)
Pepsico, Inc.
6.13%; 1/15/98 500,000 500,526
Business Credit Institutions (3.92%)
CIT Group Holdings, Inc.
Debentures; 8.75%; 4/15/98 500,000 510,360
Medium-Term Notes;
6.20%; 4/15/98 500,000 500,264
Senior Notes; 5.85%; 3/16/98 500,000 500,668
General Electric Capital Corp. Notes;
8.00%; 1/15/98 200,000 201,877
1,713,169
Computer & Office Equipment (0.69%)
Xerox Corp. Notes;
9.63%; 9/1/97 300,000 301,853
Consumer Products (1.38%)
Philip Morris Cos. Notes;
6.38%; 1/15/98 600,000 601,055
Electric Services (1.60%)
Southern California Edison Co.
1st Ref. Mortgage; 6.13%; 7/15/97 500,000 500,096
Notes; 5.88%; 2/1/98 200,000 200,056
700,152
Personal Credit Institutions (9.40%)
American General Finance Corp.
Notes; 7.70%; 11/15/97 500,000 503,654
Senior Notes; 8.25%; 1/15/98 500,000 505,709
Associates Corp. of North America
Senior Notes;
6.75%; 7/15/97 500,000 500,165
5.88%; 8/15/97 500,000 500,105
8.38%; 1/15/98 185,000 187,032
Commercial Credit Co. Notes;
8.50%; 2/15/98 800,000 812,459
5.50%; 5/15/98 600,000 596,868
Household Finance Corp. Notes;
6.25%; 10/15/97 500,000 500,704
4,106,696
Total Bonds 7,923,451
Total Portfolio Investments (100.54%) 43,925,599
Liabilities, net of cash and receivables (-0.54%) (237,972)
Total Net Assets (100.00%) $43,687,627
PRINCIPAL WORLD FUND, INC.
Shares
Held Value
Common Stocks (94.33%)
Advertising (1.59%)
WPP Group PLC 415,000 $ 1,702,538
Beverages (1.71%)
Lion Nathan 205,000 518,226
Panamerican Beverages 39,900 1,311,712
1,829,938
Blast Furnace & Basic Steel
Products (1.37%)
British Steel PLC 121,300 300,800
Voest-Alpine Stahl 25,700(b) 1,164,370
1,465,170
Central Reserve Depositories (4.74%)
Banco Totta & Acores 39,000 652,477
Dao Heng Bank Group Ltd. 89,000 487,087
Ergo Bank 126 7,575
National Westminster Bank 110,000 1,478,315
Union Bank of Norway 12,800 381,161
Wing Hang Bank 343,200 2,073,212
5,079,827
Chewing & Smoking Tobacco (1.46%)
Imperial Tobacco Group PLC 243,500 1,566,319
Combination Utility Services (1.56%)
ABB AG 1,105 1,675,104
Commercial Banks (10.40%)
ABN-AMRO Holdings NV 101,156 1,889,587
Bank of Ireland 186,833 2,056,911
Barclays PLC 64,748 1,284,501
Fokus Bank 64,000(b) 542,018
Instituto Mobiliare Italiano 141,000 1,267,881
National Australia Bank Ltd. 89,886 1,277,393
Royal Bank of Canada Montreal, Quebec 36,000(a) 1,632,262
Svenska Handelsbanken AB Free 40,500 1,194,199
11,144,752
Communications Equipment (0.97%)
ECI Telecommunications Ltd. 35,000 1,041,250
Communications Services, NEC (0.97%)
KPN Royal PTT Nederland 26,450 1,039,467
Computer & Office Equipment (0.10%)
Canon, Inc. 4,000 109,062
Construction & Related
Machinery (0.59%)
Powerscreen International PLC 58,100 632,874
Consumer Products (1.51%)
Imasco Ltd. 55,700 1,615,010
Crude Petroleum & Natural Gas (0.45%)
Hardy Oil & Gas 86,200 479,883
Deap Sea Foreign Transportation
of Freight (0.81%)
Van Ommeren NV 22,288 866,803
Department Stores (0.65%)
Vendex International 12,658 694,493
Drugs (6.97%)
Elan Corp. PLC ADR 34,400(a) 1,556,600
Galenica Holdings AG 480(a) 225,538
Novartis AG 1,668 2,670,447
Pharmacia & Upjohn, Inc. 46,500 1,615,875
Teva Pharmaceutical ADR 21,500 1,392,125
