Planning for the Future...One Dollar at a Time
In the spring of 1982, Kay and Bill were contacted by a registered
representative. The registered representative asked if he could talk to them
about investing for their future. Bill hesitated, but Kay realized the need to
start planning for retirement. During their first meeting, the registered
representative helped Bill and Kay put together a household budget, and provided
them with four words to get their investment plan going: "One dollar per day."
One dollar per day. Though it didn't sound like much, Kay felt $30 per month was
all their budget could spare back in 1982. At the time, Kay had just realized a
dream and opened her own beauty shop. Bill worked at the local car dealership.
Together, they earned about $23,000.
In the early years, Bill didn't share Kay's enthusiasm for investing; he didn't
think $30 per month would ever amount to anything. Kay thought differently.
Following her registered representative's suggestion, she began investing $30
each month into an Individual Retirement Account (IRA).
Since she needed her money to grow and knew she would be investing for several
years, Kay (with her registered representative's help) selected the Principal
Growth Fund A. She made her first automatic monthly investment on June 30, 1982.
Within two years, Kay felt their budget would allow an increase in her monthly
contributions. In October 1984, during an annual review with her registered
representative, he suggested she raise the amount to $50 per month. Kay agreed,
commenting, "We don't even miss the money. It's just become part of our monthly
budget."
Five years passed and Kay's beauty shop business grew, as did her Principal
Growth Fund-A account. By the end of 1987, her investment had grown to $3,475.
Encouraged by the increasing value of her investment, on December 31, 1987, she
bumped up her monthly contribution to $75 and split it equally among Class A
shares of three Principal funds---Growth, International and MidCap. Her
accumulation even impressed Bill, who decided it was high time he opened a
Principal Mutual Funds IRA for himself.
In January 1989, Kay boosted her monthly automatic investments to $150, which
she maintains to this day. Over the past sixteen years, Kay has invested a total
of $21,245 into her funds. She remains very satisfied with the values of her
Principal Mutual Funds accounts. As of September 30, 1998, her Principal Mutual
Funds IRA was valued at $52,275.
Now, Kay has switched her $150 monthly contribution to a Roth IRA. She is
excited about reaping the tax advantages of this new type of IRA while still
realizing the same investment choices and benefits she has always enjoyed with
Principal Mutual Funds.
Over the years, Kay has encouraged many of her friends, relatives, and clients
to start investing for their futures with Principal Mutual Funds. Kay has been a
great source of referrals for her registered representative, not he least of
whom was her husband Bill!
One dollar per day. We know it doesn't sound like much, but for Kay and Bill
Green, it meant the beginnings of an investment plan which should lead to a more
secure future and a more comfortable retirement.
This story does not represent any actual investor, but does reflect actual
investment results of the Principal Mutual Funds mentioned. Past results do not
guarantee future performance. Returns and principal values fluctuate with
changes in market conditions so that the value at redemption may be more or less
than original cost. Withdrawals made from an IRA before age 59 1/2 may be
subject to penalties.
Total return represents the overall performance of an investment for a specific
period of time, assuming the reinvestment of dividends and capital gains and
after applicable expenses. Average annual total returns for A Shares are with a
maximum 4.75% sales charge. Average annual total returns for B Shares are with a
maximum 4% contingent deferred sales charge.
Average Annual Returns through 9/30/98
Including Sales Charges
1 yr. 5 yr. 10 yr.
Principal Growth Fund-A -1.89% 15.34% 15.59%
Principal Growth Fund-B -1.44% 19.20% --
Principal MidCap Fund-A -22.61% 11.44% 13.76%
Principal MidCap Fund-B -22.29% 14.99% --
Principal International Fund-A -16.93% 8.66% 9.44%
Principal International Fund-B -16.87% 9.24% --
Dear Shareholder
This has been a year that we all expected would occur eventually. After a long
bull market, stocks retreated in the third quarter. Equities fell nearly 20%, as
measured by the Standard & Poor's 500 index. For the first time in several
years, some stock funds show negative 12-month returns for the period ending
9/30/98.
Unnerved by negative economic and market events across the globe, including the
financial system collapse in Russia and the spreading of the Asian problems to
Brazil and Latin America, investors sought the safety of US Treasuries. Global
markets declined in the third quarter, with no major market remaining unscathed.
Only Hong Kong and several other distressed Asian markets held losses to a
minimum, likely because they had already fallen to such depths in the last 12
months. Europe, Japan and Latin America all recorded double-digit declines;
however, weakness in the US dollar helped offset these declines for US-dollar
investors.
Bonds were strong by comparison, especially high-quality issues. The 30-year
Treasury bond, considered the safest investment in the world, gained 10% as its
yield slipped below 5% for the first time ever.
Despite the market volatility, many positives still exist for the US economy:
o Interest rates are falling, feeling like a "tax cut" for consumers who
refinance mortgages.
o Prices are falling. Gasoline is under $1 in many regions; another "tax cut."
And prices continue to fall on computers, cars, furniture and fast food.
o Consumer spending is strong. Consumers continue to be a big driver in
economic growth.
o Gross domestic product (GDP) is positive--around 2% for the second half of
1998; sharply lower than the first quarter, but still positive.
We believe that many stocks are priced fairly. Despite recent jitters, we are
confident that owning good companies will always be rewarded over the long term.
The keys to successful investing include patience...a focus on the
long-term...and discipline to look beyond the latest financial headlines. The
investor profile on the inside cover illustrates the importance and benefits of
committing to a long-term investment plan.
We are proud to note that 1999 will mark our 30th anniversary. In an industry
which has experienced most of its expansion in the past decade, we offer you a
history of investment experience which most funds groups can't. In addition, our
investment team is part of, and supported by, an extensive group which has over
$70 billion in assets under management for the Principal Financial Group(R)--a
diversified group of financial services companies for over 119 years.
As a customer, keeping you informed about your investments is very important to
us. We hope that you will take some time to review this report. Given the market
volatility, we've included some thoughts about strategies to help you endure
uncertain financial markets on the following page. On the subsequent page is a
glossary of financial terms to help with your understanding of this report.
Thank you for your confidence in the Principal Mutual Funds.
Sincerely
/s/Stephan L. Jones
Stephan L. Jones
President
Princor Financial Services Corporation
Market Correction . . . Bear Market
What Do They Mean, and How Can You Protect Yourself
While "bull market" and "rally" are words we prefer to see, sometimes we must
face up to their antonyms. But do we really know what these words mean?
The words "correction" and "bear market" are often used interchangeably. What is
a bear market? A common definition is a decline in stock prices of 20% or more
over a period of at least two months. By comparison, a market correction is
usually defined as a steep decline in stock prices which may last only a few
days or weeks.
Bear markets have occurred, on average, about once every four or five years.
Since 1956, stocks as measured by the Dow Jones Industrial Average have
experienced nine periods generally regarded as bear markets.
How Can You Protect Your Investment Program?
Diversification helps reduce the market risk involved in owning a few individual
stocks. Stock mutual funds provide diversification by holding many different
issues. They enable investors to avoid putting "all their eggs in one basket" as
can be the case when investing in just a few individual securities. However,
owning a mutual fund does not eliminate the risk involved with investing in the
stock market. Investors should consider owning a variety of asset classes.
For example, a balanced portfolio of stocks, bonds and short-term securities can
help reduce the impact of a bear market. During one of the worst bear markets in
recent history - which began in January 1973 and lasted 23 months to December
1974 - the Standard & Poor's 500 Index fell 36%. A $10,000 investment in stocks
at the beginning of the bear market declined to $6364. A portfolio of 60% stocks
and 40% bonds (measured by the Salomon Brothers Corporate Bonds - US) fared
better by declining to $7770.* Of course, past performance does not guarantee
future results.
One common mistake made by investors during bear markets is to sell at or near
the bottom. Prudent investors are prepared by holding balanced portfolios
reflecting their objectives, risk tolerances and time horizons.
Are You Prepared For a Bear Market?
Market downturns are inevitable. Here are some guidelines to help you manage
your assets when downturns occur.
Stay calm. Watching investment values decline can be agonizing and cause you to
second guess your investment mix. The markets often move in irregular
cycles. Keep your focus on the long term, not avoiding a short-term loss.
Continue investing. When investment values decline, you have an opportunity to
invest at lower prices. Continue to make contributions if you invest
regularly through an automatic investment plan. Although, such a plan does
not assure a profit or protect against loss in a declining market.
Consider the tax consequences if you sell. If you've owned your investments for
some time, the outstanding gains over the past several years may impose a
substantial capital gain if your sell or exchange fund shares.
No one knows when or how severe the next bear market will be. Be prepared to
weather declines in stock and bond values over lengthy periods. You'll be glad
you did when the words "Bull Market" and "Rally" are back in the news!
* Source: CDA/Weisenberger
The Dow Jones Industrial Average is an index which follows stock price movements
of 30 blue chip U.S. companies. The stocks represent primarily industrial
companies, with some service-oriented companies.
S&P 500 Index is a market capitalization weighted index composed of 500
widely-held common stocks listed on the New York, American and Over-the-Counter
markets. The index encompasses approximately 75% of the total value of the U.S.
stock market.
Salomon Brothers Corporate Bonds - US is an index of long-term corporate bonds,
high-grade industrial and utility bonds rated Aa or better with an average
maturity of approximately 23 years.
The value of these indexes will vary according to the aggregate value of the
common equity of each of the securities included. The indexes represent asset
types which are subject to risk, including the possible loss of principal. These
are unmanaged indexes into which direct investment is not possible.
Commonly-Used Investment Terms
In this annual report, you may find some of the following investment terms. As a
result, we felt it might be useful to include a brief definition of some of the
more common investment terms.
Returns
o Total Return calculations show the overall dollar or percentage change in
value of a hypothetical fund investment assuming the reinvestment of all
portfolio distributions (i.e., dividends and capital gains).
o Average Annual Total Returns illustrate the annually compounded returns that
would have produced the fund's cumulative total returns if fund performance
had been constant over the period measured. Average annual returns are not the
same as year-by-year returns, and are reported in standard increments, usually
1, 3, 5 and 10 years.
Portfolio Statistics
o Price to Earnings (P/E) Ratio is a stock value measurement arrived at by
dividing a company's stock price by its earnings per share. The result is
expressed as a multiple rather than a percentage. A P/E ratio can be expressed
in current terms by using the current price divided by the most recent
quarter's earnings, or in future terms by dividing the current price by
projected earnings.
o Portfolio Turnover provides the percentage of the fund's portfolio which is
replaced during a given time period, usually one year.
o Expense Ratio refers to fund operating expenses and is expressed as a
percentage of net assets. Shareholders pay these expenses (e.g., management
fees paid to the portfolio manager for investment advisory services)
indirectly as they are deducted from income generated by the fund's portfolio
holdings not shareholder accounts.
Stock Types
o Blue Chip Stocks are stocks of the most well-established U.S. companies.
Typically, they are large, stable companies which have
demonstrated consistent earnings and the potential for long-term growth.
o Cyclical Stocks are those whose price and earnings tend to follow the ups
and downs of the business cycle. Some examples would
include: stocks of automobile manufacturers and steel producers.
o Growth Stocks are stocks of companies who have experienced above-average
earnings growth and are expected to continue such growth. These stocks often
sell at high P/E ratios. Examples might include: high-tech, health care and
consumer staples stocks.
o Value Stocks are those companies whose stocks are believed to be undervalued
and, therefore, attractive. These stocks generally have low P/E ratios and
higher dividend yields.
o Large Capitalization Stocks (Large-Cap) are generally considered to be stocks
of companies with a market capitalization (total value of a company's
outstanding stock) of more than $5 billion. These stocks tend to comprise the
Dow Jones Industrial Average, the S&P 500 and the Russell 1000 Index.
o Medium Capitalization Stocks (Mid-Cap) are usually thought to be stocks of
companies with a market capitalization (total value of a company's outstanding
stock) of $1 - $5 billion. These stocks tend to make up the S&P 400.
o Small Capitalization Stocks (Small-Cap) are stocks of companies with a market
capitalization (total value of a company's outstanding stock) of less than $1
billion. These tend to be the stocks which make up the Nasdaq Composite Index
and the Russell 2000 Index.
Table of Contents
Page
Market Correction . . . Bear Market-- What Do They Mean, and How Can You
Protect Yourself............................................................ 2
Portfolio Managers' Comments................................................ 6
Domestic Growth-Oriented Funds Financial Statements and Highlights
Statements of Assets and Liabilities..................................... 20
Statements of Operations................................................. 22
Statements of Changes in Net Assets...................................... 24
Notes to Financial Statements............................................ 26
Schedules of Investments
Balanced Fund.......................................................... 32
Blue Chip Fund......................................................... 35
Capital Value Fund..................................................... 36
Growth Fund............................................................ 37
MidCap Fund............................................................ 39
Real Estate Fund....................................................... 41
SmallCap Fund.......................................................... 42
Utilities Fund......................................................... 44
Financial Highlights..................................................... 46
International Growth-Oriented Funds Financial Statements and Highlights
Statements of Assets and Liabilities..................................... 56
Statements of Operations................................................. 57
Statements of Changes in Net Assets...................................... 58
Notes to Financial Statements............................................ 60
Schedules of Investments
International Emerging Markets Fund.................................... 68
International Fund..................................................... 70
International SmallCap Fund............................................ 72
Financial Highlights..................................................... 76
Income-Oriented Funds Financial Statements and Highlights
Statements of Assets and Liabilities..................................... 80
Statements of Operations................................................. 82
Statements of Changes in Net Assets...................................... 84
Notes to Financial Statements............................................ 86
Schedules of Investments
Bond Fund.............................................................. 94
Government Securities Income Fund...................................... 97
High Yield Fund........................................................ 97
Limited Term Bond Fund................................................. 99
Tax-Exempt Bond Fund................................................... 100
Financial Highlights..................................................... 106
Money Market Funds Financial Statements and Highlights
Statements of Assets and Liabilities..................................... 114
Statements of Operations................................................. 115
Statements of Changes in Net Assets...................................... 116
Notes to Financial Statements............................................ 118
Schedules of Investments
Cash Management Fund................................................... 122
Tax-Exempt Cash Management Fund........................................ 124
Financial Highlights..................................................... 128
Report of Independent Auditors.............................................. 131
Federal Income Tax Information.............................................. 132
Principal Mutual Funds...................................................... 137
<TABLE>
<CAPTION>
Principal Funds Performance
Average Annual Total Returns
As of October 31, 1998
- --------------------------------------------------------------------------------------------
1 Year 5 Years 10 Years
--------------------- --------------------- -----------------
with without with without with without
sales sales sales sales sales sales
A Shares of: charge charge charge charge charge charge
- ------------------------------ --------------------- --------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balanced 5.78% 11.00% 10.21% 11.28% 10.43% 10.96%
Blue Chip 13.87 19.48 16.61 17.74 13.63(a) 14.34(a)
Bond 2.69 7.76 5.92 6.95 8.61 9.14
Capital Value 10.16 15.59 17.04 18.17 13.55 14.09
Government Securities Income 2.33 7.38 5.47 6.49 8.09 8.61
Growth 9.75 15.17 16.32 17.44 16.44 17.00
High Yield (7.73) (3.18) 5.62 6.64 6.35 6.86
International (2.86) 1.93 8.93 9.98 9.97 10.50
International Emerging Markets (24.82) (21.11) (28.45)(b) (25.45)(b)
International SmallCap (4.11) 0.30 (3.36)(b) 0.69(b)
Limited Term Bond 4.98 6.57 5.76(c) 6.36(c)
MidCap (14.02) (9.78) 12.25 13.33 14.58 15.13
Real Estate (19.43)(d) (15.45)(d)
SmallCap (19.90)(d) (15.95)(d)
Tax-Exempt Bond 1.74 6.76 4.74 5.75 7.27 7.79
Utilities 25.89 32.10 10.40 11.47 11.56(e) 12.48(e)
</TABLE>
1 Year 5 Years(f)
--------------------- ---------------------
with without with without
B Shares of: CDSC* CDSC* CDSC* CDSC*
- ------------------------------ --------------------- ---------------------
Balanced 6.18% 10.18% 14.35% 14.87%
Blue Chip 14.59 18.59 21.21 21.65
Bond 3.04 7.04 9.09 9.68
Capital Value 10.71 14.71 22.44 22.87
Government Securities Income 2.60 6.60 8.70 9.30
Growth 10.58 14.58 21.03 21.47
High Yield (7.52) (3.93) 6.87 7.50
International (2.68) 1.27 11.50 12.06
International Emerging Markets (24.41) (21.26) (28.20)(b) (25.65)(b)
International SmallCap (3.90) 0.10 (2.90)(b) (0.52)(b)
Limited Term Bond 4.99 6.24 5.70(c) 5.95(c)
MidCap (13.75) (10.24) 16.57 17.06
Real Estate (18.98)(d) (15.67)(d)
SmallCap (19.51)(d) (16.15)(d)
Tax-Exempt Bond 2.01 6.01 8.87 9.47
Utilities 27.23 31.23 18.74 19.21
* Contingent Deferred Sales Charge
R Shares of: 1 Year 5 Years(c)
- ------------------------------ ---------- ----------
Balanced 10.43% 12.44%
Blue Chip 19.01 17.89
Bond 7.05 7.60
Capital Value 14.77 19.51
Government Securities Income 6.66 6.98
Growth 14.46 16.11
High Yield (3.97) 4.59
International 1.13 11.04
International Emerging Markets (21.14) (25.55)
International SmallCap 0.50 0.86
Limited Term Bond 6.12 5.77
MidCap (10.37) 8.48
Real Estate (15.37)(d)
SmallCap (15.75)(d)
Utilities 31.47 16.13
(a) Partial period,
from effective date 3/1/91
(b) Partial period,
from effective date 8/29/97
(c) Partial period,
from effective date 2/29/96
(d) Partial period,
from effective date 12/31/97
(e) Partial period,
from effective date 12/16/92
(f) Partial period,
from effective date 12/9/94
Total return represents the overall perfor-mance of an investment for a specific
period of time, assuming the reinvestment of dividends and capital gains and
after applicable expenses. Average annual total returns for A shares are with
and without maximum 4.75% sales charge. Average annual total returns for B
shares are with and without maximum 4.0% contingent deferred sales charge. Total
returns reflect past performance. Past performance does not predict future
performance. The investment return and principal value of an investment will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost.
PORTFOLIO MANAGERS' COMMENTS
Principal Management Corporation, the adviser to the Principal Mutual Funds, is
staffed with investment professionals who manage each individual fund. Comments
by these individuals in the following paragraphs summarize in capsule form the
general strategy and recent results of each fund over the past year. We believe
any Principal Mutual Fund should, under normal circumstances, represent only a
portion of an investor's total investments. For most investors, a portfolio
should be balanced among stocks, bonds, and cash reserves to fit their own needs
and risk tolerance. Those who maintain this balanced approach should be aware of
the short-term results, but focus on the long term. Past performance is no
guarantee of future results. Fund values will fluctuate so that the shares, upon
redemption, may be worth more or less than their original cost.
Growth-Oriented Funds
Domestic Growth Funds
Principal Balanced Fund
- -----------------------
Marty Schafer Judi Vogel
Comparison of Change in Value of $10,000 Investment in the Balanced Fund Class
A, Lipper Balanced Fund Average, Lehman Brothers Government/Corporate Bond Index
and S&P 500 Stock Index
- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 11.00% 11.28% 10.96%
Class B 10.18% 14.87%* -
Class R 10.43% 12.44%** -
- --------------------------------------------
Lehman Gov't. Lipper
Balanced Corporate Balanced S&P 500
Fund Bond Average Index
-------- ------------- -------- -------
9,527 10,000 10,000 10,000
1989 10,580 11,214 11,708 12,640
1990 9,387 11,831 11,097 11,693
1991 12,586 13,649 14,257 15,611
1992 14,079 15,085 15,502 17,167
1993 15,802 17,141 17,799 19,727
1994 15,951 16,346 17,673 20,488
1995 18,215 18,987 20,743 25,899
1996 20,965 20,011 23,821 32,135
1997 24,295 21,774 28,468 42,450
1998 26,966 24,012 31,067 51,785
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since inception date 12/9/94
** Since inception date 2/29/96
A real mood swing occurred in the second half of the year versus the optimism
and high expectations evident in the first half. The last few months have been
characterized by tremendous volatility in the markets and increasing aversion to
risk on the part of investors. Unnerved by negative economic and market events
across the globe, including the financial system collapse in Russia and the
spreading of Asian contagion to Brazil and Latin America, investors have
recently sought the safety and security of U.S. Treasury bonds, shunning nearly
everything else in the process. International returns have been dismal with
domestic equity results only slightly better. Small cap stocks, down 20% in the
third quarter, have been especially hard hit. While the U.S. economic expansion
does continue, negative pressures are mounting. Accordingly, confidence in
continued growth and prosperity has been shaken. Market participants now require
greater compensation to take on risk in both stocks and bonds.
The Balanced Fund, with 55% in stocks and convertibles and 45% in fixed income
and cash, enjoyed above average returns for the year. With a focus on high
quality bonds and undervalued stocks, the Fund is positioned to perform well in
this period of global uncertainty. There is no independent market index against
which to measure returns of balanced portfolios. However, the S&P 500 Stock
Index and the Lehman Brothers Government/Corporate Bond Index are presented for
your information.
Principal Blue Chip Fund
- ------------------------
Mark Williams
Comparison of Change in Value of $10,000 Investment in the Blue Chip Fund Class
A, Lipper Growth & Income Fund Average and S&P 500 Stock Index
- -----------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Years 10 Year
- ------------------------------------------------
Class A 19.48% 17.74% 14.34%*
Class B 18.59% 21.65%** -
Class R 19.01% 17.89%*** -
- -----------------------------------------------
Blue Lipper S&P 500
Chip Growth & Income Stock
Fund Fund Average Index
------ --------------- -------
9,524 10,000 10,000
1991 10,181 10,544 10,911
1992 11,190 11,499 11,998
1993 11,822 13,424 13,787
1994 12,600 13,763 14,319
1995 15,455 16,510 18,100
1996 18,267 20,011 22,459
1997 22,391 25,638 29,668
1998 26,753 28,174 36,192
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since inception date 3/1/91
** Since inception date 12/9/94
*** Since inception date 2/29/96
Principal Blue Chip Fund's investment strategy continues to concentrate on those
companies with a significant operating history, a well-capitalized balance
sheet, and a history of consistent increases in earnings and dividends. Special
importance is placed on the consistency of dividend increases, for two reasons.
First, by increasing the dividend, management sends a signal of confidence to
investors. Management generally increases the dividend when they are confident
of future business conditions. Second, companies that consistently increase the
dividend provide investors the benefit of a rising income stream. This differs
from bond investors who receive a fixed income stream.
For the year ended October 31, 1998, Principal Blue Chip Fund remained very
competitive versus its benchmarks. The Fund had a return of 19.5% well
outperforming the Lipper Growth and Income Fund Average with a 9.9% return, yet
underperforming the S&P 500 Index at 22.0%.
For the first half of the year, the S&P 500 Stock Index turned in strong
performance. The performance was remarkable given the mix of economic news.
During the period, the inflation-adjusted price of oil hit its lowest levels
since before the energy crisis of the 1970s. The Fund's two biggest positive
contributors to performance in the fourth quarter 1997 were consumer durables
and industrial cyclicals. The fact that the Fund was not invested in durables
was an advantage versus the benchmark. However, in cyclicals, stock selection
made the difference in fund performance. The first quarter of 1998 tells a
different story as the Fund lost some ground versus the benchmarks. Healthcare
was the best performing fund sector and technology the poorest performing sector
relative to the benchmarks. The second half of the year was an extremely
volatile (and negative) market. Major indices suffered their worst declines
since 1990, and third-quarter performance was the worst since the third quarter
of 1990. Investors saw markets rebound in September and October; however, this
late recovery was not enough to recapture the losses from July and August.
Principal Blue Chip Fund was no exception with technology and consumer cyclicals
sectors once again playing a major factor in sector underperformance. Stock
selection in the consumer staples sector versus the benchmark was a positive
contribution to the Fund.
Principal Capital Value Fund
- ----------------------------
Catherine Zaharis
Comparison of Change in Value of $10,000 Investment in the Capital Value Fund
Class A, Lipper Growth & Income Fund Average and S&P 500 Stock Index
- -----------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- -----------------------------------------------
Class A 15.59% 18.17% 14.09%
Class B 14.71% 22.87%* -
Class R 14.77% 19.51%** -
- -----------------------------------------------
Lipper S&P 500
Capital Growth & Income Stock
Accumulation Fund Average Index
------------ --------------- -------
9,526 10,000 10,000
1989 10,840 12,047 12,640
1990 8,908 10,864 11,693
1991 12,528 14,503 15,611
1992 13,990 15,817 17,167
1993 15,447 18,465 19,727
1994 16,477 18,931 20,488
1995 19,433 22,709 25,899
1996 24,565 27,526 32,135
1997 30,795 35,266 42,450
1998 35,590 38,754 51,785
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since Inception date 12/9/94
** Since Inception date 2/29/96
The strategy for the Principal Capital Value Fund is to look for companies that
are priced at a discount relative to their historical levels. Fund managers
focus on the future and how companies are valued relative to their worth as
ongoing business operations. This strategy gives the Fund a foundation based on
the underlying value of the business.
The most recent period has been marked by extreme volatility in the equity
markets. As uncertainty increased regarding the impact of worldwide economic
concerns on the U.S. economy, the stock market has reacted dramatically to any
change in the landscape.
Two issues drive stock prices currently earnings and interest rates. Until this
summer, both had a positive impact on stocks. Suddenly, earnings strength became
a concern to stock investors. Although the concerns have been offset by recent
Fed actions of lowering interest rates, the tug of war is not over, and greater
stock volatility could remain.
The S&P 500 Index continues to be led by a narrow group of stocks whose
valuations keep them out of the Fund's screening process. Therefore, the Fund
has lagged the S&P 500 for the latest period. However, most funds are
underweighted in this small group of companies, so in a comparison to its peers
the Fund's returns have been attractive. Management continues to focus on
companies where sustainability of earnings may be more predictable.
Principal Growth Fund
- ---------------------
Mike Hamilton
Comparison of Change in Value of $10,000 Investment in the Growth Fund Class A,
Lipper Growth Fund Average and S&P 500 Stock Index
- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 15.17% 17.44% 17.00%
Class B 14.58% 21.47%* -
Class R 14.46% 16.11%** -
- --------------------------------------------
Lipper S&P 500
Growth Growth Stock
Fund Fund Average Index
------ ------------ -------
9,527 10,000 10,000
1989 11,245 12,431 12,640
1990 10,210 10,983 11,693
1991 16,265 15,522 15,611
1992 18,665 16,742 17,167
1993 20,500 19,600 19,727
1994 22,514 19,902 20,488
1995 27,758 24,674 25,899
1996 30,701 29,231 32,135
1997 39,773 37,206 42,450
1998 45,801 40,785 51,785
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since Inception date 12/9/94
** Since Inception date 2/29/96
The bull market took a breather during the third quarter as stock prices staged
a broad pull back even though the domestic economy continued to grow. Global
conditions, particularly the continuing crisis in Asian financial markets and
problems in Latin America and Canada, seemed to make many investors
uncomfortable. Temporarily, they forgot about our relatively strong domestic
economy with its low interest rates, high level of consumer confidence and
falling commodity prices. The S&P 500 fell 19% from its high in mid-July, until
it reached its low at the end of August as investors sold good stocks along with
poor ones and generally fled to the safety of Treasury securities.
Principal Growth Fund performed as well as its peers during the retrenchment,
finishing between the S&P 500 Index and the Lipper Growth Fund Average
performances for the year ended October 31.
The Fund is built on the belief that markets behave rationally over time. This
means during portions of a market cycle, some Fund holdings may be out of favor.
As long as the fundamental business prospects of the companies are sound, the
Fund will hold these companies until they reach full value. The Manager looks
for companies with competitive advantages that will allow them to earn
above-average returns for many years. The Fund buys and holds these stocks to
make a profit as owners of the companies.
Principal MidCap Fund
- ---------------------
Mike Hamilton
Comparison of Change in Value of $10,000 Investment in the MidCap Fund Class A,
Lipper Mid-Cap Fund Average and S&P 500 Stock Index
- ---------------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- ---------------------------------------------------
Class A -9.78% 13.33% 15.13%
Class B -10.24% 17.06* -
Class R -10.37% 8.48** -
- ---------------------------------------------------
Lipper S&P 500
Mid Cap Stock
MidCap Fund Average Index
------ ------------ -------
9,523 10,000 10,000
1989 11,389 12,646 12,640
1990 9,378 10,886 11,693
1991 15,653 17,405 15,611
1992 17,475 18,632 17,167
1993 20,911 23,149 19,727
1994 22,345 23,639 20,488
1995 28,246 29,433 25,899
1996 33,018 34,811 32,135
1997 43,339 42,748 42,450
1998 39,101 41,512 51,785
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since Inception date 12/9/94
** Since Inception date 2/29/96
The relatively solid performance of the U.S. economy in terms of low interest
rates, consumer confidence and moderate earnings growth was overshadowed in the
minds of U.S. stock investors during late summer. A growing awareness of
mounting problems in other economies led U.S. markets to join those of Europe,
Japan and Latin America in recording double-digit losses at the end of August.
By October, stock prices began to rebound as the Fed exerted leadership to keep
the domestic economy on track. Central banks acted to reinflate world economies.
Both the Principal MidCap Fund and the Lipper Mid-Cap Fund Average finished well
behind the S&P 500 Index for the year. This is due to the Index being heavily
weighted in large companies. These familiar names found investors preferrence
for most of this year as concerns grew over the aging bull market.
The Manager's investment approach in the Fund is based on attempting to estimate
the true economic value of a company and then purchasing the stock at a discount
to this value. As long as the fundamental business prospects of the company are
sound, the Fund will hold that company in its portfolio. This means that during
any portions of a market cycle, some portion of the holdings may be out of
favor. As a long-term investors, the Manager looks for results over two or more
market cycles and refrains from chasing the market during wild short-term price
swings.
Principal Real Estate Fund
- --------------------------
Kelly Rush
Comparison of Change in Value of $10,000 Investment in the Real Estate Fund,
Lipper Real Estate Fund Average and Morgan Stanley REIT Index
- -------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- -------------------------------------------
Class A -15.45%* - -
Class B -15.67%* - -
Class R -15.37%* - -
- -------------------------------------------
Principal Real Estate Fund, Inc.
REF REF REF Lipper Morgan S&P 500
Fund Fund Fund Real Estate Stanley Daily
Class A Class B Class R Fund Avg. REIT Reinv
------- ------- ------- ---------- -------
9,521 10,000 10,000 10,000 10,000 10,000
1998 8,068 8,452 8,482 8,318 8,346 11,463
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since Inception date 12/31/97
Principal Real Estate Fund opened to the public in January 1998. The fund
invests primarily in equity securities of companies engaged principally in the
real estate industry. Fund managers have available the resources of real estate
professionals within the Principal Financial Group to identify companies
possessing the attributes considered essential for successful real estate
investing.
Real estate markets enjoyed a strong year in 1998, and real estate companies
experienced record earnings growth. While the operating environment was robust,
the prices of real estate company stocks were falling. Several factors have
contributed to the decline. The most predominant reason for the decline has been
the fear of deteriorating conditions in 1999 and beyond. For the period ended
October 31, 1998 Principal Real Estate Fund performed slightly better than the
Morgan Stanley REIT Index and the Lipper Real Estate Fund Average because of its
underweighting in the hotel sector and overweighting in companies which have
proven to be resilient in the face of market pressure.
Declining earnings growth from the record setting levels of 1998 is inevitable.
The transition from abnormally high earnings growth to a lower sustainable
earnings growth level has caused investor nervousness and price declines in
1998. This drop provided an attractive price entry point, in the Manager's
opinion, for patient investors in search of value opportunities supported by an
above average level of current income.
Principal SmallCap Fund
- -----------------------
John McClain Mark Williams
Comparison of Change in Value of $10,000 Investment in the SmallCap Fund, Lipper
Small-Cap Fund Average and S&P 600 Stock Index
- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A -15.95%* - -
Class B -16.15%* - -
Class R -15.17%* - -
- --------------------------------------------
Principal SmallCap Fund, Inc.
SCF SCF SCF Lipper
Fund Fund Fund Small Cap S&P
Class A Class B Class R Fund Average 600
------- ------- ------- ----------- ------
9,527 10,000 10,000 10,000 10,000
1998 7,975 8,352 8,391 8,683 8,782
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since Inception date 12/31/97
This is the first annual report of Principal SmallCap Fund, Inc., as its
inception date was January 1, 1998. Fund strategy is to take the best that
small-cap growth stocks have to offer and combine it in a single portfolio with
the best that small-cap value stocks have to offer. By doing so, managers hope
to provide superior results when compared to other small-cap funds.
Initially, approximately 60% of the Fund's assets were invested in growth stocks
with the balance in value stocks. The original allocation of 60/40 was still in
place at fiscal year end. This allocation was chosen initially for two reasons.
First, the small-cap value sector has outperformed the small-cap growth sector
for several measurement periods. Fund managers believe the performance balance
going forward has a good chance of being reversed, or at least not expanded
further. Second, the opportunities for superior stock selection are greater in
the growth area at this time.
Performance for small companies during July through September was a continuation
of poor performance logged earlier in the year. At October 31, the Principal
SmallCap Fund was below its benchmark with a return of -16.0 (net of expenses)
versus that of the Lipper SmallCap Fund Average at -13.2%. The Fund was ahead of
its benchmarks for the first part of the year until June erased its positive
performance. Approximately 65% of the Fund underperformance in the spring and
early summer was due to sector allocation choices and the rest was security
selection. Specifically, technology holdings were under severe pressure during
June as the Asian economic problems reignited investor concerns. The months of
July through September followed June's lead with continued negative returns. For
the benchmark, seven sectors had losses greater than 20%, three had losses
greater than 15% and one sector (Utilities) had a positive return. The Principal
SmallCap Fund experienced similar sector performance trends. The Fund
underperformed the benchmark due to exposure in the consumer cyclicals and
financial sectors.
Looking forward, small stocks are more attractive relative to large stocks than
at anytime in the last twenty years. This is based on trailing and projected
profits. Fund managers believe this is an opportunity.
Principal Utilities Fund
- ------------------------
Catherine Zaharis
Comparison of Change in Value of $10,000 Investments in the Utilities Fund Class
A, Lipper Utilities Fund Average, Dow Jones Utilities Index with Income and S&P
500 Stock Index
- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 32.10% 11.47% 12.48*
Class B 31.23% 19.21%** -
Class R 31.47% 16.13%*** -
- --------------------------------------------
Dow Jones
Dow Jones Utilities Lipper
Utilities Utilities With Income Utilities Fund S&P 500
Fund With Income Index Average Index
--------- ----------- ------------ -------------- -------
9,524 10,000 10,000 10,000
1993 11,250 11,658 11,575 10,979
1994 9,540 9,349 10,475 11,402
1995 11,864 11,810 26.32% 12,325 14,414
1996 12,829 13,216 11.91% 13,733 17,885
1997 14,658 14,879 12.58% 16,179 23,625
1998 19,364 19,027 27.88% 19,720 28,821
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since Inception date 12/16/92
** Since Inception date 12/9/94
*** Since Inception date 2/29/96
The utility industry continues to evolve on all fronts -- electrics, gas and
telephones. Convergence continues to be a theme on the electric and gas side.
Companies are trying to provide as many products and services as possible to
each customer, and a natural growth aspect is other utility products. Another
theme is concentration. Some companies favor a focus on making electricity and
others believe they are better sellers of electricity.
Regardless of the strategy, the goal is growth, a rare occurrence in a mature
industry. Fund management's goal is to look at each strategy, the company's
strengths and weaknesses, and determine if the company's plans are achievable.
As events are changing rather rapidly, an increasing awareness of corporate
plans is a must.
Telecommunications is in a similar situation with one distinction. This sector
still enjoys substantial growth of business from existing product lines and
regions, but it is still important to understand and believe each company's
growth strategy.
Principal Utilities Fund, with its focus on quality and long term success, has
enjoyed success. For the past year, the Fund outperformed both its index and
peer group. When the index does well, the Fund tends to be near the top of its
peer group as the Fund's current strategy is to hold only utility stocks. Fund
managers were also aided by a lack of foreign utilities, which have struggled
substantially in the past year.
International Growth Funds
Principal International Emerging Markets Fund
- ---------------------------------------------
Kurt Spieler
Comparison of Change in Value of $10,000 Investment in the International
Emerging Markets Fund, Lipper Emerging Markets Fund Average and MSCI EMF Index
- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A -21.11% -25.45%* -
Class B -21.26% -25.65%* -
Class R -21.14% -25.55%* -
- --------------------------------------------
IEM IEM IEM Lipper Emerging
Fund Fund Fund Markets
Class A Class B Class R Fund Average
------- ------- ------- --------------
9,524 10,000 10,000 10,000
1997 7,895 8,280 8,280 8,816
1998 6,228 6,520 6,530 6,010
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since Inception date 8/29/97
Principal International Emerging Markets Fund experienced high volatility in the
second half of the fiscal year. From April 30 to the low on September 11, the
Fund returned -38%. Catalyst events for the negative returns include high
interest rates, a deterioration in the macroeconomic environment and low
liquidity in many emerging markets. In the Manager's view, emerging markets
became ridiculously oversold in September after the Russian debt moratorium and
devaluation. The second and third quarter represented the two worst quarters
since inception of emerging market indices. Since September 11, emerging markets
have rallied with the Fund returning a positive 18% through October 31. Reasons
for the rally include the decline in interest rates in many countries (including
the U.S.), increased stability in Asia and Latin America, and cheap valuations.
The Fund outperformed both the MSCI Emerging Market Free Index and Lipper
Emerging Market Index in the second half. Relative returns were +7.4% vs. MSCI
and +7.6% vs. Lipper. This is a result of the strategy of focusing on countries
that require less external financing from the international community. This list
includes such countries as Israel, Poland, Hungary, Hong Kong and Singapore. The
Fund portfolio remains diversified by region with EMEA (Eastern Europe, Middle
East, Africa) making up 37% of assets, Latin America 31% and Asia 25%. The
portfolio is defensive by country and company with no exposure in Russia and
Malaysia. Generally, the Fund holds companies that have strong cash generative
abilities and solid balance sheets. Overall, the Fund strategy is founded on the
belief that international markets are inefficient. The manager will continue to
add value by buying high quality companies at a discount to their investment
value, and find these undervalued companies through application of internal
research and bottom-up analysis.
Principal International Fund
- ----------------------------
Scott Opsal
Comparison of Change in Value of $10,000 Investment in the International Fund
Class A, Lipper International Fund Average and MSCI EAFE Index
- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 1.93% 9.98% 10.50%
Class B 1.27% 12.06%* -
Class R 1.13% 11.04%** -
- --------------------------------------------
Lipper MSCI
International International EAFE
Fund Average Index
------------- ------------- ------
9,534 10,000 10,000
1989 10,048 11,493 10,814
1990 10,141 11,406 9,428
1991 11,545 12,377 10,083
1992 11,358 11,771 8,750
1993 16,059 15,704 12,028
1994 17,600 17,365 13,242
1995 17,781 17,259 13,193
1996 21,047 19,111 14,575
1997 25,354 21,097 15,249
1998 25,842 21,955 16,720
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since Inception date 12/9/94
** Since Inception date 2/29/96
Global investment markets experienced considerable volatility of returns during
the past year. In the first half of 1998, international equity markets advanced
due to strong economic growth and low interest rates throughout the world and as
Europe moved closer to Monetary Union. The third quarter saw the international
markets collapse, as investors became increasingly risk averse. The Fund's
European overweighting provided an early benefit as investor enthusiasm drove up
stock prices based on strong fundamentals. Emerging markets exposure to hurt the
Fund's return relative to the Morgan Stanley's EAFE Index as these markets
underperformed for the year. Near zero weighting in Japan benefited the Fund as
this country continued to experience financial problems.
World stock markets' volatility was highlighted during the third quarter as
markets came crashing down and investors sought safety. The markets had been
highly valued during the year as they were "priced for perfection" with strong
consumer confidence and an attractive investment outlook. As Asian troubles
spread, other markets experienced problems during the year, and Russia's
currency devaluation in August brought the problem to a head. This, in
connection with the short-term debt problems in Brazil, led investors to demand
higher risk premiums and place their money in safer investments.
Entering the second half, the Fund was positioned defensively to limit the
downside risk in the market. Unfortunately, any exposure to emerging markets
hurt investment returns. During the year, growth-oriented investments performed
better than value investments. Investors sought safety in large capitalization,
blue chip companies despite their higher valuations. Management's value approach
to investing led the Fund to avoid these high valuation companies. The currency
exposure during the past year was neutral to the Fund's overall return.
Looking forward, the Fund's current strategy remains defensive in all respects.
The Fund is overweighted in Europe which, despite the world's troubles, still
has the most robust economic outlook of the developed markets. The recently
weaker U.S. dollar may negatively impact Europe's exporters, but Fund managers
expect European economic growth to remain well above recession levels. And,
reasonable earnings performance is expected from the portfolio. The Fund's
overweighting in the U.K. is not based on a top-down view of that economy.
Rather, it reflects the fact that Fund managers have uncovered a fair number of
unique companies and discrete opportunities there which offer
higher-than-average expected returns. Latin America continues to face economic
weakness. Although we are seeing prices that more fully reflect that outlook and
will be researching "deep value" opportunities where we think the stock price
has overly discounted the company's future prospects. The Fund's manager
continues to monitor the Asian markets in hopes of identifying interesting
investments when the market turns.
Principal International SmallCap Fund
- -------------------------------------
Darren Sleister
Comparison of Change in Value of $10,000 Investment in the International
SmallCap Fund, Lipper International Small-Cap Fund Average and Morgan Stanley
Capital International EAFE
- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 0.30% 0.69%* -
Class B 0.10% 0.52%* -
Class R 0.50% 0.86%* -
- --------------------------------------------
ISF ISF ISF Lipper Int'l
Fund Fund Fund SmallCap MSCI
Class A Class B Class R Fund Average EAFE
------- ------- ------- ------------- ------
9,524 10,000 10,000 10,000 10,000
1997 9,486 9,960 9,960 9,736 9,748
1998 9,514 9,970 10,010 9,774 10,689
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since Inception date 8/29/97
The ancient Chinese cure "May you live in interesting times," could now describe
the recent investment environment. SmallCap international stocks have fluctuated
widely recently as high levels of volatility gripped equity markets in general.
The Asian economic malaise crept into other parts of the world in the past
several months. For instance, Russia defaulted on some of its debt which sent
emerging country financial markets into a tailspin. Brazil's economy hovered on
the edge of collapse and was pressured recently into accepting a bailout
package. In short, the current state of world affairs does not favor strong
economic growth in many areas outside of the U.S. As small stocks tend to
benefit from a strong economic environment, the current perception is that small
companies should be sold. In many cases this has been accomplished in
spectacular fashion, resulting in small stocks becoming an excellent value.
Given the uncertainty surrounding Asia, Fund managers continue to favor
companies operating with clearly defined Western-management principles. As such,
the Principal International SmallCap Fund is heavily weighted in European,
Australian and Canadian stocks. At this time, growth companies offer the best
risk/return trade-off compared to more traditional value stocks. Management's
bottom-up, borderless stock selection criteria has taken the Fund to the
telecommunications, temporary employment, information technology, deep-sea oil
exploration and development, and niche financial companies. The Fund Manager
continues to choose stocks on an individual, stand-alone basis. This means the
industry and country exposures are the output of finding solid individual
investments rather than attempting to predict changes in economic activity or
currencies.
The Fund's investment philosophy firmly believes that paying less for a stock is
better than paying more. It is recognized that buying into a falling market can
be difficult as prices tomorrow may well be lower than today. However, stocks
are purchased for the long run and the Fund continues to invest in those
companies believed to generate solid returns for the longer term. When markets
sell off violently and the underlying economic conditions are not changing
significantly, this is generally a good buying opportunity. Investors in the
Fund should remember that volatility is not avoidable at all times but Fund
managers use such times to benefit shareholders.
Investment results for the period generally paralled the Lipper International
SmallCap Fund average. Results lagged the Morgan Stanley EAFE Index due to
different country weightings in the Fund and a much lower average capitalization
level in the Fund. The EAFE index is comprised of much larger companies that
pertained better in this market.
Important Notes on the Growth-Oriented Funds:
Dow Jones Utility Index with Income: This average is a price-weighted average of
15 utility companies that are listed on the New York Stock Exchange and are
involved in the production of electrical energy.
Lehman Brothers Government/Corporate Bond Index: This index consists of publicly
issued securities from the Government Index and the Corporate Index. The
Government Index includes U.S. Treasuries and Agencies. The Corporate Index
includes U.S. Corporate and Yankee debentures and secured notes from the
Industrial, Utility, Finance, and Yankee categories.
Lipper Balanced Fund Average: This average consists of funds whose primary
objective is to conserve principal by maintaining at all times a balanced
portfolio of both stocks and bonds. Typically, the stock/bond ratio ranges
around 60%/40%. The one-year average currently contains 395 funds.