7,460,585
Electric Light & Wiring
Equipment (0.21%)
Clipsal Industries Holdings 25,000 88,500
Otra NV 8,300 133,439
221,939
Electric Services (0.23%)
Korea Electric Power Corp. 8,100 241,723
Electronic Components &
Accessories (1.90%)
Amtek Engineering 221,250 388,389
Elec & Eltek International 268,000 1,500,800
Murata Mfg. 1,000 39,850
Varitronix 63,000 106,934
2,035,973
Electronic Distribution
Equipment (3.41%)
Amper SA 38,000 1,082,613
Phillips Electronics 28,900 2,073,850
Techtronic Industries Co. 2,800,000 498,756
3,655,219
Engines & Turbines (2.28%)
Mabuchi Motor 1,400 81,360
PT United Tractors 372,000 1,376,928
Scapa Group PLC 281,000 986,780
2,445,068
Farm & Garden Machinery (1.15%)
New Holland NV 45,000 1,231,875
Finance Services (0.68%)
MBF Capital Berhad 395,000 726,148
Functions Closely Related to
Banking (0.70%)
Liechtenstein Global Trust AG 1,225 752,049
Gas Production & Distribution (1.19%)
OMV AG 9,950 1,274,810
General Industrial Machinery (0.85%)
SKF AB 'B' Free 35,300 913,044
Holding Offices (1.02%)
First Pacific Co., Ltd. 860,382 1,099,455
Household Appliances (0.66%)
Fisher & Paykel 182,087 709,582
Industrial Inorganic Chemicals (2.83%)
Bayer AG 30,100 1,160,792
Kemira OY 112,000(b) 1,056,552
Rhome Poulenc 20,000 817,587
3,034,931
Investment Offices (1.24%)
AMVESCAP PLC 226,800 1,323,009
Life Insurance (0.91%)
QBE Insurance Group Ltd. 162,000(a) 970,892
Meat Products (5.83%)
AFFCO Holdings 1,147,266 396,543
Danisco AS 33,300 2,038,966
Davomas ABADI 780,000(a) 962,369
Orkla B Ordinary Shares 21,300 1,446,031
Unilever NV 6,630 1,398,196
6,242,105
Miscellaneous Chemical Products (1.10%)
Hoechst AG 27,800 1,178,984
Miscellaneous Converted Paper
Products (1.06%)
Bunzl PLC 352,000(a) 1,139,447
Miscellaneous Durable Goods (0.89%)
Hagemeyer NV 18,350 949,660
Miscellaneous Food & Kindred
Products (0.90%)
Greencore Group PLC 197,000(a) 962,290
Miscellaneous Manufacturers (0.44%)
Carter Holt Harvey Ltd. 181,000 467,369
Miscellaneous Non-Durable
Goods (1.95%)
Grand Metropolitan PLC 215,516 2,085,744
Miscellaneous Plastics Products,
NEC (0.60%)
Royal Group Technologies Ltd. 24,100(a)(b) 646,366
Miscellaneous Textile Goods (1.21%)
Espirit Holdings Ltd. 1,822,000 1,293,486
Miscellaneous Transportation
Equipment (1.05%)
Autoliv AB 28,700 1,122,888
Miscellaneous Wood Products (0.19%)
Enso OY 22,300 206,074
Motor Vehicles & Equipment (1.75%)
E.C.I.A. Equipment and Composants 4,600 702,035
Hyndai Motor Co. Ltd. GDR 25,000(b) 243,750
UMW Holdings Berhad 196,000 924,087
1,869,872
Motor Vehicles, Parts & Supplies (0.66%)
Dahl International AB 36,000 707,674
Newspapers (1.28%)
Publishing & Broadcasting Ltd. 240,000 1,371,834
Oil & Gas Field Services (0.76%)
ENI SPA 144,000 814,575
Petroleum Refining (2.95%)
Repsol Petroleo SA 39,860 1,688,500
YPF Sociedad Anonima ADR 48,000 1,476,000
3,164,500
Plastic Materials & Synthetics (0.80%)
Astra AB 48,000 $ 853,554
Pulp Mills (2.22%)
Lassila & Tikanoja Ltd. OY 10,700 896,086
UPM-Kymmene OY 64,140 1,481,791
2,377,877
Security & Commodity
Services (1.36%)
Corporacion Bancaria de Espania SA 26,000 1,458,489
Security Brokers & Dealers (1.70%)
Peregrine Investment Holdings 875,000 1,801,438
Peregrine Investment - Warrants 38,800(a) 17,028
1,818,466
Soap, Cleaners, & Toilet Goods (1.27%)
Reckitt & Colman PLC 90,945 1,355,427
Special Industry Machinery (0.42%)
IHC Caland NV 7,700 421,682
Rauma Group 1,173(a) 26,873
448,555
Sugar & Confectionary Products (2.38%)
Nestle 1,545 2,041,136
Tate & Lyle 68,500 509,030
2,550,166
Telephone Communication (6.14%)
Investec Consultadoria Internacional S 8,600(a) 293,483
Nokia Corp., Class A ADR 23,800 1,755,250
Tele Danmark B 8,500 442,260
Telecom Corp of New Zealand Ltd. 289,000 1,468,979
Telecom Italia-DI 448,200 886,390
Telefonica de Espana SA 59,700 1,729,257
6,575,619
Water Transportation of Freight,
NEC (0.31%)
ICB Shipping AB 'B' Free 32,000 326,937
Total Common Stocks 101,026,750
Preferred Stock (1.06%)
Commercial Banks (1.06%)
National Australia Bank ECU
Convertible Preferred 40,500 1,131,469
Bonds (0.95%)
Principal
Amount Value
Fire, Marine & Casualty
Insurance (0.95%)
Alfa SA Convertible Subordinated
Debentures; 8.00%; 9/15/00 $ 700,000(b)$ 1,016,750
Commercial Paper (5.72%)
Personal Credit Institutions (2.92%)
Associates Corp.;
6.25%; 7/1/97 3,130,000 3,130,000
Security Brokers & Dealers (2.80%)
Goldman Sachs Group L.P.
5.65%; 7/7/97 3,000,000 2,997,175
Total Commercial Paper 6,127,175
Total Portfolio Investments (102.06%) 109,302,144
Liabilities, net of cash and receivables (-2.06%) (2,206,914)
Total Net Assets (100.00%) $107,095,230
(a) Non-Income producing security - No dividend paid during the period.
(b) Restricted security - See Note 4 to the financial statements.
Principal World Fund, Inc. Investments by Country
Total Market Percentage of Total
Country Value Market Value
Argentina $ 1,476,000 1.35%
Australia 4,751,589 4.35
Austria 2,439,180 2.23
Canada 3,893,638 3.56
Denmark 2,481,226 2.27
Finland 5,422,626 4.96
France 1,519,621 1.39
Germany 2,339,776 2.14
Greece 7,575 0.01
Hong Kong 7,377,397 6.75
Indonesia 2,339,296 2.14
Israel 2,433,375 2.23
Italy 2,968,847 2.72
Japan 230,272 0.21
Korea 485,473 0.44
Malaysia 1,650,235 1.51
Mexico 1,016,750 0.93
Netherlands 10,699,051 9.79
New Zealand 3,560,699 3.26
Norway 2,369,210 2.17
Portugal 945,961 0.87
Singapore 1,977,689 1.81
Spain 5,958,859 5.45
Sweden 5,118,294 4.68
Switzerland 7,364,274 6.74
United Kingdom 19,420,470 17.77
United States 9,054,763 8.28
Total Market Value $109,302,144 100.00%
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from
Investment Operations Less Distributions
Net Realized
and Excess
Net Asset Net Unrealized Total Dividends Distributions
Value at Invest- Gain from from Net Distributions from
Beginning ment (Loss) on Investment Investment from Capital Total
of Period Income Investments Operations Income Capital Gains Gains(a) Distributions
PRINCIPAL AGGRESSIVE GROWTH FUND INC.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30, 1997 $14.52 $.02 $1.91 $1.93 $-- $(.45) $ -- $(.45)
Year Ended December 31,
1996 12.94 .11 3.38 3.49 (.11) (1.80) -- (1.91)
1995 10.11 .13 4.31 4.44 (.13) (1.48) -- (1.61)
Period Ended December 31, 1994(d) 9.92 .05 .24 .29 (.05) (.05) -- (.10)
PRINCIPAL ASSET ALLOCATION FUND, INC.