Lipper Emerging Markets Fund Average: This average consists of funds which
invest at least 65% of their total assets in emerging market equity securities,
where "emerging market" is defined by a country's GNP per capita or other
economic measures. The one-year average currently contains 151 funds.
Lipper Growth & Income Fund Average: This average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one-year average currently contains 725 funds.
Lipper Growth Fund Average: This average consists of funds which normally invest
in companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices. The one-year average currently contains 944 funds.
Lipper International Small Cap Funds Average: This average consists of funds
which invest at least 65% of their assets in equity securities of non-United
States companies with market capitalizations less than U.S. $1 billion at the
time of purchase. The one-year average currently contains 53 funds.
Lipper Mid-Cap Fund Average: This average consists of funds which, by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average currently contains 302 funds.
Lipper International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average currently contains 489 funds.
Lipper Real Estate Fund Average: This average consists of funds which invest 65%
of their equity portfolio in equity securities of domestic and foreign companies
engaged in the real estate industry. The one-year average currently contains 88
funds.
Lipper Small-Cap Fund Average: This average consists of funds which invest
primarily in companies with market capitalizations less than $1 billion at the
time of purchase. The one-year average currently contains 588 funds.
Lipper Utilities Fund Average: This average consists of funds which invest 65%
of their equity portfolio in utility shares. The one-year average currently
contains 100 funds.
Morgan Stanley EAFE (Europe, Australia and Far East) Index: This average
reflects an arithmetic, market value weighted average of performance of more
than 900 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.
Morgan Stanley EMF (Emerging Markets Free) Index: This average is capitalization
weighted and consists of stocks from 26 countries. These countries include:
Argentina, Brazil, Chile, China Free, Columbia, Czech Republic, Greece, Hungary,
India, Indomesia Free, Israel, Jordan, Korea at 50%, Malaysia Free, Mexico Free,
Pakistan, Peru, Philippines Free, Poland, Portugal, South Africa, Sri Lanka,
Taiwan at 50%, Thailand Free, Turkey and Venezuela.
Morgan Stanley REIT Index: This is a capitalization-weighted index of the most
actively traded real estate investment trusts, and is designed to be a measure
of real estate equity performance.
Standard & Poor's 500 Stock Index: This is 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.
Standard & Poor's 600 Index: This is a market-value weighted index consisting of
600 domestic stocks chosen for market size, liquidity and industry group
representation.
Note: Mutual fund data from Lipper Analytical Services, Inc.
Income-Oriented Funds
Principal Bond Fund
- -------------------
Scott Bennett
Comparison of Change in Value of $10,000 Investment in the Bond Fund Class A,
Lipper Corporate Debt BBB Rated Fund Average and Lehman Brothers BAA Corporate
Index
- -------------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- -------------------------------------------------
Class A 7.76% 6.95% 9.14%
Class B 7.04% 9.68%* -
Class R 7.05% 7.60%** -
- -------------------------------------------------
Lehman Lipper
Bond Baa BBB Corp.
Fund Index Average
------ ------ ---------
9,522 10,000 10,000
1989 10,623 11,236 10,944
1990 10,950 11,549 11,232
1991 12,706 13,641 13,151
1992 14,070 15,217 14,572
1993 16,211 17,635 16,773
1994 15,236 16,852 15,873
1995 18,242 20,111 18,154
1996 19,107 21,484 19,159
1997 21,047 23,667 20,993
1998 22,682 25,142 22,181
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since Inception date 12/9/94
** Since Inception date 2/29/96
For the year ending October 31, 1998, the Principal Bond Fund outperformed its
competition and the Lehman Brothers BAA Corporate Index by posting strong
absolute returns during a period of market upheaval and general economic
uncertainty. Corporate bonds, which make up the bulk of the Fund's holdings,
benefited from lower Treasury rates over the past year. However, they have been
impacted by investor fears of an expansion of the global economic slowdown and
problems in the financial markets. This has resulted in extreme investor risk
aversion as evidenced by U.S. Treasuries being the star performer of the bond
market during the past year. Because of these fears, corporate bonds have
underperformed Treasuries as buyers demanded a much greater premium to hold
corporates. This extreme bias towards Treasuries eased in the last several weeks
of October allowing corporates to improve their relative performance.
Principal Bond Fund has performed well in this environment by increasing the
credit quality of the portfolio, maintaining a somewhat longer duration than its
peers and continuing to focus on domestic companies. The biggest contributor to
the outperformance during the past year has been the increased quality emphasis
of the portfolio with 33% of the portfolio rated A- or higher including 4% which
is rated AAA. This has been significant as the higher the credit quality, the
higher the return during the past year. The bulk of the higher-rated bonds in
the Fund are in liquid instruments which can be sold quickly and reinvested in
higher yielding investments as market conditions improve.
Principal Government Securities Income Fund
- -------------------------------------------
Marty Schafer
Comparison of Change in Value of $10,000 Investment in the Government Securities
Income Fund Class A, Lipper GNMA Fund Average and Lehman Brothers GNMA Inex
- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 7.38% 6.49% 8.61%
Class B 6.60% 9.30%* -
Class R 6.66% 6.98%** -
- --------------------------------------------
Government Lehman Lipper
Securities GNMA GNMA
Income Fund Index Average
9,521 10,000 10,000
1989 10,554 11,142 10,976
1990 11,206 12,067 11,777
1991 13,085 14,129 13,536
1992 14,111 15,371 14,660
1993 15,776 16,536 15,851
1994 14,789 16,281 15,363
1995 17,370 18,755 17,458
1996 18,423 20,096 18,427
1997 20,124 21,946 19,973
1998 21,609 23,520 21,325
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since Inception date 12/9/94
** Since Inception date 2/29/96
Being long in duration* and fully invested set the stage for a very respectable
year. For three quarters of the past year, the economy was led by reasonable
growth, shrinking federal deficits and non-threatening inflation which pushed
interest rates lower. However, the fourth quarter was marked by financial
turmoil which wreaked havoc in the U.S. bond and stock markets. This was
followed by an unprecedented contraction in liquidity and dramatically wider
spreads across all fixed income products. Nevertheless, the Fund's disciplined
and long-term investment approach, combined with its long-term economic
forecast, has produced a very solid performance. For the year ended October 31,
1998, the Fund outperformed both the Lipper and Lehman Indices.
Fund management continues to believe the current portfolio is well positioned
for the period ahead. Value is added by selecting undervalued mortgage-backed
securities, combined with adjusting the duration of the portfolio as needed. As
of October 31, 1998, the duration of the fund was 3.34 years versus the index of
2.05 years. Given the absolute level of current interest rates, we plan on
moving the fund duration closer to the index over the coming quarters.
Principal High Yield Fund
- -------------------------
Mark Denkinger
Comparison of Change in Value of $10,000 Investment in the High Yield Fund Class
A, Lipper High Current Yield Fund Average and Lehman Brothers High Yield
Composite Bond Index
- -----------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- -----------------------------------------------
Class A -3.18% 6.64% 6.86%
Class B -3.93% 7.50%* -
Class R -3.97% 4.59%** -
- -----------------------------------------------
Lehman Lipper
High High Yield High Yield
Yield Fund Index Average
---------- ---------- ----------
9,526 10,000 10,000
1989 9,779 10,195 10,111
1990 8,360 8,885 8,875
1991 10,499 13,209 12,101
1992 12,091 15,224 14,084
1993 13,399 17,949 16,911
1994 13,593 18,168 16,841
1995 15,187 21,016 19,065
1996 16,992 23,349 21,476
1997 19,086 26,553 24,582
1998 18,479 26,420 23,758
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since Inception date 12/9/94
** Since Inception date 2/29/96
After several years of strong returns, the high yield market underperformed its
fixed income counterparts for the year ended October 31, 1998. Principal High
Yield Fund posted a total return of -3.18% for the year. This performance
trailed the Lehman Brothers High Yield Index return of -.50%, but slightly
outperformed the Lipper High Current Yield Fund Average of -3.35%. The relative
performance was negatively impacted by the Fund's exposure to Indonesia in the
first half the year. After seeing spreads continue to narrow for the first three
quarters of the year, spreads widened substantially in the fourth quarter.
August was one of the worst performing months in high yield history as the Fund
returned -6.58%. With financial problems throughout Asia, Russia and Latin
America continuing, investors became risk averse and looked to U.S. Treasuries
as a safe haven. High yield securities were adversely impacted with these market
conditions and followed the equity markets lower. Unlike other fixed income
securities, high yield securities have a higher correlation to the equity market
than to interest rates.
The high yield market was very active for most of 1998. New issues continued at
a frivolous pace setting new records each month. This new issue volume, combined
with historically low default rates, low inflation and a strong economy
continued to make the high yield market attractive for the first half of fiscal
1998. The August market downturn changed all this, and spreads widened
substantially and new issues came to a halt. Returns turned negative and the
outlook was grim heading into October. October experienced a dramatic change in
tone from the first to second halves of the month. The first half of October
continued negative returns and spread widening. During the second half, market
returns were decidedly positive and spreads narrowed as confidence and money
flows returned to the market. With default rates remaining low, it became
evident that current spreads were more than compensating for the potential risks
in the market.
Principal High Yield Fund maintains a BB- average quality. While Fund managers
have increased the exposure to CCC quality and non-rated securities during the
year, the overall quality of the portfolio has not significantly changed. This
is a relatively conservative risk position compared to other funds in the high
yield market and worked to the Fund's benefit during these troubling times.
Going forward, Fund managers will be more willing to lower the quality of the
Fund when market conditions warrant the increased risk. Throughout 1998, the
number of bonds in the portfolio has been reduced and the focus on sector
diversification has been renewed. At October 31, 1998, the Fund was well
diversified among 50 bonds of various sectors and it is currently overweighted
in telecommunication/media. Also, exposure to securities of a cyclical nature
has been reduced in anticipation of a slower economy. Principal High Yield Fund
continues to demonstrate its worth as an asset class that can enhance overall
portfolio diversification and returns.
Principal Limited Term Bond Fund
- --------------------------------
Marty Schafer
Comparison of Change in Value of $10,000 Investment in the Limited Term Bond
Fund, Lipper Short-Intermediate Investment Grade Debt Fund Average and Lehman
Brothers Intermediate Government/Corporate Index
- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 6.57% 6.36%* -
Class B 6.24% 5.95%* -
Class R 6.12% 5.77%* -
- --------------------------------------------
Limited Term Limited Term
Bond Fund Bond Fund
Class A Class B
------------ ------------
9,851 10,000
1996 10,208 10,332
1997 10,897 10,985
1998 11,614 11,670
Limited Term Lehman Brothers Lipper Intermediate
Bond Fund Government Corporate Investment Grade
Class R Intermediate Index Bond Fund Average
------------ -------------------- -------------------
10,000 10,000 10,000
1996 10,324 10,368 10,357
1997 10,944 11,145 11,032
1998 11,615 12,161 11,801
Note: Past performance is not predictive of future performance. The performance
of Class B and Class R shares will vary from the performance of Class A shares
based on the differences in loads and fees.
* Since Inception date 2/29/96
Principal Limited Term Bond Fund continues to be an investment well suited for
those investors looking to improve on lower yielding money markets funds and
similar investments.
Fund managers kept duration shorter than the benchmarks and produced returns
through asset selection. For the year, this process led to slightly below
average performance as rates fell; again showing duration dominates performance.
Absolute returns for fixed income sectors (not including treasuries) were solid
for the year, however, in comparison to treasuries it was a poor year.
For three quarters of the past year the economy was led by reasonable growth,
shrinking federal deficits and non-threatening inflation which pushed interest
rates lower. However, the fourth quarter was marked by financial turmoil which
wreaked havoc in the U.S. bond and stock markets. Investor confidence was
undermined by: Asia, Russia, Latin America, hedge funds, supply stock market,
etc. There was only one place for many investors to hide - U.S. Treasuries.
Fund strategy continues to stay fully invested, find the best value among
various short-term fixed income securities, maintain high credit quality
standards and manage duration within the target range.
Principal Tax-Exempt Bond Fund
- ------------------------------
Dan Garrett
Comparison of Change in Value of $10,000 Investment in the Tax-Exempt Bond Fund
Class A, Lipper General Municipal Debt Tax-Exempt Bond Fund Average and Lehman
Brothers Municipal Bond Index
- --------------------------------------------
Total Returns
As of October 31, 1998
1 Year 5 Year 10 Year
- --------------------------------------------
Class A 6.76% 5.75% 7.79%
Class B 6.01% 9.47%* -
- --------------------------------------------
Lehman Lipper
Tax-Exempt Municipal General
Bond Fund Bond Index Municipal Debt
---------- ---------- --------------
9,523 10,000 10,000
1989 10,471 10,811 10,779
1990 10,895 11,613 11,376
1991 12,322 13,027 12,775
1992 13,212 14,119 13,720
1993 15,215 16,107 15,839
1994 14,087 15,405 14,911
1995 16,345 17,691 16,954
1996 17,339 18,700 17,820
1997 18,849 20,287 19,267
1998 20,124 21,914 20,639
Note: Past performance is not predictive of future performance. The performance
of Class B will vary from the performance of Class A shares based on the
differences in loads and fees.
* Since Inception date 12/9/94
Principal Tax-Exempt Bond Fund strives to provide income free from federal tax
while preserving capital. The financial markets were quite volatile the past few
months. For disciplined investors, these gyrations were reminders of why
long-term goals and asset allocation are sound ideas.
Supported by strong local and state budget surpluses and ongoing growth in the
domestic economy, municipal bond values were steadier than other bond sectors
during this turmoil. The Fund focuses on projects for the public good (e.g.,
utilities, industrial pollution control) where the revenues for debt service is
tied to corporate guarantees. These bonds tend to provide higher income than the
average bond in both the Lehman Municipal Bond Index and the Fund's Lipper peer
group with only a slightly higher risk. With fears of global market turmoil,
markets have seen the risk premium's increase reflected in lower prices. The
less liquid a bond (the ability to find a buyer), the more severe the price
drop.
The Fund has a slightly lower credit quality (average rating A) than its Lipper
peers (AA) or the Lehman Index (AA). This resulted in lower average prices on
the Fund's holdings for the past few months. This underperformance is slight and
covers a few months when fears of extreme credit market turmoil prevailed. This
fear has since been calmed by moves of the Fed and other global banks to lower
rates ensuring that markets will function, credit will be available for
businesses and consumers at reasonable rates, and financial markets will provide
liquidity for securities trading. As risk premiums have come down, the Fund's
holdings have risen faster than its peers.
Looking forward, the U.S. economy shows signs of continued low inflation with
steady growth. The Fund's holdings in higher coupon revenue bonds should
continue to provide positive relative return compared to the broader municipal
market and the Fund's peers. The Fund's disciplined approach continues to
provide good value for those seeking high tax-exempt income.
Principal Cash Management Fund
Principal Tax-Exempt Cash Management Fund
- -----------------------------------------
Mike Johnson Steve Schneider
On September 29, 1998, at the Federal Open Market Committee (FOMC) meeting, the
Federal Reserve cut its targeted Fed Funds rate** by .25% to 5.25%. Two weeks
later the Fed stepped in again and cut Fed funds by an additional .25% to 5.00%.
These were the first Fed funds adjustments to take place since March 1997 and
the first downward moves since January 1996. The rate cuts were aimed at easing
the effects of a global slowdown on the U.S. economy. Rates had been holding
quite steady through the year until Alan Greenspan began dropping hints about a
potential rate cut. Following these comments, the market began pricing in a .25%
to .50% downward adjustment in rates. The industry's average maturity for the
bulk of fiscal 1998 was in the high 50 and 60+ day area. The Funds strove to
stay on top of the industry average. However, due to a planned early May
redemption resulting from the transition of certain "sweep accounts" (short-term
balances of customers of securities dealers) to another fund organization the
Funds' average days lagged significantly. Barring unusual circumstances, Fund
management actively monitors the industry averages to keep both yields and
average maturities in line. Both funds continue to invest from a list of high
credit quality investments that is carefully monitored.
Investment in the money market funds is neither insured nor guaranteed by the
U.S. Government. While the Funds strive to maintain a $1.00 per share net asset
value, it is possible to lose money by investing in them.
Principal Tax-Exempt Cash Management Fund income dividends are exempt from
federal taxation but may not be exempt from state and local taxes. The
alternative minimum tax applies to some investors.
Important Notes for Income-Oriented Funds:
Greater credit risks are inherent in a fund which invests primarily in high
yield bonds.
* Duration is the dollar weighted, present value of cash flows, principal and
interest, expressed in time.
** The Fed Funds rate is the rate at which banks lend to each other on an
overnight basis.
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 Standard & Poor's.
Lehman Brothers GNMA Index: An unmanaged index of 15- and 30-year fixed-rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA) and Graduated Payment Mortgages (GPMs) with at least $100
million outstanding and one year or more to maturity.
Lehman Brothers High Yield Composite Bond Index: An unmanaged index of all
publicly issued fixed, dollar-denominated, SEC-registered corporate debt rated
Ba1 or lower with at least $100 million outstanding and one year or more to
maturity.
Lehman Brothers Intermediate Government/Corporate Index: An unmanaged index of
U. S. Government agency and Treasury securities and investment-grade corporate
debt securities with maturities of five to ten years.
Lehman Brothers Municipal Bond Index: An unmanaged index of investment-grade,
tax-exempt bonds which have been issued within the last five years and at least
one year or more to maturity. This index is classified into four main sectors:
General Obligation, Revenue, Insured and Prerefunded.
Lipper Corporate Debt BBB Rated Fund Average: This average consists of funds
which invest at least 65% of their assets in corporate and government debt
issues rated in the top four grades. The one-year average currently contains 91
funds.
Lipper General Municipal Debt Fund Average: This average consists of funds which
invest at least 65% of their assets in municipal debt issues in the top four
credit ratings. The one-year average currently contains 239 funds.
Lipper GNMA Fund Average: This average consists of funds which invest a least
65% of their assets in Government National Mortgage Association securities. The
one-year average currently contains 51 funds.
Lipper High Current Yield Fund Average: This average consists of funds which aim
at high (relative) current yield from fixed-income securities. No quality or
maturity restrictions. They tend to invest in lower grade debt issues. The
one-year average currently contains 235 funds.
Lipper Short-Intermediate Investment Grade Debt Fund Average: This average
consists of funds which invest at least 65% of their assets in investment-grade
debt issues rated in the top four grades with dollar-weighted average maturities
of one to five years. The one-year average currently contains 94 funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
October 31, 1998
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
Principal Principal Principal Principal Principal Principal
Balanced Blue Chip Capital Value Growth MidCap Real Estate
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Investment in securities
<S> <C> <C> <C> <C> <C> <C>
-- at cost $125,244,229 $155,325,151 $478,777,622 $305,883,113 $332,380,783 $12,930,842
Assets
Investment in securities
-- at value (Note 4) $140,184,928 $192,975,605 $642,787,372 $500,523,733 $428,959,431 $11,535,535
Cash........................ 2,002 2,007 2,671 2,032 6,877 2,195
Receivables:
Dividends and interest.... 829,209 111,884 1,018,354 467,753 196,306 16,877
Investment securities sold 1,711,697 320,900 3,600,782 -- -- --
Capital Stock sold........ 201,239 658,133 702,535 951,013 419,030 4,297
Other assets................ 3,953 708 25,013 8,637 3,395 --
Total Assets 142,933,028 194,069,237 648,136,727 501,953,168 429,585,039 11,558,904
Liabilities
Accrued expenses............ 111,941 46,689 354,341 319,251 364,182 21,167
Payables:
Investment securities
purchased -- -- -- 9,438,610 4,054,794 --
Capital Stock reacquired.. 43,420 188,017 290,179 875,158 326,224 --
Total Liabilities 155,361 234,706 644,520 10,633,019 4,745,200 21,167
Net Assets Applicable to
Outstanding Shares.......... 142,777,667 $193,834,531 $647,492,207 $491,320,149 $424,839,839 $11,537,737
Net Assets Consist of:
Capital Stock............... $ 93,597 $89,454 $208,612 $ 87,647 $ 106,816 $ 13,750
Additional paid-in capital.. 122,961,011 156,056,332 439,309,526 300,079,580 328,552,043 13,496,703
Accumulated undistributed
net investment income..... 500,739 607 3,066,439 982,816 -- 35,698
Accumulated undistributed
net realized gain (loss)
on investment
transactions...... 4,281,621 37,684 40,897,880 (4,470,514) (397,668) (613,107)
Net unrealized appreciation
(depreciation)of
investments.. 14,940,699 37,650,454 164,009,750 194,640,620 96,578,648 (1,395,307)
Total Net Assets $142,777,667 $193,834,531 $647,492,207 $491,320,149 $424,839,839 $11,537,737
Capital Stock
(par value: $.01 a share):
Shares authorized.......... 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000 100,000,000
Net Asset Value Per Share:
Class A:
Net Assets............... $104,414,116 $126,740,153 $565,052,308 $395,954,359 $332,942,120 $ 5,489,536
Shares issued and
outstanding............ 6,832,891 5,837,421 18,189,057 7,059,140 8,344,793 654,401
Net asset value per
share... $15.28 $21.71 $31.07 $56.09 $39.90 $8.39
Maximum offering price
per share(a).......... $16.04 $22.79 $32.62 $58.89 $41.89 $8.81
Class B:
Net Assets.............. $18,929,793 $34,223,360 $44,764,507 $64,808,709 $68,357,748 $3,119,646
Shares issued and
outstanding........... 1,243,950 1,587,969 1,448,791 1,157,692 1,739,784 372,195
Net asset value
per share(b).......... $15.22 $21.55 $30.90 $55.98 $39.29 $8.38
Class R:
Net Assets........ $19,433,758 $32,871,018 $37,675,392 $30,557,081 $23,539,971 $2,928,555
Shares issued and
outstanding 1,282,856 1,520,018 1,223,310 547,909 596,991 348,440
Net asset value per
share $15.15 $21.63 $30.80 $55.77 $39.43 $8.40
<FN>
(a) Maximum offering price is equal to net asset value plus a front-end sales
charge of 4.75% of the offering price or 4.99% of the net asset value.
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</FN>
See accompanying notes.
</TABLE>
October 31, 1998
STATEMENTS OF ASSETS AND LIABILITIES
Principal Principal
SmallCap Utilities
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc.
Investment in securities
-- at cost $33,007,985 $68,557,497
Assets
Investment in securities
-- at value (Note 4) $29,620,107 $98,511,173
Cash........................ 3,088 30,500
Receivables:
Dividends and interest.... 4,679 336,744
Investment securities sold -- --
Capital Stock sold........ 235,364 201,826
Other assets................ 21 514
Total Assets 29,863,259 99,080,757
Liabilities
Accrued expenses............ 32,840 112,172
Payables:
Investment securities
purchased -- --
Capital Stock reacquired.. 53,976 39,790
Total Liabilities 86,816 151,962
Net Assets Applicable to
Outstanding Shares.......... $29,776,443 $98,928,795
Net Assets Consist of:
Capital Stock............... $ 35,322 $ 61,406
Additional paid-in capital.. 34,355,800 67,157,974
Accumulated undistributed
net investment income..... -- 280,319
Accumulated undistributed
net realized gain (loss)
on investment
transactions...... (1,226,801) 1,475,420
Net unrealized appreciation
(depreciation)of
investments.. (3,387,878) 29,953,676
Total Net Assets $29,776,443 $98,928,795
Capital Stock
(par value: $.01 a share):
Shares authorized.......... 100,000,000 100,000,000
Net Asset Value Per Share:
Class A:
Net Assets............... $18,437,838 $83,533,366
Shares issued and
outstanding............ 2,186,171 5,183,590
Net asset value per
share... $8.43 $16.11
Maximum offering price
per share(a).......... $8.85 $16.91
Class B:
Net Assets.............. $6,650,394 $11,390,675
Shares issued and
outstanding........... 791,193 707,750
Net asset value
per share(b).......... $8.41 $16.09
Class R:
Net Assets........ $4,688,211 $4,004,754
Shares issued and
outstanding 554,813 249,210
Net asset value per
share $8.45 $16.07
(a) Maximum offering price is equal to net asset value plus a front-end sales
charge of 4.75% of the offering price or 4.99% of the net asset value.
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See accompanying notes.
Year Ended October 31, 1998, Except as Noted
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Principal Principal Principal Principal Principal
Balanced Blue Chip Capital Value Growth MidCap
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
Income:
Dividends................................... $ 1,386,241 $ 2,704,996 $ 14,038,593 4,527,977 3,036,707
Interest.................................... 3,893,561 283,944 822,481 2,792,407 1,865,304
Total Income 5,279,802 2,988,940 14,861,074 7,320,384 4,902,011
Expenses:
Management and investment advisory fees (Note 3) 750,616 764,784 2,349,118 1,863,070 2,548,924
Distribution and shareholder servicing
fees (Notes 1 and 3)..................... 497,017 704,240 1,313,474 1,346,009 1,525,106
Transfer and administrative services
(Notes 1 and 3)......................... 521,852 832,394 1,247,865 1,421,948 1,840,474
Registration fees (Note 1).................. 48,742 89,529 110,642 89,906 101,101
Custodian fees.............................. 5,061 3,970 2,460 4,244 4,821
Auditing and legal fees..................... 6,392 7,422 6,175 10,717 8,342
Directors' fees............................. 7,384 7,385 7,372 7,446 7,371
Other....................................... 9,028 11,443 39,501 29,568 33,839
Total Gross Expenses 1,846,092 2,421,167 5,076,607 4,772,908 6,069,978
Less: Management and investment
advisory fees waived............... -- -- -- -- --
Total Net Expenses 1,846,092 2,421,167 5,076,607 4,772,908 6,069,978
Net Investment Income (Operating Loss) 3,433,710 567,773 9,784,467 2,547,476 (1,167,967)
Net Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) from investment
transactions 4,283,465 21,090 40,907,350 (4,470,515) (397,666)
Net realized gains from other investment
companies .................................. -- -- -- -- --
Change in unrealized appreciation/
depreciation of investments.............. 4,621,248 23,303,399 33,306,303 58,299,881 (47,859,461)
Net Realized and Unrealized
Gain (Loss) on Investments 8,904,713 23,324,489 74,213,653 53,829,366 (48,257,127)
Net Increase (Decrease) in Net Assets
Resulting from Operations $12,338,423 $23,892,262 $83,998,120 $56,376,842 (49,425,094)
<FN>
(a)Period from December 11, 1997 (date operations commenced) through October
31, 1998.
See accompanying notes.
</FN>
</TABLE>
Year Ended October 31, 1998, Except as Noted
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Principal Principal Principal
Real Estate SmallCap Utilities
GROWTH FUNDS (DOMESTIC) Fund, Inc.(a) Fund, Inc.(a) Fund, Inc
Net Investment Income
Income:
Dividends................................... 438,265 74,378 $3,334,804
Interest.................................... 68,103 103,891 104,549
Total Income 506,368 178,269 3,439,353
Expenses:
Management and investment advisory fees (Note 3) 87,653 147,083 531,644
Distribution and shareholder servicing
fees (Notes 1 and 3)..................... 33,946 75,049 294,281
Transfer and administrative services
(Notes 1 and 3)......................... 76,546 199,807 304,813
Registration fees (Note 1).................. 3,977 3,039 31,613
Custodian fees.............................. 1,746 4,493 1,789
Auditing and legal fees..................... 6,256 3,849 4,899
Directors' fees............................. 2,775 2,700 7,385
Other....................................... 1,300 514 5,987
Total Gross Expenses 214,199 436,534 1,182,411
Less: Management and investment
advisory fees waived............... -- -- 82,515
Total Net Expenses 214,199 436,534 1,099,896
Net Investment Income (Operating Loss) 292,169 (258,265) 2,339,457
Net Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) from investment
transactions (631,002) (1,226,801) 1,540,023
Net realized gains from other investment
companies .................................. 17,895 -- --
Change in unrealized appreciation/
depreciation of investments.............. (1,395,307) (3,387,878) 19,641,699
Net Realized and Unrealized
Gain (Loss) on Investments (2,008,414) (4,614,679) 21,181,722
Net Increase (Decrease) in Net Assets
Resulting from Operations $(1,716,245) $(4,872,944) $23,521,179
<FN>
(a)Period from December 11, 1997 (date operations commenced) through October
31, 1998.
See accompanying notes.
</FN>
</TABLE>
Years Ended October 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Principal Principal Principal
Balanced Blue Chip Capital Value
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc. Fund, Inc.
1998 1997 1998 1997 1998 1997
Operations
<S> <C> <C> <C> <C> <C> <C>
Net investment income(operating loss) 3,433,710 2,134,586 567,773 773,899 9,784,467 9,136,213
Net realized gain (loss) from
investment transactions 4,283,465 7,456,891 21,090 12,146,669 40,907,350 44,903,311
Change in unrealized appreciation/
depreciation of investments 4,621,248 3,601,722 23,303,399 617,291 33,306,303 57,109,297
Net Increase (Decrease) in Net Assets
Resulting from Operations 12,338,423 13,193,199 23,892,262 13,537,859 83,998,120 111,148,821
Dividends and Distributions to Shareholders
From net investment income:
Class A.................................... (2,435,139) (1,962,353) (571,140) (664,560) (9,413,649) (8,406,934)
Class B ................................... (269,151) (152,316) (21,463) (25,978) (302,359) (131,991)
Class R.................................... (300,221) (102,915) (42,466) (42,305) (272,715) (86,476)
From net realized gain on investments:
Class A ................................... (5,882,074) (6,130,810) (8,442,806) (1,212,100) (40,827,739) (60,902,870)
Class B ................................... (842,073) (566,868) (1,993,541) (188,032) (2,381,772) (1,471,954)
Class R.................................... (725,965) (112,915) (1,692,630) (55,610) (1,697,455) (338,789)
Tax return of capital distributions:
Class A ................................... -- -- -- -- -- --
Class B ................................... -- -- -- -- -- --
Class R.................................... -- -- -- -- -- --
Total Dividends and Distributions (10,454,623) (9,028,177) (12,764,046) (2,188,585) (54,895,689) (71,339,014)
Capital Share Transactions (Note 5)
Shares sold:
Class A.................................... 23,880,103 21,449,772 46,354,686 34,250,614 73,344,881 57,963,775
Class B ................................... 8,010,824 5,741,685 15,736,209 11,442,392 17,966,775 15,764,589
Class R.................................... 11,459,488 9,101,517 18,838,628 14,353,877 22,090,590 16,511,369
Shares issued in reinvestment of dividends and
distributions:
Class A.................................... 8,093,981 7,361,276 8,730,513 1,791,093 49,153,586 68,083,831
Class B ................................... 1,101,436 712,904 2,000,486 211,943 2,633,936 1,583,642
Class R.................................... 1,026,031 215,722 1,734,897 97,891 2,028,417 425,209
Shares redeemed:
Class A ................................... (14,404,904) (17,550,684) (15,983,191) (9,512,640) (78,578,133) (103,901,296)
Class B ................................... (2,320,820) (943,794) (3,609,645) (1,463,536) (4,560,133) (1,795,682)
Class R ................................... (3,017,907) (846,178) (4,847,775) (1,259,802) (5,699,984) (1,636,526)
Net Increase (Decrease) in Net Assets
from Capital Share Transactions 33,828,232 25,242,220 68,954,808 49,911,832 78,379,935 52,998,911
Total Increase 35,712,032 29,407,242 80,083,024 61,261,106 107,482,366 92,808,718
Net Assets
Beginning of period........................... 107,065,635 77,658,393 113,751,507 52,490,401 540,009,841 447,201,123
End of period [including undistributed
net investment income as set forth below]... 142,777,667 107,065,635 193,834,531 113,751,507 647,492,207 540,009,841
Undistributed Net Investment Income ........... 500,739 75,127 607 79,494 3,066,439 3,270,973
<FN>
(a) Period from December 11, 1997 (date operations commenced) through
October 31, 1998.
See accompanying notes.
</FN>
</TABLE>
Years Ended October 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Principal Principal Principal
Growth MidCap Real Estate
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc. Fund, Inc.
1998 1997 1998 1997 1998(a)
Operations
<S> <C> <C> <C> <C> <C>
Net investment income(operating loss) 2,547,476 2,008,065 (1,167,967) 419,786 292,169
Net realized gain (loss) from
investment transactions (4,470,515) 11,213,338 (397,666) 10,456,322 (613,107)
Change in unrealized appreciation/
depreciation of investments 58,299,881 65,942,389 (47,859,461) 80,084,426 (1,395,307)
Net Increase (Decrease) in Net Assets
Resulting from Operations 56,376,842 79,163,792 (49,425,094) 90,960,534 (1,716,245)
Dividends and Distributions to Shareholders
From net investment income:
Class A.................................... (2,281,014) (1,853,254) -- (741,359) (118,861)
Class B ................................... (84,298) (14,911) -- (4,780) (70,429)
Class R.................................... (5,786) (8,766) -- (594) (67,181)
From net realized gain on investments:
Class A ................................... (9,421,497) (2,178,840) (8,489,268) (7,708,737) --
Class B ................................... (1,280,548) (232,571) (1,505,719) (989,543) --
Class R.................................... (518,291) (27,607) (456,798) (95,503) --
Tax return of capital distributions:
Class A ................................... -- -- (3,831) -- --
Class B ................................... -- -- (351) -- --
Class R.................................... -- -- (114) -- --
Total Dividends and Distributions (13,591,434) (4,315,949) (10,456,081) (9,540,516) (256,471)
Capital Share Transactions (Note 5)
Shares sold:
Class A.................................... 80,738,775 54,732,684 84,673,707 76,822,359 6,657,527
Class B ................................... 23,436,918 14,638,635 26,339,797 24,764,751 3,740,670
Class R.................................... 16,186,162 13,558,095 14,593,610 14,520,116 3,419,415
Shares issued in reinvestment of dividends and
distributions:
Class A.................................... 11,393,839 3,915,241 8,301,363 8,245,913 117,899
Class B ................................... 1,340,964 244,569 1,491,031 981,686 72,055
Class R.................................... 524,005 36,360 456,912 96,080 69,699
Shares redeemed:
Class A ................................... (49,829,917) (35,146,370) (60,048,924)(36,719,008) (394,690)
Class B ................................... (6,849,158) (4,184,396) (9,249,916) (4,945,062) (118,103)
Class R ................................... (4,298,409) (1,144,394) (5,504,466) (1,479,854) (54,019)
Net Increase (Decrease) in Net Assets
from Capital Share Transactions 72,643,179 46,650,424 61,053,114 82,286,981 13,510,453
Total Increase 115,428,587 121,498,267 1,171,939 163,706,999 11,537,737
Net Assets
Beginning of period........................... 375,891,562 254,393,295 423,667,900 259,960,901 --
End of period [including undistributed
net investment income as set forth below]... 491,320,149 375,891,562 424,839,839 423,667,900 11,537,737
Undistributed Net Investment Income .......... 982,816 813,820 -- 36,047 35,698
<FN>
(a) Period from December 11, 1997 (date operations commenced) through
October 31, 1998.
See accompanying notes.
</FN>
</TABLE>
Years Ended October 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Principal Principal
SmallCap Utilities
GROWTH FUNDS (DOMESTIC) Fund, Inc. Fund, Inc.
1998(a) 1998 1997
Operations
<S> <C> <C> <C>
Net investment income(operating loss) (258,265) 2,339,457 2,768,051
Net realized gain (loss) from
investment transactions (1,226,801) 1,540,023 1,274,214
Change in unrealized appreciation/
depreciation of investments (3,387,878) 19,641,699 5,564,046
Net Increase (Decrease) in Net Assets
Resulting from Operations (4,872,944) 23,521,179 9,606,311
Dividends and Distributions to Shareholders
From net investment income:
Class A.................................... -- (2,238,576) (2,431,314)
Class B ................................... -- (202,869) (183,927)
Class R.................................... -- (59,525) (28,627)
From net realized gain on investments:
Class A ................................... -- -- --
Class B ................................... -- -- --
Class R.................................... -- -- --
Tax return of capital distributions:
Class A ................................... (4,160) -- --
Class B ................................... (3,120) -- --
Class R.................................... (3,120) -- --
Total Dividends and Distributions (10,400) (2,500,970) (2,643,868)
Capital Share Transactions (Note 5)
Shares sold:
Class A.................................... 22,354,702 12,723,975 5,270,881
Class B ................................... 8,073,780 4,293,220 2,196,079
Class R.................................... 5,958,145 2,547,194 1,364,313
Shares issued in reinvestment of dividends and
distributions:
Class A.................................... 4,160 1,973,186 2,147,554
Class B ................................... 3,120 182,379 165,257
Class R.................................... 3,120 59,486 28,603
Shares redeemed:
Class A ................................... (967,357) (13,805,582) (15,663,584)
Class B ................................... (232,397) (2,155,400) (1,595,827)
Class R ................................... (537,486) (725,248) (272,901)
Net Increase (Decrease) in Net Assets
from Capital Share Transactions 34,659,787 5,093,210 (6,359,625)
Total Increase 29,776,443 26,113,419 602,818
Net Assets
Beginning of period........................... -- 72,815,376 72,212,558
End of period [including undistributed
net investment income as set forth below]... 29,776,443 98,928,795 72,815,376
Undistributed Net Investment Income ........... -- 280,319 445,581
<FN>
(a) Period from December 11, 1997 (date operations commenced) through
October 31, 1998.
See accompanying notes.
</FN>
</TABLE>
October 31, 1998
NOTES TO FINANCIAL STATEMENTS
Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Growth Fund, Inc.
Principal MidCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Utilities Fund, Inc.
Note 1 -- Significant Accounting Policies
Principal Balanced Fund, Inc., Principal Blue Chip Fund, Inc., Principal Capital
Value Fund, Inc., Principal Growth Fund, Inc., Principal MidCap Fund, Inc.,
Principal Real Estate Fund, Inc., Principal SmallCap Fund, Inc. and Principal
Utilities Fund, Inc. (the "Domestic Growth Funds") are registered under the
Investment Company Act of 1940, as amended, as open-end diversified management
investment companies and operate in the mutual fund industry.
Effective January 1, 1998, the following changes were made to the names of the
Domestic Growth Funds:
Former Fund Name New Fund Name
- -------------------------------------- ----------------------------------
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Capital Accumulation Fund, Inc. Principal Capital Value Fund, Inc.
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor Emerging Growth Fund, Inc. Principal MidCap Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.
On December 11, 1997, the initial purchases of 400,000 shares of Class A Capital
Stock, 300,000 shares of Class B Capital Stock and 300,000 shares of Class R
Capital Stock of each of Principal Real Estate Fund, Inc. and Principal SmallCap
Fund, Inc. were made by Principal Life Insurance Company (formerly known as
Principal Mutual Life Insurance Company) (see Note 3). Effective December 31,
1997, Principal Real Estate Fund, Inc. and Principal SmallCap Fund, Inc. each
began offering Class A and Class B shares to the public and Class R shares to
eligible purchasers.
Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions made within six years
of purchase. Class R shares are sold without an initial sales charge and are not
subject to a CDSC. Class B shares and Class R shares bear higher ongoing
distribution fees than Class A shares. Class B shares automatically convert into
Class A shares, based on relative net asset value (without a sales charge) after
seven years. Class R shares automatically convert into Class A shares, based on
relative net asset value (without a sales charge) after four years. All classes
of shares for each fund represent interests in the same portfolio of
investments, and will vote together as a single class except where otherwise
required by law or as determined by each of the Domestic Growth Funds'
respective Board of Directors. In addition, the Board of Directors of each fund
declares separate dividends on each class of shares.
The Domestic Growth Funds allocate daily all income, expenses (other than
class-specific expenses), and realized and unrealized gains or losses to each
class of shares based upon the relative proportion of the value of shares
outstanding of each class. Expenses specifically attributable to a particular
class are charged directly to such class. Class-specific expenses charged to
each class during the periods ended October 31, 1998, which are included in the
corresponding captions of the Statement of Operations, were as follows:
<TABLE>
<CAPTION>
Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees
Class A Class B Class R Class A Class B Class R Class A Class B Class R
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Balanced Fund, Inc. 241,795 140,18 115,035 121,030 28,933 25,380 12,833 7,101 9,962
Principal Blue Chip Fund, Inc. 265,449 247,915 190,876 139,580 44,191 36,727 31,197 11,989 13,307
Principal Capital Value Fund, Inc. 789,870 296,909 226,695 341,696 59,885 54,503 36,224 16,356 13,383
Principal Growth Fund, Inc. 790,328 367,515 188,166 450,403 95,041 46,878 30,541 10,811 11,436
Principal MidCap Fund, Inc. 869,425 483,775 171,906 516,585 123,162 59,007 26,629 13,205 11,889
Principal Real Estate Fund, Inc. 13,607 16,949 3,390 2,520 1,036 403 1,700 287 1,684
Principal SmallCap Fund, Inc. 40,552 30,209 4,288 15,514 4,511 1,153 1,401 1,201 102
Principal Utilities Fund, Inc. 191,411 82,003 20,867 78,984 13,075 6,383 10,105 7,256 7,035
</TABLE>
The Domestic Growth Funds value securities for which market quotations are
readily available at market value, which is determined using the last reported
sale price or, if no sales are reported, as is regularly the case for some
securities traded over-the-counter, the last reported bid price. When reliable
market quotations are not considered to be readily available, which may be the
case, for example, with respect to certain debt securities and preferred stocks,
the investments are valued by using prices provided by market makers or
estimates of market values obtained from yield data and other factors relating
to instruments or securities with similar characteristics in accordance with
procedures established in good faith by each fund's Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market.
The Domestic Growth Funds record investment transactions generally one day after
the trade date, except for short-term investment transactions which are recorded
generally on the trade date. The identified cost basis has been used in
determining the net realized gain or loss from investment transactions and
unrealized appreciation or depreciation of investments. The Domestic Growth
Funds record dividend income on the ex-dividend date. Interest income is
recognized on an accrual basis.
The Domestic Growth Funds may, pursuant to an exemptive order issued by the
Securities and Exchange Commission, transfer uninvested funds into a joint
trading acount. The order permits the Domestic Growth Funds' cash balances to be
deposited into a single joint account along with the cash of other registered
investment companies managed by Principal Management Corporation (formerly known
as Princor Management Corporation) (the "Manager"). These balances may be
invested in one or more short-term instruments.
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Dividends and distributions to shareholders from net investment income and
net realized gain from investments are determined in accordance with federal 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 Principal MidCap Fund,
Inc. and Principal SmallCap Fund, Inc. for the year ended October 31, 1998
aggregated $1,172,263 and $268,657 respectively. Other reclassifications made
for the periods ended October 31, 1998 and 1997 were not material.
Dividends and distributions which exceed net investment income and net realized
capital gains for financial reporting purposes, but not for tax purposes, are
reported as dividends in excess of net investment income or distributions in
excess of net realized capital gains. To the extent distributions exceed current
and accumulated earnings and profits for federal income tax purposes, they are
reported as return of capital distributions.
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 approximates that used for financial
reporting purposes.
At October 31, 1998, the Domestic Growth Funds had approximate net capital loss
carryforwards as follows:
<TABLE>
<CAPTION>
Principal Principal Principal Principal
Growth MidCap Real Estate SmallCap
Net Capital Loss Carryforwards Expire In: Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C> <C>
2006 $4,471,000 $398,000 $613,000 $1,227,000
</TABLE>
Note 3 -- Management Agreement and Transactions With Affiliates
The Domestic Growth Funds have agreed to pay investment advisory and management
fees to Principal Management Corporation (wholly owned by Princor Financial
Services Corporation, a subsidiary of Principal Life Insurance Company) computed
at an annual percentage rate of each fund's average daily net assets. The annual
rate used in this calculation for the Domestic Growth Funds is as follows:
<TABLE>
<CAPTION>
Net Asset Value of Funds
(in millions)
First Next Next Next Over
$100 $100 $100 $100 $400
<S> <C> <C> <C> <C> <C>
Principal Balanced Fund, Inc. 0.60% 0.55% 0.50% 0.45% 0.40%
Principal Blue Chip Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Principal Capital Value Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Principal Growth Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Principal MidCap Fund, Inc. 0.65% 0.60% 0.55% 0.50% 0.45%
Principal Real Estate Fund, Inc. 0.90% 0.85% 0.80% 0.75% 0.70%
Principal SmallCap Fund, Inc. 0.85% 0.80% 0.75% 0.70% 0.65%
Principal Utilities Fund, Inc. 0.60% 0.55% 0.50% 0.45% 0.40%
</TABLE>
The Domestic Growth Funds also reimburse the Manager for transfer and
administrative services, including the cost of accounting, data processing,
supplies and other services rendered.
The Manager voluntarily waived a portion of its fee for the Principal Utilities
Fund, Inc. The waivers are in amounts that maintain total operating expenses
within certain limits. The limits are expressed as a percentage of average net
assets attributable to each class on an annualized basis during the reporting
period. The amount waived and the operating expense limits, which were
maintained at or below those shown, are as follows:
<TABLE>
<CAPTION>
Amount Waived
Year Ended Year Ended Expense
October 31, 1998 October 31, 1997 Limit
Principal Utilities Fund, Inc.
<S> <C> <C> <C>
Class A $60,477 $65,940 1.15%
Class B 9,557 3,753 1.95%
Class R 12,481 9,355 1.65%
</TABLE>
The Manager ceased its waiver of expenses October 31, 1998.