Six Months Ended June 30, 1997 11.48 .16 1.14 1.30 -- (.21) -- (.21)
Year Ended December 31,
1996 11.11 .36 1.06 1.42 (.36) (.69) -- (1.05)
1995 9.79 .40 1.62 2.02 (.40) (.30) -- (.70)
Period Ended December 31, 1994(d) 9.98 .23 (.18) .05 (.23) -- (.01) (.24)
PRINCIPAL BALANCED FUND, INC.
Six Months Ended June 30, 1997 14.44 .22 1.19 1.41 -- (.01) -- (.01)
Year Ended December 31,
1996 13.97 .40 1.41 1.81 (.40) (.94) -- (1.34)
1995 11.95 .45 2.44 2.89 (.45) (.42) -- (.87)
1994 12.77 .37 (.64) (.27) (.37) (.18) -- (.55)
1993 12.58 .42 .95 1.37 (.42) (.76) -- (1.18)
Six Months Ended December 31, 1992(e) 12.93 .23 .75 .98 (.47) (.86) -- (1.33)
Year Ended June 30, 1992 11.33 .47 1.61 2.08 (.48) -- -- (.48)
PRINCIPAL BOND FUND, INC.
Six Months Ended June 30, 1997 11.33 .38 (.04) .34 -- -- -- --
Year Ended December 31,
1996 11.73 .68 (.40) .28 (.68) -- -- (.68)
1995 10.12 .62 1.62 2.24 (.63) -- -- (.63)
1994 11.16 .72 (1.04) (.32) (.72) -- -- (.72)
1993 10.77 .88 .38 1.26 (.87) -- -- (.87)
Six Months Ended December 31, 1992(e) 11.08 .45 .13 .58 (.89) -- -- (.89)
Year Ended June 30, 1992 10.64 .91 .46 1.37 (.93) -- -- (.93)
PRINCIPAL CAPITAL ACCUMULATION
FUND, INC.
Six Months Ended June 30, 1997 29.84 .32 3.81 4.13 -- (1.07) -- (1.07)
Year Ended December 31,
1996 27.80 .57 5.82 6.39 (.58) (3.77) -- (4.35)
1995 23.44 .60 6.69 7.29 (.60) (2.33) -- (2.93)
1994 24.61 .62 (.49) .13 (.61) (.69) -- (1.30)
1993 25.19 .61 1.32 1.93 (.60) (1.91) -- (2.51)
Six Months Ended December 31, 1992(e) 26.03 .31 1.84 2.15 (.64) (2.35) -- (2.99)
Year Ended June 30, 1992 23.35 .65 2.70 3.35 (.67) -- -- (.67)
PRINCIPAL EMERGING GROWTH FUND, INC.
Six Months Ended June 30, 1997 29.74 .15 3.53 3.68 -- (.10) -- (.10)
Year Ended December 31,
1996 25.33 .22 5.07 5.29 (.22) (.66) -- (.88)
1995 19.97 .22 5.57 5.79 (.22) (.21) -- (.43)
1994 20.79 .14 .03 .17 (.14) (.85) -- (.99)
1993 18.91 .17 3.47 3.64 (.17) (1.59) -- (1.76)
Six Months Ended December 31, 1992(e) 15.97 .10 3.09 3.19 (.21) (.04) -- (.25)
Year Ended June 30, 1992 13.93 .21 2.04 2.25 (.21) -- -- (.21)
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
PRINCIPAL AGGRESSIVE GROWTH FUND INC.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30, 1997 $16.00 13.60%(b) $109,514 .83%(c) .31%(c) 179.5%(c) .0563
Year Ended December 31,
1996 14.52 28.05% 90,106 .85% 1.05% 166.9% .0541
1995 12.94 44.19% 33,643 .90% 1.34% 172.9% N/A
Period Ended December 31, 1994(d) 10.11 2.59%(b) 13,770 1.03%(c) 1.06%(c) 105.6%(c) N/A
PRINCIPAL ASSET ALLOCATION FUND, INC.
Six Months Ended June 30, 1997 12.57 11.47%(b) 71,892 .88%(c) 2.83%(c) 149.4%(c) .0559
Year Ended December 31,
1996 11.48 12.92% 61,631 .87% 3.45% 108.2% .0497
1995 11.11 20.66% 41,074 .89% 4.07% 47.1% N/A
Period Ended December 31, 1994(d) 9.79 .52%(b) 28,041 .95%(c) 4.27%(c) 60.7%(c) N/A
PRINCIPAL BALANCED FUND, INC.
Six Months Ended June 30, 1997 15.84 9.74%(b) 113,288 .62%(c) 3.19%(c) 33.5%(c) .0374
Year Ended December 31,
1996 14.44 13.13% 93,158 .63% 3.45% 22.6% .0417
1995 13.97 24.58% 45,403 .66% 4.12% 25.7% N/A
1994 11.95 (2.09)% 25,043 .69% 3.42% 31.5% N/A
1993 12.77 11.06% 21,399 .69% 3.30% 15.8% N/A
Six Months Ended December 31, 1992(e) 12.58 8.00%(b) 18,842 .73%(c) 3.71%(c) 38.4%(c) N/A
Year Ended June 30, 1992 12.93 18.78% 17,344 .72% 3.80% 26.6% N/A
PRINCIPAL BOND FUND, INC.
Six Months Ended June 30, 1997 11.67 3.00%(b) 71,812 .52%(c) 7.07%(c) 8.7%(c) N/A
Year Ended December 31,
1996 11.33 2.36% 63,387 .53% 7.00% 1.7% N/A
1995 11.73 22.17% 35,878 .56% 7.28% 5.9% N/A
1994 10.12 (2.90)% 17,108 .58% 7.86% 18.2% N/A
1993 11.16 11.67% 14,387 .59% 7.57% 14.0% N/A
Six Months Ended December 31, 1992(e) 10.77 5.33%(b) 12,790 .62%(c) 8.10%(c) 6.7%(c) N/A
Year Ended June 30, 1992 11.08 13.57% 12,024 .62% 8.47% 6.1% N/A
PRINCIPAL CAPITAL ACCUMULATION
FUND, INC.
Six Months Ended June 30, 1997 32.90 14.28%(b) 249,077 .48%(c) 2.22%(c) 29.0%(c) .0427
Year Ended December 31,
1996 29.84 23.50% 205,019 .49% 2.06% 48.5% .0426
1995 27.80 31.91% 135,640 .51% 2.25% 49.2% N/A
1994 23.44 .49% 120,572 .51% 2.36% 44.5% N/A
1993 24.61 7.79% 128,515 .51% 2.49% 25.8% N/A
Six Months Ended December 31, 1992(e) 25.19 8.81%(b) 105,355 .55%(c) 2.56%(c) 39.7%(c) N/A
Year Ended June 30, 1992 26.03 14.53% 94,596 .54% 2.65% 34.8% N/A
PRINCIPAL EMERGING GROWTH FUND, INC.
Six Months Ended June 30, 1997 33.32 12.39%(b) 180,072 .65%(c) 1.05%(c) 10.9%(c) .0390
Year Ended December 31,
1996 29.74 21.11% 137,161 .66% 1.07% 8.8% .0379
1995 25.33 29.01% 58,520 .70% 1.23% 13.1% N/A
1994 19.97 .78% 23,912 .74% 1.15% 12.0% N/A
1993 20.79 19.28% 12,188 .78% .89% 22.4% N/A
Six Months Ended December 31, 1992(e) 18.91 20.12%(b) 9,693 .81%(c) 1.24%(c) 8.6%(c) N/A
Year Ended June 30, 1992 15.97 16.19% 7,829 .82% 1.33% 10.1% N/A
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (Continued)
Selected data for a share of Capital Stock outstanding throughout each period:
Income from
Investment Operations Less Distributions
Net Realized
and Excess
Net Asset Net Unrealized Total Dividends Distributions
Value at Invest- Gain from from Net Distributions from
Beginning ment (Loss) on Investment Investment from Capital Total
of Period Income Investments Operations Income Capital Gains Gains(a) Distributions
PRINCIPAL GOVERNMENT SECURITIES
FUND, INC.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30, 1997 $10.31 $.33 $ .01 $ .34 $(.01) $-- $-- $(.01)
Year Ended December 31,
1996 10.55 .59 (.24) .35 (.59) (.59)
1995 9.38 .60 1.18 1.78 (.61) -- -- (.61)
1994 10.61 .76 (1.24) (.48) (.75) -- -- (.75)
1993 10.28 .71 .33 1.04 (.71) -- -- (.71)
Six Months Ended December 31, 1992(e) 10.93 .40 .04 .44 (.78) -- (.31) (1.09)
Year Ended June 30, 1992 10.24 .80 .71 1.51 (.81) -- (.01) (.82)
PRINCIPAL GROWTH FUND, INC.