Princor Financial Services Corporation, as principal underwriter, receives
proceeds of any CDSC on certain Class A and Class B share redemptions. The
charge is based on declining rates which for Class A shares begin at .75%, and
for Class B shares at 4.00%, of the lesser of the current market value or the
cost of shares being redeemed. Princor Financial Services Corporation also
retains sales charges on sales of Class A shares based on declining rates which
begin at 4.75% of the offering price. The aggregate amount of these charges
retained, by fund, for the periods ended October 31, 1998 were as follows:
Class A Class B
Principal Balanced Fund, Inc. $ 682,760 $ 33,555
Principal Blue Chip Fund, Inc. 1,172,738 57,361
Principal Capital Value Fund, Inc. 1,691,500 77,543
Principal Growth Fund, Inc. 1,990,628 89,098
Principal MidCap Fund, Inc. 2,295,383 152,254
Principal Real Estate Fund, Inc. 52,363 917
Principal SmallCap Fund, Inc. 397,232 1,159
Principal Utilities Fund, Inc. 302,546 36,807
No brokerage commissions were paid by the Domestic Growth Funds to Princor
Financial Services Corporation during the periods ended October 31, 1998 and
1997. Brokerage commissions were paid to other affiliates by the following
funds:
Periods Ended Year Ended
October 31, 1998 October 31, 1997
Principal Balanced Fund, Inc. $ 6,080 $15,194
Principal Blue Chip Fund, Inc. 2,315 21,243
Principal Capital Value Fund, Inc. 32,675 17,016
Principal Growth Fund, Inc. 18,750 4,637
Principal MidCap Fund, Inc. 7,716 3,750
Principal Real Estate Fund, Inc. 14,745 --
Principal SmallCap Fund, Inc. 1,050 --
Principal Utilities Fund, Inc. 3,235 4,665
The Domestic Growth Funds bear distribution and shareholder servicing fees with
respect to Class A shares computed at an annual rate of up to .25% of the
average daily net assets attributable to Class A shares of each fund. Each of
the Domestic Growth Funds adopted a distribution plan with respect to Class B
shares that provides for distribution and shareholder servicing fees computed at
an annual rate of up to 1.00% of the average daily net assets attributable to
Class B shares of each fund. Each of the Domestic Growth Funds adopted a
distribution plan with respect to Class R shares that provides for distribution
and shareholder servicing fees computed at an annual rate of up to .75% of the
average daily net assets attributable to Class R shares of each fund.
Distribution and shareholder servicing fees are paid to Princor Financial
Services Corporation; a portion of the fees are subsequently remitted to retail
dealers. Pursuant to the distribution agreements, fees unused by the principal
underwriter at the end of the fiscal year are returned to the Domestic Growth
Funds.
At October 31, 1998, Principal Life Insurance Company, subsidiaries of Principal
Life Insurance Company and benefit plans sponsored on behalf of Principal Life
Insurance Company owned shares of the Domestic Growth Funds as follows:
Class A Class B Class R
Principal Balanced Fund, Inc. 56,947 111 2,661
Principal Blue Chip Fund, Inc. 64,478 99 71
Principal Capital Value Fund, Inc. 5,004,324 71 52
Principal Growth Fund, Inc. 37,577 37 27
Principal MidCap Fund, Inc. 46,739 45 32
Principal Real Estate Fund, Inc. 409,528 306,709 307,067
Principal SmallCap Fund, Inc. 400,425 300,319 300,319
Principal Utilities Fund, Inc. 85,553 123 92
Note 4 -- Investment Transactions
For the periods ended October 31, 1998, the cost of investment securities
purchased and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the Domestic Growth Funds were as
follows:
Purchases Sales
Principal Balanced Fund, Inc. $ 86,937,874 $ 29,929,482
Principal Blue Chip Fund, Inc. 54,535,363 735,207
Principal Capital Value Fund, Inc. 167,160,767 138,801,462
Principal Growth Fund, Inc. 144,105,468 89,116,523
Principal MidCap Fund, Inc. 131,971,760 106,338,131
Principal Real Estate Fund, Inc. 18,328,496 5,192,357
Principal SmallCap Fund, Inc. 35,175,646 3,215,257
Principal Utilities Fund, Inc. 12,674,891 10,367,659
At October 31, 1998, net unrealized appreciation (depreciation) of investments
by the Domestic Growth Funds was composed of the following:
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
Gross Unrealized (Depreciation)
Appreciation (Depreciation) of Investments
<S> <C> <C> <C>
Principal Balanced Fund, Inc. $ 17,834,181 $ (2,893,482) $ 14,940,699
Principal Blue Chip Fund, Inc. 44,720,024 (7,069,570) 37,650,454
Principal Capital Value Fund, Inc. 179,712,466 (15,702,716) 164,009,750
Principal Growth Fund, Inc. 197,621,764 (2,981,144) 194,640,620
Principal MidCap Fund, Inc. 135,193,328 (38,614,680) 96,578,648
Principal Real Estate Fund, Inc. 55,032 (1,450,339) (1,395,307)
Principal SmallCap Fund, Inc. 2,447,869 (5,835,747) (3,387,878)
Principal Utilities Fund, Inc. 30,487,207 (533,531) 29,953,676
</TABLE>
The Domestic Growth Funds' investments are with various issuers in various
industries. The Schedules of Investments contained herein summarize
concentrations of credit risk by issuer and industry.
Note 5 -- Capital Share Transactions
Transactions in Capital Stock by fund were as follows:
<TABLE>
<CAPTION>
Principal Principal Principal Principal
Balanced Blue Chip Capital Value Growth
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Year Ended October 31, 1998:
Shares sold:
<S> <C> <C> <C> <C>
Class A ......................................... 1,578,648 2,196,999 2,383,996 1,435,543
Class B ......................................... 531,549 749,555 582,574 414,689
Class R ......................................... 764,170 893,287 717,506 290,030
Shares issued in reinvestment of dividends
and distributions:
Class A ........................................... 551,343 445,659 1,687,027 219,136
Class B ........................................... 75,490 102,886 91,259 26,054
Class R ......................................... 70,471 89,024 70,217 10,249
Shares redeemed:
Class A ......................................... (952,391) (760,092) (2,537,205) (888,842)
Class B ......................................... (153,016) (171,471) (148,042) (121,844)
Class R ......................................... (202,139) (231,149) (186,811) (76,609)
Net Increase 2,264,125 3,314,698 2,660,521 1,308,406
Year Ended October 31, 1997:
Shares sold:
Class A ......................................... 1,484,901 1,757,696 2,094,307 1,188,640
Class B ......................................... 394,660 585,899 569,099 315,097
Class R ......................................... 632,661 734,050 600,469 296,077
Shares issued in reinvestment of dividends
and distributions:
Class A ........................................... 521,642 97,219 2,633,617 89,929
Class B ........................................... 50,747 11,785 61,682 5,779
Class R ......................................... 15,156 5,263 16,393 863
Shares redeemed:
Class A ......................................... (1,197,833) (495,337) (3,785,181) (760,739)
Class B ......................................... (65,006) (73,924) (64,340) (91,289)
Class R ......................................... (57,684) (62,702) (58,005) (23,813)
Net Increase 1,779,244 2,559,949 2,068,041 1,020,544
Principal Principal Principal Principal
MidCap Real Estate SmallCap Utilities
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Periods Ended October 31, 1998, Except as Noted:
Shares sold:
Class A ......................................... 1,891,397 684,793 2,291,199 853,517
Class B ......................................... 593,857 377,186 817,321 286,360
Class R ......................................... 327,198 346,800 610,143 172,466
Shares issued in reinvestment of dividends
and distributions:
Class A ........................................... 188,881 13,045 425 130,341
Class B ........................................... 34,300 7,946 319 12,065
Class R ......................................... 10,456 7,688 319 3,932
Shares redeemed:
Class A ......................................... (1,383,727) (43,437) (105,453) (928,474)
Class B ......................................... (215,454) (12,937) (26,447) (144,160)
Class R ......................................... (127,550) (6,048) (55,649) (48,307)
Net Increase 1,319,358 1,375,036 3,532,177 337,740
Year Ended October 31, 1997:
Shares sold:
Class A ......................................... 1,925,742 N/A N/A 442,282
Class B ......................................... 622,365 N/A N/A 182,586
Class R ......................................... 363,949 N/A N/A 114,303
Shares issued in reinvestment of dividends
and distributions:
Class A ........................................... 223,920 N/A N/A 179,204
Class B ........................................... 27,006 N/A N/A 13,766
Class R ......................................... 2,629 N/A N/A 2,382
Shares redeemed:
Class A ......................................... (920,261) N/A N/A (1,312,610)
Class B ......................................... (125,040) N/A N/A (133,160)
Class R ......................................... (36,211) N/A N/A (23,006)
Net Increase (Decrease) 2,084,099 (534,253)
</TABLE>
Note 6 -- Line of Credit
The Domestic Growth Funds participate with other funds and portfolios managed by
Principal Management Corporation in an unsecured joint line of credit with a
bank, which allows the funds to borrow up to $60,000,000, collectively.
Borrowings are made solely to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Interest is charged to each fund,
based on its borrowings, at a rate equal to the Fed Funds Rate plus .50%.
Additionally, a commitment fee is charged at the annual rate of .08% on the
average unused portion of the line of credit. The commitment fee is allocated
among the participating funds and portfolios in proportion to their average net
assets during each quarter. At October 31, 1998, the Domestic Growth Funds had
no outstanding borrowings under the line of credit.
Note 7 -- Year 2000 Problem (Unaudited)
Like other mutual funds, financial and business organizations and individuals
around the world, the Domestic Growth Funds could be adversely affected if the
computer systems used by the Manager and other service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." The Manager is
taking steps it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems it uses and to obtain reasonable
assurances that comparable steps are being taken by each fund's other major
service providers. At this time, however there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the funds.
October 31, 1998
SCHEDULES OF INVESTMENTS
GROWTH FUNDS (DOMESTIC)
PRINCIPAL BALANCED FUND, INC.
Shares
Held Value
Common Stocks (54.08%)
Auto & Home Supply Stores (0.71%)
Autozone, Inc. 38,700(a) $ 1,018,294
Bakery Products (0.37%)
Sara Lee Corp. 8,900 531,219
Beverages (0.87%)
Pepsico, Inc. 36,700 1,238,625
Business Credit Institutions (0.19%)
Associates First Capital `A' 3,840 270,720
Chemicals & Allied Products (0.51%)
Dow Chemical Co. 7,800 730,275
Commercial Banks (4.50%)
BankAmerica Corp. 15,500 890,281
BankBoston Corp. 19,200 706,800
Bankers Trust Corp. 12,500 785,156
Chase Manhattan Corp. 14,700 835,144
First Union Corp. 21,292 1,234,936
Fleet Financial Group, Inc. 29,400 1,174,162
PNC Financial Corp. 15,900 795,000
6,421,479
Commercial Printing (0.70%)
R. R. Donnelley & Sons Co. 23,100 996,188
Communications Equipment (0.35%)
General Instrument Corp. 19,600(a) 503,475
Computer & Data Processing
Services (2.46%)
Adobe Systems, Inc. 23,700 879,862
Electronic Data Systems Corp. 37,600 1,529,850
First Data Corp. 41,600 1,102,400
3,512,112
Computer & Office Equipment (2.84%)
3COM Corp. 14,200(a) 512,087
Compaq Computer Corp. 26,900 850,712
Hewlett-Packard Co. 16,700 1,005,131
International Business
Machines Corp. 11,300 1,677,344
4,045,274
Consumer Products (2.71%)
Fortune Brands, Inc. 34,300 1,134,044
UST, Inc. 29,500 1,003,000
RJR Nabisco Holdings Corp. 11,000 314,187
Philip Morris Cos., Inc. 27,700 1,416,162
3,867,393
Crude Petroleum & Natural Gas (1.35%)
Texaco, Inc. 32,500 1,927,656
Department Stores (0.62%)
Dillard's, Inc., Class A 28,600 888,388
Drugs (4.23%)
Abbott Labs 14,200 666,512
American Home Products Corp. 23,900 1,165,125
Johnson & Johnson 19,200 1,564,800
Merck & Co., Inc. 13,100 1,771,775
Pharmacia & Upjohn, Inc. 16,500 873,469
6,041,681
Electric Services (2.66%)
Central & Southwest Corp. 51,500 1,432,344
Dominion Resources, Inc. 19,900 919,131
Houston Industries, Inc. 26,700 829,369
Potomac Electric Power Co. 23,400 612,787
3,793,631
Electrical Industrial Apparatus (0.82%)
Emerson Electric Co. 17,800 1,174,800
Electronic Distribution Equipment (0.56%)
General Electric Co. 9,100 796,250
Fats & Oils (0.74%)
Archer Daniels Midland Co. 63,193 1,054,533
Federal & Federally-Sponsored
Credit (0.32%)
Federal National Mortgage Association 6,400 453,200
Fire, Marine & Casualty Insurance (2.99%)
Citigroup, Inc. 19,100 898,894
General Re Corp. 5,100 1,120,406
Loews Corp. 12,800 1,202,400
Safeco Corp. 24,300 1,052,494
4,274,194
General Industrial Machinery (0.80%)
Pall Corp. 45,500 1,148,875
Tyco International Ltd. 1 47
1,148,922
Grain Mill Products (0.83%)
Ralston-Ralston Purina Group 35,400 1,181,475
Groceries & Related Materials (1.00%)
Sysco Corp. 53,200 1,433,075
Grocery Stores (1.71%)
Albertson's, Inc. 17,700 983,456
American Stores Co. 44,900 1,462,056
2,445,512
Industrial Inorganic Chemicals (0.53%)
Eastman Chemical Co. 4,850 284,938
Praxair Inc. 11,800 474,950
759,888
Jewlery, Silverware & Plated Ware (0.13%)
Jostens, Inc. 8,400 189,525
Life Insurance (0.43%)
Lincoln National Corp. 8,100 614,588
Machinery, Equipment & Supplies (0.83%)
Grainger (W. W.), Inc. 25,600 1,179,200
Management & Public Relations (0.45%)
Dun & Bradstreet Corp. 22,500 638,438
Meat Products (0.98%)
Tyson Foods, Inc. 60,850 1,399,550
Medical Instruments & Supplies (0.67%)
St. Jude Medical, Inc. 33,850(a) 956,263
Medical Services & Health
Insurance (1.68%)
Aon Corp. 11,400 706,800
Conseco, Inc. 18,100 627,844
Pacificare Health Systems,
Inc., Class B 13,600(a) 1,071,000
2,405,644
Metal Forgings & Stampings (0.47%)
Newell Co. 15,100 664,400
Miscellaneous Converted Paper
Products (0.81%)
Minnesota Mining & Mfg. Co. 14,400 1,152,000
Miscellaneous Food & Kindred
Products (0.43%)
Universal Foods Corp. 28,600 620,263
Miscellaneous Transportation
Equipment (0.44%)
FMC Corp. 12,400(a) 633,175
Motor Vehicles & Equipment (0.56%)
Ford Motor Co. 14,654 794,979
Paper Mills (1.81%)
Fort James Corp. 16,962 683,781
Kimberly Clark Corp. 30,800 1,486,100
Union Camp Corp. 9,600 412,800
2,582,681
Petroleum Refining (3.44%)
Amerada Hess Corp. 17,500 966,875
Amoco Corp. 22,300 1,251,587
Atlantic Richfield Co. 19,700 1,356,838
Exxon Corp. 18,800 1,339,500
4,914,800
Plumbing & Heating (0.14%)
Masco Corp. 7,200 202,950
Pulp Mills (0.37%)
Boise Cascade Corp. 18,900 529,200
Rubber & Plastics Footwear (0.46%)
Nike, Inc. 14,900 650,944
Sanitary Services (1.75%)
Browning-Ferris Industries, Inc. 24,800 878,850
Waste Management, Inc. 35,742 1,612,858
2,491,708
Security Brokers & Dealers (0.19%)
Bear Stearns Cos., Inc. 7,500 267,656
Telephone Communication (2.36%)
AT&T Corp. 13,800 859,050
GTE Corp. 18,600 1,091,587
Motorola, Inc. 19,200 998,400
SBC Communications, Inc. 9,100 421,444
3,370,481
Variety Stores (0.31%)
Wal-Mart Stores, Inc. 6,400 441,600
Total Common Stocks 77,208,304
Principal
Amount Value
Bonds (31.22%)
Beverages (0.70%)
Seagram Co., Ltd.
Notes; 6.50%; 4/1/2003 $1,000,000 1,007,195
Blast Furnace & Basic
Steel Products (0.76%)
Carpenter Technology Corp.
Medium-Term Notes;
6.99%; 4/20/2018 800,000 794,285
Quanex Corp. Convertible
Subordinated Debentures;
6.88%; 6/30/2007 350,000 309,750
1,104,035
Business Credit Institutions (2.20%)
CIT Group Holdings
Senior Medium-Term Notes;
6.38%; 10/1/2002 1,000,000 1,019,533
Ford Motor Credit Co. Notes;
7.75%; 3/15/2005 1,000,000 1,108,054
Heller Financial, Inc. Notes;
6.44%; 10/6/2002 1,000,000 1,004,575
3,132,162
Commercial Banks (0.99%)
NationsBank Corp.
Subordinated Notes;
7.80%; 9/15/2016 1,300,000 1,415,406
Communications Equipment (1.00%)
Motorola, Inc.
Debentures;
7.50%; 5/15/2025 1,291,000 1,431,487
Computer & Office Equipment (1.51%)
International Business Machines Corp.
Debentures;
7.00%; 10/30/2025 1,300,000 1,412,437
Seagate Technology, Inc.
Senior Notes;
7.37%; 3/1/2007 750,000 748,074
2,160,511
Consumer Products (1.39%)
Philip Morris Cos., Inc. Notes;
7.25%; 9/15/2001 1,500,000 1,579,070
6.15%; 3/15/2010 400,000 404,384
1,983,454
Department Stores (0.82%)
Dillard's, Inc.
Notes; 7.38%; 6/1/2006 600,000 639,737
Fred Meyer, Inc. Senior Notes;
7.38%; 3/1/2005 500,000 526,855
1,166,592
Electric Services (0.75%)
Virginia Electric & Power Co.
First Mortgage Bond;
7.38%; 7/1/2002 1,000,000 1,069,860
Farm & Garden Machinery (0.85%)
Deere & Co.
Senior Debentures;
8.50%; 1/9/2022 $1,000,000 1,210,995
Forest Products (0.68%)
Weyerhaeuser Co.
Debentures;
6.95%; 10/1/2027 1,000,000 971,997
Functions Closely Related to
Banking (0.94%)
J.P. Morgan & Co., Inc.
Subordinated Notes;
6.70%; 11/01/2007 1,300,000 1,338,949
General Government (1.13%)
Province of Quebec, Canada
Debentures;
7.50%; 7/15/2002 500,000 536,180
7.00%; 1/30/2007 1,000,000 1,076,580
1,612,760
General Industrial Machinery (1.10%)
Ingersoll-Rand
Medium-Term Notes;
6.46%; 11/19/2003 1,000,000 1,042,574
Timken Co.
Medium-Term Notes;
7.30%; 8/13/2002 500,000 532,203
1,574,777
Miscellaneous Investing (1.76%)
Federal Realty Investment Trust Notes;
8.88%; 1/15/2000 1,000,000 1,039,864
Kimco Realty Corp. Senior Notes;
6.50%; 10/1/2003 1,500,000 1,465,956
2,505,820
Mortgage Bankers & Brokers (0.71%)
Countrywide Funding Corp.
Medium-Term Notes;
6.54%; 4/14/2000 1,000,000 1,011,842
Motion Picture Production &
Services (0.38%)
Viacom, Inc.
Guaranteed Senior Notes;
7.75%; 6/1/2005 500,000 541,852
Motor Vehicles & Equipment (2.04%)
Chrysler Corp. Debentures;
7.45%; 3/1/2027 1,400,000 1,535,401
General Motors Corp. Debentures;
7.70%; 4/15/2016 1,250,000 1,380,664
2,916,065
Paper & Paper Products (0.33%)
Boise Cascade Office Products Corp.
Notes; 7.05%; 5/15/2005 500,000 471,235
Paper Mills (0.71%)
International Paper Co. Notes;
6.88%; 7/10/2000 1,000,000 1,018,075
Personal Credit Institutions (1.47%)
Associates Corp. of North America
Senior Notes; 6.45%; 10/15/2001 1,000,000 1,026,550
General Electric Capital Corp.
Notes; 6.50%; 11/1/2026 1,000,000 1,065,532
2,092,082
Petroleum & Petroleum Products (0.74%)
Enron Corp. Notes;
6.75%; 9/1/2004 1,000,000 1,051,830
Plumbing & Heating, Except
Electricity (0.73%)
Masco Corp. Notes;
6.13%; 9/15/2003 1,000,000 1,037,319
Railroads (1.62%)
Norfolk Southern Debentures;
9.00%; 3/1/2021 1,000,000 1,282,295
Union Pacific Corp. Notes;
7.00%; 6/15/2000 1,000,000 1,023,642
2,305,937
Security Brokers & Dealers (2.18%)
Lehman Brothers, Inc.
Senior Subordinated Notes;
6.13%; 2/1/2001 1,000,000 989,724
Merrill Lynch & Co.
Notes; 7.00%; 1/15/2007 1,000,000 1,017,921
Morgan Stanley Group, Inc.
Debentures; 8.88%; 10/15/2001 1,000,000 1,095,804
3,103,449
Surety Insurance (2.10%)
Allstate Corp.
Debentures; 6.75%; 5/15/2018 2,000,000 1,961,674
MBIA, Inc.
Debentures; 7.00%; 12/15/2025 1,000,000 1,037,524
2,999,198
Telephone Communication (0.80%)
AT&T Corp.
Senior Notes; 7.75%; 3/1/2007 1,000,000 1,146,477
Trucking & Courier Services,
Except Air (0.04%)
Builders Transport, Inc. Convertible
Subordinated Debentures;
6.50%; 5/1/2011 306,000(b) 59,670
Trusts (0.79%)
Salomon Smith Barney Holdings, Inc.
Notes; 7.98%; 3/1/2000 1,100,000 1,131,938
Total Bonds 44,572,969
Description of Issue Principal
Type Rate Maturity Amount Value
Federal Home Loan Mortgage Corporation (FHLMC)
Certificates (2.63%)
FHLMC 6.50% 10/1/2027 $1,891,366 $1,906,535
FHLMC 7.00 12/1/2027 1,816,008 1,852,474
Total FHLMC Certificates 3,759,009
Government National Mortgage Association (GNMA)
Certificates (3.03%)
GNMA II 6.00 6/20/2026-9/20/2028 4,403,248 4,331,792
Principal
Amount Value
U.S. Government Treasury Note (1.53%)
Treasury Note (1.53%)
6.00%; 2/15/2026 $2,000,000 $ 2,184,376
Asset-Backed Securities (2.10%)
Motor Vehicles & Equipment (1.39%)
GMAC Commercial Mortgage Securities,
Inc. Mortgage Pass-Through Certificates,
Series 1998-C2, Class C; 6.50%;
8/15/2008 2,000,000 1,975,460
Personal Credit Institutions (0.72%)
Chase Manhattan Credit Card Master Trust
Asset-Backed Certificates, Series 97-2,
Class A; 6.30%; 4/15/2003 1,000,000 1,024,250
Total Asset-Backed Securities 2,999,710
Commercial Paper (3.59%)
Personal Credit Institutions (3.59%)
Investment in Joint Trade Account;
Associates Corp.;
5.72%; 11/2/1998 5,128,768 5,128,768
Total Portfolio Investments (98.18%) 140,184,928
Cash, receivables and other assets,
net of liabilities (1.82%) 2,592,739
Total Net Assets (100.00%) $142,777,677
(a) Non-income producing security - No dividend paid during the period.
(b) Non-income producing - Security in default.
PRINCIPAL BLUE CHIP FUND, INC.
Shares
Held Value
Common Stocks (96.06%)
Bakery Products (3.27%)
Sara Lee Corp. 106,200 $ 6,338,812
Beverages (5.55%)
Anheuser-Busch Cos., Inc. 111,300 6,615,394
Pepsico, Inc. 122,600 4,137,750
10,753,144
Commercial Banks (4.20%)
Bank One Corp. 85,419 4,174,854
J.P. Morgan & Co., Inc. 42,000 3,958,500
8,133,354
Computer & Office Equipment (6.08%)
Automatic Data Processing, Inc. 74,300 5,781,469
Hewlett-Packard Co. 99,700 6,000,694
11,782,163
Drugs (12.10%)
American Home Products Corp. 111,100 5,416,125
Johnson & Johnson 74,800 6,096,200
Merck & Co., Inc. 44,800 6,059,200
Pharmacia & Upjohn, Inc. 111,000 5,876,063
23,447,588
Eating & Drinking Places (3.04%)
McDonald's Corp. 88,000 5,885,000
Electronic Distribution Equipment (5.52%)
Emerson Electric Co. 77,300 5,101,800
General Electric Co. 64,000 5,600,000
10,701,800
Fire, Marine & Casualty Insurance (4.91%)
American International Group 57,375 4,891,219
Chubb Corp. 75,300 4,630,950
9,522,169
General Industrial Machinery (3.01%)
Pall Corp. 231,200 5,837,800
Grain Mill Products (2.36%)
Kellogg Co. 138,500 4,570,500
Grocery Stores (3.31%)
Sysco Corp. 238,200 6,416,512
Medical Instruments & Supplies (3.16%)
Becton, Dickinson & Co. 145,200 6,116,550
Metal Cans & Shipping Containers (2.39%)
Crown Cork & Seal Co., Inc. 145,400 4,634,625
Miscellaneous Converted Paper
Products (2.20%)
Minnesota Mining & Mfg. Co. 53,400 4,272,000
Miscellaneous Food & Kindered
Products (2.70%)
Bestfoods 96,000 5,232,000
Miscellaneous Shopping Goods (1.90%)
Toys `R' Us, Inc. 188,700(a) 3,691,444
Petroleum Refining (7.75%)
Exxon Corp. 83,100 5,920,875
Mobil Corp. 63,000 4,768,312
Royal Dutch Petroleum Co. ADR 88,100 4,338,925
15,028,112
Preserved Fruits & Vegetables (2.54%)
H.J. Heinz Co. 84,900 4,934,812
Sanitary Services (2.51%)
Browning-Ferris Industries, Inc. 137,100 4,858,481
Sugar & Confectionery Products (2.95%)
Wrigley Wm. Jr. Co. 70,600 5,714,187
Telephone Communication (8.89%)
AT&T Corp. 90,300 5,621,175
GTE Corp. 112,900 6,625,819
Motorola, Inc. 95,800 4,981,600
17,228,594
Variety Stores (3.59%)
Wal-Mart Stores, Inc. 100,800 6,955,200
Women's Clothing Stores (2.13%)
The Limited, Inc. 161,100 4,128,188
Total Common Stocks 186,183,035
Principal
Amount Value
Commercial Paper (3.50%)
Personal Credit Institutions (3.50%)
Investment in Joint Trade Account;
Associates Corp.; 5.72%; 11/2/1998 6,792,570 6,792,570
Total Portfolio Investments (99.56%) 192,975,605
Cash, receivables and other assets,
net of liabilities (0.44%) 858,926
Total Net Assets (100.00%) $193,834,531
(a) Non-income producing security - No dividend paid during the period.
PRINCIPAL CAPITAL VALUE FUND, INC.
Shares
Held Value
Common Stocks (95.46%)
Beverages (3.29%)
Anheuser-Busch Cos., Inc. 285,000 16,939,688
Pepsico, Inc. 129,700 4,377,375
21,317,063
Commercial Banks (18.75%)
Bank One Corp. 324,764 15,872,840
BankAmerica Corp. 161,000 9,247,438
BankBoston Corp. 201,400 7,414,038
Chase Manhattan Corp. 200,000 11,362,500
Comerica, Inc. 270,000 17,415,000
First Union Corp. 320,760 18,604,080
KeyCorp 459,000 13,913,437
Summit Bancorp 364,500 13,828,219
Union Planters Corp. 296,100 13,750,144
121,407,696
Commercial Printing (1.03%)
R. R. Donnelley & Sons Co. 155,000 6,684,375
Communications Equipment (2.10%)
Harris Corp. 386,900 13,565,681
Computer & Office Equipment (1.60%)
Hewlett-Packard Co. 82,000 4,935,375
International Business Machines Corp. 36,600 5,432,813
10,368,188
Crude Petroleum & Natural Gas (1.75%)
Texaco, Inc. 190,600 11,304,962
Department Stores (2.24%)
Sears, Roebuck & Co. 322,300 14,483,356
Drugs (7.29%)
Abbott Labs 94,800 4,449,675
American Home Products Corp. 231,300 11,275,875
Merck & Co., Inc. 85,000 11,496,250
Pharmacia & Upjohn, Inc. 378,000 20,010,375
47,232,175
Electric Services (4.51%)
Dominion Resources, Inc. 98,200 4,535,612
FPL Group, Inc. 85,100 5,324,069
Houston Industries, Inc. 530,000 16,463,125
Potomac Electric Power Co. 110,000 2,880,625
29,203,431
Electrical Industrial Apparatus (1.24%)
Emerson Electric Co. 121,394 8,012,004
Electronic Distribution Equipment (1.09%)
General Electric Co. 81,000 7,087,500
Fats & Oils (1.06%)
Archer Daniels Midland Co. 410,550 6,851,053
General Industrial Machinery (1.28%)
Pall Corp. 329,300 8,314,825
Tyco International Ltd. 7 424
8,315,249
Grain Mill Products (2.35%)
Kellogg Co. 264,800 8,738,400
Ralston-Ralston Purina Group 195,000 6,508,125
15,246,525
Greeting Cards (2.29%)
American Greetings Corp. 369,100 14,810,137
Groceries & Related Products (1.75%)
Sysco Corp. 421,000 11,340,687
Grocery Stores (1.41%)
American Stores Co. 280,000 9,117,500
Life Insurance (2.31%)
American General Corp. 218,600 14,974,100
Machinery, Equipment & Supplies (1.28%)
Grainger (W. W.), Inc. 180,600 8,318,888
Management & Public Relations (1.19%)
Dun & Bradstreet Corp. 270,600 7,678,275
Meat Products (1.17%)
Tyson Foods, Inc. 329,550 7,579,650
Medical Services & Health
Insurance (1.07%)
Aon Corp. 111,900 6,937,800
Metal Cans & Shipping Containers (4.03%)
Ball Corp. 251,000 10,589,063
Crown Cork & Seal Co., Inc. 485,600 15,478,500
26,067,563
Metal Forgings & Stampings (0.68%)
Newell Co. 100,200 4,408,800
Miscellaneous Converted Paper
Products (3.94%)
Avery Dennison Corp. 301,600 12,497,550
Minnesota Mining & Mfg. Co. 162,600 13,008,000
25,505,550
Miscellaneous Food & Kindred
Products (0.32%)
Universal Foods Corp. 96,600 2,095,013
Paper Mills (2.54%)
Kimberly Clark Corp. 341,200 16,462,900
Petroleum Refining (6.39%)
Amoco Corp. 70,000 3,928,750
Atlantic Richfield Co. 204,600 14,091,825
Chevron Corp. 190,000 15,485,000
Exxon Corp. 110,100 7,844,625
41,350,200
Plumbing & Heating, Except
Electrical (2.80%)
Masco Corp. 643,000 18,124,562
Rental of Railroad Cars (2.56%)
GATX Corp. 480,000 16,560,000
Sanitary Services (2.30%)
Browning-Ferris Industries, Inc. 420,000 14,883,750
Telephone Communication (7.85%)
AT&T Corp. 245,500 15,282,375
SBC Communications, Inc. 395,280 18,306,405
US West, Inc. 300,000 17,212,500
50,801,280
Total Common Stocks 618,095,913
Principal
Amount Value
Commercial Paper (3.81%)
Personal Credit Institutions (3.81%)
Investment in Joint Trade Account,
Associates Corp.; 5.72%; 11/2/1998 24,691,459 24,691,459
Total Portfolio Investments (99.27%) 642,787,372
Cash and receivables, net of liabilities (0.73%) 4,704,835
Total Net Assets (100.00%) $647,492,207
PRINCIPAL GROWTH FUND, INC.
Shares
Held Value
Common Stocks (88.88%)
Advertising (1.19%)
Interpublic Group of Cos., Inc. 100,000 5,850,000
Beverages (2.90%)
Coca-Cola Co. 60,000 4,057,500
Pepsico, Inc. 302,500 10,209,375
14,266,875
Carpets & Rugs (0.71%)
Shaw Industries, Inc. 200,000 3,475,000
Cash Grains (1.71%)
Pioneer Hi-Bred International, Inc. 300,000 8,400,000
Commercial Banks (8.37%)
Bank One Corp. 178,500 8,724,188
BankAmerica Corp. 71,644 4,115,052
Firstar Corp. 150,000 8,512,500
FirstMerit Corp. 100,000 2,650,000
National City Corp. 72,000 4,630,500
Norwest Corp. 100,000 3,718,750
US Bancorp 240,000 8,760,000
41,110,990
Communications Equipment (3.69%)
General Instrument Corp. 175,000(a) 4,495,312
Lucent Technologies 90,000 7,216,875
Northern Telecom Ltd. (Foreign) 150,000 6,421,875
18,134,062
Computer & Data Processing
Services (2.58%)
Gtech Holdings Corp. 139,300(a) 3,343,200
Microsoft Corp. 88,000(a) 9,317,000
12,660,200
Computer & Office Equipment (5.56%)
Automatic Data Processing, Inc. 100,000 7,781,250
Ceridian Corp. 172,800(a) 9,914,400
Compaq Computer Corp. 67,567 2,136,806
Hewlett-Packard Co. 79,100 4,760,831
Pitney Bowes, Inc. 49,400 2,720,088
27,313,375
Consumer Products (1.32%)
Philip Morris Cos., Inc. 127,200 6,503,100
Department Stores (0.81%)
May Department Stores 65,000 3,965,000
Drugs (14.75%)
American Home Products Corp. 185,200 9,028,500
Bristol-Myers Squibb Co. 50,000 5,528,125
Forest Laboratories, Inc. 132,600(a) 5,544,338
Genzyme Corp. - General Division 100,756(a) 4,238,049
Johnson & Johnson 128,000 10,432,000
Lilly (Eli) & Co. 100,000 8,093,750
Merck & Co., Inc. 75,800 10,251,950
Pharmacia & Upjohn, Inc. 220,000 11,646,250
Smithkline Beecham PLC ADR 120,000 7,650,000
72,412,962
Electrical Goods (0.30%)
Avnet, Inc. 30,000 1,492,500
Electronic Components &
Accessories (3.49%)
Intel Corp. 132,000 11,772,750
Linear Technology Corp. 90,000 5,366,250
17,139,000
Electronic Distribution Equipment (0.71%)
General Electric Co. 40,000 3,500,000
Federal & Federally Sponsored
Credit (3.13%)
Federal Home Loan Mtg. 65,700 3,777,750
Federal National Mortgage
Association 163,600 11,584,925
15,362,675
Fire, Marine & Casualty Insurance (1.14%)
Citigroup, Inc. 118,650 5,583,966
Forest Products (0.09%)
Georgia Timber Group 20,000 443,750
General Industrial Machinery (3.72%)
Ingersoll-Rand Co. 105,000 5,302,500
Tyco International Ltd. 209,400 12,969,712
18,272,212
Grain Mill Products (2.89%)
General Mills, Inc. 50,000 3,675,000
Ralston-Ralston Purina Group 315,000 10,513,125
14,188,125
Groceries & Related Products (1.44%)
Sysco Corp. 262,800 7,079,175
Grocery Stores (0.12%)
Casey's General Stores, Inc. 42,104 589,456
Hospitals (1.92%)
Humana, Inc. 105,000(a) 1,988,437
Universal Health Services, Inc. 145,400(a) 7,460,838
9,449,275
Investment Offices (0.89%)
AMVESCAP PLC Sponsored ADR 120,000 4,395,000
Lumber & Other Building Materials (2.66%)
Home Depot, Inc. 300,000 13,050,000
Medical Instruments & Supplies (2.86%)
Becton, Dickinson & Co. 140,000 5,897,500
Boston Scientific Corp. 150,000(a) 8,165,625
14,063,125
Medical Services & Health
Insurance (2.60%)
Aon Corp. 60,000 3,720,000
Foundation Health Systems, Inc. 147,500(a) 1,733,125
Pacificare Health Systems, Inc. 28,540(a) 2,247,525
Torchmark Corp. 56,700 2,480,625
United Healthcare Corp. 60,000 2,613,750
12,795,025
Miscellaneous Converted Paper
Products (0.51%)
Minnesota Mining & Mfg. Co. 31,400 2,512,000
Miscellaneous Fabricated Metal
Products (0.75%)
Parker-Hannifin Corp. 103,350 3,694,763
Miscellaneous Food & Kindred
Products (0.55%)
Bestfoods 50,000 2,725,000
Motor Vehicles & Equipment (0.83%)
Dana Corp. 98,000 4,097,625
Petroleum Refining (2.05%)
Atlantic Richfield Co. 40,000 2,755,000
Exxon Corp. 102,600 7,310,250
10,065,250
Plumbing & Heating, Except
Electric (0.92%)
Masco Corp. 160,000 4,510,000
Radio, Television, & Computer
Stores (0.20%)
Tandy Corp. 20,000 991,250
Refrigeration & Service Machinery (0.42%)
Tecumseh Products Co. 40,000 2,080,000
Sanitary Services (1.07%)
Browning-Ferris Industries, Inc. 80,000 2,835,000
Waste Management, Inc. 53,945 2,434,268
5,269,268
Soap, Cleaners & Toilet Goods (3.06%)
Colgate-Palmolive Co. 80,000 7,070,000
Ecolab, Inc. 266,400 7,958,700
15,028,700
Sugar & Confectionery Products (0.91%)
Wrigley Wm. Jr. Co. 55,000 4,451,563
Telephone Communication (4.20%)
AT&T Corp. 103,730 6,457,193
MCI Worldcom, Inc. 256,829(a) 14,189,802
20,646,995
Toys & Sporting Goods (0.90%)
Mattel, Inc. 123,046 4,414,275
Women's & Children's
Undergarments (0.96%)
Warnaco Group 185,200 4,734,175
Total Common Stocks 436,715,712
Principal
Amount Value
Bond (0.50%)
Electrical Industrial Apparatus (0.50%)
Liebert Co.; Convertible Subordinated
Debentures; 8.00%; 11/15/2010 $ 500,000 $ 2,443,750
Commercial Paper (12.49%)
Business Credit Institutions (6.45%)
American Express Credit Corp.;
5.10%; 11/9/1998 5,190,000 5,184,118
5.10%; 11/16/1998 13,740,000 13,710,802
General Electric Capital Corp.
5.27%; 11/9/1998 9,955,000 9,943,342
5.08%; 11/16/1998 2,840,000 2,833,989
31,672,251
Personal Credit Institutions (6.04%)
Ford Motor Credit Co.
5.04%; 11/2/1998 485,000 484,932
5.28%; 11/2/1998 13,150,000 13,148,082
Household Finance Corp.
5.28%; 11/9/1998 490,000 489,425
5.10%; 11/23/1998 15,600,000 15,551,380
Investment in Joint Trade Account;
Associates Corp.;
5.72%; 11/2/1998 18,201 18,201
29,692,020
Total Commercial Paper 61,364,271
Total Portfolio Investments (101.87%) 500,523,733
Liabilities, net of cash, receivables and
other assets (-1.87%) $(9,203,584)
Total Net Assets (100.00%) $491,320,149
(a) Non-income producing security - No dividend paid during the period.
PRINCIPAL MIDCAP FUND, INC.
Shares
Held Value
Common Stocks (88.53%)
Blast Furnace & Basic Steel
Products (1.24%)
Carpenter Technology 150,000 $ 5,259,375
Carpets & Rugs (0.81%)
Shaw Industries, Inc. 198,700 3,452,412
Chemicals & Allied Products (0.29%)
Sigma-Aldrich Corp. 40,400 1,248,613
Commercial Banks (9.53%)
Associated Banc Corp. 167,535 5,884,667
First Federal Capital Corp. 328,796 5,014,139
Independent Bank Corp. Michigan 104,265 2,111,366
Mercantile Bancorp, Inc. 195,529 8,933,231
Merchants Bancorp, Inc. 116,200 3,486,000
North Fork Bancorp, Inc. 362,187 7,198,467
Peoples Heritage Financial
Group, Inc. 197,800 3,560,400
Princeton National Bancorp, Inc. 150,000 2,531,250
Summit Bancorp 46,950 1,781,166
40,500,686
Commercial Printing (0.34%)
Merrill Corp. 87,200 1,460,600
Computer & Data Processing
Services (9.19%)
American Management Systems, Inc. 101,000(a) 3,099,438
Cadence Design Systems, Inc. 177,700(a) 3,798,337
Cerner Corp. 238,900(a) 5,345,387
HBO & Co. 276,000 7,245,000
ICG Communications, Inc. 129,000(a) 2,668,688
Microsoft Corp. 73,200(a) 7,750,050
Synopsys, Inc. 201,900(a) 9,135,975
39,042,875
Computer & Office Equipment (3.58%)
3COM Corp. 150,000(a) 5,409,375
Cabletron Systems, Inc. 102,000(a) 1,160,250
EMC Corp. 134,000(a) 8,626,250
15,195,875
Construction & Related Machinery (0.61%)
Cooper Cameron Corp. 75,000(a) 2,606,250
Crude Petroleum & Natural Gas (2.46%)
Devon Energy Corp. 165,000 5,589,375
Newfield Exploration Co. 200,000(a) 4,862,500
10,451,875
Dairy Products (0.20%)
Dreyer's Grand Ice Cream, Inc. 65,400 858,375
Department Stores (1.24%)
Saks, Inc. 232,060(a) 5,279,365
Drugs (5.80%)
Centocor, Inc. 140,700(a) 6,261,150
Dura Pharmaceuticals, Inc. 282,000(a) 3,401,625
Genzyme Corp. - General Division 83,000(a) 3,491,187
Pharmacia & Upjohn, Inc. 75,700 4,007,369
Watson Pharmaceuticals 134,000(a) 7,453,750
24,615,081
Electronic Components &
Accessories (6.22%)
Altera Corp. 125,000(a) 5,203,125
Intel Corp. 70,300 6,269,881
Linear Technology Corp. 99,900 5,956,538
Solectron Corp. 157,300(a) 9,005,425
26,434,969
Engineering & Architectural
Services (1.15%)
Paychex, Inc. 98,043 4,877,639
Fabricated Rubber Products, NEC (2.02%)
Weatherford International 314,800 8,558,625
Fire, Marine & Casualty Insurance (0.94%)
Berkley W.R. Corp. 132,750 4,003,242
General Industrial Machinery (4.14%)
Flow International Corp. 187,200(a) 1,965,600
Kaydon Corp. 181,600 6,378,700
Pentair, Inc. 137,500 5,173,438
Roper Industries, Inc. 228,000 4,061,250
17,578,988
Grocery Stores (0.93%)
Casey's General Stores, Inc. 282,800 3,959,200
Holding Offices (0.64%)
ISB Financial Corp. 109,100 2,713,863
Hospitals (2.49%)
Humana, Inc. 249,300(a) 4,721,119
Universal Health Services,
Inc., Class B 114,000(a) 5,849,625
10,570,744
Hotels & Motels (0.88%)
Four Seasons Hotel, Inc. 163,100 3,751,300
Household Appliances (1.65%)
Maytag Corp. 141,300 6,985,519
Industrial Inorganic Chemicals (0.37%)
ICN Pharmaceuticals, Inc. 67,821 1,585,316
Industrial Machinery, NEC (1.58%)
Coltec Industries 401,000(a) 6,691,687
Insurance Agents, Brokers &
Services (1.82%)
Equifax, Inc. 200,000 7,737,500
Investment Offices (1.20%)
AMVESCAP PLC Sponsored ADR 138,920 5,087,945
Iron & Steel Foundries (0.25%)
Atchison Casting Corp. 111,100(a) 1,062,394
Laundry, Cleaning & Garment
Services (0.91%)
G&K Services, Inc. 84,600 3,870,450
Measuring & Controlling Devices (0.00%)
ISCO, Inc. 1 2
Meat Products (1.07%)
Michael Foods, Inc. 188,500 4,524,000
Medical Instruments & Supplies (2.24%)
Boston Scientific Corp. 68,100(a) 3,707,194
Steris Corp. 252,600(a) 5,809,800
9,516,994
Medical Services & Health
Insurance (4.65%)
Alternative Living Services 234,200(a) 6,118,475
Foundation Health Systems,
Inc., Class A 332,340(a) 3,904,995
Orthofix International NV 156,200(a) 1,991,550
Pacificare Health Systems,
Inc., Class B 51,391 4,047,041
United Healthcare Corp. 85,000 3,702,813
19,764,874
Miscellaneous Chemical Products (0.87%)
Cytec Industries 72,600(a) 1,742,400
H.B. Fuller Co. 47,500 1,953,437
3,695,837
Miscellaneous Investing (0.35%)
Cendant Corp. 129,938(a) 1,486,166
Office Furniture (0.55%)
Chromcraft Revington, Inc. 142,800(a) 2,311,575
Oil & Gas Field Service (1.08%)
Diamond Offshore Drilling 150,000 4,603,125
Operative Builders (1.41%)
D. R. Horton, Inc. 294,500 4,675,187
Pulte Corp. 50,400 1,297,800
5,972,987
Paints & Allied Products (0.79%)
RPM, Inc. 200,500 3,370,906
Personal Credit Institutions (0.16%)
Firstplus Financial Group 152,000(a) 674,500
Plumbing, Heating &
Air Conditioning (0.85%)
Apogee Enterprises, Inc. 343,700 3,608,850
Refrigeration & Service Machinery (0.31%)
Tecumseh Products Co. 25,200 1,310,400
Sanitary Services (1.75%)
Browning-Ferris Industries, Inc. 86,200 3,054,713
Republic Services, Inc., Class A 200,000(a) 4,375,000
7,429,713
Savings Institutions (4.86%)
Greenpoint Financial Corp. 190,000 6,234,375
Sterling Financial Corp. 124,133(a) 2,032,678
TCF Financial Corp. 333,100 7,848,669
WSFS Financial Corp. 265,000 4,538,125
20,653,847
Security Brokers & Dealers (0.75%)
Jefferies Group, Inc. 106,400 3,192,000
Telephone Communication (2.83%)
Hyperion Telecomm, Inc., Class A 300,000(a) 2,925,000
McLeodUSA, Inc. 171,300(a) 6,263,156
Winstar Communications, Inc. 105,000 2,835,000
12,023,156
Toys & Sporting Goods (0.66%)
Mattel, Inc. 78,050 2,800,044
Trucking & Courier Services,
Except Air (0.43%)
J.B. Hunt Transport Services, Inc. 109,900 1,840,825
Women's And Children's
Undergarments (0.44%)
Warnaco Group, Class A 73,612 1,881,707
Total Common Stocks 376,102,269
Principal
Amount Value
Bond (0.01%)
Management & Public Relations (0.01%)
Complete Management, Inc.
Convertible Debentures;
8.00%; 12/15/2003 $ 200,000 $ 39,750
Commercial Paper (12.43%)
Business Credit Institutions (2.22%)
American Express Credit Corp.;
5.10%;11/9/1998 5,365,000 5,358,920
General Electric Capital Corp.;
5.10%; 11/2/1998 1,915,000 1,914,729
5.45%; 11/6/1998 700,000 699,470
5.22%; 11/9/1998 555,000 554,356
5.08%; 11/16/1998 925,000 923,030
9,450,505
Personal Credit Institutions (10.21%)
Investment in Joint Trade Account;
Associates Corp.;
5.73%; 11/02/1998 $18,845,800 $18,845,800
Ford Motor Credit Co.;
5.28%; 11/02/1998 7,940,000 7,938,844
Household Finance Corp.;
5.09%; 11/16/1998 4,110,000 4,101,284
5.10%; 11/23/1998 12,520,000 12,480,979
43,366,907
Total Commercial Paper 52,817,412
Total Portfolio Investments (100.97%) 428,959,431
Liabilities, net of cash, receivables and
other assets (-0.97%) (4,119,592)
Total Net Assets (100.00%) $424,839,839
(a) Non-income producing security - No dividend paid during the period.
PRINCIPAL REAL ESTATE FUND, INC.
Shares
Held Value
Common Stocks (96.45%)
Apartment REITs (21.77%)
Archstone Comm. Trust 17,400 $ 350,175
Apartment Investment & Management Co. 4,300 150,231
Avalonbay Communities, Inc. 9,987 320,832
BRE Properties, Inc. 9,400 226,775
Camden Property Trust 9,900 266,063
Equity Residential Properties Trust 8,000 336,000
Gables Residential Trust 10,500 276,281
Irvine Apartment Communities, Inc. 12,200 320,250
Walden Residential Properties, Inc. 11,500 265,219
2,511,826
Factory Outlet REITs (1.49%)
Chelsea GCA Realty 5,000 171,875
Hotel REITs (9.62%)
Felcor Lodging Trust 7,600 179,075
Host Marriott Corp. 24,300(a) 352,350
Meristar Hospitality Corp. 19,500 360,750
Sunstone Hotel Investors, Inc. 24,000 217,500
1,109,675
Mall REITs (12.69%)
CBL & Associates Properties, Inc. 11,500 299,719
General Growth Properties 6,500 231,156
Rouse Co. 9,500 266,594
Simon Property Group, Inc. 13,000 389,187
Taubman Centers, Inc. 20,300 277,856
1,464,512
Manufactured Housing REITs (2.75%)
Manufactured Home Communities, Inc. 6,000 $ 149,625
Sun Communities, Inc. 5,000 167,188
316,813
Mortgage, Mixed Use & Miscellaneous
REITs (6.00%)
Bradley Real Estate, Inc. 22,700 476,700
Eastgroup Properties, Inc. 11,300 215,406
692,106
Net Lease REITs (2.72%)
Trinet Corporate Realty Trust, Inc. 10,900 313,375
Office & Industrial REITs (31.55%)
Prologis Trust 10,900 237,756
Arden Realty Group, Inc. 6,900 149,213
Cabot Industrial Trust 24,600 492,000
Carramerica Realty Corp. 18,400 414,000
Cornerstone Properties 13,000 201,500
Duke Realty Investments, Inc. 12,300 293,663
Equity Office Properties Trust 8,500 204,000
First Industrial Realty Trust, Inc. 17,000 435,624
Highwoods Properties, Inc. 11,000 307,312
Kilroy Realty Corp. 10,900 241,844
Liberty Property Trust 9,000 207,000
Mack-Cali Realty Corp. 6,700 198,488
Spieker Properties, Inc. 7,500 258,750
3,641,150
Self Storage REITs (2.88%)
Storage USA 10,900 331,769
Shopping Center REITs (4.98%)
Burnham Pacific Properties, Inc. 16,200 212,625
Federal Realty Investment Trust 16,000 362,000
574,625
Total Common Stocks 11,127,726
Principal
Amount Value
Commercial Paper (3.53%)
Federal & Federally Sponsored
Credit (3.53%)
Investment in Joint Trade Account;
Federal National Mortgage
Association; 5.45%; 11/2/1998 $407,686 $ 407,809
Total Portfolio Investments (99.98%) 11,535,535
Cash & receivables, net of liabilities (0.02%) 2,202
Total Net Assets (100.00%) $11,537,737
(a) Non-income producing security - No dividend paid during the period.
PRINCIPAL SMALLCAP FUND, INC.
Shares
Held Value
Common Stocks (91.84%)
Blast Furnace & Basic Steel
Products (1.05%)
Carpenter Technology Corp. 8,900 $ 312,056
Commercial Banks (3.16%)
Associated Banc-Corp. 9,925 348,616
First Federal Capital Corp. 22,500 343,125
Valley National Bancorp 9,200 248,400
940,141
Commercial Printing (0.66%)
World Color Press, Inc. 6,450(a) 195,919
Communications Equipment (5.65%)
DSP Communications, Inc. 60,700(a) 595,619
Reltec Corp. 20,000(a) 430,000
Sawtek, Inc. 25,100(a) 506,706
Spectrian Corp. 14,100(a) 150,694
1,683,019
Communications Services, NEC (1.06%)
Smartalk Teleservices, Inc. 13,000(a) 75,562
World Access, Inc. 11,250(a) 240,469
316,031
Computer & Data Processing
Services (7.02%)
Advanced Communications System, Inc. 17,950(a) 175,013
Barra, Inc. 8,950(a) 236,056
Cotelligent, Inc. 21,000(a) 396,375
Gtech Holdings Corp. 8,250(a) 198,000
Hypercom Corp. 22,500(a) 213,750
ICG Communications, Inc. 13,100(a) 271,006
SPSS, Inc. 9,200(a) 175,950
Structural Dynamics Research Corp. 10,000(a) 143,750
Synopsys, Inc. 6,200(a) 280,550
2,090,450
Computer & Office Equipment (1.10%)
Smart Modular Technologies, Inc. 15,650(a) 328,650
Construction & Related Machinery (1.31%)
JLG Industries, Inc. 23,500 389,219
Crude Petroleum & Natural Gas (1.49%)
Forcenergy, Inc. 14,250(a) 84,609
Nuevo Energy Co. 16,900(a) 358,069
442,678
Drugs (4.55%)
Chirex, Inc. 16,100(a) 245,525
Dura Pharmaceuticals, Inc. 16,500(a) 199,031
Inhale Therapeutic Systems, Inc. 11,950(a) 313,688
Liposome Co., Inc. 60,000(a) 375,000
Matritech, Inc. 90,900(a) 221,569
1,354,813
Eating & Drinking Places (1.74%)
CEC Entertainment, Inc. 9,800(a) 276,850
Ruby Tuesday, Inc. 14,200 239,625
516,475
Electric Services (1.29%)
TNP Enterprises, Inc. 11,400 $ 384,750
Electronic Components &
Accessories (6.06%)
DII Group, Inc. 21,050(a) 309,172
Flextronics International, Ltd. 11,250(a) 584,297
Jabil Circuit, Inc. 7,950(a) 368,184
Microchip Technology, Inc. 9,100(a) 246,269
Sanmina Corp. 7,200(a) 295,200
1,803,122
Fabricated Structural Metal
Products (1.26%)
Aavid Thermal Technologies, Inc. 25,000(a) 375,000
Family Clothing Stores (0.65%)
Pacific Sunwear of California, Inc. 9,000(a) 194,625
Fire, Marine & Casualty Insurance (2.24%)
Berkley W.R. Corp. 10,600 319,656
HCC Insurance Holdings, Inc. 19,300 346,194
665,850
Footwear, Except Rubber (1.27%)
Wolverine World Wide, Inc. 28,900 377,506
Furniture & Home Furnishing
Stores (0.92%)
Cost Plus, Inc. 9,100(a) 273,000
General Industrial Machinery (1.43%)
General Scanning, Inc. 16,750(a) 92,125
Regal-Beloit Corp. 15,800 332,787
424,912
Grain Mill Products (1.27%)
Ralcorp Holdings, Inc. 21,500(a) 378,938
Hotels & Motels (0.91%)
Four Seasons Hotel, Inc. 8,000 184,000
Servico, Inc. 17,950(a) 87,506
271,506
Industrial Machinery, NEC (0.43%)
Industrial Distribution Group, Inc. 17,750(a) 128,688
Industrial Organic Chemicals (0.62%)
CFC International, Inc. 21,450(a) 185,006
Lumber & Other Building Materials (1.13%)
Eagle Hardware & Garden, Inc. 14,500(a) 337,125
Measuring & Controlling Devices (3.24%)
Cytyc Corporation 24,050(a) 402,837
Integrated Measurement Systems, Inc. 24,300(a) 182,250
Quickturn Design Systems, Inc. 34,500(a) 379,500
964,587
Medical Instruments & Supplies (3.63%)
ADAC Laboratories 16,500(a) 488,813
Focal, Inc. 26,850(a) 258,431
Hologic, Inc. 24,400 333,975
1,081,219
Men's & Boys' Clothing Stores (2.05%)
Abercrombie & Fitch Co. 8,000(a) $ 317,500
Hot Topic, Inc. 15,600(a) 292,500
610,000
Men's & Boys' Furnishings (0.72%)
Nautica Enterprises, Inc. 10,350(a) 214,116
Metal Forgings & Stampings (1.26%)
Varlen Corp. 12,600 376,425
Metal Services, NEC (1.20%)
BMC Industries, Inc. 49,700 357,219
Miscellaneous Apparel & Accessory
Stores (2.06%)
Pier 1 Imports, Inc. 28,000 259,000
The Buckle, Inc. 19,600(a) 355,250
614,250
Miscellaneous Chemical Products (1.18%)
H.B. Fuller Co. 8,500 349,562
Miscellaneous Converted Products (1.49%)
Shorewood Packaging Corp. 27,675(a) 442,800
Miscellaneous Electrical Equipment &
Supplies (0.69%)
Motorcar Parts & Accessories 16,550(a) 206,875
Miscellaneous Equipment Rental &
Leasing (0.43%)
T & W Financial Corp. 11,000(a) 129,250
Miscellaneous Fabricated Metal
Products (1.13%)
Watts Industries, Inc. 18,300 336,262
Miscellaneous Manufacturers (1.09%)
Russ Berrie & Co. 16,500 325,875
Miscellaneous Shopping Goods
Stores (0.68%)
Zale Corp. 8,600(a) 203,713
Miscellaneous Textile Goods (1.06%)
Kellwood Co. 11,600 316,100
Motor Vehicles & Equipment (1.03%)
United Auto Group, Inc. 22,300(a) 306,625
Non-Store Retailers (0.93%)
USA Floral Products, Inc. 30,450(a) 277,856
Office Furniture (2.42%)
Chromcraft Revington, Inc. 22,100(a) 357,744
Kimball International, Inc., Class B 19,600 363,212
720,956
Oil & Gas Field Services (0.76%)
Marine Drilling Co., Inc. 20,250(a) 226,547
Personal Credit Institutions (0.10%)
Firstplus Financial Group, Inc. 6,450(a) 28,622
Personnel Supply Services (0.80%)
Remedytemp, Inc. 13,000(a) 237,250
Petroleum Refining (0.95%)
IRI International Corp. 52,000(a) 282,750
Photographic Equipment &
Supplies (0.87%)
Imax Corp. 10,100(a) 258,812
Plumbing, Heating & Air
Conditioning (0.96%)
Apogee Enterprises, Inc. 27,200 285,600
Public Building & Related
Furniture (0.34%)
BE Aerospace Inc. 4,700(a) 101,050
Rubber & Plastics Footwear (0.62%)
Vans, Inc. 22,200(a) 183,150
Savings Institutions (1.15%)
Community First Bankshares, Inc. 17,200 341,850
Security Brokers & Dealers (1.24%)
Jefferies Group, Inc. 12,300 369,000
Soap, Cleaners & Toilet Goods (1.86%)
Carter-Wallace Inc. 20,900 370,975
Digene Corp. 30,550(a) 183,300
554,275
Surety Insurance (1.85%)
CMAC Investment Corp. 6,600 276,375
Enhance Financial Services Group, Inc. 11,200 275,100
551,475
Telephone Communication (3.10%)
Audiovox Corp., Class A 88,900(a) 488,950
Intermedia Communications, Inc. 9,000(a) 166,500
Winstar Communications, Inc. 9,900(a) 267,300
922,750
Women's Clothing Stores (2.68%)
St. John Knits, Inc. 11,450 231,147
Wet Seal, Inc., Class A 26,900(a) 568,262
799,409
Total Common Stocks 27,345,709
Principal
Amount Value
Commercial Paper (7.64%)
Federal & Federally Sponsored
Credit (7.64%)
Investment in Joint Trade Account;
Federal National Mortgage
Association; 5.45%; 11/2/1998 $2,274,742 $2,274,398
Total Portfolio Investments (99.48%) 29,620,107
Cash, receivables and other assets,
net of liabilities (0.52%) 156,336
Total Net Assets (100.00%) $29,776,443
(a) Non-income producing security - No dividend paid during the period.
PRINCIPAL UTILITIES FUND, INC.
Shares
Held Value
Common Stocks (96.40%)
Combination Utility Services (22.22%)
Baltimore Gas & Electric Co. 82,500 $2,588,438
Cilcorp, Inc. 15,100 777,650
Citizens Utilities 334,483 3,010,347
L G & E Energy Corp. 45,400 1,197,425
Montana Power Co. 47,800 2,070,338
Nipsco Industries, Inc. 83,200 2,490,800
Pacificorp 107,600 2,051,125
Scana Corp. 85,600 2,894,350
Utilicorp United, Inc. 69,000 2,479,687
Washington Water Power Co. 40,500 761,906
Wisconsin Energy Corp. 54,300 1,662,937
21,985,003
Electric Services (36.12%)
Allegheny Energy 86,000 2,644,500
Carolina Power & Light Co. 50,300 2,307,513
Dominion Resources, Inc. 46,300 2,138,481
Duke Energy Corp. 42,700 2,762,156
Edison International 109,400 2,885,425
Enron Corp. 58,680 3,095,370
FPL Group, Inc. 37,600 2,352,350
GPU, Inc. 62,400 2,691,000
Houston Industries, Inc. 94,900 2,947,831
Ipalco Enterprises, Inc. 10,000 458,750
MidAmerican Energy Holdings 56,800 1,476,800
Pinnacle West Capital Corp. 59,700 2,615,606
Southern Co. 85,800 2,418,488
Teco Energy, Inc. 90,500 2,500,062
Texas Utilities Holdings 55,600 2,432,500
35,726,832
Gas Production & Distribution (3.52%)
AGL Resources, Inc. 54,400 1,139,000
New Jersey Resources Corp. 38,700 1,487,531
Peoples Energy Corp. 23,300 859,188
3,485,719
Telephone Communication (34.54%)
Ameritech Corp. 96,600 $5,210,362
AT&T Corp. 46,900 2,919,525
Bell Atlantic Corp. 73,600 3,910,000
BellSouth Corp. 59,500 4,748,844
GTE Corp. 52,900 3,104,569
MCI Worldcom, Inc. 81,724 4,515,251
RCN Corp. 81,000(a) 1,303,594
Sprint Corp. 53,400 4,098,450
US West, Inc. 76,000 4,360,500
34,171,095
Total Common Stocks 95,368,649
Principal
Amount Value
Commercial Paper (3.18%)
Personal Credit Institutions (3.18%)
Investment in Joint Trade Account;
Associates Corp.;
5.72%; 11/2/1998 $3,142,524 $3,142,524
Total Portfolio Investments (99.58%) 98,511,173
Cash, receivables and other assets,
net of liabilities (0.42%) 417,622
Total Net Assets (100.00%) $98,928,795
(a) Non-income producing security - No dividend paid during the period.
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
PRINCIPAL BALANCED FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
Net Asset Value, Beginning of Period................... $15.11 $14.61 $13.74 $12.43 $13.26
Income from Investment Operations:
Net Investment Income............................... .42 .35 .38 .41 .32
Net Realized and Unrealized Gain (Loss) on Investments 1.15 1.81 1.59 1.31 (.20)
Total from Investment Operations 1.57 2.16 1.97 1.72 .12
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.37) (.36) (.43) (.36) (.40)
Distributions from Capital Gains.................... (1.03) (1.30) (.67) (.05) (.55)
Total Dividends and Distributions (1.40) (1.66) (1.10) (.41) (.95)
Net Asset Value, End of Period......................... $15.28 $15.11 $14.61 $13.74 $12.43
Total Return(b)........................................ 11.00% 15.88% 15.10% 14.18% .94%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $104,414 $85,436 $70,820 $57,125 $53,366
Ratio of Expenses to Average Net Assets............. 1.28% 1.33% 1.28% 1.37% 1.51%
Ratio of Net Investment Income to Average Net Assets 2.86% 2.42% 2.82% 3.21% 2.70%
Portfolio Turnover Rate............................. 57.0% 27.6% 32.6% 35.8% 14.4%
PRINCIPAL BALANCED FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
Net Asset Value, Beginning of Period................... $15.05 $14.56 $13.71 $11.80
Income from Investment Operations:
Net Investment Income............................... .31 .25 .29 .31
Net Realized and Unrealized Gain (Loss) on Investments 1.14 1.79 1.55 1.90
Total from Investment Operations 1.45 2.04 1.84 2.21
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.25) (.25) (.32) (.30)
Distributions from Capital Gains.................... (1.03) (1.30) (.67) --
Total Dividends and Distributions (1.28) (1.55) (.99) (.30)
Net Asset Value, End of Period......................... $15.22 $15.05 $14.56 $13.71
Total Return(b)........................................ 10.18% 14.96% 14.10% 18.72%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $18,930 $11,885 $5,964 $1,263
Ratio of Expenses to Average Net Assets............. 2.04% 2.14% 2.13% 1.91%(d)
Ratio of Net Investment Income to Average Net Assets 2.08% 1.58% 1.93% 2.53%(d)
Portfolio Turnover Rate............................. 57.0% 27.6% 32.6% 35.8%(d)
PRINCIPAL BALANCED FUND, INC.(a)
Class R shares 1998 1997 1996(f)
Net Asset Value, Beginning of Period................... $14.98 $14.52 $13.81
Income from Investment Operations:
Net Investment Income............................... .33 .29 .24
Net Realized and Unrealized Gain (Loss) on Investments 1.15 1.76 .73
Total from Investment Operations 1.48 2.05 .97
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.28) (.30) (.26)
Distributions from Capital Gains.................... (1.03) (1.29) --
Total Dividends and Distributions (1.31) (1.59) (.26)
Net Asset Value, End of Period......................... $15.15 $14.98 $14.52
Total Return(b)........................................ 10.43% 15.16% 7.52%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $19,434 $9,745 $875
Ratio of Expenses to Average Net Assets............. 1.88% 1.99% 1.49%(d)
Ratio of Net Investment Income to Average Net Assets 2.22% 1.66% 2.26%(d)
Portfolio Turnover Rate............................. 57.0% 27.6% 32.6%(d)
PRINCIPAL BLUE CHIP FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
Net Asset Value, Beginning of Period................... $20.22 $17.10 $15.03 $12.45 $11.94
Income from Investment Operations:
Net Investment Income............................... .12 .21 .23 .24 .20
Net Realized and Unrealized Gain (Loss) on Investments 3.57 3.58 2.45 2.55 .57
Total from Investment Operations 3.69 3.79 2.68 2.79 .77
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.12) (.21) (.26) (.21) (.26)
Distributions from Capital Gains.................... (2.08) (.46) (.35) -- --
Total Dividends and Distributions (2.20) (.67) (.61) (.21) (.26)
Net Asset Value, End of Period......................... $21.71 $20.22 $17.10 $15.03 $12.45
Total Return(b)........................................ 19.48% 22.57% 18.20% 22.65% 6.58%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $126,740 $79,985 $44,389 $35,212 $27,246
Ratio of Expenses to Average Net Assets............. 1.31% 1.30% 1.33% 1.38% 1.46%
Ratio of Net Investment Income to Average Net Assets .57% 1.10% 1.41% 1.83% 1.72%
Portfolio Turnover Rate............................. .5% 55.4% 13.3% 26.1% 5.5%
PRINCIPAL BLUE CHIP FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
Net Asset Value, Beginning of Period................... $20.14 $17.03 $14.99 $11.89
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.02) .07 .11 .15
Net Realized and Unrealized Gain (Loss) on Investments 3.53 3.54 2.41 3.10
Total from Investment Operations 3.51 3.61 2.52 3.25
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.02) (.04) (.13) (.15)
Distributions from Capital Gains.................... (2.08) (.46) (.35) --
Total Dividends and Distributions (2.10) (.50) (.48) (.15)
Net Asset Value, End of Period......................... $21.55 $20.14 $17.03 $14.99
Total Return(b)........................................ 18.59% 21.59% 17.18% 26.20%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $34,223 $18,265 $6,527 $1,732
Ratio of Expenses to Average Net Assets............. 2.02% 2.06% 2.19% 1.90%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.14)% .32% .49% .97%(d)
Portfolio Turnover Rate............................. .5% 55.4% 13.3% 26.1%(d)
PRINCIPAL BLUE CHIP FUND, INC.(a)
Class R shares 1998 1997 1996(f)
Net Asset Value, Beginning of Period................... $20.16 $17.08 $16.21
Income from Investment Operations:
Net Investment Income............................... .02 .13 .12
Net Realized and Unrealized Gain (Loss) on Investments 3.57 3.53 .90
Total from Investment Operations 3.59 3.66 1.02
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.04) (.12) (.15)
Distributions from Capital Gains.................... (2.08) (.46) --
Total Dividends and Distributions (2.12) (.58) (.15)
Net Asset Value, End of Period......................... $21.63 $20.16 $17.08
Total Return(b)........................................ 19.01% 21.82% 7.02%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $32,871 $15,502 $1,575
Ratio of Expenses to Average Net Assets............. 1.85% 1.89% 1.48%(d)
Ratio of Net Investment Income to Average Net Assets .02%(e) .45% .68%(d)
Portfolio Turnover Rate............................. .5% 55.4% 13.3%(d)
PRINCIPAL CAPITAL VALUE FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
Net Asset Value, Beginning of Period................... $29.69 $27.72 $23.69 $20.83 $21.41
Income from Investment Operations:
Net Investment Income............................... .50 .50 .45 .45 .39
Net Realized and Unrealized Gain (Loss) on Investments 3.88 5.80 5.48 3.15 .93
Total from Investment Operations 4.38 6.30 5.93 3.60 1.32
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.53) (.48) (.43) (.39) (.41)
Distributions from Capital Gains.................... (2.47) (3.85) (1.47) (.35) (1.49)
Total Dividends and Distributions (3.00) (4.33) (1.90) (.74) (1.90)
Net Asset Value, End of Period......................... $31.07 $29.69 $27.72 $23.69 $20.83
Total Return(b)........................................ 15.59% 25.36% 26.41% 17.94% 6.67%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $565,052 $494,444 $435,617 $339,656 $285,965
Ratio of Expenses to Average Net Assets............. .74% .70% .69% .75% .83%
Ratio of Net Investment Income to Average Net Assets 1.67% 1.85% 1.82% 2.08% 2.02%
Portfolio Turnover Rate............................. 23.2% 30.8% 50.2% 46.0% 31.7%
PRINCIPAL CAPITAL VALUE FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
Net Asset Value, Beginning of Period................... $29.51 $27.58 $23.61 $19.12
Income from Investment Operations:
Net Investment Income............................... .26 .23 .21 .33
Net Realized and Unrealized Gain (Loss) on Investments 3.86 5.77 5.45 4.46
Total from Investment Operations 4.12 6.00 5.66 4.79
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.26) (.22) (.22) (.30)
Distributions from Capital Gains.................... (2.47) (3.85) (1.47) --
Total Dividends and Distributions (2.73) (4.07) (1.69) (.30)
Net Asset Value, End of Period......................... $30.90 $29.51 $27.58 $23.61
Total Return(b)........................................ 14.71% 24.13% 25.19% 25.06%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $44,765 $27,240 $9,832 $2,248
Ratio of Expenses to Average Net Assets............. 1.52% 1.65% 1.70% 1.50%(d)
Ratio of Net Investment Income to Average Net Assets .88% .84% .80% 1.07%(d)
Portfolio Turnover Rate............................. 23.2% 30.8% 50.2% 46.0%(d)
PRINCIPAL CAPITAL VALUE FUND, INC.(a)
Class R shares 1998 1997 1996(f)
Net Asset Value, Beginning of Period................... $29.44 $27.57 $24.73
Income from Investment Operations:
Net Investment Income............................... .28 .30 .19
Net Realized and Unrealized Gain (Loss) on Investments 3.84 5.74 2.81
Total from Investment Operations 4.12 6.04 3.00
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.29) (.32) (.16)
Distributions from Capital Gains.................... (2.47) (3.85) --
Total Dividends and Distributions (2.76) (4.17) (.16)
Net Asset Value, End of Period......................... $30.80 $29.44 $27.57
Total Return(b)........................................ 14.77% 24.36% 12.74%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $37,675 $18,326 $1,752
Ratio of Expenses to Average Net Assets............. 1.50% 1.50% 1.16%(d)
Ratio of Net Investment Income to Average Net Assets .88% .93% 1.18%(d)
Portfolio Turnover Rate............................. 23.2% 30.8% 50.2%(d)
PRINCIPAL GROWTH FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
Net Asset Value, Beginning of Period................... $50.43 $39.54 $37.22 $31.14 $30.41
Income from Investment Operations:
Net Investment Income............................... .35 .31 .35 .35 .26
Net Realized and Unrealized Gain (Loss) on Investments 7.14 11.26 3.50 6.67 2.56
Total from Investment Operations 7.49 11.57 3.85 7.02 2.82
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.34) (.31) (.35) (.31) (.28)
Distributions from Capital Gains.................... (1.49) (.37) (1.18) (.63) (1.81)
Total Dividends and Distributions (1.83) (.68) (1.53) (.94) (2.09)
Net Asset Value, End of Period......................... $56.09 $50.43 $39.54 $37.22 $31.14
Total Return(b)........................................ 15.17% 29.55% 10.60% 23.29% 9.82%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $395,954 $317,386 $228,361 $174,328 $116,363
Ratio of Expenses to Average Net Assets............. .95% 1.03% 1.08% 1.16% 1.30%
Ratio of Net Investment Income to Average Net Assets .66% .68% .95% 1.12% .95%
Portfolio Turnover Rate............................. 21.9% 16.5% 1.8% 12.2% 13.6%
PRINCIPAL GROWTH FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
Net Asset Value, Beginning of Period................... $50.36 $39.43 $37.10 $28.33
Income from Investment Operations:
Net Investment Income............................... .06 .09 .08 .21
Net Realized and Unrealized Gain (Loss) on Investments 7.14 11.23 3.48 8.76
Total from Investment Operations 7.20 11.32 3.56 8.97
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.09) (.02) (.05) (.20)
Distributions from Capital Gains.................... (1.49) (.37) (1.18) --
Total Dividends and Distributions (1.58) (.39) (1.23) (.20)
Net Asset Value, End of Period......................... $55.98 $50.36 $39.43 $37.10
Total Return(b)........................................ 14.58% 28.92% 9.80% 31.48%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $64,809 $42,241 $24,019 $8,279
Ratio of Expenses to Average Net Assets............. 1.46% 1.48% 1.79% 1.80%(d)
Ratio of Net Investment Income to Average Net Assets .15% .23% .22% .31%(d)
Portfolio Turnover Rate............................. 21.9% 16.5% 1.8% 12.2%(d)
PRINCIPAL GROWTH FUND, INC.(a)
Class R shares 1998 1997 1996(f)
Net Asset Value, Beginning of Period................... $50.16 $39.40 $39.27
Income from Investment Operations:
Net Investment Income............................... .02 .06 .10
Net Realized and Unrealized Gain (Loss) on Investments 7.09 11.16 .13
Total from Investment Operations 7.11 11.22 .23
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.01) (.09) (.10)
Distributions from Capital Gains.................... (1.49) (.37) --
Total Dividends and Distributions (1.50) (.46) (.10)
Net Asset Value, End of Period......................... $55.77 $50.16 $39.40
Total Return(b)........................................ 14.46% 28.72% 1.12%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $30,557 $16,265 $2,014
Ratio of Expenses to Average Net Assets............. 1.59% 1.69% 1.42%(d)
Ratio of Net Investment Income to Average Net Assets .01% .00% .14%(d)
Portfolio Turnover Rate............................. 21.9% 16.5% 1.8%(d)
PRINCIPAL MIDCAP FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
Net Asset Value, Beginning of Period................... $45.33 $35.75 $31.45 $25.08 $23.56
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.07) .07 .14 .12 --
Net Realized and Unrealized Gain (Loss) on Investments (4.26) 10.80 5.05 6.45 1.61
Total from Investment Operations (4.33) 10.87 5.19 6.57 1.61
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- (.11) (.14) (.06) --
Distributions from Capital Gains.................... (1.10) (1.18) (.75) (.14) (.09)
Total Dividends and Distributions (1.10) (1.29) (.89) (.20) (.09)
Net Asset Value, End of Period......................... $39.90 $45.33 $35.75 $31.45 $25.08
Total Return(b)........................................ (9.78)% 31.26% 16.89% 26.89% 6.86%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $332,942 $346,666 $229,465 $150,611 $92,965
Ratio of Expenses to Average Net Assets............. 1.22% 1.26% 1.32% 1.47% 1.74%
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.14)% .20% .46% .47% .02%
Portfolio Turnover Rate............................. 25.1% 9.5% 12.3% 13.5% 8.1%
PRINCIPAL MIDCAP FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
Net Asset Value, Beginning of Period................... $44.88 $35.48 $31.31 $23.15
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.23) (.05) (.04) --
Net Realized and Unrealized Gain (Loss) on Investments (4.26) 10.64 4.97 8.18
Total from Investment Operations (4.49) 10.59 4.93 8.18
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- (.01) (.01) (.02)
Distributions from Capital Gains.................... (1.10) (1.18) (.75) --
Total Dividends and Distributions (1.10) (1.19) (.76) (.02)
Net Asset Value, End of Period......................... $39.29 $44.88 $35.48 $31.31
Total Return(b)........................................ (10.24)% 30.64% 16.07% 35.65%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $68,358 $59,554 $28,480 $8,997
Ratio of Expenses to Average Net Assets............. 1.73% 1.69% 2.01% 2.04%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.66)% (.24)% (.24)% (.17)%(d)
Portfolio Turnover Rate............................. 25.1% 9.5% 12.3% 13.5%(d)
PRINCIPAL MIDCAP FUND, INC.(a)
Class R shares 1998 1997 1996(f)
Net Asset Value, Beginning of Period................... $45.10 $35.67 $33.77
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.28) (.12) .04
Net Realized and Unrealized Gain (Loss) on Investments (4.29) 10.74 1.88
Total from Investment Operations (4.57) 10.62 1.92
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- (.01) (.02)
Distributions from Capital Gains.................... (1.10) (1.18) --
Total Dividends and Distributions (1.10) (1.19) (.02)
Net Asset Value, End of Period......................... $39.43 $45.10 $35.67
Total Return(b)........................................ (10.37)% 30.56% 6.20%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $23,540 $17,448 $2,016
Ratio of Expenses to Average Net Assets............. 1.89% 1.87% 1.53%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.82)% (.45)% .29%(d)
Portfolio Turnover Rate............................. 25.1% 9.5% 12.3%(d)
PRINCIPAL REAL ESTATE FUND, INC.
Class A shares 1998(g)
Net Asset Value, Beginning of Period................... 10.15
Income from Investment Operations:
Net Investment Income............................... .20
Net Realized and Unrealized Gain (Loss) on Investments (1.76)
Total from Investment Operations (1.56)
Less Dividends:
Dividends from Net Investment Income................ (.20)
Total Dividends (.20)
Net Asset Value, End of Period......................... $8.39
Total Return(b)........................................ (15.45)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ 5,490
Ratio of Expenses to Average Net Assets............. 2.25%(d)
Ratio of Net Investment Income to Average Net Assets 2.89%(d)
Portfolio Turnover Rate............................. 60.4%(d)
PRINCIPAL REAL ESTATE FUND, INC.
Class B shares 1998(g)
Net Asset Value, Beginning of Period................... 10.15
Income from Investment Operations:
Net Investment Income............................... .20
Net Realized and Unrealized Gain (Loss) on Investments (1.78)
Total from Investment Operations (1.58)
Less Dividends:
Dividends from Net Investment Income................ (.19)
Total Dividends (.19)
Net Asset Value, End of Period......................... 8.38
Total Return(b)........................................ (15.67)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ 3,120
Ratio of Expenses to Average Net Assets............. 2.47%(d)
Ratio of Net Investment Income to Average Net Assets 2.67%(d)
Portfolio Turnover Rate............................. 60.4%(d)
PRINCIPAL REAL ESTATE FUND, INC.
Class R shares 1998(g)
Net Asset Value, Beginning of Period................... 10.15
Income from Investment Operations:
Net Investment Income............................... .23
Net Realized and Unrealized Gain (Loss) on Investments (1.78)
Total from Investment Operations (1.55)
Less Dividends:
Dividends from Net Investment Income................ (.20)
Total Dividends (.20)
Net Asset Value, End of Period......................... 8.40
Total Return(b)........................................ (15.37)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ 2,928
Ratio of Expenses to Average Net Assets............. 1.99%(d)
Ratio of Net Investment Income to Average Net Assets 3.07%(d)
Portfolio Turnover Rate............................. 60.4%(d)
PRINCIPAL SMALLCAP FUND, INC.
Class A shares 1998(g)
Net Asset Value, Beginning of Period................... 9.92
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.08)
Net Realized and Unrealized Gain (Loss) on Investments (1.41)
Total from Investment Operations (1.49)
Less Dividends:
Dividends from Net Investment Income................ --
Total Dividends --
Net Asset Value, End of Period......................... $8.43
Total Return(b)........................................ (15.95)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ 18,438
Ratio of Expenses to Average Net Assets............. 2.58%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (1.65)%(d)
Portfolio Turnover Rate............................. 20.5%(d)
PRINCIPAL SMALLCAP FUND, INC.
Class B shares 1998(g)
Net Asset Value, Beginning of Period................... 9.91
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.11)
Net Realized and Unrealized Gain (Loss) on Investments (1.39)
Total from Investment Operations (1.50)
Less Dividends:
Dividends from Net Investment Income................ --
Total Dividends --
Net Asset Value, End of Period......................... $8.41
Total Return(b)........................................ (16.15)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ 6,550
Ratio of Expenses to Average Net Assets............. 2.80%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (1.85)%(d)
Portfolio Turnover Rate............................. 20.5%(d)
PRINCIPAL SMALLCAP FUND, INC.
Class R shares 1998(g)
Net Asset Value, Beginning of Period................... 9.91
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.07)
Net Realized and Unrealized Gain (Loss) on Investments (1.39)
Total from Investment Operations (1.46)
Less Dividends:
Dividends from Net Investment Income................ --
Total Dividends --
Net Asset Value, End of Period......................... $8.45
Total Return(b)........................................ (15.75)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ 4,688
Ratio of Expenses to Average Net Assets............. 2.07%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (1.12)%(d)
Portfolio Turnover Rate............................. 20.5%(d)
PRINCIPAL UTILITIES FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
Net Asset Value, Beginning of Period................... $12.55 $11.40 $10.94 $9.25 $11.45
Income from Investment Operations:
Net Investment Income(h)............................ .41 .48 .44 .48 .46
Net Realized and Unrealized Gain (Loss) on Investments 3.59 1.12 .45 1.70 (2.19)
Total from Investment Operations 4.00 1.60 .89 2.18 (1.73)
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.44) (.45) (.43) (.49) (.45)
Distributions from Capital Gains.................... -- -- -- -- (.02)
Total Dividends and Distributions (.44) (.45) (.43) (.49) (.47)
Net Asset Value, End of Period......................... $16.11 $12.55 $11.40 $10.94 $9.25
Total Return(b)........................................ 32.10% 14.26% 8.13% 24.36% (15.20)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $83,533 $64,366 $66,322 $65,873 $56,747
Ratio of Expenses to Average Net Assets(h).......... 1.15% 1.15% 1.17% 1.04% 1.00%
Ratio of Net Investment Income to Average Net Assets 2.73% 3.90% 3.85% 4.95% 4.89%
Portfolio Turnover Rate............................. 11.9% 22.5% 34.2% 13.0% 13.8%
PRINCIPAL UTILITIES FUND, INC.(a)
Class B shares 1998 1997 1996 1995(e)
Net Asset Value, Beginning of Period................... $12.53 $11.38 $10.93 $9.20
Income from Investment Operations:
Net Investment Income(h)............................ .30 .38 .36 .40
Net Realized and Unrealized Gain (Loss) on Investments 3.59 1.13 .43 1.77
Total from Investment Operations 3.89 1.51 .79 2.17
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.33) (.36) (.34) (.44)
Distributions from Capital Gains.................... -- -- -- --
Total Dividends and Distributions (.33) (.36) (.34) (.44)
Net Asset Value, End of Period......................... $16.09 $12.53 $11.38 $10.93
Total Return(b)........................................ 31.23% 13.41% 7.23% 24.18%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $11,391 $6,937 $5,579 $3,952
Ratio of Expenses to Average Net Assets(h).......... 1.90% 1.90% 1.93% 1.72%(d)
Ratio of Net Investment Income to Average Net Assets 2.04% 3.14% 3.07% 3.84%(d)
Portfolio Turnover Rate............................. 11.9% 22.5% 34.2% 13.0%(d)
PRINCIPAL UTILITIES FUND, INC.(a)
Class R shares 1998 1997 1996(f)
Net Asset Value, Beginning of Period................... $12.49 $11.33 $11.75
Income from Investment Operations:
Net Investment Income(h)............................ .33 .39 .28
Net Realized and Unrealized Gain (Loss) on Investments 3.58 1.14 (.41)
Total from Investment Operations 3.91 1.53 (.13)
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.33) (.37) (.29)
Distributions from Capital Gains.................... -- -- --
Total Dividends and Distributions (.33) (.37) (.29)
Net Asset Value, End of Period......................... $16.07 $12.49 $11.33
Total Return(b)........................................ 31.47% 13.72% (.31)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $4,005 $1,512 $311
Ratio of Expenses to Average Net Assets(h).......... 1.65% 1.65% 1.47%(d)
Ratio of Net Investment Income to Average Net Assets 2.21% 3.35% 3.77%(d)
Portfolio Turnover Rate............................. 11.9% 22.5% 34.2%(d)
</TABLE>
Notes to Financial Highlights
(a) Effective January 1, 1998, the following changes were made to the names of
the Domestic Growth Funds:
Former Fund Name New Fund Name
--------------------------------------------------------------------------
Princor Balanced Fund, Inc. Principal Balanced Fund, Inc.
Princor Blue Chip Fund, Inc. Principal Blue Chip Fund, Inc.
Princor Capital Accumulation Fund, Inc. Principal Capital Value Fund, Inc.
Princor Growth Fund, Inc. Principal Growth Fund, Inc.
Princor Emerging Growth Fund, Inc. Principal MidCap Fund, Inc.
Princor Utilities Fund, Inc. Principal Utilities Fund, Inc.
(b) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(c) Total return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. The Domestic Growth Funds' Class B shares
recognized net investment income as follows for the period from the initial
purchase of Class B shares on December 5, 1994 through December 8, 1994,
none of which was distributed to the sole shareholder, Principal Management
Corporation. The Domestic Growth Funds' Class B shares incurred unrealized
losses on investments during the initial interim period as follows. This
represents Class B share activities of each fund prior to the initial
public offering of Class B shares:
Per Share
Net Investment Per Share
Income Unrealized (Loss)
Principal Balanced Fund, Inc. $-- $(.19)
Principal Blue Chip Fund, Inc. -- (.15)
Principal Capital Value Fund, Inc. -- (.46)
Principal Growth Fund, Inc. -- (.86)
Principal MidCap Fund, Inc. -- (.77)
Principal Utilities Fund, Inc. .01 (.01)
(f) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. Certain of the Domestic
Growth Funds' Class R shares recognized net investment income for the
period from the initial purchase of Class R shares on February 27, 1996
through February 28, 1996 as follows, none of which was distributed to the
sole shareholder, Principal Management Corporation. Additionally, the
Domestic Growth Funds incurred unrealized gains (losses) on investments
during the initial interim period as follows. This represents Class R share
activities of each fund prior to the initial offering of Class R shares:
Per Share
Net Investment Per Share
Income Unrealized (Loss)
Principal Balanced Fund, Inc. $-- $(.03)
Principal Blue Chip Fund, Inc. .01 (.02)
Principal Capital Value Fund, Inc. .01 (.11)
Principal Growth Fund, Inc. .01 .10
Principal MidCap Fund, Inc -- .19
(g) Period from December 31, 1997, date Class A and Class B shares first
offered to the public and Class R shares first offered to eligible
purchasers, through October 31, 1998. With respect to Principal Real Estate
Fund, Inc. Class A, Class B and Class R shares, net investment income
aggregating $.03 per share for the period from the initial purchase of
shares on December 11, 1997 through December 30, 1997 was recognized, of
which $.01 per share was distributed to its sole shareholder, Principal
Life Insurance Company, during the period. With respect to Principal
SmallCap Fund, Inc. Class A, Class B and Class R shares, net investment
income aggregating $.01 per share from the initial purchase of shares on
December 11, 1997 through December 30, 1997 was recognized. Principal
SmallCap Fund, Inc. Class A, Class B and Class R distributed a tax return
of capital of $.01 per share to the sole shareholder Principal Life
Insurance Company, during the period. Principal Real Estate Fund, Inc. and
Principal SmallCap Fund, Inc. Class A, Class B and Class R shares incurred
unrealized gains (losses) on investments during the initial interim period
as follows. This represents Class A, Class B and Class R share activities
of each fund prior to the initial public offering of each class of shares.