Six Months Ended June 30, 1997 13.79 .09 2.01 2.10 -- -- -- --
Year Ended December 31,
1996 12.43 .16 1.39 1.55 (.16) -- (.03) (.19)
1995 10.10 .17 2.42 2.59 (.17) -- (.09) (.26)
Period Ended December 31, 1994(f) 9.60 .07 .51 .58 (.08) -- -- (.08)
PRINCIPAL HIGH YIELD FUND, INC.
Six Months Ended June 30, 1997 8.72 .38 .09 .47 (.01) -- -- (.01)
Year Ended December 31,
1996 8.39 .80 .30 1.10 (.77) -- -- (.77)
1995 7.91 .76 .51 1.27 (.77) (.02) -- (.79)
1994 8.62 .77 (.72) .05 (.76) -- -- (.76)
1993 8.38 .80 .23 1.03 (.79) -- -- (.79)
Six Months Ended December 31, 1992(e) 8.93 .45 (.10) .35 (.90) -- -- (.90)
Year Ended June 30, 1992 8.28 .92 .66 1.58 (.93) -- -- (.93)
PRINCIPAL MONEY MARKET FUND, INC.
Six Months Ended June 30, 1997 1.000 .025 -- .025 (.025) -- -- (.025)
Year Ended December 31,
1996 1.000 .049 -- .049 (.049) -- -- (.049)
1995 1.000 .054 -- .054 (.054) -- -- (.054)
1994 1.000 .037 -- .037 (.037) -- -- (.037)
1993 1.000 .027 -- .027 (.027) -- -- (.027)
Six Months Ended December 31, 1992(e) 1.000 .016 -- .016 (.016) -- -- (.016)
Year Ended June 30, 1992 1.000 .046 -- .046 (.046) -- -- (.046)
PRINCIPAL WORLD FUND, INC.
Six Months Ended June 30, 1997 13.02 .17 2.03 2.20 -- -- (.04) (.04)
Year Ended December 31,
1996 10.72 .22 2.46 2.68 (.22) -- (.16) (.38)
1995 9.56 .19 1.16 1.35 (.18) -- (.01) (.19)
Period Ended December 31, 1994(f) 9.94 .03 (.33) (.30) (.05) (.02) (.01) (.08)
See accompanying notes.
Notes to Financial Highlight
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
PRINCIPAL GOVERNMENT SECURITIES
FUND, INC.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Six Months Ended June 30, 1997 $10.64 3.26%(b) $ 84,656 .53%(c) 6.48%(c) 11.0%(c) N/A
Year Ended December 31,
1996 10.31 3.35% 85,100 .52% 6.46% 8.4% N/A
1995 10.55 19.07% 50,079 .55% 6.73% 9.8% N/A
1994 9.38 (4.53)% 36,121 .56% 7.05% 23.2% N/A
1993 10.61 10.07% 36,659 .55% 7.07% 20.4% N/A
Six Months Ended December 31, 1992(e) 10.28 4.10%(b) 31,760 .59%(c) 7.35%(c) 34.5%(c) N/A
Year Ended June 30, 1992 10.93 15.34% 33,022 .58% 7.84% 38.9% N/A
PRINCIPAL GROWTH FUND, INC.
Six Months Ended June 30, 1997 15.89 15.23%(b) 132,259 .51%(c) 1.36%(c) 7.5%(c) .0452
Year Ended December 31,
1996 13.79 12.51% 99,612 .52% 1.61% 2.0% .0401
1995 12.43 25.62% 42,708 .58% 2.08% 6.9% N/A
Period Ended December 31, 1994(f) 10.10 5.42%(b) 13,086 .75%(c) 2.39%(c) 0.9%(c) N/A
PRINCIPAL HIGH YIELD FUND, INC.
Six Months Ended June 30, 1997 9.18 5.36%(b) 14,525 .69%(c) 8.64%(c) 45.7%(c) N/A
Year Ended December 31,
1996 8.72 13.13% 13,740 .70% 9.21% 32.0% N/A
1995 8.39 16.08% 11,830 .73% 9.09% 35.1% N/A
1994 7.91 .62% 9,697 .73% 9.02% 30.6% N/A
1993 8.62 12.31% 9,576 .74% 8.80% 28.7% N/A
Six Months Ended December 31, 1992(e) 8.38 4.06%(b) 8,924 .77%(c) 10.33%(c) 20.6%(c) N/A
Year Ended June 30, 1992 8.93 20.70% 8,556 .77% 11.00% 31.3% N/A
PRINCIPAL MONEY MARKET FUND, INC.