Per Share Unrealized
Gain (Loss)
Class Class Class
A B R
Principal Real Estate Fund, Inc. $ .13 $ .13 $ .13
Principal SmallCap Fund, Inc. (.08) (.09) (.09)
(h) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods
indicated, Principal Utilities Fund, Inc. would have had per share net
investment income and the ratios of expenses to average net assets as
shown:
Year Ended
October 31, Per Share Ratio of Expenses
Except Net Investment to Average Net Amount
as Noted Income Assets Waived
Class A 1998 $.39 1.23% $ 60,477
1997 .46 1.25% 65,940
1996 .43 1.25% 54,932
1995 .46 1.30% 151,145
1994 .41 1.50% 284,836
Class B 1998 .29 2.00% 9,557
1997 .37 1.95% 3,753
1996 .34 2.06% 6,690
1995(e) .40 1.81%(d) 1,338
Class R 1998 .28 2.10% 12,481
1997 .31 2.67% 9,355
1996(f) .28 1.47%(d) --
October 31, 1998
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
Principal Principal
International Principal International
Emerging Markets International SmallCap
GROWTH FUNDS (INTERNATIONAL) Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Investment in securities -- at cost........ $16,534,258 $327,089,074 $22,704,728
Assets
Investment in securities -- at value (Note 4) $12,795,683 $368,412,087 $21,433,644
Cash.................................... 19,179 20,827 4,413
Receivables:
Dividends and interest.................. 26,337 800,343 37,404
Investment securities sold.............. 70,239 841,417 356,814
Capital Stock sold...................... 7,669 559,034 38,716
Other assets............................... -- 1,979 --
Total Assets 12,919,107 370,635,687 21,870,991
Liabilities
Accrued expenses........................... 39,471 396,493 49,926
Payables:
Net payable for foreign currency
contract (Note 5).................... 19,040 89,575 --
Investment securities purchased......... 70,691 7,560,762 65,603
Capital Stock reacquired................ -- 416,522 3,220
Indebtedness (Note 7) ..................... -- -- 85,000
Total Liabilities 129,202 8,463,352 203,749
Net Assets Applicable to Outstanding Shares $12,789,905 $362,172,335 $21,667,242
Net Assets Consist of:
Capital Stock.............................. $ 19,571 $ 393,967 $ 21,695
Additional paid-in capital................. 17,964,592 294,729,701 22,744,050
Accumulated undistributed net
investment income ...................... -- 4,262,374 --
Accumulated undistributed net realized
gain (loss) from investment and
foreign currency transactions........... (1,436,265) 21,542,398 171,669
Net unrealized appreciation (depreciation)
of investments.......................... (3,738,575) 41,323,013 (1,271,084)
Net unrealized appreciation (depreciation) on
translation of assets and liabilities in
foreign currencies...................... (19,418) (79,118) 912
Total Net Assets $12,789,905 $362,172,335 $21,667,242
Capital Stock (par value: $.01 a share):
Shares authorized.......................... 100,000,000 100,000,000 100,000,000
Net Asset Value Per Share:
Class A: Net Assets....................... $7,312,361 $302,756,625 $11,765,019
Shares issued and outstanding. 1,117,661 32,894,131 1,177,376
Net asset value per share...... $6.54 $9.20 $9.99
Maximum offering price per share(a) $6.87 $9.66 $10.49
Class B: Net Assets....................... $3,275,343 $41,676,330 $6,585,150
Shares issued and outstanding. 502,111 4,560,292 660,703
Net asset value per share(b)... $6.52 $9.14 $9.97
Class R: Net Assets....................... $2,202,201 $17,739,380 $3,317,073
Shares issued and outstanding. 337,289 1,942,312 331,451
Net asset value per share............... $6.53 $9.13 $10.01
<FN>
(a) Maximum offering price is equal to net asset value plus a front-end sales
charge of 4.75% of the offering price or 4.99% of the net asset value.
(b) Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</FN>
</TABLE>
See accompanying notes.
Year Ended October 31, 1998
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Principal Principal
International Principal International
Emerging Markets International SmallCap
GROWTH FUNDS (INTERNATIONAL) Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
Income:
<S> <C> <C> <C>
Dividends............................. $ 329,076 $ 9,704,858 $ 338,236
Withholding tax on foreign dividends... (17,844) (1,140,879) (29,429)
Interest............................... 56,907 1,282,335 65,346
Total Income 368,139 9,846,314 374,153
Expenses:
Management and investment advisory
fees (Note 3)....................... 157,324 2,492,037 242,403
Distribution and shareholder servicing
fees (Notes 1 and 3)................ 54,053 1,022,931 81,404
Transfer and administrative services
(Notes 1 and 3)..................... 119,948 1,168,106 153,320
Registration fees (Note 1)............. 43,535 98,860 37,217
Custodian fees ........................ 37,425 120,802 16,497
Auditing and legal fees ............... 9,712 10,214 9,229
Directors' fees ....................... 7,526 7,390 7,115
Other ................................. 622 27,346 1,005
Total Net Expenses 430,145 4,947,686 548,190
Net Investment Income (Operating Loss) (62,006) 4,898,628 (174,037)
Net Realized and Unrealized Gain (Loss)on
Investments and Foreign
Currencies Net realized gain (loss) from:
Investment transactions................ (1,349,593) 21,724,953 365,750
Foreign currency transactions.......... (10,717) (159,094) (2,884)
Change in unrealized appreciation/depreciation of:
Investments............................ (1,750,572) (21,749,628) (1,229,130)
Translation of assets and liabilities in
foreign currencies.................. (21,381) (101,686) 889
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies (3,132,263) (285,455) (865,375)
Net Increase (Decrease) in Net Assets
Resulting from Operations $(3,194,269) $ 4,613,173 $(1,039,412)
</TABLE>
See accompanying notes.
Years Ended October 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Principal Principal
International Principal International
Emerging Markets International SmallCap
GROWTH FUNDS (INTERNATIONAL) Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C> <C> <C> <C>
1998 1997(a) 1998 1997 1998 1997(a)
Operations
Net investment income (operating loss).... $(62,006) $(861) $4,898,628 $3,090,074 $ (174,037) $ (1,911)
Net realized gain (loss) from investment and
foreign currency transactions.......... (1,360,310) (85,030) 21,565,859 7,071,870 362,866 (154,500)
Change in unrealized appreciation/depreciation
of investments and translation of assets
and liabilities in foreign currencies (1,771,953) (1,986,040) (21,851,314) 32,599,107 (1,228,241) (41,931)
Net Increase (Decrease) in Net
Assets Resulting from Operations (3,194,269) (2,071,931) 4,613,173 42,761,051 (1,039,412) (198,342)
Dividends and Distributions to Shareholders
From net investment income:
Class A................................ -- -- (3,230,657) (2,378,873) -- --
Class B ............................... -- -- (135,323) (79,037) -- --
Class R ............................... -- -- (60,535) (19,984) -- --
From net realized gain on investments and
foreign currency transactions:
Class A ............................... -- -- (6,125,804) (6,657,874) -- --
Class B ............................... -- -- (754,887) (635,525) -- --
Class R................................ -- -- (272,111) (55,824) -- --
Total Dividends and Distributions -- -- (10,579,317) (9,827,117) -- --
Capital Share Transactions (Note 6)
Shares sold:
Class A................................ 4,862,019 5,966,460 61,935,765 96,500,904 8,737,574 6,307,287
Class B ............................... 1,321,774 3,867,018 14,284,105 20,265,356 3,023,591 4,967,080
Class R................................ 609,470 3,028,924 9,941,189 11,220,828 532,826 3,022,777
Shares issued in reinvestment of dividends
and distributions:
Class A................................ -- -- 9,196,905 8,872,973 -- --
Class B ............................... -- -- 870,916 696,974 -- --
Class R................................ -- -- 332,448 75,789 -- --
Shares redeemed:
Class A ............................... (797,000) (7,197) (44,920,651) (26,121,521) (2,487,754) (7,102)
Class B ............................... (339,033) (118,315) (6,478,598) (5,667,020) (895,810) (97,291)
Class R ............................... (338,015) -- (3,796,800) (1,083,455) (192,387) (5,795)
Net Increase in Net Assets from
Capital Share Transactions 5,319,215 12,736,890 41,365,279 104,760,828 8,718,040 14,186,956
Total Increase 2,124,946 10,664,959 35,399,135 137,694,762 7,678,628 13,988,614
Net Assets
Beginning of period....................... 10,664,959 -- 326,773,200 189,078,438 13,988,614 --
End of period (including undistributed net
investment income as set forth below). 12,789,905 10,664,959 362,172,335 326,773,200 21,667,242 13,988,614
Undistributed Net Investment Income....... $ -- $ -- $4,262,374 $2,790,261 $ -- $ --
<FN>
(a) Period from August 14, 1997 (date operations commenced) through October 31,
1997.
</FN>
See accompanying notes.
</TABLE>
October 31, 1998
NOTES TO FINANCIAL STATEMENTS
Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.
Note 1 -- Significant Accounting Policies
Principal International Emerging Markets Fund, Inc., Principal International
Fund, Inc. and Principal International SmallCap Fund, Inc. (the "International
Growth Funds") are registered under the Investment Company Act of 1940, as
amended, as open-end diversified management investment companies and operate in
the mutual fund industry.
Effective January 1, 1998, Princor World Fund, Inc. changed its name to
Principal International Fund, Inc.
On August 14, 1997, the initial purchases of 400,000 shares of Class A Capital
Stock, 300,000 shares of Class B Capital Stock and 300,000 shares of Class R
Capital Stock of each of Principal International Emerging Markets Fund, Inc. and
Principal International SmallCap Fund, Inc. were made by Principal Life
Insurance Company (formerly known as Principal Mutual Life Insurance Company)
(see Note 3). Effective August 29, 1997, Principal International Emerging
Markets Fund, Inc. and Principal International SmallCap Fund, Inc. began
offering Class A and Class B shares to the public and Class R shares to eligible
purchasers.
Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions made within six years
of purchase. Class R shares are sold without an initial sales charge and are not
subject to a CDSC. Class B shares and Class R shares bear a higher ongoing
distribution fee than Class A shares. Class B shares automatically convert into
Class A shares, based on relative net asset value (without a sales charge) after
seven years. Class R shares automatically convert into Class A shares, based on
relative net asset value (without a sales charge) after four years. All classes
of shares for each fund represent interests in the same portfolio of
investments, and will vote together as a single class except where otherwise
required by law or as determined by each of the International Growth Funds'
respective Board of Directors. In addition, the Board of Directors of each fund
declares separate dividends on each class of shares.
The International Growth Funds allocate daily all income, expenses (other than
class-specific expenses), and realized and unrealized gains or losses to each
class of shares based upon the relative proportion of the value of shares
outstanding of each class. Expenses specifically attributable to a particular
class are charged directly to such class. Class-specific expenses charged to
each class during the year ended October 31, 1998, which are included in the
corresponding captions of the Statement of Operations, were as follows:
<TABLE>
<CAPTION>
Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees
Class A Class B Class R Class A Class B Class R Class A Class B Class R
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal International
Emerging Markets Fund, Inc. $26,567 $21,608 $ 5,878 $12,431 $3,105 $ 445 $10,446 $9,086 $15,389
Principal International Fund, Inc. 602,849 299,813 120,269 326,519 78,169 40,326 21,324 14,281 11,794
Principal International SmallCap Fund, Inc. 34,908 38,235 8,261 13,637 4,975 427 8,996 5,349 5,730
</TABLE>
The International Growth Funds value securities for which market quotations are
readily available at market value, which is determined using the last reported
sale price or, if no sales are reported, as is regularly the case for some
securities traded over-the-counter, the last reported bid price. When reliable
market quotations are not considered to be readily available, which may be the
case, for example, with respect to certain debt securities, preferred stocks and
foreign securities, the investments are valued by using 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.
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 each fund's
net asset value. If events materially affecting the value of such securities
occur during such period, then these securities are valued at their fair value
as determined in good faith by the Manager under procedures established and
regularly reviewed by each fund's Board of Directors. To the extent each fund
invests in foreign securities listed on foreign exchanges which trade on days on
which the fund does not determine its net asset value, for example Saturdays and
other customary national U.S. holidays, each fund's net asset value could be
significantly affected on days when shareholders do not have access to the
International Growth Funds.
Certain securities issued by companies in emerging market countries may have
more than one quoted valuation at any given point in time, sometimes referred to
as a "local" price and a "premium" price. The premium price is often a
negotiated price which may not consistently represent a price at which a
specific transaction can be effected. It is the policy of the International
Growth Funds 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 each fund's Board of Directors
as may occasionally be necessary.
The value of foreign securities in foreign currency amounts is expressed in U.S.
dollars at the closing daily rate of exchange. The identified cost of the
portfolio holdings is translated at approximate rates prevailing when acquired.
Income and expense amounts are translated at approximate rates prevailing when
received or paid, with daily accruals of such amounts reported at approximate
rates prevailing at the date of valuation. Since the carrying amount of the
foreign securities is determined based on the exchange rate and market values at
the close of the period, it is not practicable to isolate that portion of the
results of operations arising as a result of changes in the foreign exchange
rates from the fluctuations arising from changes in the market prices of
securities during the period.
The International Growth Funds record investment transactions generally one day
after the trade date, except for short-term investment transactions which are
recorded generally on the trade date. The identified cost basis has been used in
determining the net realized gain or loss from investment transactions and
unrealized appreciation or depreciation of investments. The International Growth
Funds record dividend income on the ex-dividend date, except dividend income
from foreign securities whereby the ex-dividend date has passed; such dividends
are recorded as soon as the International Growth Funds are informed of the
ex-dividend date. Interest income is recognized on an accrual basis.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between trade and
settlement dates on security transactions, and the difference between the amount
of dividends and foreign withholding taxes recorded on the books and the U.S.
dollar equivalent of the amounts actually received or paid. Net unrealized
appreciation on translation of assets and liabilities in foreign currencies
arise from changes in the exchange rate relating to assets and liabilities,
other than investments in securities, purchased and held in non-U.S. denominated
currencies.
The International Growth Funds may, pursuant to an exemptive order issued by the
Securities and Exchange Commission, transfer uninvested funds into a joint
trading acount. The order permits the International Growth Funds' cash balances
to be deposited into a single joint account along with the cash of other
registered investment companies managed by Principal Management Corporation
(formerly known as Princor Management Corporation) (the "Manager"). These
balances may be invested in one or more short-term instruments.
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Dividends and distributions to shareholders from net investment income and
net realized gain from investments and foreign currency transactions are
determined in accordance with federal income tax regulations, which may differ
from generally accepted accounting principles. Permanent book and tax basis
differences are reclassified within the capital accounts based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Reclassifications made for Principal International Emerging Markets Fund, Inc.
and Principal International SmallCap Fund, Inc. for the year ended October 31,
1998 aggregated $75,696 and $181,352 respectively. Other reclassifications made
for the periods ended October 31, 1998 and 1997 were not material.
Dividends and distributions which exceed net investment income and net realized
capital gains for financial reporting purposes, but not for tax purposes, are
reported as dividends in excess of net investment income or distributions in
excess of net realized capital gains. To the extent distributions exceed current
and accumulated earnings and profits for federal income tax purposes, they are
reported as tax return of capital distributions.
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 approximates that used for financial
reporting purposes.
At October 31, 1998, Principal International Emerging Markets Fund, Inc. had net
capital loss carryforwards of approximately $72,000 which expires in 2005 and
$1,350,000 which expires in 2006.
Note 3 -- Management Agreement and Transactions With Affiliates
The International Growth Funds have agreed to pay investment advisory and
management fees to Principal Management Corporation (wholly owned by Princor
Financial Services Corporation, a subsidiary of Principal Life Insurance
Company) computed at an annual percentage rate of each fund's average daily net
assets. The annual rate used in this calculation for the International Growth
Funds is as follows:
<TABLE>
<CAPTION>
Net Asset Value of Funds
(in millions)
First Next Next Next Over
$100 $100 $100 $100 $400
<S> <C> <C> <C> <C> <C>
Principal International Emerging Markets Fund, Inc. 1.25% 1.20% 1.15% 1.10% 1.05%
Principal International Fund, Inc. 0.75% 0.70% 0.65% 0.60% 0.55%
Principal International SmallCap Fund, Inc. 1.20% 1.15% 1.10% 1.05% 1.00%
</TABLE>
The International Growth Funds also reimburse the Manager for transfer and
administrative services, including the cost of accounting, data processing,
supplies and other services rendered.
Princor Financial Services Corporation, as principal underwriter, receives
proceeds of any CDSC on certain Class A and Class B share redemptions. The
charge is based on declining rates which for Class A shares begin at .75%, and
for Class B shares at 4.00%, of the lesser of the current market value or the
cost of shares being redeemed. Princor Financial Services Corporation also
retains sales charges on sales of Class A shares based on declining rates which
begin at 4.75% of the offering price. The aggregate amount of these charges
retained, by fund, for the year ended October 31, 1998 were as follows:
<TABLE>
<CAPTION>
Class A Class B
<S> <C> <C>
Principal International Emerging Markets Fund, Inc. $ 111,414 $ 2,911
Principal International Fund, Inc. 1,271,429 97,586
Principal International SmallCap Fund, Inc. 185,226 11,813
</TABLE>
No brokerage commissions were paid by the International Growth Funds to Princor
Financial Services Corporation during the periods. Brokerage commissions were
paid to other affiliates by the following funds:
<TABLE>
<CAPTION>
Year Ended Periods Ended
October 31, 1998 October 31, 1997
<S> <C> <C>
Principal International Emerging Markets Fund, Inc. $ 4,730 $ 1,586
Principal International Fund, Inc. 138,499 20,595
Principal International SmallCap Fund, Inc. 6,610 1,502
</TABLE>
The International Growth Funds bear distribution and shareholder servicing fees
with respect to Class A shares computed at an annual rate of up to .25% of the
average daily net assets attributable to Class A shares of each fund. Each of
the International Growth Funds adopted a distribution plan with respect to Class
B shares that provides for distribution and shareholder servicing fees computed
at an annual rate of up to 1.00% of the average daily net assets attributable to
Class B shares of each fund. Each of the International Growth Funds adopted a
distribution plan with respect to Class R shares that provides for distribution
and shareholder servicing fees computed at an annual rate of up to .75% of the
average daily net assets attributable to Class R shares of each fund.
Distribution and shareholder servicing fees are paid to Princor Financial
Services Corporation; a portion of the fees are subsequently remitted to retail
dealers. Pursuant to the distribution agreements, fees unused by the principal
underwriter at the end of the fiscal year are returned to the International
Growth Funds.
At October 31, 1998, Principal Life Insurance Company, subsidiaries of Principal
Life Insurance Company and benefit plans sponsored on behalf of Principal Life
Insurance Company owned shares of the International Growth Funds as follows:
<TABLE>
<CAPTION>
Class A Class B Class R
<S> <C> <C> <C>
Principal International Emerging Markets Fund, Inc. 400,000 300,000 300,000
Principal International Fund, Inc. 8,948,596 167 144
Principal International SmallCap Fund, Inc. 400,000 300,000 300,000
</TABLE>
Note 4 -- Investment Transactions
For the year ended October 31, 1998, the cost of investment securities purchased
and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the International Growth Funds
were as follows:
<TABLE>
<CAPTION>
Purchases Sales
<S> <C> <C>
Principal International Emerging Markets Fund, Inc. $ 10,650,789 $ 5,255,733
Principal International Fund, Inc. 160,865,537 133,077,387
Principal International SmallCap Fund, Inc. 24,647,135 18,690,336
</TABLE>
At October 31, 1998, net unrealized appreciation (depreciation) of investments
by the International Growth Funds was composed of the following:
<TABLE>
<CAPTION>
Net Unrealized
Gross Unrealized Appreciation (Depreciation)
Appreciation (Depreciation) of Investments
<S> <C> <C> <C>
Principal International Emerging Markets Fund, Inc. $ 914,650 $ (4,653,225) $(3,738,575)
Principal International Fund, Inc. 75,054,616 (33,731,603) 41,323,013
Principal International SmallCap Fund, Inc. 1,545,687 (2,816,771) (1,271,084)
</TABLE>
At October 31, 1998, the International Growth Funds held the following
securities which were purchased in a private placement transaction and may
require registration, 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 October 31, Percentage of
Security Description Acquisition Cost 1998 Net Assets
<S> <C> <C> <C> <C> <C>
Principal International Al Ahram Beverages Co. ADR 8/21/97 $ 56,100 $ 61,710 .48%
Emerging Markets Fund, Inc. 4/14/98 12,050 11,220 .09
9/28/98 19,350 16,830 .13
Bank Handlowy GDR 8/14/97 50,200 45,600 .35
2/23/98 31,100 22,800 .18
4/2/98 16,625 11,400 .09
4/21/98 16,100 11,400 .09
Banque Libanaise le Commerce
SAL ADR 8/14/97 115,250 86,250 .68
2/19/98 7,440 6,900 .05
Banque Marocaine du Commerce
Exterieur 8/15/97 87,600 116,800 .91
Eesti Uhispank GDR 3/24/98 79,750 25,375 .20
4/2/98 15,250 5,075 .04
Industrial Credit & Investment Corp.
of India ADR 8/14/97 137,750 41,800 .32
10/7/97 31,400 11,000 .09
10/20/97 33,400 11,000 .09
11/10/97 15,000 5,500 .04
12/4/97 10,750 5,500 .04
12/17/97 18,675 9,900 .08
1/13/98 13,975 7,150 .06
6/5/98 13,000 5,500 .04
7/14/98 14,365 7,150 .06
8/28/98 20,988 12,650 .10
Mol Magyar Olaj-Es Gazipari ADR 3/20/98 $150,000 $111,801 .87%
4/14/98 16,250 11,180 .09
5/20/98 13,800 11,180 .09
8/4/98 11,950 8,944 .07
9/2/98 18,113 20,124 .16
9/23/98 20,570 24,596 .19
Paints & Chemical Industries
Co. GDR 9/26/97 149,225 116,522 .92
9/26/97 5,745 5,505 .04
10/20/97 11,700 9,175 .07
10/30/97 19,750 18,350 .14
12/4/97 12,155 11,928 .09
1/23/98 3,450 3,670 .03
4/14/98 14,788 11,928 .09
7/20/98 21,390 21,102 .17
9/1/98 17,040 22,020 .17
Pick Szeged RT GDR 7/7/98 26,510 18,257 .14
7/8/98 27,280 18,257 .14
7/14/98 12,950 8,299 .06
9/2/98 20,400 24,896 .20
9/23/98 14,490 24,896 .20
10/22/98 14,200 16,597 .13
10/27/98 20,410 21,576 .17
Reliance Industries GDR 8/14/97 72,000 30,450 .24
10/24/97 22,125 10,150 .08
12/12/97 21,750 15,225 .12
1/2/98 17,535 10,658 .08
1/13/98 12,750 8,628 .07
4/6/98 13,800 7,612 .06
7/14/98 13,050 9,135 .07
Tata Engineering & Locomotive
Ltd. Co. GDR 8/14/97 71,250 15,209 .12
10/1/97 19,000 5,070 .04
10/20/97 18,900 5,070 .04
12/30/97 7,650 2,282 .02
Videsh Sanchar Nigam Ltd. GDR 8/14/97 132,800 84,000 .66
11/18/97 28,250 21,000 .16
12/2/97 14,250 10,500 .08
12/12/97 10,720 8,400 .07
1/2/98 15,235 11,550 .09
1/13/98 13,620 12,600 .10
3/5/98 10,440 8,400 .07
4/3/98 21,038 17,850 .14
6/5/98 19,800 18,900 .15
7/14/98 11,750 10,500 .08
7/30/98 10,875 10,500 .08
9/28/98 16,688 15,750 .12
1,428,752 11.18
</TABLE>
<TABLE>
<CAPTION>
Value at Value as a
Date of October 31, Percentage of
Security Description Acquisition Cost 1998 Net Assets
<S> <C> <C> <C> <C> <C>
Principal International Fokus Bank 10/9/95 $ 557,692 $1,033,640 .29%
Fund, Inc. 12/17/96 797,392 1,033,640 .29
Kemira OY 12/13/96 610,584 411,838 .11
12/20/96 1,478,458 963,700 .27
2/26/97 1,162,586 831,912 .23
4/8/97 615,051 494,205 .14
4/9/97 41,573 32,947 .01
4,801,882 1.34
Principal International Bure Investment Aktiebolaget AB 8/14/97 46,173 52,963 .25
SmallCap Fund, Inc. 8/18/97 46,092 52,963 .25
8/22/97 8,101 9,268 .04
6/25/98 104,616 84,740 .39
8/5/98 32,121 29,129 .13
8/27/98 34,931 35,750 .16
10/19/98 38,867 42,370 .20
10/20/98 12,055 13,240 .06
Computacenter PLC 5/21/98 188,072 130,342 .60
5/21/98 22,261 21,219 .10
9/28/98 32,653 30,312 .14
10/2/98 64,456 61,382 .28
Industrial & Financial Systems 8/14/97 1,752 3,786 .02
8/18/97 10,528 22,720 .11
10/9/97 26,974 37,867 .17
10/30/97 53,442 75,734 .35
11/12/97 91,032 132,534 .61
Newsquest PLC 10/16/97 227,052 222,735 1.03
11/13/97 35,652 34,604 .16
8/26/98 49,359 43,752 .20
1,137,410 5.25
</TABLE>
The International Growth Funds' investments are with various issuers in various
industries. The Schedules of Investments contained herein summarize
concentrations of credit risk by issuer and industry.
Note 5 -- Foreign Currency Contracts
At October 31, 1998, Principal International Emerging Markets Fund, Inc. and
Principal International Fund, Inc. owned forward contracts to sell Hong Kong
Dollars ("HKD") at specified future dates at fixed exchange rates. Forward
foreign currency contracts are valued at the forward rate, and are
marked-to-market daily. The change in market value is recorded by each fund as
an unrealized gain or loss. When the contract is closed, each fund records a
realized gain or loss equal to the difference between the value of the contract
at the time it was opened and the value at the time it was closed.
<TABLE>
<CAPTION>
Value at
Contracts In Exchange Settlement October 31, Net Unrealized
to Deliver For Date 1998 (Depreciation)
<S> <C> <C> <C> <C> <C>
Principal International
Emerging Markets Fund, Inc. 3,575,000 HKD $ 440,000 3/1/99 $ 459,040 $(19,040)
Principal International Fund, Inc. 16,818,750 HKD 2,070,000 3/1/99 2,159,575 (89,575)
</TABLE>
The use of forward foreign currency contracts does not eliminate fluctuations in
underlying prices of each fund's portfolio securities, but it does establish a
rate of exchange that can be achieved in the future. Although forward foreign
currency contracts limit the risk of loss due to a decline in the value of the
hedged currency, they also limit any potential gain that might result should the
value of the currency increase. In addition, each fund could be exposed to risks
if the counterparties to the contracts are unable to meet the terms of their
contracts.
Note 6 -- Capital Share Transactions
Transactions in Capital Stock by fund were as follows:
<TABLE>
<CAPTION>
Principal Principal
International Principal International
Emerging Markets International SmallCap
Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Year Ended October 31, 1998:
Shares sold:
Class A ......................................... 620,056 6,434,705 770,054
Class B ......................................... 169,453 1,480,411 260,731
Class R ......................................... 87,602 1,035,347 47,319
Shares issued in reinvestment of dividends and distributions:
Class A ........................................... -- 1,012,117 --
Class B ........................................... -- 95,849 --
Class R ......................................... -- 36,589 --
Shares redeemed:
Class A ......................................... (110,092) (4,688,589) (216,075)
Class B ......................................... (43,618) (672,121) (79,482)
Class R ......................................... (53,356) (400,191) (17,457)
Net Increase 670,045 4,334,117 765,090
Periods Ended October 31, 1997:
Shares sold:
Class A ......................................... 608,541 10,828,384 624,104
Class B ......................................... 389,744 2,259,005 489,175
Class R ......................................... 303,043 1,249,248 302,174
Shares issued in reinvestment of dividends and distributions:
Class A ........................................... -- 1,075,120 --
Class B ........................................... -- 85,277 --
Class R ......................................... -- 9,208 --
Shares redeemed:
Class A ......................................... (844) (2,929,702) (707)
Class B ......................................... (13,468) (638,189) (9,721)
Class R ......................................... -- (118,068) (585)
Net Increase 1,287,016 11,820,283 1,404,440
</TABLE>
Note 7 -- Line of Credit
The International Growth Funds participate with other funds and portfolios
managed by Principal Management Corporation in an unsecured joint line of credit
with a bank, which allows the funds to borrow up to $60,000,000, collectively.
Borrowings are made solely to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Interest is charged to each fund,
based on its borrowings, at a rate equal to the Fed Funds Rate plus .50%.
Additionally, a commitment fee is charged at the annual rate of .08% on the
average unused portion of the line of credit. The commitment fee is allocated
among the participating funds and portfolios in proportion to their average net
assets during each quarter. At October 31, 1998, the Principal International
SmallCap Fund, Inc. had an outstanding borrowing of $85,000 at an annual rate of
5.93%. No other International Growth Fund had outstanding borrowings at October
31, 1998 under the line of credit.
Note 8 -- Year 2000 Problem (Unaudited)
Like other mutual funds, financial and business organizations and individuals
around the world, the International Growth Funds could be adversely affected if
the computer systems used by the Manager and other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." The Manager
is taking steps it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems it uses and to obtain reasonable
assurances that comparable steps are being taken by each fund's other major
service providers. At this time, however there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the funds.
Note 9 -- Euro Conversion (Unaudited)
The planned introduction of a new European currency, the euro, may result in
uncertainties for European securities in the markets in which they trade and
with respect to the operation of each of the International Growth Funds'
portfolios. Currently, the euro is expected to be introduced on January 1, 1999
by eleven European countries that are members of the European Economic and
Monetary Union ("EMU"). The introduction of the euro will require the
redenomination of European debt and equity securities over a period of time,
which may result in various accounting differences and/or tax treatments that
otherwise would not likely occur. Additional questions are raised by the fact
that certain other EMU members, including the United Kingdom, will not
officially be implementing the euro on January 1, 1999. If the introduction of
the euro does not take place as planned, there could be negative effects, such
as severe currency fluctuations and market disruptions.
The Manager is actively working to address euro-related issues and understands
that other key service providers are taking similar steps. At this time,
however, no one knows precisely what the degree of impact will be. To the extent
that the market impact or effect on a portfolio holding is negative, it could
hurt the fund's performance.
GROWTH FUNDS (INTERNATIONAL)
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Shares
Held Value
Common Stocks (85.92%)
Air Transportation, Scheduled (0.28%)
Cintra SA De Cv Ser'anpv 73,000 $ 35,336
Bakery Products (0.58%)
Nong Shim Co., Ltd. 1,600 74,576
Beer, Wine & Distilled Beverages (1.45%)
South African Breweries Ltd. 9,531 184,849
Beverages (8.18%)
Al Ahram Beverages Co. ADR 3,200(a) 89,760
Embotelladora Andina ADR, Series A 9,800 130,463
PanAmerican Beverages ADR 9,100 184,275
Fomento Economico Mexicano ADR 10,550 274,959
Pepsi-Gemex SA De Cv GDR 11,400 74,100
Quilmes Industrial Quines SA ADR 31,900 293,081
1,046,638
Blast Furnace & Basic Steel
Products (1.29%)
Hylsamex SA, Class B 36,100 49,428
Tubos De Acero De Mexico ADR 13,600 115,600
165,028
Cable & Other Pay TV Services (1.44%)
Ceske Radiokomunikace GDR 6,050(b) 184,525
Central Reserve Depositories (0.78%)
Banco Santiago SA ADR 7,300 99,462
Chemicals & Allied Products (0.81%)
Sarantis SA 8,980 103,351
Commercial Banks (5.61%)
Banco Portugues Do Atlantico 5,900(b) 118,341
Banco Rio De La Plata ADR 16,900 152,100
Bank Handlowy GDR 8,000(a) 91,200
Banque Libanaise Le Commerce SAL ADR 5,400(a) 93,150
Banque Marocaine du Commerce Exterieur 4,800(a) 116,880
Big Bank Gdanski SA 111,995 115,395
Eesti Uhispank GDR 6,000(a)(b) 30,450
717,516
Communications Equipment (2.25%)
ECI Telecommunications Ltd. ADR 8,700 288,187
Computer & Data Processing
Services (1.02%)
Tecnomatix Technologies Ltd. ADR 9,000(b) 130,500
Computer & Office Equipment (2.42%)
Orbotech Ltd. ADR 7,100(b) 248,500
Sindo Ricoh Co. 2,000 60,479
308,979
Construction & Related Machinery (0.87%)
Barlow Ltd. 23,458 110,812
Consumer Products (2.89%)
Rothmans Industries Ltd. 43,000 217,875
Souza Cruz SA 12,100 82,163
Tabak AS 300 70,337
370,375
Crude Petroleum & Natural Gas (1.47%)
Mol Magyar Olaj-Es Gazipari ADR 8,400(a) 187,825
Deep Sea Foreign Transportation of
Freight (0.11%)
Noble Group Ltd. ADR 98,000(b) 14,210
Drugs (1.32%)
Teva Pharmaceutical ADR 4,300 169,581
Eating & Drinking Places (1.00%)
Cafe De Coral Holdings Ltd. 373,000 127,608
Electric Services (3.43%)
Companhia Paranaense De Enersis ADR 20,400 158,100
Electricidade De Portugal SA 5,700 143,407
Enersis SA ADR 6,600 137,775
439,282
Electrical Industrial Apparatus (0.33%)
Guangdong Kelon Electric Holdings 50,000 42,603
Electronic Components &
Accessories (3.19%)
Elec & Eltek International ADR 34,500 172,500
Varitronix 90,000 170,798
Wong Circuits Holdings Ltd. ADR 80,000 65,200
408,498
Electronic Distribution
Equipment (3.87%)
Tadiran Ltd. ADR 4,900 144,244
Techtronic Industries Co. 1,164,000 219,396
Vtech Holdings Ltd. 35,000 131,261
494,901
Engines & Turbines (0.59%)
First Tractor Co. Ltd. 242,000 76,543
Federal & Federally Sponsored
Credit (0.92%)
Industrial Credit & Investment
Corp. of India ADR 21,300(a) 117,150
Fire, Marine & Casualty Insurance (0.45%)
Alfa, Series A 21,700 57,237
Foreign Banks, Branches &
Agencies (1.13%)
Bank Leumi Le - Israel 55,000 70,054
Credicorp Ltd. ADR 11,050 74,587
144,641
Furniture & Home Furnishing
Stores (0.58%)
Grupo Elektra SA CPO 175,000 74,683
Grocery Stores (1.19%)
Blue Square Chain Investments &
Property Ltd. 11,900(b) 151,571
Holding Offices (1.62%)
The India Fund, Inc. ADR 33,400(b)$ 206,662
Measuring & Controlling Devices (2.24%)
IDT Holdings Singapore Ltd. ADR 195,000 149,175
Moulin International Holding 1,230,000 136,561
285,736
Meat Products (1.04%)
Pick Szeged RT GDR 16,000(a) 132,778
Medical Instruments & Supplies (1.70%)
Medison Co. 19,600 216,876
Metal Cans & Shipping Containers (0.62%)
Colep 9,100(b) 78,746
Miscellaneous Electrical Equipment &
Supplies (1.28%)
G.P. Batteries International 74,500 163,804
Miscellaneous Food & Kindred
Products (0.90%)
Thai Union Frozen Products 28,000 115,067
Miscellaneous Investing (1.07%)
Banco Latino Americano
De Exportaciones 6,300 136,631
Miscellaneous Non-Durable (1.90%)
Desc SA ADR 12,900 243,487
Miscellaneous Textile Goods (2.07%)
Esprit Holdings Ltd. 466,000 172,960
Reliance Industries GDR 18,100(a) 91,858
264,818
Motor Vehicles & Equipment (0.22%)
Tata Engineering & Locomotive Ltd.
Co. GDR 10,900(a) 27,631
Newspapers (0.62%)
Investec-Consultadoria Internacional SA 2,000 78,935
Oil & Gas Field Services (0.17%)
Gulf Indonesia Resources Ltd. ADR 2,200(b) 21,725
Paints & Allied Products (1.72%)
Paints & Chemical Industries Co. GDR 24,000(a) 220,200
Paperboard Containers & Boxes (0.69%)
Hung Hing Print Group 228,000 88,304
Petroleum Refining (3.99%)
Sasol Ltd. 41,100 201,110
YPF Sociedad Anonima ADR 10,700 309,631
510,741
Search & Navigation Equipment (1.70%)
Elbit Systems Ltd. ADR 18,800 217,375
Security Brokers & Dealers (0.00%)
Peregrine Investment Holdings 62,000(c) --
Security & Commodity Exchanges (0.71%)
OTK Holdings Ltd. ADR 146,000 91,090
Services, NEC (0.92%)
IDT International 900,000 $ 117,351
Telephone Communications (11.29%)
Compania Anonima Telefonos De
Venezuela ADR 4,200 65,100
Compania De Telecomunicacion De
Chile ADR 7,400 162,338
Global Telesystems Group, Inc. ADR 5,400(b) 216,338
Hellenic Telecommunication 7,811 177,578
Matav RT ADR 9,000 241,875
Telec De Sao Paulo SA 200,000(b) 21,880
Telecommunicacoes Brasileiras SA ADR 2,200 167,063
Telefonica De Argentina ADR 4,900 162,006
Videsh Sanchar Nigam Ltd. GDR 21,900(a)(b) 229,950
1,444,128
Total Common Stocks 10,988,552
Preferred Stocks (6.70%)
Cement, Hydraulic (1.56%)
Titan Cement Co. 3,700 199,578
Central Reserve Depositories (0.43%)
Banco Ganadero SA ADR 7,700 55,344
Electric Services (1.05%)
Centrais Electricas De Santa Catarina 247,000 134,591
Industrial Inorganic Chemicals (0.27%)
Fertilizantes Fosfatados Fosfertil NPV 13,800,000 34,012
Telephone Communication (3.39%)
Telemig Celular 1,300,000(b) 12,206
Telesp Celular SA 1,290,000(b) 62,723
Telecomunicacoes De Minus Gerais 1,220,000 36,808
Telec De Sao Paulo SA 1,940,000(b) 322,013
433,750
Total Preferred Stocks 857,275
Principal
Amount Value
Commercial Paper (7.43%)
Federal & Federally Sponsored
Credit (7.43%)
Federal National Mortgage Association;
5.45%; 11/2/1998 $949,569 $ 949,856
Total Portfolio Investments (100.05%) 12,795,683
Liabilities, net of cash, receivables and
other assets (-0.05%) (5,778)
Total Net Assets (100.00%) $12,789,905
(a) Restricted security - See Note 4 to the financial statements.
(b) Non-income producing security - No dividend paid during the period.
(c) Peregrine Investment Holdings has filed a plan of liquidation.
Principal International Emerging Markets Fund, Inc.
Investments by Country
Total Percentage of
Country Value Total Value
Argentina $ 916,819 7.17%
Brazil 1,031,560 8.06
Chile 530,038 4.14
China 119,145 0.93
Colombia 55,344 0.43
Czech Republic 471,200 3.68
Egypt 309,960 2.42
Estonia 30,450 0.24
Greece 480,507 3.76
Hong Kong 1,164,238 9.10
Hungary 562,477 4.40
India 673,252 5.26
Indonesia 21,725 0.17
Israel 1,420,012 11.10
Korea, Republic of 351,932 2.75
Lebanon 93,150 0.73
Mexico 1,109,106 8.67
Morocco 116,880 0.91
Panama 136,631 1.07
Peru 74,587 0.58
Poland 206,595 1.61
Portugal 419,428 3.28
Singapore 782,763 6.12
South Africa 587,861 4.59
Thailand 115,067 0.90
United States 949,856 7.42
Venezuela 65,100 0.51
Total $12,795,683 100.00%
PRINCIPAL INTERNATIONAL FUND, INC.
Shares
Held Value
Common Stocks (93.28%)
Advertising (1.75%)
WPP Group PLC 1,295,000 $ 6,354,407
Beverages (0.87%)
PanAmerican Beverages ADR 156,300 3,165,075
Blast Furnace & Basic Steel
Products (0.31%)
Tubos De Acero De Mexico ADR 132,000 1,122,000
Central Reserve Depositories (2.62%)
National Westminster Bank 329,931 5,511,549
Union Bank of Norway 209,660 3,981,603
9,493,152
Commercial Banks (14.01%)
Bank of Ireland 428,239 7,896,075
Barclays PLC 146,594 3,147,327
BG Bank 106,000 6,145,237
Fokus Bank 240,000(a) 2,067,280
Istituto Mobiliare Italiano 413,000 6,353,066
Merita PLC Class A 1,187,670 6,364,546
National Australia Bank Ltd. 326,437 4,306,363
Royal Bank of Canada Montreal Quebec 143,000 6,572,426
Svenska Handelsbanken Class A 30,000 1,260,736
Svenska Handelsbanken AB Free 172,750 6,640,948
50,754,004
Communications Equipment (2.06%)
ECI Telecommunications Ltd. ADR 225,000 7,453,125
Communications Services, NEC (1.10%)
Koninklijke KPN NV 102,780 3,995,245
Computer & Office Equipment (1.24%)
Orbotech Ltd. ADR 128,200(b) 4,487,000
Concrete, Gypsum & Plaster
Products (1.78%)
Lafarge SA 63,000 6,439,591
Consumer Products (5.36%)
Imasco Ltd. 413,457 7,750,840
Imperial Tobacco Group PLC 303,500 3,123,332
Societe Nationale D'Exploitation
Industrielle Des Tabacs et
Allumettes 43,750 2,598,133
Swedish Match Co. 1,688,000 5,938,445
19,410,750
Copper Ores (0.96%)
Trelleborg AB Class B 379,000 3,466,672
Deep Sea Foreign
Transportation of Freight (0.58%)
Van Ommeren NV 64,841 2,100,406
Drugs (5.62%)
Elan Corp. PLC ADR 75,000(b) 5,254,688
Novartis AG 4,423 7,969,999
Pharmacia & Upjohn, Inc. 135,000 7,146,562
20,371,249
Electrical Goods (1.28%)
Smiths Industries PLC 344,000 4,623,184
Electronic Components &
Accessories (1.22%)
Elec & Eltek International ADR 757,400 3,787,000
Varitronix 340,000 645,236
4,432,236
Electronic Distribution
Equipment (2.31%)
Phillips Electronics 157,100 8,361,050
Engines & Turbines (1.20%)
RHI AG 89,000 2,787,906
Scapa Group PLC 835,400 1,559,937
4,347,843
Farm & Garden Machinery (0.81%)
New Holland NV 231,000 2,916,375
Finance Services (0.50%)
Takefuji Corp. 34,000 $ 1,811,948
Gas Production & Distribution (0.79%)
Omv AG 30,600 2,870,363
Hose, Belting, Gaskets & Packing (0.55%)
Phoenix AG 94,000 1,986,503
Industrial Inorganic Chemicals (0.76%)
Kemira OY 332,000(a) 2,734,602
Investment Offices (1.40%)
AMVESCAP PLC 671,400 5,076,644
Life Insurance (1.03%)
QBE Insurance Group Ltd. 946,390 3,721,878
Meat Products (5.79%)
Danisco AS 120,000 6,632,853
Orkla ASA Class A 111,000 1,874,591
Orkla ASA Class B 349,600 5,216,491
Unilever NV 97,800 7,257,722
20,981,657
Miscellaneous Chemical Products (1.52%)
Hoechst AG 132,000 5,507,382
Miscellaneous Converted
Paper Products (1.64%)
Bunzl PLC 1,285,000 5,939,500
Miscellaneous Food & Kindred
Products (1.03%)
Greencore Group PLC 991,000 3,734,168
Miscellaneous Non-Durable Goods (2.93%)
Desc S.A. Class B 3,140,000 2,878,597
Diageo PLC 716,179 7,736,044
10,614,641
Miscellaneous Textile Goods (0.73%)
Esprit Holdings Ltd. 7,082,000 2,628,550
Miscellaneous Transportation
Equipment (0.79%)
Autoliv, Inc. 86,000 2,843,375
Motor Vehicles & Equipment (1.98%)
E.C.I.A. Equipment & Composants 20,000 3,797,098
Mayflower Corp. PLC 1,557,000 3,389,765
7,186,863
Newspapers (0.77%)
Publishing & Broadcasting Ltd. 710,000 2,805,479
Oil & Gas Field Services (0.94%)
Eni Spa 571,000 3,398,392
Paperboard Containers & Boxes (0.93%)
Buhrmann NV 187,200 3,357,754
Personnel Supply Services (1.02%)
Vedior NV 144,265 3,676,767
Petroleum Refining (5.25%)
Repsol Petroleo SA 155,400 7,785,649
Sasol Ltd. 751,000 3,674,784
YPF Sociedad Anonima ADR 261,000 7,552,688
19,013,121
Plastic Materials & Synthetics (0.96%)
Astra AB 222,466 $ 3,486,320
Pulp Mills (2.38%)
Lassila & Tikanoja Ltd. OY 164,000 3,906,006
Upm-Kymmene OY 196,980 4,711,043
8,617,049
Radio & Television Broadcasting (0.91%)
Mirror Group PLC 1,351,000 3,291,971
Security Brokers & Dealers (0.00%)
Peregrine Investment Holdings 2,289,000(b)(c) --
Soap, Cleaners & Toilet Goods (3.29%)
Benckiser NV Class B 98,650 5,593,598
Reckitt & Colman PLC 367,297 6,329,515
11,923,113
Special Industry Machinery (1.55%)
Cookson Group 2,673,200 5,596,018
Sugar & Confectionery Products (2.35%)
Nestle 4,004 8,516,047
Telephone Communications (6.41%)
Nokia Corp. Class A ADR 62,000 5,769,875
Swisscom AG 10,600(b) 3,593,106
Telecom Corp. of New Zealand Ltd. 1,395,000 5,723,645
Telecom Italia-DI 1,617,200 8,154,110
23,240,736
Total Common Stocks 337,854,205
Preferred Stock (0.70%)
Commercial Banks (0.70%)
National Australia Bank
ECU Convertible 96,000 2,538,000
Principal
Amount Value
Commercial Paper (7.74%)
Business Credit Institutions (3.19%)
General Electric Capital Corp.;
5.18%; 11/3/1998 $ 5,750,000 $ 5,748,345
5.45%; 11/6/1998 5,805,000 5,800,606
11,548,951
Personal Credit Institutions (4.55%)
Ford Motor Credit Co.;
5.15%; 11/4/1998 6,035,000 6,032,410
Household Finance Corp.;
5.10%; 11/2/1998 10,440,000 10,438,521
16,470,931
Total Commercial Paper (7.74%) 28,019,882
Total Portfolio Investments (101.72%) 368,412,087
Liabilities, net of cash, receivables
and other assets (-1.72%) (6,239,752)
Total Net Assets (100.00%) $362,172,335
(a)Restricted security - See Note 4 to the financial statements.
(b)Non-income producing security - No dividend paid during the period.
(c)Peregrine Investment Holdings has filed a plan of liquidation.
Principal International Fund, Inc.
Investments by Country
Total Percentage of
Country Value Total Value
Argentina $ 7,552,687 2.05%
Australia 13,371,720 3.63
Austria 5,658,268 1.54
Canada 14,323,266 3.89
Denmark 12,778,090 3.47
Finland 23,486,072 6.37
France 12,834,822 3.48
Germany 7,493,885 2.03
Hong Kong 3,273,786 0.89
Israel 11,940,125 3.24
Italy 17,905,568 4.86
Japan 1,811,948 0.49
Mexico 7,165,672 1.95
Netherlands 37,258,918 10.11
New Zealand 5,723,645 1.55
Norway 13,139,965 3.57
Singapore 3,787,000 1.03
South Africa 3,674,784 1.00
Spain 7,785,649 2.11
Sweden 23,636,496 6.42
Switzerland 20,079,153 5.45
United Kingdom 78,564,123 21.32
United States 35,166,445 9.55
Total $368,412,087 100.00%
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Shares
Held Value
Common Stocks (80.44%)
Advertising (2.42%)
Industrial & Financial Systems 28,800(a)(b)$272,641
United Group Ltd. 170,000 252,826
525,467
Air Transportation, Scheduled (1.34%)
Ryanair Holdings PLC ADR 9,900(a) 290,812
Airports, Flying Fields
& Services (3.63%)
Aeroporti Di Roma 29,400 183,952
Auckland International Airport Ltd 394,500(a) 409,355
Virgin Express Holdings ADR 23,800(a) 193,375
786,682
Central Reserve Depositories (1.09%)
Union Bank of Norway 12,420 235,865
Commercial Banks (1.38%)
Banco Pastor SA 5,600 298,818
Communications Equipment (1.08%)
Research In Motion Ltd. 67,900(a)$ 234,825
Computer & Data Processing
Services (4.64%)
Computacenter PLC 32,100(a)(b) 243,255
Computershare Ltd. 63,900 270,386
Equant ADR 4,000(a) 175,000
Intentia International AB 3,800(a) 101,601
Merkantildata ASA 21,500 215,816
1,006,058
Computer & Office Equipment (1.21%)
Orbotech Ltd. ADR 7,500(a) 262,500
Drugs (1.44%)
Fabrica Espanola De Productos 20,760 312,616
Electric Services (2.99%)
Independent Energy Holdings ADR 36,400(a) 245,700
Vestas Wind Systems 8,300(a) 402,085
647,785
Electrical Industrial Apparatus (0.47%)
Doncasters PLC ADR 7,300(a) 102,200
Electrical Work (1.25%)
Internatio-Muller NV 2,200 53,007
Telesystem International
Wireless, Inc. 20,800(a) 217,820
270,827
Electronic Components &
Accessories (0.41%)
Elec & Eltek International ADR 17,900 89,500
Electronic Distribution
Equipment (3.67%)
C/TAC NV 14,500(a) 308,993
Techtronic Industries Co. 1,447,000 272,737
Vtech Holdings Ltd. 57,000 213,768
795,498
Engines & Turbines (0.49%)
RHI AG 3,400 106,504
Fabricated Rubber Products, NEC (1.50%)
Semperit AG Holding 3,000 324,405
Grocery Stores (0.35%)
Superdiplo SA 2,900(a) 74,907
Hose, Belting, Gaskets & Packing (2.01%)
Phoenix AG 20,600 435,340
Hotels & Motels (0.66%)
Choice Hotels Scandinavia 110,000(a) 143,245
Household Furniture (0.68%)
Ekornes ASA 16,000 146,500
Investment Offices (0.68%)
Tyndall Australia Ltd. 121,442 146,604
Life Insurance (1.01%)
Scor SA 3,800 217,871
Measuring & Controlling Devices (0.53%)
Sensonor ASA 59,900(a) 113,755
Meat Products (0.93%)
Perkins Foods PLC 89,360 201,281
Medical Instruments & Supplies (1.12%)
Cochlear Ltd. 47,900 241,611
Metalworking Machinery (2.11%)
Mikron Holding AG 2,200 458,166
Miscellaneous Amusement, Recreation
Services (1.89%)
Tab Ltd. 215,500(a) 408,999
Miscellaneous Business Services (0.38%)
Enator AB 3,400 81,772
Miscellaneous Electrical Equipment &
Supplies (2.41%)
Kaba Holding AG, Class B 1,080 522,416
Miscellaneous Food & Kindred
Products (1.25%)
Greencore Group PLC 72,100 271,679
Miscellaneous Manufacturers (1.06%)
Docdata NV 13,600(a) 229,376
Miscellaneous Non-Durable Goods (2.66%)
Austria Tabakwerke AG 8,200 577,063
Miscellaneous Plastics Products,
NEC (1.06%)
Airspray NV 7,700(a) 230,463
Miscellaneous Primary Metal
Products (0.00%)
YBM Magnex International, Inc. 28,300(a) 183
Miscellaneous Transportation
Services (0.53%)
ASG AB, Class B 5,500 114,688
Motor Vehicles & Equipment (1.40%)
E.C.I.A. Equipment & Composants 1,100 208,840
Mayflower Corp. PLC 43,000 93,616
302,456
Newspapers (1.39%)
Newsquest PLC 75,700(b) 301,091
Non-Classifiable Establishments (1.48%)
Bure Investment Aktiebolaget AB 24,200(b) 320,423
Non-Residential Building
Construction (0.54%)
Algeco 1,200 116,396
Oil & Gas Field Services (2.49%)
Cie Generale De Geophysique 800(a) 51,828
Cie Generale De Geophysique ADR 2,500(a) 33,125
Det Sondenfjelds-Norske
Dampskibsselska 9,400(a) 133,247
Hydralift ASA, A Shares 19,000(a) 118,557
Hydralift ASA, B Shares 3,800(a) 21,907
Petrolia Drilling ASA 75,300(a) 179,772
538,436
Personnel Supply Services (2.47%)
Dis Deutshcer Industries Service AG 3,100 $ 150,678
Unique International NV 13,700 383,637
534,315
Pulp Mills (2.73%)
Lassila & Tikanoja Ltd. OY 14,800 352,493
Miquel Y Costas 7,300 237,961
590,454
Real Estate Agents & Managers (1.27%)
Tornet Fastighet 21,500 275,046
Sanitary Services (1.81%)
De Sammensluttede Vognmand AS 4,500 393,111
Security Brokers & Dealers (4.18%)
AOT NV 29,200 362,718
Kempen & Co. NV 8,212 448,484
Van Der Moolen Holdings 1,365 95,376
906,578
Services To Buildings (0.72%)
Spotless Group Ltd. 71,000 156,842
Special Industry Machinery (1.09%)
Aixtron 1,400 237,112
Telephone Communication (7.80%)
Aapt Ltd. 71,400(a) 142,175
Esat Telecom Group PLC ADR 8,000(a) 242,000
Esprit Telecom Group PLC ADR 20,900(a) 376,200
Global Telesystems Group, Inc. ADR 6,700(a) 268,419
Metronet Communications ADR, Class B 28,800(a) 662,400
1,691,194
Trusts (0.74%)
NHP PLC 62,040(a) 160,004
Total Common Stocks 17,429,739
Principal
Amount Value
Commercial Paper (18.48%)
Federal & Federally Sponsored
Credit (18.48%)
Federal Home Loan Mortgage Corporation;
4.74%; 11/4/1998 $2,004,208 $2,004,208
Federal National Mortgage Association;
5.45%; 11/2/1998 1,999,697 1,999,697
Total Commercial Paper 4,003,905
Total Portfolio Investments (98.92%) 21,433,644
Cash and receivables, net of liabilities (1.08%) 233,598
Total Net Assets (100.00%) $21,667,242
(a) Non-income producing security - No dividend paid during the period.
(b) Restricted security - See Note 4 to the financial statements.
Principal International SmallCap Fund, Inc.
Investments by Country
Total Percentage of
Country Value Total Value
Australia $1,619,443 7.56%
Austria 1,007,971 4.70
Belgium 193,375 0.90
Canada 1,115,228 5.20
Czech Republic 268,419 1.25
Denmark 795,196 3.71
Finland 352,493 1.64
France 628,060 2.93
Germany 823,131 3.84
Hong Kong 486,505 2.27
Ireland 532,812 2.49
Israel 262,500 1.22
Italy 183,952 0.86
Netherlands 2,287,055 10.67
New Zealand 409,355 1.91
Norway 1,308,664 6.11
Singapore 89,500 0.42
Spain 924,301 4.31
Sweden 1,166,171 5.44
Switzerland 980,583 4.57
United Kingdom 1,995,025 9.31
United States 4,003,905 18.69
Total $21,433,644 100.00%
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Class A shares 1998 1997(a)
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $8.29 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.02) (.01)
Net Realized and Unrealized Gain (Loss) on Investments (1.73) (1.21)
Total from Investment Operations (1.75) (1.22)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --
Total Dividends and Distributions -- --
Net Asset Value, End of Period......................... $6.54 $8.29
Total Return(b)........................................ (21.11)% (10.18)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $7,312 $5,039
Ratio of Expenses to Average Net Assets............. 3.31% 2.03%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.36)% (.32)%(d)
Portfolio Turnover Rate............................. 45.2% 21.4%(d)
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Class B shares 1998 1997(a)
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $8.28 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.05) (.01)
Net Realized and Unrealized Gain (Loss) on Investments (1.71) (1.22)
Total from Investment Operations (1.76) (1.23)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --
Total Dividends and Distributions -- --
Net Asset Value, End of Period......................... $6.52 $8.28
Total Return(b)........................................ (21.26)% (10.29)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $3,275 $3,116
Ratio of Expenses to Average Net Assets............. 3.59% 2.16%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.69)% (.46)%(d)
Portfolio Turnover Rate............................. 45.2% 21.4%(d)
............................
PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND, INC.
Class R shares 1998 1997(a)
- --------------------------------------------------------------------------------
Net Asset Value, Beginning of Period................... $8.28 $9.51
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.04) (.01)
Net Realized and Unrealized Gain (Loss) on Investments (1.71) (1.22)
Total from Investment Operations (1.75) (1.23)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --
Total Dividends and Distributions -- --
Net Asset Value, End of Period......................... $6.53 $8.28
Total Return(b)........................................ (21.14)% 10.29)%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $2,202 $2,510
Ratio of Expenses to Average Net Assets............. 3.47% 2.20%(d)
Ratio of Net Investment Income (Operating Loss)
to Average Net Assets............................. (.60)% (.51)%(d)
Portfolio Turnover Rate............................. 45.2% 21.4%(d)
See accompanying notes.
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL FUND, INC.(e)
Class A shares 1998 1997 1996 1995 1994
- -------------------------------------------------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.33 $8.14 $7.28 $7.44 $6.85
Income from Investment Operations:
Net Investment Income............................... .13 .09 .10 .08 .01
Net Realized and Unrealized Gain (Loss) on Investments .04 1.52 1.17 (.02) .64
Total from Investment Operations .17 1.61 1.27 .06 .65
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.10) (.11) (.08) (.03) (.02)
Distributions from Capital Gains.................... (.20) (.31) (.33) (.19) (.04)
Total Dividends and Distributions (.30) (.42) (.41) (.22) (.06)
Net Asset Value, End of Period......................... $9.20 $9.33 $8.14 $7.28 $7.44
Total Return(b)........................................ 1.93% 20.46% 18.36% 1.03% 9.60%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $302,757 $281,158 $172,276 $126,554 $115,812
Ratio of Expenses to Average Net Assets............. 1.25% 1.39% 1.45% 1.63% 1.74%
Ratio of Net Investment Income to Average Net Assets 1.45% 1.25% 1.43% 1.10% .10%
Portfolio Turnover Rate............................. 38.7% 26.6% 23.8% 35.4% 13.2%
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL FUND, INC.(e)
Class B shares 1998 1997 1996 1995(f)
- ------------------------------------------------------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.26 $8.07 $7.24 $6.71
Income from Investment Operations:
Net Investment Income............................... .07 .03 .03 .05
Net Realized and Unrealized Gain (Loss) on Investments .04 1.51 1.15 .51
Total from Investment Operations .11 1.54 1.18 .56
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.03) (.04) (.02) (.03)
Distributions from Capital Gains.................... (.20) (.31) (.33) --
Total Dividends and Distributions (.23) (.35) (.35) (.03)
Net Asset Value, End of Period......................... $9.14 $9.26 $8.07 $7.24
Total Return(b)........................................ 1.27% 19.62% 17.16% 9.77%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $41,676 $33,842 $15,745 $3,908
Ratio of Expenses to Average Net Assets............. 1.91% 2.17% 2.28% 2.19%(d)
Ratio of Net Investment Income to Average Net Assets .77% .42% .64% .58%(d)
Portfolio Turnover Rate............................. 38.7% 26.6% 23.8% 35.4%(d)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL FUND, INC.(e)
Class R shares 1998 1997 1996(g)
- ------------------------------------------------------------------- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period................... $9.27 $8.12 $7.48
Income from Investment Operations:
Net Investment Income............................... .06 .07 .01
Net Realized and Unrealized Gain (Loss) on Investments .04 1.47 .63
Total from Investment Operations .10 1.54 .64
Less Dividends and Distributions:
Dividends from Net Investment Income................ (.04) (.08) --
Distributions from Capital Gains.................... (.20) (.31) --
Total Dividends and Distributions (.24) (.39) --
Net Asset Value, End of Period......................... $9.13 $9.27 $8.12
Total Return(b)........................................ 1.13% 19.65% 9.29%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $17,739 $11,773 $1,057
Ratio of Expenses to Average Net Assets............. 2.01% 2.10% 1.59%(d)
Ratio of Net Investment Income to Average Net Assets .67% .44% .78%(d)
Portfolio Turnover Rate............................. 38.7% 26.6% 23.8%(d)
</TABLE>
See accompanying notes.
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Class A shares 1998 1997(a)
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period................... $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.07) (.01)
Net Realized and Unrealized Gain (Loss) on Investments .10 (.07)
Total from Investment Operations .03 (.08)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --
Total Dividends and Distributions -- --
Net Asset Value, End of Period......................... $9.99 $9.96
Total Return(b)........................................ .30% .50%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $11,765 $6,210
Ratio of Expenses to Average Net Assets............. 2.66% 1.99%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.81)% (.40)%(d)
Portfolio Turnover Rate............................. 99.8% 10.4%(d)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Class B shares 1998 1997(a)
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period................... $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.10) (.01)
Net Realized and Unrealized Gain (Loss) on Investments .11 (.07)
Total from Investment Operations .01 (.08)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --
Total Dividends and Distributions -- --
Net Asset Value, End of Period......................... $9.97 $9.96
Total Return(b)........................................ .10% .50%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $6,585 $4,774
Ratio of Expenses to Average Net Assets............. 2.90% 2.07%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (1.05)% (.47)%(d)
Portfolio Turnover Rate............................. 99.8% 10.4%(d)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC.
Class R shares 1998 1997(a)
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Asset Value, Beginning of Period................... $9.96 $10.04
Income from Investment Operations:
Net Investment Income (Operating Loss).............. (.07) (.01)
Net Realized and Unrealized Gain (Loss) on Investments .12 (.07)
Total from Investment Operations .05 (.08)
Less Dividends and Distributions:
Dividends from Net Investment Income................ -- --
Distributions from Capital Gains.................... -- --
Total Dividends and Distributions -- --
Net Asset Value, End of Period......................... $10.01 $9.96
Total Return(b)........................................ .50% .50%(c)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............ $3,317 $3,004
Ratio of Expenses to Average Net Assets............. 2.51% 2.15%(d)
Ratio of Net Investment Income (Operating Loss) to
Average Net Assets................................ (.68)% (.54)%(d)
Portfolio Turnover Rate............................. 99.8% 10.4%(d)
</TABLE>
See accompanying notes.
Notes to Financial Highlights
(a) Period from August 29, 1997, date Class A and Class B shares first offered
to the public and Class R shares first offered to eligible purchasers,
through October 31, 1997. Principal International Emerging Markets Fund,
Inc. and Principal International SmallCap Fund, Inc. classes of shares
recognized net investment income as follows for the period from the initial
purchase of shares on August 14, 1997, through August 28, 1997, none of
which was distributed to the sole shareholder, Principal Life Insurance
Company. Principal International Emerging Markets Fund, Inc. and Principal
International SmallCap Fund, Inc. incurred unrealized gains (losses) on
investments during the initial interim period as follows. This represents
Class A, Class B and Class R share activities prior to the initial public
offering of all classes of shares of each fund.
Per Share
Net Investment
Income
Principal International Emerging Markets Fund, Inc.:
Class A $.01 $(.50)
Class B .01 (.50)
Class R .01 (.50)
Principal International SmallCap Fund, Inc.:
Class A .01 .03
Class B .01 .03
Class R .01 .03
(b) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(c) Total return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Effective January 1, 1998, Princor World Fund, Inc. changed its name to
Principal International Fund, Inc.
(f) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Principal International Fund, Inc. Class
B shares recognized no net investment income for the period from the
initial purchase by Principal Management Corporation of Class B shares on
December 5, 1994, through December 8, 1994. Additionally, Class B shares
incurred unrealized losses on investments of $.07 per share during the
initial interim period. This represents Class B share activities of the
fund prior to the initial public offering of Class B shares.
(g) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996. Principal International
Fund, Inc. Class R shares recognized no net investment income for the
period from the initial purchase by Principal Management Corporation of
Class R shares on February 27, 1996, through February 28, 1996.
Additionally, Class R shares incurred unrealized gains on investments of
$.02 per share during the initial interim period. This represents Class R
share activities of the fund prior to the intial offering of Class R
shares.
<TABLE>
<CAPTION>
October 31, 1998
STATEMENTS OF ASSETS AND LIABILITIES
Principal Principal Government
Bond Securities Income
INCOME FUNDS Fund, Inc. Fund, Inc.
<S> <C> <C>
Investment in securities -- at cost............................... $170,474,225 $282,353,179
------------ ------------
------------ ------------
Assets
Investment in securities -- at value (Note 4)..................... $179,472,476 $291,952,706
Cash ............................................................ 2,035 3,852
Receivables:
Interest....................................................... 3,094,436 1,547,275
Investment securities sold..................................... -- --
Capital Stock sold............................................. 492,795 518,797
Other assets...................................................... 3,589 17,027
------------ ------------
Total Assets 183,065,331 294,039,657
Liabilities
Accrued expenses.................................................. 141,357 189,849
Payables:
Investment securities purchased................................ -- 9,113,438
Capital Stock reacquired....................................... 181,310 754,994
Indebtedness (Note 6)............................................. -- --
------------ ------------
Total Liabilities 322,667 10,058,281
------------ ------------
Net Assets Applicable to Outstanding Shares....................... $182,742,664 $283,981,376
------------ ------------
------------ ------------
Net Assets Consist of:
Capital Stock..................................................... $ 157,709 $ 244,238
Additional paid-in capital........................................ 173,027,577 275,891,834
Accumulated undistributed (overdistributed)
net investment income.......................................... 33,837 254,305
Accumulated net realized gain (loss) on investment transactions .. 525,290 (2,008,528)
Net unrealized appreciation (depreciation) of investments......... 8,998,251 9,599,527
------------ ------------
Total Net Assets $182,742,664 $283,981,376
------------ ------------
------------ ------------
Capital Stock (par value: $.01 a share):
Shares authorized................................................. 100,000,000 100,000,000
Net Asset Value Per Share:
Class A: Net Assets............................................... $148,081,417 $251,455,080
Shares issued and outstanding............................ 12,778,833 21,617,045
Net asset value per share................................ $11.59 $11.63
Maximum offering price per share(a)...................... $12.17 $12.21
------ ------
------ ------
Class B: Net Assets .............................................. $22,465,556 $24,369,677
Shares issued and outstanding............................ 1,940,097 2,100,344
Net asset value per share(b)............................. $11.58 $11.60
------ ------
------ ------
Class R: Net Assets............................................... $12,195,691 $8,156,619
Shares issued and outstanding............................ 1,051,897 706,374
Net asset value per share................................ $11.59 $11.55
------ ------
------ ------
<FN>
(a)Maximum offering price is equal to net asset value plus a front-end
sales charge of 4.75% (1.50% with respect to Principal Limited Term Bond
Fund, Inc.) of the offering price or 4.99% of the net asset value (1.52%
of net asset value with respect to Principal Limited Term Bond Fund,
Inc.)
(b)Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
</FN>
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
October 31, 1998
STATEMENTS OF ASSETS AND LIABILITIES
Principal Principal Principal
High Yield Limited Term Bond Tax-Exempt Bond
INCOME FUNDS Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Investment in securities -- at cost............................... $49,663,453 $30,883,301 $197,560,741
----------- ----------- ------------
----------- ----------- ------------
Assets
Investment in securities -- at value (Note 4)..................... $45,353,447 $31,044,504 $212,152,700
Cash ............................................................ 27,865 2,016 4,376
Receivables:
Interest....................................................... 1,150,194 351,223 3,989,442
Investment securities sold..................................... -- 16,695 --
Capital Stock sold............................................. 56,589 8,210 423,276
Other assets...................................................... 2,036 -- 7,512
----------- ----------- ------------
Total Assets 46,590,131 31,422,648 216,577,306
Liabilities
Accrued expenses.................................................. 66,187 24,664 138,975
Payables:
Investment securities purchased................................ 1,643,916 -- --
Capital Stock reacquired....................................... 145,226 27,279 34,426
Indebtedness (Note 6)............................................. -- -- 120,000
----------- ----------- ------------
Total Liabilities 1,855,329 51,943 293,401
---------- ----------- ------------
Net Assets Applicable to Outstanding Shares....................... $44,734,802 $31,370,705 $216,283,905
----------- ----------- ------------
----------- ----------- ------------
Net Assets Consist of:
Capital Stock..................................................... $ 58,731 $ 31,575 $ 171,819
Additional paid-in capital........................................ 50,862,953 31,196,899 201,351,447
Accumulated undistributed (overdistributed)
net investment income.......................................... (48,931) 24,590 83,391
Accumulated net realized gain (loss) on investment transactions .. (1,827,945) (43,562) 85,289
Net unrealized appreciation (depreciation) of investments......... (4,310,006) 161,203 14,591,959
----------- ----------- ------------
Total Net Assets $44,734,802 $31,370,705 $216,283,905
----------- ----------- ------------
----------- ----------- ------------
Capital Stock (par value: $.01 a share):
Shares authorized................................................. 100,000,000 100,000,000 100,000,000
Net Asset Value Per Share:
Class A: Net Assets............................................... $33,473,629 $27,631,893 $204,864,505
Shares issued and outstanding............................ 4,384,993 2,781,690 16,275,214
Net asset value per share................................ $7.63 $9.93 $12.59
Maximum offering price per share(a)...................... $8.01 $10.08 $13.22
----- ------ ------
----- ------ ------
Class B: Net Assets .............................................. $8,526,963 $1,704,891 $11,419,400
Shares issued and outstanding............................ 1,124,088 170,914 906,696
Net asset value per share(b)............................. $7.59 $9.98 $12.59
----- ------ ------
----- ------ ------
Class R: Net Assets............................................... $2,734,210 $2,033,921 N/A
Shares issued and outstanding............................ 363,981 204,914 N/A
Net asset value per share................................ $7.51 $9.93 N/A
----- ----- ------
----- ----- ------
<FN>
(a)Maximum offering price is equal to net asset value plus a front-end
sales charge of 4.75% (1.50% with respect to Principal Limited Term Bond
Fund, Inc.) of the offering price or 4.99% of the net asset value (1.52%
of net asset value with respect to Principal Limited Term Bond Fund,
Inc.)
(b)Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
</FN>
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31, 1998
STATEMENTS OF OPERATIONS
Principal Principal Government
Bond Securities Income
INCOME FUNDS Fund, Inc. Fund, Inc.
<S> <C> <C>
Net Investment Income
Interest income.................................................... $11,618,838 $18,885,184
Expenses:
Management and investment advisory fees (Note 3)................ 782,241 1,239,644
Distribution and shareholder servicing fees (Notes 1 and 3)..... 539,213 692,648
Transfer and administrative services (Notes 1 and 3)............ 482,817 499,207
Registration fees (Note 1)...................................... 53,167 37,239
Custodian fees ................................................. 2,786 10,837
Auditing and legal fees ........................................ 8,973 7,377
Directors' fees ................................................ 7,335 7,348
Other .......................................................... 11,664 20,798
----------- -----------
Total Gross Expenses 1,888,196 2,515,098
Less: Management and investment
advisory fees waived......................................... 172,366 --
----------- -----------
Total Net Expenses 1,715,830 2,515,098
----------- -----------
Net Investment Income 9,903,008 16,370,086
Net Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) from investment transactions.............. 598,317 242,270
Change in unrealized appreciation/depreciation
of investments ................................................. 1,323,899 2,717,566
----------- -----------
Net Realized and Unrealized
Gain (Loss) on Investments 1,922,216 2,959,836
----------- -----------
Net Increase (Decrease) in Net Assets
Resulting from Operations $11,825,224 $19,329,922
----------- -----------
----------- -----------
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31, 1998
STATEMENTS OF OPERATIONS
Principal Principal Principal
High Yield Limited Term Bond Tax-Exempt Bond
INCOME FUNDS Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Net Investment Income
Interest income.................................................... $ 4,371,633 $1,788,479 $11,754,268
Expenses:
Management and investment advisory fees (Note 3)................ 287,858 133,825 974,740
Distribution and shareholder servicing fees (Notes 1 and 3)..... 197,857 50,768 530,667
Transfer and administrative services (Notes 1 and 3)............ 217,020 90,187 199,780
Registration fees (Note 1)...................................... 49,117 38,997 49,540
Custodian fees ................................................. 2,728 2,366 2,666
Auditing and legal fees ........................................ 6,527 4,740 6,784
Directors' fees ................................................ 7,347 7,348 7,359
Other .......................................................... 4,343 4,483 16,905
----------- ---------- -----------
Total Gross Expenses 772,797 332,714 1,788,441
Less: Management and investment
advisory fees waived......................................... -- 100,270 --
----------- ---------- -----------
Total Net Expenses 772,797 232,444 1,788,441
----------- ---------- -----------
Net Investment Income 3,598,836 1,556,035 9,965,827
Net Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) from investment transactions.............. 148,393 (2,668) 919,377
Change in unrealized appreciation/depreciation
of investments ................................................. (5,300,030) 172,616 2,567,043
----------- ---------- -----------
Net Realized and Unrealized
Gain (Loss) on Investments (5,151,637) 169,948 3,486,420
----------- ---------- -----------
Net Increase (Decrease) in Net Assets
Resulting from Operations $(1,552,801) $1,725,983 $13,452,247
----------- ---------- -----------
----------- ---------- -----------
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Years Ended October 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal Government
Bond Securities Income
INCOME FUNDS Fund, Inc. Fund, Inc.
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operations
Net investment income............................................ $ 9,903,008 $ 8,629,236 $ 16,370,086 $ 16,566,061
Net realized gain (loss) from investment transactions ........... 598,317 921,121 242,270 (776,007)
Change in unrealized appreciation/depreciation
of investments................................................ 1,323,899 3,176,634 2,717,566 7,674,729
------------ ------------ ------------ ------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 11,825,224 12,726,991 19,329,922 23,464,783
Dividends and Distributions to Shareholders
From net investment income:
Class A....................................................... (8,430,036) (8,447,557) (15,088,625) (16,727,976)
Class B....................................................... (977,376) (648,042) (1,071,553) (797,919)
Class R....................................................... (530,322) (193,972) (334,428) (127,873)
Excess distribution of net investment income:
Class A....................................................... -- -- -- --
Class B....................................................... -- -- -- --
Class R....................................................... -- -- -- --
------------ ------------ ------------ ------------
Total Dividends and Distributions (9,937,734) (9,289,571) (16,494,606) (17,653,768)
Capital Share Transactions (Note 5)
Shares sold:
Class A....................................................... 41,289,926 27,360,904 39,967,883 31,378,780
Class B....................................................... 10,554,095 6,449,151 10,634,274 6,564,032
Class R....................................................... 8,716,511 6,016,081 4,770,310 3,952,066
Shares issued in reinvestment of dividends and distributions:
Class A....................................................... 6,299,889 5,936,473 12,166,316 13,338,406
Class B....................................................... 833,944 523,092 882,934 644,830
Class R....................................................... 524,979 193,561 329,918 127,615
Shares redeemed:
Class A....................................................... (27,535,115) (23,209,507) (53,118,031) (59,260,515)
Class B....................................................... (2,514,110) (1,891,456) (2,741,242) (3,726,468)
Class R....................................................... (3,120,947) (948,686) (1,161,190) (510,669)
------------ ------------ ------------ ------------
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 35,049,172 20,429,613 11,731,172 (7,491,923)
------------ ------------ ------------ ------------
Total Increase (Decrease) 36,936,662 23,867,033 14,566,488 (1,680,908)
Net Assets
Beginning of year................................................ 145,806,002 121,938,969 269,414,888 271,095,796
------------ ------------ ------------ ------------
End of year (including undistributed (overdistributed) net
investment income as set forth below)......................... $182,742,664 $145,806,002 $283,981,376 $269,414,888
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Undistributed (Overdistributed) Net Investment Income........... $ 33,837 $ 68,563 $ 254,30 $ 447,772
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Years Ended October 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal
High Yield Limited Term Bond
INCOME FUNDS Fund, Inc. Fund, Inc.
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operations
Net investment income............................................ $ 3,598,836 $ 3,025,285 $ 1,556,035 $ 1,200,046
Net realized gain (loss) from investment transactions ........... 148,393 1,000,035 (2,668) (30,744)
Change in unrealized appreciation/depreciation
of investments................................................ (5,300,030) 221,232 172,616 99,272
----------- ----------- ----------- -----------
Net Increase (Decrease) in Net Assets
Resulting from Operations (1,552,801) 4,246,552 1,725,983 1,268,574
Dividends and Distributions to Shareholders
From net investment income:
Class A....................................................... (2,856,403) (2,851,339) (1,431,290) (1,227,443)
Class B....................................................... (571,855) (305,236) (53,434) (14,695)
Class R....................................................... (189,231) (76,561) (78,892) (27,342)
Excess distribution of net investment income:
Class A....................................................... (50,532) -- -- --
Class B....................................................... (10,117) -- -- --
Class R....................................................... (3,347) -- -- --
----------- ----------- ----------- -----------
Total Dividends and Distributions (3,681,485) (3,233,136) (1,563,616) (1,269,480)
Capital Share Transactions (Note 5)
Shares sold:
Class A....................................................... 11,927,135 12,193,322 12,780,385 6,544,078
Class B....................................................... 4,358,175 4,993,786 1,373,038 580,621
Class R....................................................... 1,736,594 1,904,286 1,710,613 847,672
Shares issued in reinvestment of dividends and distributions:
Class A....................................................... 1,574,414 1,195,770 1,358,983 1,161,005
Class B....................................................... 427,433 195,332 42,187 8,758
Class R....................................................... 191,997 76,523 77,461 27,342
Shares redeemed:
Class A....................................................... (14,350,135) (4,508,255) (7,216,941) (4,380,863)
Class B....................................................... (1,816,211) (825,099) (344,198) (78,682)
Class R....................................................... (839,238) (149,618) (370,918) (355,461)
----------- ----------- ----------- -----------
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 3,210,164 15,076,047 9,410,610 4,354,470
----------- ----------- ----------- -----------
Total Increase (Decrease) (2,024,122) 16,089,463 9,572,977 4,353,564
Net Assets
Beginning of year................................................ 46,758,924 30,669,461 21,797,728 17,444,164
----------- ----------- ----------- -----------
End of year (including undistributed (overdistributed) net
investment income as set forth below)......................... $44,734,802 $46,758,924 $31,370,705 $21,797,728
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Undistributed (Overdistributed) Net Investment Income........... $ (48,931) $ 33,718 $ 24,590 $ 25,655
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
Years Ended October 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal
Tax-Exempt Bond
INCOME FUNDS Fund, Inc.
1998 1997
<S> <C> <C>
Operations
Net investment income............................................ $ 9,965,827 $ 10,171,880
Net realized gain (loss) from investment transactions ........... 919,377 818,662
Change in unrealized appreciation/depreciation
of investments................................................ 2,567,043 5,658,545
------------ ------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 13,452,247 16,649,087
Dividends and Distributions to Shareholders
From net investment income:
Class A....................................................... (9,655,683) (10,615,003)
Class B....................................................... (408,929) (312,381)
Class R....................................................... N/A N/A
Excess distribution of net investment income:
Class A....................................................... -- --
Class B....................................................... -- --
Class R....................................................... -- --
------------ ------------
Total Dividends and Distributions (10,064,612) (10,927,384)
Capital Share Transactions (Note 5)
Shares sold:
Class A....................................................... 30,673,603 24,107,825
Class B....................................................... 4,178,912 2,704,384
Class R....................................................... N/A N/A
Shares issued in reinvestment of dividends and distributions:
Class A....................................................... 6,533,809 7,156,854
Class B....................................................... 306,980 214,928
Class R....................................................... N/A N/A
Shares redeemed:
Class A....................................................... (28,581,284) (30,946,309)
Class B....................................................... (1,005,105) (1,143,685)
Class R....................................................... N/A N/A
------------ ------------
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 12,106,915 2,093,997
------------ ------------
Total Increase (Decrease) 15,494,550 7,815,700
Net Assets
Beginning of year................................................ 200,789,355 192,973,655
------------ ------------
End of year (including undistributed (overdistributed) net
investment income as set forth below)......................... $216,283,905 $200,789,355
------------ ------------
------------ ------------
Undistributed (Overdistributed) Net Investment Income........... $ 83,391 $ 191,601
------------ ------------
------------ ------------
See accompanying notes.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
Principal Bond Fund, Inc.
Principal Government Securities Income Fund, Inc.
Principal High Yield Fund, Inc.
Principal Limited Term Bond Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
Note 1 -- Significant Accounting Policies
Principal Bond Fund, Inc., Principal Government Securities Income Fund, Inc.,
Principal High Yield Fund, Inc., Principal Limited Term Bond Fund, Inc. and
Principal Tax-Exempt Bond Fund, Inc. (the "Income 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.
Effective January 1, 1998, the following changes were made to the names of the
Income Funds:
<TABLE>
<CAPTION>
Former Fund Name New Fund Name
---------------- -------------
<S> <C> <C>
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Government Securites Income Fund, Inc. Principal Government Securities Income Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc. Principal Limited Term Bond Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc. Principal Tax-Exempt Bond Fund, Inc.
</TABLE>
Class A shares generally are sold with an initial sales charge based on
declining rates and certain purchases may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions made within six years
of purchase. Class R shares are sold without an initial sales charge and are not
subject to a CDSC. Class B shares and Class R shares bear a higher ongoing
distribution fee than Class A shares. Class B shares automatically convert into
Class A shares, based on relative net asset value (without a sales charge) after
seven years. Class R shares automatically convert into Class A shares, based on
relative net asset value (without a sales charge) after four years. All classes
of shares for each fund represent interests in the same portfolio of
investments, and will vote together as a single class except where otherwise
required by law or as determined by each of the Income Funds' respective Board
of Directors. In addition, the Board of Directors of each fund declares separate
dividends on each class of shares.
The Income Funds allocate daily all income, expenses (other than class-specific
expenses) and realized and unrealized gains or losses to each class of shares
based upon the relative proportion of the value of shares outstanding of each
class. Expenses specifically attributable to a particular class are charged
directly to such class. Class-specific expenses charged to each class during the
year ended October 31, 1998, which are included in the corresponding captions of
the Statement of Operations, were as follows:
<TABLE>
<CAPTION>
Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees
-------------------------- ------------------------- --------------------------
Class A Class B Class R Class A Class B Class R Class A Class B Class R
-------- -------- ------- -------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Bond Fund, Inc. $311,884 $157,212 $70,117 $103,059 $26,545 $14,181 $12,906 $10,861 $8,660
Principal Government Securities Income Fund, Inc. 491,907 154,126 46,615 161,187 21,608 8,023 12,562 9,470 9,315
Principal High Yield Fund, Inc. 92,573 85,322 19,962 35,188 12,133 5,166 11,749 10,526 7,860
Principal Limited Term Bond Fund, Inc. 36,351 5,062 9,355 6,718 1,484 2,244 10,987 8,429 8,290
Principal Tax-Exempt Bond Fund, Inc. 464,545 66,122 N/A 53,011 3,387 N/A 23,416 13,979 N/A
</TABLE>
The Income 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 prices provided by market makers or estimates of
market values obtained from yield data and other factors relating to instruments
or securities with similar characteristics in accordance with procedures
established in good faith by each fund's Board of Directors. Securities with
remaining maturities of 60 days or less are valued at amortized cost, which
approximates market.
The Income Funds record investment transactions generally one day after the
trade date, except for short-term investment transactions which are recorded
generally on the trade date. The identified cost basis has been used in
determining the net realized gain or loss from investment transactions and
unrealized appreciation or depreciation of investments. Interest income is
recognized on an accrual basis.
The Income 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 Income Funds' cash balances to be deposited into a single
joint account along with the cash of other registered investment companies
managed by Principal Management Corporation (formerly known as Princor
Management Corporation) (the "Manager"). These balances may be invested in one
or more short-term instruments.
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Dividends and distributions to shareholders from net investment income and
net realized gain from investments are determined in accordance with federal 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 years ended October
31, 1998 and 1997 were not material.
Dividends and distributions which exceed net investment income and net realized
capital gains for financial reporting purposes, but not for tax purposes, are
reported as dividends in excess of net investment income or distributions in
excess of net realized capital gains. To the extent distributions exceed current
and accumulated earnings and profits for federal income tax purposes, they are
reported as tax return of capital distributions.
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 approximates that used for financial
reporting purposes.
At October 31, 1998, the Income Funds had approximate net capital loss
carryforwards as follows:
<TABLE>
<CAPTION>
Principal
Government Principal Principal
Securities Income High Yield Limited Term Bond
Net Capital Loss Carryforwards Expire In: Fund, Inc. Fund, Inc. Fund, Inc.
---------------------------------------- ----------------- ---------- -----------------
<S> <C> <C> <C>
1999 $ - $ 429,000 $ -
2000 - 561,000 -
2001 - 409,000 -
2002 157,000 323,000 -
2003 1,075,000 106,000 -
2004 - - 4,000
2005 776,000 - 31,000
2006 - - 9,000
---------- ---------- -------
$2,008,000 $1,828,000 $44,000
---------- ---------- -------
---------- ---------- -------
</TABLE>
Note 3 -- Management Agreement and Transactions With Affiliates
The Income Funds have agreed to pay investment advisory and management fees to
Principal Management Corporation [wholly owned by Princor Financial Services
Corporation, a subsidiary of Principal Life Insurance Company (formerly known as
Principal Mutual Life Insurance Company)] computed at an annual percentage rate
of each fund's average daily net assets. The annual rate used in this
calculation for the Income Funds is as follows:
<TABLE>
<CAPTION>
Net Asset Value of Funds
(in millions)
---------------------------------------------------------------------------
First Next Next Next Over
$100 $100 $100 $100 $400
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Principal Bond Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Principal Government Securities Income Fund, Inc. 0.50 0.45 0.40 0.35 0.30
Principal High Yield Fund, Inc. 0.60 0.55 0.50 0.45 0.40
Principal Limited Term Bond Fund, Inc. 0.50 0.45 0.40 0.35 0.30
Principal Tax-Exempt Bond Fund, Inc. 0.50 0.45 0.40 0.35 0.30
</TABLE>
The Income Funds also reimburse the Manager for transfer and administrative
services, including the cost of accounting, data processing, supplies and other
services rendered.
The Manager voluntarily waives a portion of its fee for some of the Income
Funds. The waivers are in amounts that maintain total operating expenses for
each fund within certain limits. The limits are expressed as a percentage of
average daily net assets attributable to each class on an annualized basis
during the reporting period. The amounts waived and the operating expense
limits, which were maintained at or below those shown, are as follows:
<TABLE>
<CAPTION>
Amount
Waived
-----------------------------------------------
Year Ended Year Ended Expense
October 31, 1998 October 31, 1997 Limit
---------------- ---------------- -------
<S> <C> <C> <C>
Principal Bond Fund, Inc.
Class A $121,092 $41,526 0.95%
Class B 26,130 8,982 1.70
Class R 25,144 10,427 1.45
Principal Limited Term Bond Fund, Inc.
Class A 76,952 46,271 0.90
Class B 11,537 6,528 1.25
Class R 11,781 6,831 1.50
</TABLE>
The Manager intends to continue its voluntary waiver and, if necessary, pay
expenses normally payable by Principal Limited Term Bond Fund, Inc. through
October 31, 1999. Effective November 1, 1998, the expense limits were increased
to 1.00%, 1.35% and 1.60%, for Class A, Class B and Class R shares,
respectively. The Manager ceased its waiver of expenses for Principal Bond Fund,
Inc. on October 31, 1998.
Princor Financial Services Corporation, as principal underwriter, receives
proceeds of any CDSC on certain Class A and Class B share redemptions. The
charge is based on declining rates which for Class A shares begin at .75%, and
for Class B shares at 4.00% (.25% and 1.25% for Principal Limited Term Bond
Fund, Inc., respectively), of the lesser of the current market value or the cost
of shares being redeemed. Princor Financial Services Corporation also retains
sales charges on sales of Class A shares based on declining rates which begin at
4.75% of the offering price (1.50% for Principal Limited Term Bond Fund, Inc.).
The aggregate amount of these charges retained, by fund, for the year ended
October 31, 1998 were as follows:
Class A Class B
-------- --------
Principal Bond Fund, Inc. $852,533 $35,337
Principal Government Securities Income Fund, Inc. 805,031 41,791
Principal High Yield Fund, Inc. 300,230 34,925
Principal Limited Term Bond Fund, Inc. 75,772 1,419
Principal Tax-Exempt Bond Fund, Inc. 643,073 24,683
No brokerage commissions were paid by the Income Funds to affiliated broker
dealers during the year.
The Income Funds bear distribution and shareholder servicing fees with respect
to Class A shares computed at an annual rate of up to .25% (.15% for the
Principal Limited Term Bond Fund, Inc.) of the average daily net assets
attributable to Class A shares of each fund. Each of the Income Funds adopted a
distribution plan with respect to Class B shares that provides for distribution
and shareholder servicing fees computed at an annual rate of up to 1.00% of the
average daily net assets attributable to Class B shares of each fund (.50% for
the Principal Limited Term Bond Fund, Inc.). Each of the Income Funds, with the
exception of Principal Tax-Exempt Bond Fund, Inc., adopted a distribution plan
with respect to Class R shares that provides for distribution and shareholder
servicing fees computed at an annual rate of up to .75% of the average daily net
assets attributable to Class R shares of each fund. Distribution and shareholder
servicing fees are paid to Princor Financial Services Corporation; a portion of
the fees are subsequently remitted to retail dealers. Pursuant to the
distribution agreements, fees unused by the principal underwriter at the end of
the fiscal year are returned to the Income Funds.
At October 31, 1998, Principal Life Insurance Company, subsidiaries of Principal
Life Insurance Company and benefit plans sponsored on behalf of Principal Life
Insurance Company owned shares of the Income Funds as follows:
<TABLE>
<CAPTION>
Class A Class B Class R
--------- ------- -------
<S> <C> <C> <C>
Principal Bond Fund, Inc. 178,252 124 104
Principal Government Securities Income Fund, Inc. 94,035 122 103
Principal High Yield Fund, Inc. 396,345 174 5,053
Principal Limited Term Bond Fund, Inc. 1,171,382 117 4,731
Principal Tax-Exempt Bond Fund, Inc. 92,517 113 N/A
</TABLE>
Note 4 -- Investment Transactions
For the year ended October 31, 1998, the cost of investment securities purchased
and proceeds from investment securities sold (not including short-term
investments and U. S. government securities) by the Income Funds were as
follows:
Purchases Sales
----------- -----------
Principal Bond Fund, Inc. $59,929,649 $23,024,436
Principal High Yield Fund, Inc. 32,903,766 30,183,099
Principal Limited Term Bond Fund, Inc. 12,957,730 6,012,923
Principal Tax-Exempt Bond Fund, Inc. 25,434,992 13,567,920
At October 31, 1998, net unrealized appreciation (depreciation) of investments
by the Income Funds was composed of the following:
<TABLE>
<CAPTION>
Gross Unrealized Net Unrealized
----------------------------------- Appreciation (Depreciation)
Appreciation (Depreciation) of Investments
------------ -------------- ---------------------------
<S> <C> <C> <C>
Principal Bond Fund, Inc. $ 9,764,858 $ (766,607) $ 8,998,251
Principal Government Securities Income Fund, Inc. 9,701,127 (101,600) 9,599,527
Principal High Yield Fund, Inc. 485,117 (4,795,123) (4,310,006)
Principal Limited Term Bond Fund, Inc. 387,785 (226,582) 161,203
Principal Tax-Exempt Bond Fund, Inc. 14,607,775 (15,816) 14,591,959
</TABLE>
The Income Funds 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 October 31, 1998, Principal Government
Securities Income Fund, Inc. had TBA purchase commitments involving securities
with a face amount of $9,000,000, cost of $9,113,438 and market value of
$9,092,817. The fund has set aside investment securities and other assets in
excess of the commitments to serve as collateral.