Six Months Ended June 30, 1997 1.000 2.50%(b) 43,688 .55%(c) 5.06%(c) N/A N/A
Year Ended December 31,
1996 1.000 5.07% 46,244 .56% 5.00% N/A N/A
1995 1.000 5.59% 32,670 .58% 5.32% N/A N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A N/A
Six Months Ended December 31, 1992(e) 1.000 1.54%(b) 27,680 .59%(c) 3.10%(c) N/A N/A
Year Ended June 30, 1992 1.000 4.64% 25,194 .57% 4.54% N/A N/A
PRINCIPAL WORLD FUND, INC.
Six Months Ended June 30, 1997 15.18 16.98%(b) 107,095 .84%(c) 2.92%(c) 25.4%(c) .0186
Year Ended December 31,
1996 13.02 25.09% 71,682 .90% 2.28% 12.5% .0120
1995 10.72 14.17% 30,566 .95% 2.26% 15.6% N/A
Period Ended December 31, 1994(f) 9.56 (3.37)%(b) 13,746 1.24%(c) 1.31%(c) 14.4%(c) N/A
See accompanying notes.
</TABLE>
<PAGE>
(a) Due to the timing of dividend distributions and the differences in
accounting for income and realized gains (losses) for financial statement
and federal income tax purposes, the fiscal year in which amounts are
distributed may differ from the year in which the income and realized gains
(losses) are recorded for financial statement purposes by the fund. The
differences between the income and gains distributed on a book versus tax
basis are shown in the Financial Highlights as excess distributions from
net investment income and from capital gains.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Period from June 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Aggressive Growth Fund, Inc. and $.01 per share for Principal
Asset Allocation Fund, Inc. for the period from the initial purchase of
shares on May 23, 1994 through May 31, 1994, was recognized, none of which
was distributed to the sole stockholder, Principal Mutual Life Insurance
Company, during the period. Additionally, Principal Aggressive Growth Fund,
Inc. and Principal Asset Allocation Fund, Inc. incurred unrealized losses
on investments of $.09 and $.03 per share, respectively, during the initial
interim period. This represented activities of each fund prior to the
initial public offering of fund shares.
(e) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(f) Period from May 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Growth Fund, Inc. and $.04 per share for Principal World Fund,
Inc. for the period from the initial purchase of shares on March 23, 1994
through April 30, 1994, was recognized, none of which was distributed to
the sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, Principal Growth Fund, Inc. and Principal World Fund,
Inc. incurred unrealized losses on investments of $.41 and $.10 per share,
respectively, during the initial interim period. This represented
activities of each fund prior to the initial public offering of fund
shares.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 84,463,498
<INVESTMENTS-AT-VALUE> 85,325,737
<RECEIVABLES> 819,787
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 2,332
<TOTAL-ASSETS> 86,147,856
<PAYABLE-FOR-SECURITIES> 981,875
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 66,123
<TOTAL-LIABILITIES> 1,047,998
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84,809,246
<SHARES-COMMON-STOCK> 8,255,462
<SHARES-COMMON-PRIOR> 4,748,214
<ACCUMULATED-NII-CURRENT> 45,745
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (617,372)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 862,239
<NET-ASSETS> 85,099,858
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,055,471
<OTHER-INCOME> 0
<EXPENSES-NET> (377,748)
<NET-INVESTMENT-INCOME> 4,677,723
<REALIZED-GAINS-CURRENT> 98,466
<APPREC-INCREASE-CURRENT> (1,337,219)
<NET-CHANGE-FROM-OPS> 3,438,970
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,644,240)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,520,032
<NUMBER-OF-SHARES-REDEEMED> (1,457,956)
<SHARES-REINVESTED> 445,172
<NET-CHANGE-IN-ASSETS> 35,020,389
<ACCUMULATED-NII-PRIOR> 16,895
<ACCUMULATED-GAINS-PRIOR> (715,838)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 360,968
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 377,748
<AVERAGE-NET-ASSETS> 72,373,504
<PER-SHARE-NAV-BEGIN> 10.55
<PER-SHARE-NII> .59
<PER-SHARE-GAIN-APPREC> (.24)
<PER-SHARE-DIVIDEND> (.59)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.31
<EXPENSE-RATIO> .52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