Note 4 -- Investment Transactions (Continued)
At October 31, 1998, the Income Funds 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 October 31, Percentage of
Security Description Acquisition Cost 1998 Net Assets
-------------------------------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Principal Bond Fund, Inc. John Hancock Mutual Life
Insurance Co. Surplus Notes 1/8/97 $2,396,100 $2,616,117 1.43%
Principal High Yield Fund, Inc. BE Aerospace Senior Subordinated
Notes 10/28/98 750,000 768,750 1.72
Cenargo International PLC
First Mortgage Notes 10/22/98 1,305,000 1,305,000 2.92
Qwest Communications International
Senior Notes 10/28/98 893,916 920,250 2.06
---------- -----
2,994,000 6.70
Principal Limited Term Bond Fund, Inc. Orix Credit Alliance, Inc.
Medium-Term Notes 11/8/96 850,000 850,704 2.71
Principal Tax-Exempt Bond Fund, Inc. Eddyville, Iowa, IDR Ref. Bonds,
Cargill, Inc. Project 1/11/95 859,910 1,050,000 .49
</TABLE>
The Income Funds' investments are with various issuers in various industries.
The Schedules of Investments contained herein summarize concentrations of credit
risk by issuer and industry.
Note 5 -- Capital Share Transactions
Transactions in Capital Stock by fund were as follows:
<TABLE>
<CAPTION>
Principal Principal Principal
Bond Government Securities High Yield
Fund, Inc. Income Fund, Inc. Fund, Inc.
---------- --------------------- ----------
Year Ended October 31, 1998:
Shares sold:
<S> <C> <C> <C>
Class A ......................................... 3,558,782 3,449,728 1,429,263
Class B ......................................... 911,403 919,042 520,583
Class R............................................ 751,757 414,918 208,702
Shares issued in reinvestment of dividends and
distributions:
Class A ........................................... 544,557 1,053,198 190,004
Class B ........................................... 72,083 76,520 51,887
Class R............................................ 45,324 28,745 23,509
Shares redeemed:
Class A ......................................... (2,379,170) (4,587,595) (1,722,188)
Class B ......................................... (216,720) (237,166) (222,473)
Class R............................................ (268,084) (100,699) (101,674)
--------- --------- ---------
Net Increase 3,019,932 1,016,691 377,613
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Principal Principal Principal
Bond Government Securities High Yield
Fund, Inc. Income Fund, Inc. Fund, Inc.
---------- --------------------- ----------
Year Ended October 31, 1997:
Shares sold:
<S> <C> <C> <C>
Class A ......................................... 2,460,201 2,799,875 1,440,198
Class B ......................................... 581,347 585,099 591,875
Class R............................................ 542,993 354,800 227,035
Shares issued in reinvestment of dividends and
distributions:
Class A ........................................... 534,855 1,189,680 141,482
Class B ........................................... 47,159 57,621 23,153
Class R............................................ 17,417 11,432 9,113
Shares redeemed:
Class A ......................................... (2,091,860) (5,287,652) (532,170)
Class B ......................................... (170,486) (332,061) (97,891)
Class R............................................ (84,604) (45,744) (17,821)
--------- --------- ---------
Net Increase (Decrease) 1,837,022 (666,950) 1,784,974
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
Principal Principal
Limited Term Bond Tax-Exempt Bond
Fund, Inc. Fund, Inc.
----------------- ---------------
Year Ended October 31, 1998:
Shares sold:
<S> <C> <C>
Class A ......................................... 1,291,180 2,447,392
Class B ......................................... 138,167 333,971
Class R............................................ 173,119 N/A
Shares issued in reinvestment of dividends and distributions:
Class A ......................................... 137,689 522,117
Class B ......................................... 4,256 24,507
Class R............................................ 7,859 N/A
Shares redeemed:
Class A ......................................... (729,920) (2,279,032)
Class B ......................................... (34,626) (80,155)
Class R............................................ (37,539) N/A
--------- ---------
Net Increase 950,185 968,800
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
Year Ended October 31, 1997:
Shares sold:
<S> <C> <C>
Class A ......................................... 666,459 1,983,441
Class B ......................................... 58,936 222,542
Class R............................................ 86,576 N/A
Shares issued in reinvestment of dividends and distributions:
Class A ......................................... 118,478 589,808
Class B ......................................... 892 17,694
Class R............................................ 2,797 N/A
Shares redeemed:
Class A ......................................... (445,740) (2,541,274)
Class B ......................................... (7,993) (93,935)
Class R............................................ (36,339) N/A
--------- ---------
Net Increase 444,066 178,276
--------- ---------
--------- ---------
</TABLE>
Note 6 -- Line of Credit
The Income Funds participate with other funds and portfolios managed by
Principal Management Corporation in an unsecured joint line of credit with a
bank, which allows the funds to borrow up to $60,000,000, collectively.
Borrowings are made solely to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Interest is charged to each fund,
based on its borrowings, at a rate equal to the Fed Funds Rate plus .50%.
Additionally, a commitment fee is charged at the annual rate of .08% on the
average unused portion of the line of credit. The commitment fee is allocated
among the participating funds and portfolios in proportion to their average net
assets during each quarter. At October 31, 1998, Principal Tax-Exempt Bond Fund,
Inc. had an outstanding borrowing of $120,000 at an annual rate of 5.93%. No
other Income Fund had outstanding borrowings at October 31, 1998 under the line
of credit.
Note 7 -- Year 2000 Problem (Unaudited)
Like other mutual funds, financial and business organizations and individuals
around the world, the Income Funds could be adversely affected if the computer
systems used by the Manager and other service providers do not properly process
and calculate date-related information and data from and after January 1, 2000.
This is commonly known as the "Year 2000 Problem." The Manager is taking steps
it believes are reasonably designed to address the Year 2000 Problem with
respect to computer systems it uses and to obtain reasonable assurances that
comparable steps are being taken by each fund's other major service providers.
At this time, however there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the funds.
SCHEDULES OF INVESTMENTS
INCOME FUNDS
PRINCIPAL BOND FUND, INC.
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
Bonds (95.93%)
Air Transportation, Scheduled (1.52%)
Federal Express Corp. 1994 Pass
Through Cert., Series A310-A3;
8.40%; 3/23/2010 $1,500,000 $ 1,727,070
Federal Express Corp. Pass Through
Cert.; 7.58%; 7/2/2019 1,000,000 1,053,140
------------
2,780,210
Aircraft & Parts (0.59%)
Textron, Inc. Medium-Term
Notes, Series C;
9.80%; 1/11/2000 500,000 525,083
9.55%; 3/19/2001 500,000 547,864
------------
1,072,947
Beverages (1.23%)
Joseph E. Seagram & Sons
Guaranteed Debentures;
8.38%; 2/15/2007 1,000,000 1,096,735
8.88%; 9/15/2011 1,000,000 1,145,888
------------
2,242,623
Cable & Other Pay TV Services (2.56%)
CSC Holdings, Inc. Senior Notes;
7.25%; 7/15/2008 2,000,000 1,952,500
Tele-Communications, Inc.
Notes; 7.25%; 8/1/2005 2,000,000 2,157,958
Senior Debentures; 7.88%; 8/1/2013 500,000 574,273
------------
4,684,731
Cash Grains (1.46%)
Aktiebolaget SKF Senior Notes;
7.63%; 7/15/2003 2,500,000 2,662,782
Combination Utility Services (3.43%)
MidAmerican Energy Co.
Medium-Term Notes;
6.38%; 6/15/2006 3,000,000 3,103,770
PG Energy, Inc. First Mortgage
Bonds; 8.38%; 12/1/2002 500,000 548,778
Public Service Electric & Gas
Medium-Term Notes;
8.16%; 5/26/2009 1,250,000 1,483,441
Puget Sound Power & Light Co.
1st Mortgage Medium-Term Notes,
Series A; 7.75%; 2/1/2007 1,000,000 1,126,546
------------
6,262,535
Commercial Banks (2.51%)
NationsBank Corp. Subordinated
Notes; 6.38%; 2/15/2008 4,500,000 4,584,298
Computer & Office Equipment (1.64%)
Seagate Technology, Inc. Senior Notes;
7.37%; 3/1/2007 3,000,000 2,992,296
Construction & Related
Machinery (0.72%)
Caterpillar, Inc. Global Debentures;
9.38%; 8/15/2011 $1,000,000 $ 1,309,876
Consumer Products (0.86%)
Philip Morris Cos. Notes;
6.80%; 12/1/2003 500,000 527,894
RJR Nabisco Capital Corp. Senior
Notes; 8.75%; 4/15/2004 1,000,000 1,039,660
------------
1,567,554
Copper Ores (1.91%)
Asarco, Inc.
Debentures; 7.88%; 4/15/2013 2,000,000 2,232,498
Notes; 7.38%; 2/1/2003 1,200,000 1,254,737
------------
3,487,235
Crude Petroleum & Natural Gas (0.30%)
Occidental Petroleum Corp.
Medium-Term Notes;
9.73%; 6/15/2001 500,000 545,423
Department Stores (2.97%)
Harcourt General, Inc. Subordinated
Notes; 9.50%; 3/15/2000 400,000 416,543
Fred Meyer, Inc. Senior Notes;
7.38%; 3/1/2005 2,000,000 2,107,422
J.C. Penney Co., Inc. Debentures;
7.13%; 11/15/2023 1,000,000 994,879
Sears Roebuck Co.
Medium-Term Notes;
9.05%; 2/6/2012 500,000 631,657
9.12%; 2/13/2012 1,000,000 1,269,854
------------
5,420,355
Drug Stores & Proprietary
Stores (1.11%)
Rite Aid Corp. Senior Debentures;
6.88%; 8/15/2013 2,000,000 2,030,400
Electric Services (2.89%)
Commonwealth Edison Co.
Debentures; 6.95%; 7/15/2018 1,000,000 994,401
Ohio Edison Co. First Mortgage
Bonds; 8.25%; 4/1/2002 2,000,000 2,167,752
Southern California Edison Co.
Notes; 6.38%; 1/15/2006 1,000,000 1,047,965
Toledo Edison Co. Debentures;
8.70%; 9/1/2002 1,000,000 1,078,551
------------
5,288,669
Engines & Turbines (0.57%)
Brunswick Corp. Debentures;
7.38%; 9/1/2023 1,000,000 1,047,797
Fabricated Rubber Products,
NEC (0.96%)
M. A. Hanna Co. Senior Notes;
9.38%; 9/15/2003 1,500,000 1,751,452
Farm & Garden Machinery (1.48%)
Case Corp. Notes; 7.25%; 1/15/2016 1,000,000 1,066,703
Tenneco, Inc. Notes;
10.08%; 2/1/2001 500,000 550,446
8.08%; 10/1/2002 1,000,000 1,088,692
------------
2,705,841
Federal & Federally Sponsored
Credit (4.25%)
Fannie Mae Benchmark Notes;
5.75%; 4/15/2003 $2,500,000 $ 2,593,278
5.75%; 6/15/2005 5,000,000 5,166,290
------------
7,759,568
General Government, NEC (2.58%)
Ontario Hydro Debentures;
7.45%; 3/31/2013 2,000,000 2,307,420
Province of Saskatchewan, Canada
Global Notes; 8.00%; 2/1/2013 2,000,000 2,410,320
------------
4,717,740
General Industrial Machinery (0.56%)
Timken Company Medium-Term
Notes; 6.20%; 1/15/2008 1,000,000 1,030,679
Gold & Silver Ores (0.68%)
Placer Dome, Inc. Notes;
7.13%; 6/15/2007 1,250,000 1,239,191
Grain Mill Products (0.58%)
Ralston Purina Co. Debentures;
7.75%; 10/1/2015 1,000,000 1,068,831
Grocery Stores (2.74%)
American Stores Co. Bond;
8.00%; 6/1/2026 2,500,000 2,727,230
Food Lion, Inc.
Medium-Term Notes;
8.67%; 8/28/2006 1,000,000 1,173,464
Notes; 7.55%; 4/15/2007 1,000,000 1,103,438
------------
5,004,132
Highway & Street Construction (1.33%)
Foster Wheeler Corp. Notes;
6.75%; 11/15/2005 2,500,000 2,423,840
Household Furniture (1.27%)
Masco Corp. Debentures;
7.13%; 8/15/2013 2,000,000 2,328,388
Industrial Inorganic Chemicals (1.60%)
Dow Chemical Co.
Debentures; 7.38%; 3/1/2023 1,000,000 1,033,692
Medium-Term Notes;
7.75%; 9/15/2020 1,000,000 1,108,036
FMC Corp. Senior Notes;
6.38%; 9/1/2003 750,000 777,000
------------
2,918,728
Life Insurance (1.43%)
John Hancock Mutual Life Insurance
Co. Surplus Notes; 7.38%; 2/15/2024 2,500,000(a) 2,616,117
Machinery, Equipment, & Supplies (0.14%)
AAR Corp. Notes; 7.25%; 10/15/2003 250,000 262,699
Management & Public Relations (0.57%)
Servicemaster Co. Ltd. Notes;
6.95%; 8/15/2007 1,000,000 1,050,249
Millwork, Plywood & Structural
Members (0.41%)
Georgia-Pacific Corp.
Debentures; 9.50%; 12/1/2011 $ 600,000 $ 741,187
Miscellaneous Amusement, Recreation
Service (1.01%)
Circus Circus Enterprises Senior
Notes; 6.45%; 2/1/2006 2,000,000 1,854,484
Miscellaneous Chemical
Products (1.85%)
Ferro Corp. Senior Debentures;
7.63%; 5/1/2013 1,100,000 1,254,591
Smith International, Inc. Senior
Notes; 7.00%; 9/15/2007 2,025,000 2,134,615
------------
3,389,206
Miscellaneous Investing (2.57%)
BRE Properties, Inc. Notes;
7.20%; 6/15/2007 2,000,000 1,859,490
First Industrial LP Medium-Term
Notes; 7.00%; 12/1/2006 1,500,000 1,521,584
Weingarten Realty Investors
Medium-Term Notes;
7.29%; 5/23/2005 1,250,000 1,312,487
------------
4,693,561
Miscellaneous Metal Ores (1.02%)
Cyprus Amax Minerals Notes;
7.38%; 5/15/2007 1,100,000 1,126,989
Cyprus Minerals Co. Notes;
10.13%; 4/1/2002 650,000 734,176
------------
1,861,165
Motor Vehicles & Equipment (1.91%)
Ford Motor Co. Debentures;
7.50%; 8/1/2026 1,000,000 1,083,040
8.90%; 1/15/2032 1,000,000 1,266,700
General Motors Corp. Global
Medium-Term Notes;
8.88%; 5/15/2003 1,000,000 1,135,622
------------
3,485,362
Newspapers (1.36%)
News America Holdings, Inc.
Guaranteed Senior Notes;
8.50%; 2/15/2005 2,250,000 2,486,373
Oil & Gas Field Services (1.72%)
Petroleum Geo-Services ASA Notes;
7.50%; 3/31/2007 2,500,000 2,651,430
R&B Falcon Senior Notes;
6.75%; 4/15/2005 500,000 496,301
------------
3,147,731
Operative Builders (1.34%)
Pulte Corp.
Senior Notes; 8.38%; 8/15/2004 500,000 534,255
Notes; 7.63%; 10/15/2017 2,000,000 1,922,658
------------
2,456,913
Paper & Paper Products (1.55%)
Boise Cascade Office Products Corp.;
7.05%; 5/15/2005 3,000,000 2,827,413
Paper Mills (3.37%)
Bowater, Inc. Debentures;
9.50%; 10/15/2012 $1,000,000 $ 1,283,206
9.38%; 12/15/2021 1,500,000 1,876,892
Champion International Corp.
Notes; 9.88%; 6/1/2000 750,000 795,869
Chesapeake Corp. Notes;
9.88%; 5/1/2003 1,000,000 1,161,728
James River Corp. Notes;
6.70%; 11/15/2003 1,000,000 1,040,837
------------
6,158,532
Paperboard Mills (0.99%)
Federal Paper Board Co., Inc.
Debentures; 8.88%; 7/1/2012 1,500,000 1,808,773
Personal Credit Institutions (3.46%)
Commercial Credit Co. Notes;
6.75%; 7/1/2007 2,000,000 2,097,726
General Motors Acceptance Corp.
Global Notes; 8.50%; 1/1/2003 2,000,000 2,220,296
Household Finance Corp. Notes
5.88%; 11/1/2002 2,000,000 2,004,206
------------
6,322,228
Petroleum & Petroleum
Products (2.19%)
Enron Corp. Notes; 9.13%; 4/1/2003 3,500,000 3,993,213
Petroleum Refining (5.59%)
Ashland, Inc. Medium-Term Notes;
7.71%; 5/11/2007 500,000 547,940
Ashland Oil, Inc. Medium-Term Notes;
7.73%; 7/15/2013 750,000 840,044
7.72%; 7/15/2013 1,000,000 1,119,109
Mapco, Inc. Medium-Term Notes;
8.48%; 8/5/2013 1,000,000 1,215,732
Sun Co., Inc.
Debentures; 9.00%; 11/1/2024 2,000,000 2,466,540
Notes; 7.13%; 3/15/2004 300,000 319,688
Tosco Corp. Notes; 7.25%; 1/1/2007 2,500,000 2,600,445
Ultramar Credit Corp. Guaranteed
Notes; 8.63%; 7/1/2002 1,000,000 1,107,646
------------
10,217,144
Plastic Materials & Synthetics (0.29%)
Geon Co. Notes; 6.88%; 12/15/2005 500,000 526,310
Pulp Mills (1.57%)
ITT Rayonier, Inc. Notes;
7.50%; 10/15/2002 1,875,000 2,013,248
International Paper Co.
Medium-Term Notes;
9.70%; 8/15/2000 800,000 860,503
------------
2,873,751
Railroads (1.92%)
Union Pacific Corp.
Debentures; 7.00%; 2/1/2016 2,500,000 2,443,493
Notes; 7.25%; 11/1/2008 1,000,000 1,064,144
------------
3,507,637
Real Estate Operators & Lessor (0.67%)
First Industrial, L.P. Notes;
7.60%; 5/15/2007 $1,250,000 $ 1,216,978
Refrigeration & Service
Machinery (0.87%)
Westinghouse Electric Corp.
Global Notes; 8.88%; 6/1/2001 1,500,000 1,590,775
Rental of Railroad Cars (1.50%)
GATX Capital Corp. Medium-Term Notes;
Series B; 9.50%; 1/10/2002 1,500,000 1,676,900
Series C; 6.86%; 10/13/2005 1,000,000 1,063,177
------------
2,740,077
Rubber & Plastics Footwear (1.40%)
Reebok International Ltd. Debentures;
6.75%; 9/15/2005 2,500,000 2,562,185
Sanitary Services (1.87%)
Laidlaw, Inc.
Notes; 7.70%; 8/15/2002 1,000,000 1,050,411
Senior Notes; 7.88%; 4/15/2005 750,000 805,202
WMX Technologies, Inc. Notes;
7.00%; 10/15/2006 1,500,000 1,568,724
3,424,337
Security Brokers & Dealers (2.77%)
Bear Stearns Cos., Inc.
Senior Notes; 7.00%; 3/1/2007 2,500,000 2,546,030
Lehman Brothers, Inc. Senior
Subordinated Notes;
7.38%; 1/15/2007 2,545,000 2,524,518
------------
5,070,548
Telephone Communication (5.59%)
Airtouch Communications, Inc. Notes;
6.65%; 5/1/2008 2,500,000 2,574,360
GTE Corp. Notes; 6.36%; 4/15/2006 2,500,000 2,621,327
Sprint Corp. Notes; 8.13%; 7/15/2002 1,500,000 1,647,923
Worldcom, Inc. Notes;
7.75%; 4/1/2007 3,000,000 3,372,759
------------
10,216,369
Variety Stores (0.70%)
Dayton-Hudson Corp. Debentures;
9.25%; 8/15/2011 1,000,000 1,272,728
------------
Total Bonds 175,302,166
Asset-Backed Securities (1.72%)
Security Brokers & Dealers (1.72%)
Merrill Lynch Mortgage Investors, Inc.
Collateralized Mortgage-Backed
Security, Series 95-C3, 7.37%*
Class C; 12/26/2025 3,000,000 3,150,900
Commercial Paper (0.56%)
Personal Credit Institutions (0.56%)
Investment in Joint Trade Account;
Associates Corp.; 5.72%; 11/2/1998 1,019,410 1,019,410
------------
Total Portfolio Investments (98.21%) 179,472,476
- --------------------------------------------------------------------------------
Value
- --------------------------------------------------------------------------------
Cash and receivables, net of liabilities (1.79%) $ 3,270,188
------------
Total Net Assets (100.00%) $182,742,664
------------
------------
(a)Restricted security - See Note 4 to the financial statements.
* Variable rate (monthly)
PRINCIPAL GOVERNMENT SECURITIES INCOME
FUND, INC.
- --------------------------------------------------------------------------------
Description of Issue
- ------------------------------------------ Principal
Type Rate Maturity Amount Value
- --------------------------------------------------------------------------------
Government National Mortgage Association (GNMA)
Certificates (101.50%)
GNMA I 6.00% 10/15/2023-1/20/2028 $14,658,308 $ 14,523,206
GNMA I 6.50 9/15/2023-12/1/2028 71,781,437 72,574,692
GNMA I 7.00 10/15/2022-5/15/2028 78,090,120 79,924,836
GNMA I 7.25 9/15/2025-10/15/2025 4,468,787 4,569,960
GNMA I 7.50 4/15/2017-10/15/2027 41,113,811 42,373,522
GNMA I 8.00 8/15/2016-2/15/2022 9,279,703 9,685,315
GNMA II 6.00 1/20/2024-8/20/2028 51,693,537 50,848,092
GNMA II 6.50 3/20/2024-3/20/2027 13,679,743 13,729,548
------------
Total GNMA Certificates 288,229,171
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
Federal Agency Short-Term Obligation (1.31%)
Investment in Joint Trade Account;
Federal National Mortgage
Association; 5.45%; 11/2/1998 $3,723,535 $ 3,723,535
------------
Total Portfolio Investments (102.81%) 291,952,706
Liabilities, net of cash, receivables and
other assets (-2.81%) (7,971,330)
------------
Total Net Assets (100.00%) $283,981,376
------------
------------
PRINCIPAL HIGH YIELD FUND, INC.
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
Bonds (95.07%)
Advertising (3.57%)
Lamar Advertising Co.
Senior Subordinated Notes;
9.63%; 12/1/2006 $1,500,000 $ 1,597,500
Aircraft & Parts (1.72%)
BE Aerospace Senior Subordinated
Notes; 9.50%; 11/1/2008 $ 750,000(a) $ 768,750
Cable & Other Pay TV Services (10.28%)
CSC Holdings, Inc. Senior Notes;
7.25%; 7/15/2008 1,500,000 1,464,375
Century Communications Senior Notes;
8.75%; 10/1/2007 900,000 929,250
Fox/Liberty Networks LLC Senior Notes;
8.88%; 8/15/2007 1,500,000 1,451,250
Jones Intercable, Inc. Senior Notes;
9.63%; 3/15/2002 700,000 756,000
-----------
4,600,875
Cogeneration - Small Power
Producer (3.50%)
AES Corp. Senior Subordinated
Notes; 8.38%; 8/15/2007 800,000 744,000
Calpine Corp. Senior Notes;
8.75%; 7/15/2007 800,000 820,000
-----------
1,564,000
Communications Equipment (3.10%)
FWT, Inc. Senior Subordinated
Notes; 9.88%; 11/15/2007 800,000 466,000
Qwest Communications International
Senior Notes; 7.50%; 11/1/2008 900,000(a) 920,250
-----------
1,386,250
Communication Services, NEC (2.73%)
Level 3 Communications, Inc.
Senior Notes; 9.13%; 5/1/2008 1,300,000 1,222,000
Computer & Data Processing
Services (2.01%)
DecisionOne Corp. Senior Subordinated
Notes; 9.75%; 8/1/2007 1,500,000 900,000
Crude Petroleum & Natural Gas (4.61%)
Chesapeake Energy Corp. Senior
Notes, Series A; 9.63%; 5/1/2005 1,500,000 1,275,000
Ocean Energy, Inc. Senior Subordinated
Notes; 8.88%; 7/15/2007 800,000 788,000
-----------
2,063,000
Eating & Drinking Places (5.07%)
Cafeteria Operators L. P. Senior Secured
Notes; 12.00%; 12/31/2001 1,500,000 1,413,750
Foodmaker, Inc. Senior Subordinated
Notes; 8.38%; 4/15/2008 900,000 852,750
-----------
2,266,500
Electric Services (1.89%)
York Power Funding Ltd. Senior Secured
Bonds; 12.00%; 10/30/2007 900,000 843,750
Finance Services (1.70%)
DVI, Inc. Senior Notes;
9.88%; 2/1/2004 800,000 760,000
Forest Products (1.11%)
Doman Industries Ltd. Senior Notes;
8.75%; 3/15/2004 700,000 497,000
Fuel Dealers (1.50%)
Petroleum Heat & Power Co., Inc.
Senior Subordinated Debentures;
12.25%; 2/1/2005 700,000 672,000
Funeral Service & Crematories (0.62%)
Loewen Group International, Inc.;
8.25%; 10/15/2003 $ 350,000 $ 276,500
Grocery Stores (1.75%)
Marsh Supermarkets Senior
Subordinated Notes;
8.88%; 8/1/2007 800,000 784,000
Heavy Construction, Except
Highway (3.12%)
Mastec, Inc. Senior Subordinated
Notes; 7.75%; 2/1/2008 1,500,000 1,395,000
Hotels & Motels (2.97%)
HMH Properties, Inc. Senior Notes;
7.88%; 8/1/2008 750,000 725,625
John Q. Hammons Hotels, L.P. &
Finance Corp. First Mortgage
Notes; 8.88%; 2/15/2004 700,000 602,000
-----------
1,327,625
Industrial Inorganic Chemicals (0.30%)
PT. Tri Polyta Indonesia TBK
Guaranteed Secured Notes;
11.38%; 12/1/2003 800,000(b) 136,000
Men's & Boys' Clothing Stores (0.95%)
Edison Brothers Stores, Inc. Senior
Notes; 11.00%; 9/26/2007 700,000 427,000
Miscellaneous Amusement, Recreation
Service (3.49%)
Rio Hotel & Casino, Inc. Senior
Subordinated Notes;
9.50%; 4/15/2007 700,000 759,500
Station Casinos, Inc. Senior
Subordinated Notes, Series B;
9.63%; 6/1/2003 800,000 800,000
-----------
1,559,500
Miscellaneous Equipment Rental &
Leasing (3.14%)
Rental Service Corp. Senior Subordinated
Notes; 9.00%; 5/15/2008 1,500,000 1,402,500
Miscellaneous Metal Ores (2.62%)
Glencore Nickel Priority Ltd.
Senior Secured Notes;
9.00%; 12/1/2014 1,500,000 1,170,000
Miscellaneous Shopping Goods
Stores (1.89%)
Zale Corp. Senior Notes;
8.50%; 10/1/2007 900,000 846,000
Newspapers (1.86%)
Hollinger International Publishing, Inc.
Senior Subordinated Notes;
9.25%; 3/15/2007 $ 800,000 $ 834,000
Nursing & Personal Care Facilities (1.63%)
Integrated Health Services, Inc. Senior
Subordinated Notes; 9.25%; 1/15/2008 800,000 728,000
Oil & Gas Field Services (1.56%)
Dawson Production Services
Senior Notes; 9.38%; 2/1/2007 700,000 700,000
Paper Mills (0.96%)
Indah Kiat Finance Mauritius Ltd.
Guaranteed Senior Notes;
10.00%; 7/1/2007 800,000 430,000
Personal Credit Institutions (1.18%)
MacSaver Financial Services, Inc.
Notes; 7.60%; 8/1/2007 800,000 527,793
Petroleum Refining (1.51%)
Crown Central Petroleum Corp.
Senior Notes; 10.88%; 2/1/2005 700,000 677,250
Pulp Mills (1.57%)
Pen-Tab Industries, Inc. Senior
Subordinated Notes; 10.88%; 2/1/2007 800,000 704,000
Radio & Television Broadcasting (1.72%)
Antenna TV S.A. Senior Notes;
9.00%; 8/1/2007 900,000 767,250
Retail Stores, NEC (1.83%)
Cole National Group, Inc.
Senior Subordinated Notes;
9.88%; 12/31/2006 800,000 820,000
Search & Navigation Equipment (0.94%)
AMRESCO, Inc. Senior Subordinated
Notes; 10.00%; 3/15/2004 700,000 420,000
Telephone Communication (13.75%)
Comcast Cellular Holdings Senior Notes;
9.50%; 5/1/2007 1,500,000 1,545,000
Intermedia Communications, Inc. Senior
Notes; 8.50%; 1/15/2008 800,000 756,000
Lenfest Communications Senior Notes;
8.38%; 11/1/2005 800,000 836,000
NEXTLINK Communications, Inc.
Senior Notes; 9.00%; 3/15/2008 800,000 728,000
Rogers Cablesystems, Ltd. Senior
Secured Second Priority Notes;
9.63%; 8/1/2002 750,000 800,625
Rogers Cantel, Inc. Senior Secured
Debentures; 9.75%; 6/1/2016 700,000 710,500
Vanguard Cellular Systems, Inc. Senior
Debentures; 9.38%; 4/15/2006 700,000 773,500
-----------
6,149,625
Water Transportation of Freight,
NEC (2.92%)
Cenargo International PLC First Mortgage
Notes; 9.75%; 6/15/2008 $1,500,000(a) $ 1,305,000
-----------
Total Bonds 42,528,668
Commercial Paper (6.31%)
Business Credit Institutions (1.41%)
American Express Credit Corp.;
5.05%; 11/2/1998 310,000 309,956
General Electric Capital Corp.;
5.10%; 11/2/1998 320,000 319,955
-----------
629,911
Personal Credit Institutions (4.91%)
Investment in Joint Trade Account,
Associates Corp; 5.72%; 11/2/1998 2,194,868 2,194,868
-----------
Total Commercial Paper 2,824,779
-----------
Total Portfolio Investments (101.38%) 45,353,447
Liabilities, net of cash, receivables and
other assets (-1.38%) (618,645)
-----------
Total Net Assets (100.00%) $44,734,802
-----------
-----------
(a)Restricted security - See Note 4 to the financial statements.
(b)Non-income producing security - Security in default.
PRINCIPAL LIMITED TERM BOND FUND, INC.
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
Bonds (61.34%)
Business Credit Institutions (9.36%)
CIT Group Holdings
Senior Medium-Term Notes;
6.38%; 10/1/2002 $1,000,000 $ 1,019,533
Ford Motor Credit Co. Notes;
7.50%; 1/15/2003 1,000,000 1,065,888
Orix Credit Alliance, Inc.
Medium-Term Notes;
6.46%; 5/17/1999 850,000(a) 850,704
-----------
2,936,125
Combination Utility Services (3.53%)
Consolidated Edison Co. Debentures,
Series 93-B; 6.50%; 2/1/2001 824,000 851,245
Pacificorp First Mortgage Medium-Term
Notes; 9.50%; 5/20/1999 250,000 255,550
-----------
1,106,795
Commercial Banks (1.06%)
Lehman Large Loan Class A1,
Series 1997-LLI; 6.79%; 6/12/2004 317,722 331,025
Department Stores (5.25%)
J. C. Penney Co., Inc. Notes;
9.05%; 3/1/2001 $1,000,000 $ 1,077,980
Sears Roebuck Acceptance Corp.
Medium-Term Notes, Series II;
6.69%; 8/13/2001 450,000 466,955
Sears Roebuck Co. Medium-Term
Notes; 6.46%; 5/12/2000 100,000 101,278
-----------
1,646,213
Finance Services (4.87%)
Aetna Services, Inc. Notes;
6.38%; 8/15/2003 500,000 518,663
Lehman Brothers, Inc. Senior
Subordinated Notes;
7.25%; 4/15/2003 1,000,000 1,009,355
-----------
1,528,018
Federal & Federally Sponsored
Credit (0.97%)
Federal Home Loan Mortgage
Corporation Debentures;
6.57%; 2/27/2007 130,000 141,055
Federal National Mortgage
Association Medium-Term Notes;
6.70%; 6/19/2007 150,000 163,837
-----------
304,892
General Industrial Machinery (3.39%)
Timken Co. Medium-Term Notes;
7.30%; 8/13/2002 1,000,000 1,064,405
Miscellaneous Investing (0.96%)
United Dominion Realty Trust
Notes; 7.25%; 4/1/1999 300,000 300,114
Mortgage Bankers & Brokers (2.76%)
Countrywide Funding Corp.
Medium-Term Notes;
6.05%; 3/1/2001 860,000 867,377
Motor Vehicles & Equipment (1.75%)
General Motors Corp. Medium-Term
Notes; 9.20%; 7/2/2001 500,000 548,645
Paper Mills (3.28%)
International Paper Co. Notes;
7.00%; 6/1/2001 1,000,000 1,030,053
Paperboard Mills (3.46%)
Temple-Inland, Inc. Notes;
9.00%; 5/1/2001 1,000,000 1,084,663
Personal Credit Institutions (11.62%)
American General Finance Corp.
Medium-Term Notes, Series D;
7.46%; 3/28/2000 350,000 359,675
Notes; 7.25%; 4/15/2000 701,000 721,253
Associates Corp. of North America
Notes; 5.75%; 10/15/2003 1,000,000 1,004,350
Chrysler Financial Corp.
Medium-Term Notes;
8.45%; 1/28/2000 500,000 517,709
General Motors Acceptance Corp.
Notes; 6.63%; 10/1/2002 1,000,000 1,041,056
-----------
3,644,043
Plumbing & Heating, Except
Electric (3.42%)
Masco Corp. Notes; 6.13%; 9/15/2003 $1,035,000 $ 1,073,625
Security Brokers & Dealers (3.39%)
Merrill Lynch & Co., Inc. Notes;
6.55%; 8/1/2004 1,030,000 1,064,886
Telephone Communication (2.27%)
Nynex Capital Funding Medium-Term
Notes, Series A; 9.40%; 6/1/2000 670,000 711,927
-----------
Total Bonds 19,242,806
- --------------------------------------------------------------------------------
Description of Issue
- ---------------------------------- Principal
Type Rate Maturity Amount Value
- --------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation (FHLMC)
Certificates (11.71%)
FHLMC 7.00% 12/1/2022 $ 719,438 $ 731,920
FHLMC 7.00 3/1/2028 993,337 1,009,796
FHLMC 7.25 12/1/2007 493,439 499,287
FHLMC 8.00 12/1/2011 242,965 251,502
FHLMC 8.00 10/1/2022 230,115 237,727
FHLMC 8.25 1/1/2012 86,170 88,058
FHLMC 8.50 1/1/2000 437,643 443,529
FHLMC 8.50 4/1/2000 90,095 91,307
FHLMC 9.00 9/1/2009 303,768 320,958
-----------
Total FHLMC Certificates 3,674,084
Federal National Mortgage Association (FNMA)
Certificates (6.81%)
FNMA 6.00 7/1/2028 1,000,000 987,890
FNMA 8.00 10/1/2006 119,371 121,758
FNMA 8.00 5/1/2027 337,982 349,402
FNMA 8.50 5/1/2022 286,588 298,966
FNMA 9.00 2/1/2025 356,057 376,787
-----------
Total FNMA Certificates 2,134,803
Government National Mortgage Association (GNMA)
Certificates (8.95%)
GNMA I 6.50 6/15/2028 991,200 1,002,193
GNMA I 6.50 9/15/2028 998,617 1,009,691
GNMA I 9.00 7/15/2017 76,258 81,600
GNMAII 6.00 7/20/2028 496,764 488,692
GNMAII 8.00 1/20/2016 216,224 224,529
Total GNMA Certificates 2,806,705
Asset-Backed Securities (8.92%)
Motor Vehicles & Equipment (3.15%)
GMAC Commercial Mortgage
Securities, Inc. Mortgage Pass-Through
Certificates, Series 1998-C2, Class C;
6.50%; 8/15/2008 $1,000,000 $ 987,730
Personal Credit Institutions (1.18%)
Union Acceptance Corp. 1996-B Auto
Trust Pass-Through Certificates,
Class A; 6.45%; 7/8/2003 366,453 370,924
Mortgage Pass Thru Securities (4.59%)
J.P. Morgan Commercial Mortgage
Finance Corp. Mortgage
Pass-Through, Series 97-C5,
Class A-2; 7.06%; 9/15/2029 1,360,000 1,441,097
-----------
Total Asset-Backed Securities 2,799,751
Commercial Paper (1.23%)
Personal Credit Institutions (1.23%)
Investment in Joint Trade Account;
Associates Corp.; 5.72%; 11/2/1998 386,355 386,355
-----------
Total Portfolio Investments (98.96%) 31,044,504
Cash, receivables and other assets,
net of liabilities (1.04%) 326,201
-----------
Total Net Assets (100.00%) $31,370,705
-----------
-----------
(a)Restricted security - See Note 4 to the financial statements.
PRINCIPAL TAX-EXEMPT BOND FUND, INC.
- --------------------------------------------------------------------------------
Principal
Amount Value
- --------------------------------------------------------------------------------
Long-Term Tax-Exempt Bonds (98.09%)
Alabama (2.40%)
Courtland, Alabama IDB IDR Series A
Bonds for Champion International;
7.20%; 12/1/2013 $3,815,000 $ 4,191,731
Phenix County, Alabama IDB
Environmental Improvement Rev.
Bonds, Mead Coated Board, Inc.,
Series B; 5.25%; 4/1/2028 1,000,000 991,250
------------
5,182,981
Arizona (1.97%)
Navajo County, Arizona Pollution
Control Corp. Rev. Ref. Bonds,
Arizona Public Service Co.,
Series 1993A; 5.88%; 8/15/2028 4,100,000 4,264,000
Arkansas (2.54%)
City of Blytheville, Arkansas Solid Waste
Recycling & Sewer Treatment Rev.
Bonds, Series 1992, Nucor Corp.
Project; 6.90%; 12/1/2021 $4,610,000 $ 4,984,563
Little River County Arkansas Rev.
Georgia Pacific Corp. Project;
5.60%; 10/1/2026 500,000 501,250
------------
5,485,813
California (4.58%)
ABAG Finance Authority for Nonprofit
Corp., Cert. of Participation,
Stanford University Hospital;
5.00%; 11/1/2004 750,000 797,813
5.50%; 11/1/2013 1,250,000 1,375,000
5.25%; 11/1/2020 1,750,000 1,824,375
California Pollution Control Funding
Authority Pollution Control Rev. Ref.
Bonds for San Diego Gas & Electric,
Series A; 5.90%; 6/1/2014 1,000,000 1,125,000
California Pollution Control Funding
Authority Rev. Bonds, Atlantic
Richfield Co. Project; 5.00%; 4/1/2008 2,500,000 2,609,375
City of Upland, California San Antonio
Comm. Hospital Cert. of Participation;
5.25%; 1/1/2004 2,080,000 2,173,600
------------
9,905,163
Colorado (2.60%)
City & County of Denver, Colorado
Airport System Rev. Bonds,
Series 1991D; 7.75%; 11/15/2013 3,185,000 4,108,650
Colorado Health Fac. Authority Rev.
Bonds for Sisters of Charity
Healthcare Systems, Series 1994;
5.25%; 5/15/2014 1,500,000 1,524,375
------------
5,633,025
Florida (1.10%)
Nassau County, Florida Pollution
Control Rev. Ref. Bonds; ITT
Rayonier, Inc. Project;
6.10%; 6/1/2005 1,000,000 1,065,000
7.65%; 6/1/2006 1,265,000 1,306,315
------------
2,371,315
Georgia (1.73%)
Fulco, Georgia Hospital Authority Rev.
Anticipation Cert. for St. Joseph's
Hospital of Atlanta, Inc.;
5.50%; 10/1/2014 2,000,000 2,202,500
Municipal Electric Authority of Georgia
Power Rev. Bonds, Series R;
7.30%; 1/1/2009 1,505,000 1,542,098
------------
3,744,598
Illinois (13.55%)
Chicago, Illinois Midway Airport Rev.
Bonds, Series A, MBIA Insured;
5.50%; 1/1/2011 1,500,000 1,603,125
5.50%; 1/1/2013 500,000 533,750
Chicago, Illinois O'Hare International
Airport Special Fac. Rev. Bonds for
American Airlines, Inc. Project-A;
7.88%; 11/1/2025 6,010,000 6,475,775
Chicago, Illinois O'Hare International
Airport Special Fac. Rev. Bonds for
Lufthansa German Airlines Project;
7.13%; 5/1/2018 $1,000,000 $ 1,076,250
City of Chicago, Illinois Adj. Rate Gas
Supply Rev. Bonds, Series 1985A,
Peoples Gas Light & Coke Project;
6.88%; 3/1/2015 2,800,000 3,062,500
Illinois Health Fac. Authority Ref. Rev.
Bonds for OSF Healthcare System;
5.75%; 11/15/2007 1,000,000 1,071,250
6.00%; 11/15/2010 500,000 538,750
6.00%; 11/15/2013 500,000 535,625
Illinois Health Fac. Authority Rev. Bonds,
Northwestern Memorial Hospital,
Series 1994A;
5.60%; 8/15/2006 500,000 539,375
5.75%; 8/15/2008 615,000 664,969
5.80%; 8/15/2009 840,000 906,150
6.10%; 8/15/2014 1,000,000 1,076,250
Illinois Health Fac. Authority Rev.
Bonds for Sarah Bush Lincoln
Health Center;
Series 1992; 7.25%; 5/15/2002 2,950,000 3,344,562
Series 1996B; 6.00%; 2/15/2011 1,000,000 1,087,500
Series 1996B; 5.50%; 2/15/2016 1,000,000 1,015,000
Illinois Health Fac. Authority Rev.
Bonds for South Suburban Hospital,
Series 1992;
7.00%; 2/15/2009 305,000 358,375
7.00%; 2/15/2018 720,000 888,300
Illinois Health Fac. Authority Rev. Ref.
Bonds for Advocate Healthcare,
Series A; 6.75%; 4/15/2012 2,000,000 2,314,950
Regional Transportation Authority,
Illinois General Obligation Bonds,
Series 1994A; 6.25%; 6/1/2015 2,000,000 2,212,500
------------
29,304,956
Indiana (7.52%)
City of Mount Vernon, Indiana
Pollution Control Rev. Bonds for
Southern Indiana Gas & Electric
Co. Project; 7.25%; 3/1/2014 700,000 748,125
City of Petersburg, Indiana Pollution
Control Rev. Bonds, for Indianapolis
Power & Light Co. Project,
Series 1993A; 6.10%; 1/1/2016 4,000,000 4,265,000
Indiana Health Fac. Financing Authority
Hospital Rev. Bonds, Clarian Health
Partners, Inc.; 5.50%; 2/15/2009 2,520,000 2,664,900
Indiana Health Fac. Financing
Authority Hospital Rev. Ref. Bonds,
Schneck Memorial Hospital,
Series 1998;
4.70%; 2/15/2006 500,000 504,375
5.13%; 2/15/2017 500,000 488,125
Indiana Health Fac. Financing
Authority Hospital Rev. Ref. Bonds,
Welborn Memorial Baptist Hospital,
Series 1993; 5.63%; 7/1/2023 1,860,000 1,885,575
Indiana (Continued)
Lawrenceburg, Indiana Pollution
Control Rev. Ref. Bonds, Indiana
Michigan Power Co. Project,
Series D; 7.00%; 4/1/2015 $1,000,000 $ 1,080,000
Series E; 5.90%; 11/1/2019 3,220,000 3,352,825
Warrick County, Indiana
Environmental Improvement Rev.
Bonds, Southern Indiana Gas &
Electric, Series 1993B;
6.00%; 5/1/2023 1,190,000 1,265,862
16,254,787
Iowa (2.96%)
City of Muscatine, Iowa Electric Rev.
Ref. Bonds, Series 1986;
6.00%; 1/1/2006 150,000 150,386
5.00%; 1/1/2007 1,575,000 1,576,102
Eddyville, Iowa IDR Ref. Bonds,
Cargill, Inc. Project; 5.63%; 12/1/2013 1,000,000(a) 1,050,000
Iowa Finance Authority Hospital Fac.
Ref. Rev. Bonds for Jennie
Edmundson Memorial Hospital;
7.40%; 11/1/2006 550,000 618,062
Iowa Finance Authority Hospital Fac.
Ref. Rev. Bonds, Iowa Health Systems,
Series A, MBIA Insured;
5.13%; 1/1/2028 3,000,000 3,015,000
------------
6,409,550
Kentucky (1.85%)
City of Ashland, Kentucky Sewage
and Solid Waste Rev. Bonds for
Ashland, Inc. Project, Series 1995;
7.13%; 2/1/2022 750,000 842,813
City of Ashland, Kentucky Solid
Waste Rev. Bonds for Ashland
Oil, Inc. Project, Series 1991;
7.20%; 10/1/2020 1,000,000 1,078,750
------------
1,921,563
Louisiana (0.97%)
St. Charles Parish, Louisiana Pollution
Control Rev. Bonds for Louisiana
Power & Light Co. Project;
7.50%; 6/1/2021 1,950,000 2,108,438
Maine (0.98%)
Skowhegan, Maine Pollution Control
Rev. Ref. Bonds for Scott Paper
Co. Project, Series 1993;
5.90%; 11/1/2013 2,000,000 2,122,500
Michigan (3.02%)
Detroit, Michigan LOC Dev. Financing
Authority Ref. Bonds, Senior Series A
Chrysler Corp; 5.20%; 5/1/2010 1,700,000 1,780,750
Michigan State Hospital Financing
Authority Hospital Rev. Bonds for
Detroit Medical Center, Series 1993B;
5.75%; 8/15/2013 $ 600,000 $ 628,500
5.50%; 8/15/2023 2,000,000 2,017,500
Michigan State Hospital Financing
Authority Rev. Ref. Bonds,
Daughters of Charity Hospital;
5.25%; 11/1/2015 1,000,000 1,020,000
Michigan State Hospital Financing
Authority Rev. Ref. Bonds,
Daughters of Charity Natl. Health
System; 5.50%; 11/1/2005 1,000,000 1,082,500
------------
6,529,250
Minnesota (0.73%)
City of Bass Brook, Minnesota Pollution
Control Rev. Ref. Bonds for
Minnesota Power & Light Project;
6.00%; 7/1/2022 1,500,000 1,578,750
Mississippi (0.23%)
Grenada County, Mississippi Rev. Ref.
Bonds, Georgia Pacific Corp. Project;
5.45%; 9/1/2014 500,000 502,500
Missouri (1.14%)
Missouri State Health & Educational
Fac. Authority Health Fac. Rev.
Bonds, BJC Health System,
Series 1994A; 6.75%; 5/15/2012 2,000,000 2,465,000
Montana (0.98%)
Forsyth, Montana Pollution Control
Rev. Ref. Bonds, Montana Power
Co., Colstrip Project, Series 1993A;
6.13%; 5/1/2023 2,000,000 2,127,500
Nebraska (2.20%)
Dawson County, Nebraska Sanitary &
Improvement General Obligation
Ref. Bonds; 5.55%; 2/1/2017 1,000,000 1,042,500
Nebraska Public Power Dist. Power
Supply System Rev. Bonds;
5.30%; 1/1/2002 1,000,000 1,046,250
5.40%; 1/1/2003 1,500,000 1,586,250
5.50%; 1/1/2004 1,000,000 1,077,500
------------
4,752,500
Nevada (1.84%)
Clark County, Nevada IDR Ref.
Bonds, Nevada Power Co. Project,
Series 1992C; 7.20%; 10/1/2022 3,600,000 3,969,000
New Mexico (1.08%)
City of Lordsburg, New Mexico
Pollution Control Rev. Bonds
for Phelps Dodge Corp. Project;
6.50%; 4/1/2013 2,150,000 2,340,813
North Carolina (3.46%)
Martin County, North Carolina
Industrial Fac. & Pollution Control
Finance Authority Solid Waste
Rev. Bonds, Weyerhaeuser;
5.65%; 12/1/2023 1,500,000 1,530,000
6.80%; 5/1/2024 2,000,000 2,230,000
North Carolina Medical Care Hospital
Rev. Bonds for Rex Hospital Project;
5.00%; 6/1/2023 $2,170,000 $ 2,129,312
Wake County, North Carolina
Industrial Fac. & Pollution Control
Finance Authority Rev. Bond,
Carolina Power & Light Co.;
6.90%; 4/1/2009 1,500,000 1,584,375
------------
7,473,687
North Dakota (0.96%)
Mercer County, North Dakota
Pollution Control Rev. Bonds,
Ottertail Power Co. Project,
Series 1991; 6.90%; 2/1/2019 1,950,000 2,086,500
Ohio (4.78%)
Cuyahoga County, Ohio Hospital
Rev. Bonds for Meridia Health
Systems, Series 1991;
7.25%; 8/15/2019 1,445,000 1,566,019
Lorain County, Ohio Hospital Ref.
Bonds, Humility Mary Health
Care, Series A; 5.90%; 12/15/2008 3,270,000 3,547,950
Ohio Air Quality Dev. Rev. Bonds,
Columbus Southern Power Co.
Project, Series 1985B;
6.25%; 12/1/2020 4,900,000 5,218,500
------------
10,332,469
Oklahoma (1.14%)
Tulsa Industrial Authority Rev. Bonds,
St. John Medical Center Project,
Series 1994;
6.25%; 2/15/2014 1,280,000 1,384,000
6.25%; 2/15/2017 1,000,000 1,077,500
------------
2,461,500
Rhode Island (1.44%)
Rhode Island State Industrial Facilities
Corp. Marine Term Rev. Bonds,
Mobil Oil Refining;
6.00%; 11/1/2014 2,900,000 3,113,875
South Carolina (4.68%)
Darlington County, South Carolina
Pollution Control Rev. Bonds for
Carolina Power & Light;
6.60%; 11/1/2010 1,000,000 1,098,750
Greenville Hospital System,
South Carolina Hospital Fac.
Rev. Ref. Bonds; 6.00%; 5/1/2020 230,000 259,037
Series C; 5.50%; 5/1/2016 2,500,000 2,575,000
Oconee County, South Carolina
Pollution Control Rev. Ref. Bonds,
Duke Energy Corp. Project, Series
1993; 5.80%; 4/1/2014 2,000,000 2,127,500
York County, South Carolina Exempt
Fac. Industrial Rev. Bonds for
Hoechst Celanese Project,
Series 1994; 5.70%; 1/1/2024 2,000,000 2,062,500
York County, South Carolina Pollution
Control Rev. Bonds, Bowater, Inc.
Project; 7.63%; 3/1/2006 1,700,000 1,995,375
------------
10,118,162
South Dakota (0.50%)
Pennington County, South Dakota
Pollution Control Rev. Ref. Bonds
for Black Hills Power & Light Co.
Project; 6.70%; 6/1/2010 $1,000,000 $ 1,085,000
Tennessee (0.96%)
County of Louden, Tennessee Industrial
Development Solid Waste;
6.20%; 2/1/2023 1,950,000 2,084,062
Texas (9.07%)
Brazos River Authority, Texas Rev.
Industrial Bonds Project-A Houston
Industries, Inc.; 5.13%; 5/1/2019 2,000,000 2,012,500
Cass County, Texas Industrial
Dev. Corp. Pollution Control
Rev. Bonds for International
Paper Co. - Series B
5.35%; 4/1/2012 3,750,000 3,867,187
Guadalupe-Blanco River Authority,
Texas Industrial Dev. Corp.
Pollution Control Rev. E I Du Pont
1982 Series A; 6.35%; 7/1/2022 2,500,000 2,728,125
IDC Port of Corpus Christi Rev. Ref.
Bonds, Port Fac. Rev. Bonds,
Valero Energy Corp.; 5.13%; 4/1/2009 1,000,000 1,010,000
Matagorda County, Texas
Navigational District No. 1 Pollution
Control Rev. Bonds for Central
Power & Light Co.;
7.50%; 12/15/2014 2,585,000 2,749,794
6.00%; 7/1/2028 1,000,000 1,060,000
Milam County, Texas Industrial Dev.
Corp. Pollution Control Rev. Ref.
Bonds, Alcoa Project;
5.65%; 12/1/2012 2,000,000 2,142,500
Red River Authority, Texas Pollution
Control Rev. Bonds, Hoechst
Celanese Corp. Project;
5.20%; 5/1/2007 2,825,000 2,934,469
Tarrant County, Texas Health Fac.
Dev. Corp., Harris Methodist Health
System Rev. Bonds; 5.90%; 9/1/2006 1,000,000 1,120,000
------------
19,624,575
Utah (0.91%)
Intermountain Power Agency, Utah
Power Supply, Rev. Ref. Bonds,
Series 1996D; 5.00%; 7/1/2021 2,000,000 1,967,500
Virginia (2.78%)
Albemarle County, Virginia IDA
Hospital Rev. Ref. Bonds, Martha
Jefferson Hospital; 5.50%; 10/1/2015 1,900,000 1,959,375
Bedford County, Virginia Industrial Dev.
Nekoosa Packing Corp., Georgia
Pacific; 5.60%; 12/1/2025 2,500,000 2,537,500
Chesapeake, Virginia IDA Rev. Ref.
Bonds for Cargill, Inc. Project;
5.88%; 3/1/2013 1,410,000 1,508,700
------------
6,005,575
Washington (2.96%)
City of Seattle, Washington Municipal
Light and Power Rev. Bonds;
1993; 5.10%; 11/1/2005 $1,950,000 $ 2,076,750
1994; 6.63%; 7/1/2016 1,000,000 1,147,500
1998; 4.88%; 6/1/2021 1,500,000 1,456,875
Washington Health Care Fac.
Authority Rev. Bonds; Series 1989,
Sisters of Providence;
7.88%; 10/1/1999 1,650,000 1,738,374
------------
6,419,499
West Virginia (6.69%)
Braxton County, West Virginia Solid
Waste Disposal Rev. Weyerhaeuser
Co.; 5.40%; 5/1/2025 2,000,000 2,015,000
Marshall County, West Virginia
Pollution Control Rev. Bonds
for Ohio Power Co. Project;
Series C; 6.85%; 6/1/2022 1,200,000 1,306,500
Series D; 5.90%; 4/1/2022 4,500,000 4,798,125
Pleasants County, West Virgina
Pollution Control Rev. Bonds
for Potomac Edison Co.;
6.15%; 5/1/2015 2,000,000 2,172,500
Putnam County, West Virginia
Pollution Control Rev. Bonds for
Appalachian Power Co. Project,
Series C; 6.60%; 7/1/2019 3,875,000 4,170,469
------------
14,462,594
Wisconsin (2.75%)
Kaukauna, Wisconsin Pollution
Control Rev. Ref. Bonds for
International Paper Co. Project,
Series A; 5.40%; 5/1/2004 3,610,000 3,772,450
Wisconsin Health & Educational
Fac. Authority Rev. Bonds;
Series 1995; Franciscan Skemp
Medical Center, Inc.;
5.88%; 11/15/2010 1,000,000 1,086,250
6.13%; 11/15/2015 1,000,000 1,085,000
------------
5,943,700
------------
Total Portfolio Investments (98.09%) 212,152,700
Cash, receivables and other assets,
net of liabilities (1.91%) 4,131,205
------------
Total Net Assets (100.00%) $216,283,905
------------
------------
(a)Restricted security - See Note 4 to the financial statements.
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
PRINCIPAL BOND FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.44 $11.17 $11.42 $10.27 $11.75
Income from Investment Operations:
Net Investment Income(b).............................. .71 .75 .76 .78 .78
Net Realized and Unrealized Gain (Loss) on Investments .16 .33 (.25) 1.16 (1.47)
------ ------ ------ ------ ------
Total from Investment Operations .87 1.08 .51 1.94 (.69)
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.72) (.81) (.76) (.78) (.78)
Distributions from Capital Gains...................... -- -- -- (.01) (.01)
------ ------ ------ ------ ------
Total Dividends and Distributions (.72) (.81) (.76) (.79) (.79)
------ ------ ------ ------ ------
Net Asset Value, End of Period........................... $11.59 $11.44 $11.17 $11.42 $10.27
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return(c).......................................... 7.76% 10.15% 4.74% 19.73% (6.01)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $148,081 $126,427 $113,437 $106,962 $88,801
Ratio of Expenses to Average Net Assets(b)............ .95% .95% .95% .94% .95%
Ratio of Net Investment Income to Average Net Assets.. 6.19% 6.70% 6.85% 7.26% 7.27%
Portfolio Turnover Rate............................... 15.2% 12.8% 3.4% 5.1% 8.9%
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BOND FUND, INC.(a)
Class B shares 1998 1997 1996 1995(f)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.42 $11.15 $11.41 $10.19
Income from Investment Operations:
Net Investment Income(b).............................. .63 .67 .67 .63
Net Realized and Unrealized Gain (Loss) on Investments .16 .31 (.25) 1.19
------ ------ ------ ------
Total from Investment Operations .79 .98 .42 1.82
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.63) (.71) (.68) (.60)
Distributions from Capital Gains...................... -- -- -- --
------ ------ ------ ------
Total Dividends and Distributions (.63) (.71) (.68) (.60)
------ ------ ------ ------
Net Asset Value, End of Period........................... $11.58 $11.42 $11.15 $11.41
------ ------ ------ ------
------ ------ ------ ------
Total Return(c).......................................... 7.04% 9.20% 3.91% 17.98%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $22,466 $13,403 $7,976 $2,708
Ratio of Expenses to Average Net Assets(b)............ 1.67% 1.70% 1.69% 1.59%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.45% 5.92% 6.14% 6.30%(e)
Portfolio Turnover Rate............................... 15.2% 12.8% 3.4% 5.1%(e)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL BOND FUND, INC.(a)
Class R shares 1998 1997 1996(g)
---- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.43 $11.16 $11.27
Income from Investment Operations:
Net Investment Income(b).............................. .63 .71 .51
Net Realized and Unrealized Gain (Loss) on Investments .16 .30 (.13)
------ ------ ------
Total from Investment Operations .79 1.01 .38
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.63) (.74) (.49)
Distributions from Capital Gains...................... -- -- --
------ ------ ------
Total Dividends and Distributions (.63) (.74) (.49)
------ ------ ------
Net Asset Value, End of Period........................... $11.59 $11.43 $11.16
------ ------ ------
------ ------ ------
Total Return(c).......................................... 7.05% 9.49% 3.75%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $12,196 $5,976 $525
Ratio of Expenses to Average Net Assets(b)............ 1.45% 1.45% 1.28%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.66% 6.11% 6.51%(e)
Portfolio Turnover Rate............................... 15.2% 12.8% 3.4%(e)
See accompanying notes.
</TABLE>
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.51 $11.26 $11.31 $10.28 $11.79
Income from Investment Operations:
Net Investment Income................................. .70 .70 .70 .71 .69
Net Realized and Unrealized Gain (Loss) on Investments .12 .29 (.05) 1.02 (1.40)
------ ------ ------ ------ ------
Total from Investment Operations .82 .99 .65 1.73 (.71)
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.70) (.74) (.70) (.70) (.68)
Distributions from Capital Gains...................... -- -- -- -- (.12)
------ ------ ------ ------ ------
Total Dividends and Distributions (.70) (.74) (.70) (.70) (.80)
------ ------ ------ ------ ------
Net Asset Value, End of Period........................... $11.63 $11.51 $11.26 $11.31 $10.28
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return(c).......................................... 7.38% 9.23% 6.06% 17.46% (6.26)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $251,455 $249,832 $259,029 $261,128 $249,438
Ratio of Expenses to Average Net Assets............... .86% .84% .81% .87% .95%
Ratio of Net Investment Income to Average Net Assets.. 6.07% 6.19% 6.31% 6.57% 6.35%
Portfolio Turnover Rate............................... 17.1% 10.8% 25.9% 10.1% 24.8%
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.(a)
Class B shares 1998 1997 1996 1995(f)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.50 $11.23 $11.29 $10.20
Income from Investment Operations:
Net Investment Income................................. .62 .64 .61 .56
Net Realized and Unrealized Gain (Loss) on Investments .12 .29 (.05) 1.07
------ ------ ------ ------
Total from Investment Operations .74 .93 .56 1.63
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.64) (.66) (.62) (.54)
Distributions from Capital Gains...................... -- -- -- --
------ ------ ------ ------
Total Dividends and Distributions (.64) (.66) (.62) (.54)
------ ------ ------ ------
Net Asset Value, End of Period........................... $11.60 $11.50 $11.23 $11.29
------ ------ ------ ------
------ ------ ------ ------
Total Return(c).......................................... 6.60% 8.65% 5.17% 16.07%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $24,370 $15,431 $11,586 $4,699
Ratio of Expenses to Average Net Assets............... 1.57% 1.39% 1.60% 1.53%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.43% 5.63% 5.53% 5.68%(e)
Portfolio Turnover Rate............................... 17.1% 10.8% 25.9% 10.1%(e)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC.(a)
Class R shares 1998 1997 1996(g)
---- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $11.42 $11.21 $11.27
Income from Investment Operations:
Net Investment Income................................. .61 .64 .47
Net Realized and Unrealized Gain (Loss) on Investments .13 .24 (.08)
------ ------ ------
Total from Investment Operations .74 .88 .39
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.61) (.67) (.45)
Distributions from Capital Gains...................... -- -- --
------ ------ ------
Total Dividends and Distributions (.61) (.67) (.45)
------ ------ ------
Net Asset Value, End of Period........................... $11.55 $11.42 $11.21
------ ------ ------
------ ------ ------
Total Return(c).......................................... 6.66% 8.19% 3.76%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $8,156 $4,152 $481
Ratio of Expenses to Average Net Assets............... 1.64% 1.79% 1.18%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.39% 5.21% 5.84%(e)
Portfolio Turnover Rate............................... 17.1% 10.8% 25.9%(e)
See accompanying notes.
</TABLE>
FINANCIAL HIGHLIGHTS (Continued)
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
PRINCIPAL HIGH YIELD FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $8.52 $8.27 $8.06 $7.83 $8.36
Income from Investment Operations:
Net Investment Income................................. .64 .67 .68 .68 .63
Net Realized and Unrealized Gain (Loss) on Investments (.88) .31 .23 .20 (.51)
------ ------ ------ ------ ------
Total from Investment Operations (.24) .98 .91 .88 .12
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.64) (.73) (.70) (.65) (.65)
Excess Distribution of Net Investment Income(i)....... (.01) -- -- -- --
------ ------ ------ ------ ------
Total Dividends and Distributions (.65) (.73) (.70) (.65) (.65)
------ ------ ------ ------ ------
Net Asset Value, End of Period........................... $7.63 $8.52 $8.27 $8.06 $7.83
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return(c).......................................... (3.18)% 12.33% 11.88% 11.73% 1.45%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $33,474 $38,239 $28,432 $23,396 $19,802
Ratio of Expenses to Average Net Assets............... 1.40% 1.22% 1.26% 1.45% 1.46%
Ratio of Net Investment Income to Average Net Assets.. 7.71% 7.99% 8.49% 8.71% 7.82%
Portfolio Turnover Rate............................... 65.9% 39.2% 18.8% 40.3% 27.2%
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL HIGH YIELD FUND, INC.(a)
Class B shares 1998 1997 1996 1995(f)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $8.47 $8.22 $8.05 $7.64
Income from Investment Operations:
Net Investment Income................................. .57 .62 .60 .53
Net Realized and Unrealized Gain (Loss) on Investments (.87) .28 .20 .38
---- ---- ---- ----
Total from Investment Operations (.30) .90 .80 .91
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.57) (.65) (.63) (.50)
Excess Distribution of Net Investment Income(i)....... (.01) -- -- --
---- ---- ---- ----
Total Dividends and Distributions (.58) (.65) (.63) (.50)
---- ---- ---- ----
Net Asset Value, End of Period........................... $7.59 $8.47 $8.22 $8.05
---- ---- ---- ----
---- ---- ---- ----
Total Return(c).......................................... (3.93)% 11.31% 10.46% 12.20%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $8,527 $6,558 $2,113 $633
Ratio of Expenses to Average Net Assets............... 2.34% 2.13% 2.38% 2.10%(e)
Ratio of Net Investment Income to Average Net Assets.. 6.78% 7.03% 7.39% 7.78%(e)
Portfolio Turnover Rate............................... 65.9% 39.2% 18.8% 40.3%(e)
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL HIGH YIELD FUND, INC.(a)
Class R shares 1998 1997 1996(g)
---- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $8.40 $8.20 $8.21
Income from Investment Operations:
Net Investment Income................................. .57 .62 .46
Net Realized and Unrealized Gain (Loss) on Investments (.87) .26 (.03)
------ ------ ------
Total from Investment Operations (.30) .88 .43
Less Dividends and Distributions:
Dividends from Net Investment Income................. (.58) (.68) (.44)
Excess Distribution of Net Investment Income(i)....... (.01) -- --
------ ------ ------
Total Dividends and Distributions (.59) (.68) (.44)
------ ------ ------
Net Asset Value, End of Period........................... $7.51 $8.40 $8.20
------ ------ ------
------ ------ ------
Total Return(c).......................................... (3.97)% 11.14% 5.60%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $2,734 $1,961 $124
Ratio of Expenses to Average Net Assets............... 2.28% 2.42% 1.59%(e)
Ratio of Net Investment Income to Average Net Assets.. 6.84% 6.70% 7.84%(e)
Portfolio Turnover Rate............................... 65.9% 39.2% 18.8%(e)
See accompanying notes.
</TABLE>
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
PRINCIPAL LIMITED TERM BOND FUND, INC.(a)
Class A shares 1998 1997 1996(h)
---- ---- ----
<S> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $9.88 $9.89 $9.90
Income from Investment Operations:
Net Investment Income(b).............................. .57 .61 .38
Net Realized and Unrealized Gain (Loss) on Investments .06 .03 (.04)
------ ------ ------
Total from Investment Operations .63 .64 .34
Less Dividends from Net Investment Income................ (.58) (.65) (.35)
------ ------ ------
Net Asset Value, End of Period........................... $9.93 $9.88 $9.89
------ ------ ------
------ ------ ------
Total Return(c).......................................... 6.57% 6.75% 3.62%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $27,632 $20,567 $17,249
Ratio of Expenses to Average Net Assets(b)............ .82% .90% .89%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.86% 6.20% 6.01%(e)
Portfolio Turnover Rate............................... 23.8% 17.4% 16.5%(e)
PRINCIPAL LIMITED TERM BOND FUND, INC.(a)
Class B shares 1998 1997 1996(h)
---- ---- ----
Net Asset Value, Beginning of Period..................... $9.90 $9.89 $9.90
Income from Investment Operations:
Net Investment Income(b).............................. .54 .56 .36
Net Realized and Unrealized Gain (Loss) on Investments .06 .04 (.05)
------ ------ ------
Total from Investment Operations .60 .60 .31
Less Dividends from Net Investment Income................ (.52) (.59) (.32)
------ ------ ------
Net Asset Value, End of Period........................... $9.98 $9.90 $9.89
------ ------ ------
------ ------ ------
Total Return(c).......................................... 6.24% 6.31% 3.32%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $1,705 $625 $112
Ratio of Expenses to Average Net Assets(b)............ 1.22% 1.24% 1.15%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.44% 5.84% 5.75%(e)
Portfolio Turnover Rate............................... 23.8% 17.4% 16.5%(e)
PRINCIPAL LIMITED TERM BOND FUND, INC.(a)
Class R shares 1998 1997 1996(g)
---- ---- ----
Net Asset Value, Beginning of Period..................... $9.85 $9.88 $9.90
Income from Investment Operations:
Net Investment Income(b).............................. .52 .54 .36
Net Realized and Unrealized Gain (Loss) on Investments .07 .03 (.06)
------ ------ ------
Total from Investment Operations .59 .57 .30
Less Dividends from Net Investment Income................ (.51) (.60) (.32)
------ ------ ------
Net Asset Value, End of Period........................... $9.93 $9.85 $9.88
------ ------ ------
------ ------ ------
Total Return(c).......................................... 6.12% 6.01% 3.24%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $2,034 $606 $83
Ratio of Expenses to Average Net Assets(b)............ 1.44% 1.48% 1.40%(e)
Ratio of Net Investment Income to Average Net Assets.. 5.21% 5.60% 5.64%(e)
Portfolio Turnover Rate............................... 23.8% 17.4% 16.5%(e)
See accompanying notes.
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (Continued)
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
PRINCIPAL TAX-EXEMPT BOND FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $12.38 $12.04 $11.98 $10.93 $12.62
Income from Investment Operations:
Net Investment Income................................. .60 .63 .64 .65 .64
Net Realized and Unrealized Gain (Loss) on Investments .22 .39 .07 1.05 (1.54)
------ ------ ------ ------ ------
Total from Investment Operations .82 1.02 .71 1.70 (.90)
Less Dividends and Distributions:
Dividends from Net Investment Income.................. (.61) (.68) (.65) (.65) (.63)
Distributions from Capital Gains...................... -- -- -- -- (.16)
------ ------ ------ ------ ------
Total Dividends and Distributions (.61) (.68) (.65) (.65) (.79)
------ ------ ------ ------ ------
Net Asset Value, End of Period........................... $12.59 $12.38 $12.04 $11.98 $10.93
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total Return(c)......................................... 6.76% 8.71% 6.08% 16.03% (7.41)%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $204,865 $193,007 $187,180 $179,715 $171,425
Ratio of Expenses to Average Net Assets............... .83% .79% .78% .83% .91%
Ratio of Net Investment Income to Average Net Assets.. 4.83% 5.14% 5.34% 5.67% 5.49%
Portfolio Turnover Rate............................... 6.6% 8.9% 9.8% 17.6% 20.6%
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL TAX-EXEMPT BOND FUND, INC.(a)
Class B shares 1998 1997 1996 1995(f)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period..................... $12.39 $12.02 $11.96 $10.56
Income from Investment Operations:
Net Investment Income................................. .53 .55 .55 .50
Net Realized and Unrealized Gain (Loss) on Investments .20 .40 .06 1.38
------ ------ ------ ------
Total from Investment Operations .73 .95 .61 1.88
Less Dividends and Distributions:
Dividends from Net Investment Income................. (.53) (.58) (.55) (.48)
Distributions from Capital Gains..................... -- -- -- --
------ ------ ------ ------
Total Dividends and Distributions (.53) (.58) (.55) (.48)
------ ------ ------ ------
Net Asset Value, End of Period........................... $12.59 $12.39 $12.02 $11.96
------ ------ ------ ------
------ ------ ------ ------
Total Return(c).......................................... 6.01% 8.08% 5.23% 17.97%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands).............. $11,419 $7,783 $5,794 $3,486
Ratio of Expenses to Average Net Assets............... 1.43% 1.45% 1.52% 1.51%(e)
Ratio of Net Investment Income to Average Net Assets.. 4.22% 4.46% 4.59% 4.78%(e)
Portfolio Turnover Rate............................... 6.6% 8.9% 9.8% 17.6%(e)
See accompanying notes.
</TABLE>
Notes to Financial Highlights
(a) Effective January 1, 1998, the following changes were made to the names of
the Income Funds:
<TABLE>
<CAPTION>
Former Fund Name New Fund Name
---------------- -------------
<S> <C>
Princor Bond Fund, Inc. Principal Bond Fund, Inc.
Princor Government Securites Income Fund, Inc. Principal Government Securities Income Fund, Inc.
Princor High Yield Fund, Inc. Principal High Yield Fund, Inc.
Princor Limited Term Bond Fund, Inc. Principal Limited Term Bond Fund, Inc.
Princor Tax-Exempt Bond Fund, Inc. Principal Tax-Exempt Bond Fund, Inc.
</TABLE>
(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods indicated,
the following funds would have had per share net investment income and the
ratios of expenses to average net assets as shown:
<TABLE>
<CAPTION>
Year Ended
October 31, Per Share Ratio of Expenses
Except Net Investment to Average Net Amount
as Noted Income Assets Waived
------------ -------------- ----------------- --------
Principal Bond Fund, Inc.:
<S> <C> <C> <C> <C>
Class A 1998 $.70 1.04% $121,092
1997 .74 .98 41,256
1996 .76 .97 22,536
1995 .77 1.02 86,018
1994 .77 1.09 120,999
Class B 1998 .62 1.81 26,130
1997 .66 1.79 8,982
1996 .67 1.79 5,874
1995(f) .62 1.62(e) 300
Class R 1998 .61 1.72 25,144
1997 .69 1.78 10,427
1996(g) .51 1.28(e) 3
Principal Limited Term Bond Fund, Inc.:
Class A 1998 .55 1.13 76,952
1997 .59 1.15 46,271
1996(h) .37 1.16(e) 22,716
Class B 1998 .47 2.36 11,537
1997 .46 3.82 6,528
1996(h) .34 1.94(e) 259
Class R 1998 .46 2.22 11,781
1997 .43 2.95 6,831
1996(g) .35 1.79(e) 60
</TABLE>
(c) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(d) Total return amounts have not been annualized.
(e) Computed on an annualized basis.
(f) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995. Certain of the Income Funds' Class B
shares recognized net investment income as follows, for the period from the
initial purchase of Class B shares on December 5, 1994 through December 8,
1994, none of which was distributed to the sole shareholder, Principal
Management Corporation. Additionally, the Income Funds' Class B shares
incurred unrealized losses on investments during the initial interim period
as follows. This represents Class B share activities of each fund prior to
the initial public offering of Class B shares:
Per Share Per Share
Net Investment Unrealized
Income (Loss)
-------------- ----------
Principal Bond Fund, Inc. $.01 $ --
Principal Government Securities Income Fund, Inc. .01 (.02)
Principal High Yield Fund, Inc. .01 (.03)
Principal Tax-Exempt Bond Fund, Inc. -- (.05)
(g) Period from February 29, 1996, date Class R shares first offered to eligible
purchasers, through October 31, 1996. The Income Funds' Class R shares
recognized no net investment income for the period from the initial purchase
by Principal Management Corporation of Class R shares on February 27, 1996
through February 28, 1996. Certain of the Income Funds' Class R shares
incurred unrealized losses on investments during the initial interim period
as follows. This represents Class R share activities of each fund prior to
the initial offering of Class R shares:
Per Share
Unrealized (Loss)
-----------------
Principal Bond Fund, Inc. $(.03)
Principal Government Securities Income Fund, Inc. (.03)
Principal Limited Term Bond Fund, Inc. (.02)
(h) Period from February 29, 1996, date shares first offered to the public,
through October 31, 1996. With respect to Class A shares, net investment
income, aggregating $.02 per share for the period from the initial purchase
of shares on February 13, 1996 through February 28, 1996, was recognized,
none of which was distributed to its sole shareholder, Principal Life
Insurance Company during the period. Additionally, Class A shares incurred
unrealized losses on investments of $.12 per share during the initial
interim period. With respect to Class B shares, no net investment income was
recognized for the period from initial purchase of shares on February 27,
1996 through February 28, 1996. Additionally, Class B shares incurred
unrealized losses on investments of $.02 per share during the initial
interim period. This represents Class A share and Class B share activities
of the fund prior to the initial public offering of both classes of shares.
(i) Dividends and distributions which exceed investment income and net realized
gains for financial reporting purposes but not for tax purposes are reported
as dividends in excess of net investment income or distributions in excess
of net realized gains on investments. To the extent distributions exceed
current and accumulated earnings and profits for federal income tax
purposes, they are reported as tax return of capital distributions.
October 31, 1998
STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
Principal Cash Principal Tax-Exempt
Management Cash Management
MONEY MARKET FUNDS Fund, Inc. Fund, Inc.
<S> <C> <C>
Assets
Investment in securities -- at value
(approximates cost) (Note 1)........... $302,343,330 $25,980,002
Cash............................. 3,612,026 225,388
Receivables:
Interest .............................. 515,251 101,150
Capital Stock sold..................... 4,602,478 99,633
Other assets.............................. 20,112 3,051
Total Assets 311,093,197 26,409,224
Liabilities
Accrued expenses.......................... 325,723 68,910
Payables:
Investment securities purchased........ 891,093 --
Capital Stock reacquired............... 282,796 --
Indebtedness (Note 5)..................... 660,000 --
Total Liabilities 2,159,612 68,910
Net Assets Applicable to
Outstanding Shares ..................... $308,933,585 $26,340,314
Net Assets Consist of:
Capital Stock............................. $ 3,089,336 $ 263,403
Additional paid-in capital................ 305,844,249 26,076,911
Total Net Assets $308,933,585 $26,340,314
Capital Stock (par value: $.01 a share):
Shares authorized......................... 2,000,000,000 1,000,000,000
Net Asset Value Per Share:
Class A: Net Assets....................... $294,917,447 $26,340,314
Shares issued and outstanding.... 294,917,447 26,340,314
Net asset value per share........ $1.000 $1.000
Class B: Net Assets....................... $3,602,364 N/A
Shares issued and outstanding.... 3,602,364 N/A
Net asset value per share(a)..... $1.000 N/A
Class R: Net Assets....................... $10,413,774 N/A
Shares issued and outstanding.... 10,413,774 N/A
Net asset value per share........ $1.000 N/A
<FN>
(a) Redemption price per share is equal to net asset value less any
applicable contingent deferred sales charge.
</FN>
See accompanying notes.
</TABLE>
Year Ended October 31, 1998
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Principal Cash Principal Tax-Exempt
Management Cash Management
MONEY MARKET FUNDS Fund, Inc. Fund, Inc.
<S> <C> <C>
Net Investment Income
Interest income......................... $31,537,294 $2,252,397
Expenses:
Management and investment
advisory fees (Note 3)............ 2,127,595 316,084
Distribution and shareholder
servicing fees (Notes 1 and 3).... 26,477 --
Transfer and administrative
services (Notes 1 and 3).......... 854,575 147,850
Registration fees (Note 1)........... 93,333 21,065
Custodian fees....................... 12,811 7,760
Auditing and legal fees.............. 4,411 8,271
Directors' fees...................... 7,303 7,304
Other................................ 52,070 5,911
Total Gross Expenses 3,178,575 514,245
Less: Management and investment
advisory fees waived.............. 1,343 59,049
Total Net Expenses 3,177,232 455,196
Net Investment Income $28,360,062 $1,797,201
See accompanying notes.
</TABLE>
Years Ended October 31, Except as Noted
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Principal Cash Principal Tax-Exempt
Management Cash Management
MONEY MARKET FUNDS Fund, Inc. Fund, Inc.
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operations
Net investment income .................. $ 28,360,062 $ 39,246,307 $ 1,797,201 $ 2,962,416
Dividends to Shareholders from Net
Investment Income:
Class A.............................. (28,008,033) (39,078,437) (1,797,101) (2,961,821)
Class B.............................. (70,945) (33,816) (100)(a) (595)
Class R .................... (281,084) (134,054) N/A N/A
Total Dividends (28,360,062) (39,246,307) (1,797,201) (2,962,416)
Capital Share Transactions (Note 4)
Shares sold:
Class A.............................. 2,363,859,504 3,393,711,785 192,888,810 372,738,780
Class B.............................. 5,040,642 3,168,600 -- --
Class R ..................... 11,918,726 6,448,386 N/A N/A
Shares issued in reinvestment of dividends:
Class A.............................. 26,466,497 38,790,163 1,669,792 2,914,790
Class B.............................. 66,630 29,671 85(a) 595
Class R ...................... 273,695 129,398 N/A N/A
Shares redeemed:
Class A.............................. (2,931,480,148) (3,291,392,367) (267,157,398) (375,196,233)
Class B.............................. (2,497,006) (2,725,899) (27,749)(a) --
Class R ............................. (6,074,611) (3,921,162) N/A N/A
Net Increase (Decrease) in Net Assets
from Capital Share Transactions (532,426,071) 144,238,575 (72,626,460) 457,932
Total Increase (Decrease) (532,426,071) 144,238,575 (72,626,460) 457,932
Net Assets
Beginning of year....................... 841,359,656 697,121,081 98,966,774 98,508,842
End of year ............................ $ 308,933,585 $ 841,359,656 $ 26,340,314 $ 98,966,774
<FN>
(a)For the period November 1, 1997 through December 29, 1997 (date Class B
operations ceased).
</FN>
See accompanying notes.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
Principal Cash Management Fund, Inc.
Principal Tax-Exempt Cash Management Fund, Inc.
Note 1 -- Significant Accounting Policies
Principal Cash Management Fund, Inc. and Principal Tax-Exempt Cash Management
Fund, Inc. (the "Money Market Funds") are registered under the Investment
Company Act of 1940, as amended, as open-end diversified management investment
companies and operate in the mutual fund industry.
On December 29, 1997, Principal Tax-Exempt Cash Management Fund, Inc. ceased
offering Class B shares. All outstanding Class B shares were redeemed at that
date.
Effective January 1, 1998, the following changes were made to the names of the
Money Market Funds:
<TABLE>
<CAPTION>
Former Fund Name New Fund Name
<S> <C>
Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.
Princor Tax-Exempt Cash Management Fund, Inc. Principal Tax-Exempt Cash Management Fund, Inc.
</TABLE>
A significant portion of the shares issued by Principal Cash Management Fund,
Inc. and Principal Tax-Exempt Cash Management Fund, Inc. Class A shares has been
issued through Principal Financial Securities, Inc. ("PFS"), a previously
affiliated broker-dealer. PFS was sold in January, 1998. Subsequent to the sale,
assets of PFS clients of approximately $536 million and $62 million were
redeemed from Principal Cash Management Fund, Inc. Class A shares and Principal
Tax-Exempt Cash Management Fund, Inc. Class A shares, respectively.
Shares of the Money Market Funds are sold at net asset value; no sales charge
applies to purchases of the Money Market Funds. Certain purchases of Class A
shares of the Money Market Funds may be subject to a contingent deferred sales
charge ("CDSC") if redeemed within eighteen months of purchase. Principal Cash
Management Fund, Inc. Class B shares are sold without an initial sales charge,
but are subject to a declining CDSC on certain redemptions made within six years
of purchase. Principal Cash Management Fund, Inc. Class R shares are sold
without an initial sales charge and are not subject to a CDSC. Class B and Class
R shares bear a higher ongoing distribution fee than Class A shares. Class B
shares automatically convert into Class A shares based on relative net asset
value (without a sales charge) after seven years. Class R shares automatically
convert into Class A shares based on relative net asset value (without a sales
charge) after four years. All classes of the Principal Cash Management Fund,
Inc. represent interests in the same portfolio of investments and will vote
together as a single class except where otherwise required by law or as
determined by each of the Money Market Funds' respective Board of Directors. In
addition, the Board of Directors of each fund declares separate dividends on
each class of shares.
The Money Market Funds allocate daily all income, expenses (other than
class-specific expenses), and realized gains or losses to each class of shares
based upon the relative proportion of the number of settled shares outstanding
of each class. Expenses specifically attributable to a particular class are
charged directly to such class. Class-specific expenses charged to each class
during the periods ended October 31, 1998, which are included in the
corresponding captions of the Statement of Operations, were as follows:
<TABLE>
<CAPTION>
Distribution and Transfer and
Shareholder Servicing Fees Administrative Services Registration Fees
Class A Class B Class R Class A Class B Class R Class A Class B Class R
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Cash Management Fund, Inc. N/A $5,456 $21,021 $378,811 $1,048 $4,135 $18,993 $10,330 $8,762
Principal Tax-Exempt Cash Management Fund, Inc. N/A -- N/A 25,610 6 N/A 11,091 933 N/A
</TABLE>
The Money Market Funds value their securities at amortized cost, which
approximates market. Under the amortized cost method, a security is valued by
applying a constant yield to maturity of the difference between the principal
amount due at maturity and the cost of the security to the fund.
The Money Market Funds record investment transactions generally on the trade
date. The identified cost basis has been used in determining the net realized
gain or loss from investment transactions. Interest income is recognized on an
accrual basis.
The Money Market Funds may, pursuant to an exemptive order issued by the
Securities and Exchange Commission, transfer uninvested funds into a joint
trading acount. The order permits the Money Market Funds' cash balances to be
deposited into a single joint account along with the cash of other registered
investment companies managed by Principal Management Corporation (formerly known
as Princor Management Corporation) (the "Manager"). These balances may be
invested in one or more short-term instruments.
The Money Market Funds declare all net investment income and any realized gains
and losses from investment transactions as dividends daily to shareholders of
record as of that day. Dividends and distributions to shareholders from net
investment income and net realized gain from investments 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 years ended October 31, 1998 and 1997 were not
material.
Dividends and distributions which exceed net investment income and net realized
capital gains for financial reporting purposes, but not for tax purposes, are
reported as dividends in excess of net investment income or distributions in
excess of net realized capital gains. To the extent distributions exceed current
and accumulated earnings and profits for federal income tax purposes, they are
reported as tax return of capital distributions.
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.
The Money Market Funds' investments are with various issuers in various
industries. The Schedules of Investments contained herein summarize
concentrations of credit risk by issuer and industry.
Note 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 approximates that used for financial
reporting purposes.
Note 3 -- Management Agreement and Transactions With Affiliates
The Money Market Funds have agreed to pay investment advisory and management
fees to Principal Management Corporation [wholly owned by Princor Financial
Services Corporation, a subsidiary of Principal Life Insurance Company (formerly
known as Principal Mutual Life Insurance Company)] computed at an annual
percentage rate of each fund's average daily net assets. The annual rate used in
this calculation for the Money Market Funds are as follows:
<TABLE>
Net Asset Value of Funds
(in millions)
<CAPTION>
First Next Next Next Over
$100 $100 $100 $100 $400
<S> <C> <C> <C> <C> <C>
Principal Cash Management Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
Principal Tax-Exempt Cash Management Fund, Inc. 0.50% 0.45% 0.40% 0.35% 0.30%
</TABLE>
The Money Market Funds also reimburse the Manager for transfer and
administrative services, including the cost of accounting, data processing,
supplies and other services rendered.
Note 3 -- Management Agreement and Transactions With Affiliates (Continued)
The Manager voluntarily waived a portion of its fee for the Money Market Funds.
The waivers are in amounts that maintain total operating expenses for each fund
within certain limits. The limits are expressed as a percentage of average net
assets attributable to each class on an annualized basis during the reporting
period. The amounts waived and the operating expense limits which were
maintained at or below those shown, are as follows:
<TABLE>
Amount
Waived
<CAPTION>
Year
Ended
October 31, 1998, Year Ended Expense
Except as Noted October 31, 1997 Limit
<S> <C> <C> <C>
Principal Cash Management Fund, Inc.
Class A $ -- (a) $ -- 0.75%
Class B 1,343(a) 5,492 1.50
Class R -- (a) 2,441 1.25(b)
Principal Tax-Exempt Cash Management Fund, Inc.
Class A 58,145 27,978 0.75
Class B 904(c) 5,807 1.50(c)
<FN>
(a) For the period November 1, 1997 through February 28, 1998 (date waivers
ceased).
(b) For the period March 1, 1996 through March 2, 1997, the expense limit was
1.50%.
(c) For the period November 1, 1997 through December 29, 1997 (date Class B
operations ceased).
</FN>
</TABLE>
The manager ceased its waiver of expenses for Principal Cash Management Fund,
Inc. on March 1, 1998. The manager ceased its waiver of expenses for Principal
Tax-Exempt Cash Management Fund, Inc. on October 31, 1998.
Princor Financial Services Corporation, as principal underwriter, receives
proceeds of any CDSC on certain Class A and Class B share redemptions. The
charge is based on declining rates which for Class A shares begin at .75%, and
for Class B shares at 4.00%, of the lesser of the current market value or the
cost of shares being redeemed. The aggregate amount of these charges retained by
Princor Financial Services Corporation for the year ended October 31, 1998, was
$1,646 and $17,525 for Principal Cash Management Fund, Inc. for Class A and
Class B shares, respectively. There were no charges retained by Princor
Financial Services Corporation for Principal Tax-Exempt Cash Management Fund,
Inc.
No brokerage commissions were paid by the Money Market Funds to affiliated
broker dealers during the year.
Principal Cash Management Fund, Inc. adopted a distribution plan with respect to
Class B shares that provides for distribution and shareholder servicing fees
computed at an annual rate of up to 1.00% of the average daily net assets
attributable to Class B shares of the fund. The Fund also adopted a distribution
plan with respect to Class R shares that provides for distribution and
shareholder servicing fees computed at an annual rate of up to .75% of the
average daily net assets attributable to Class R shares of the fund.
Distribution and shareholder servicing fees are paid to Princor Financial
Services Corporation; a portion of the fees are subsequently remitted to retail
dealers. Pursuant to the distribution agreements, fees unused by the principal
underwriter at the end of the fiscal year are returned to Principal Cash
Management Fund, Inc. There are no distribution or shareholder servicing fees
with respect to Class A shares.
At October 31, 1998, Principal Life Insurance Company, subsidiaries of Principal
Life Insurance Company, benefit plans sponsored on behalf of Principal Life
Insurance Company and several joint ventures (in each of which a subsidiary of
Principal Life Insurance Company is a participant) owned shares of the Money
Market Funds as follows:
<TABLE>
<CAPTION>
Class A Class B Class R
<S> <C> <C> <C>
Principal Cash Management Fund, Inc. 29,297,308 30,462 28,126
Principal Tax-Exempt Cash Management Fund, Inc. 1,028,457 N/A N/A
</TABLE>
Note 4 -- Capital Share Transactions
Transactions in Capital Stock by fund were as follows:
<TABLE>
<CAPTION>
Principal Cash Principal Tax-Exempt
Management Cash Management
Fund, Inc. Fund, Inc.
<S> <C> <C>
Periods Ended October 31, 1998:
Shares sold:
Class A .......................................... 2,363,859,504 192,888,810
Class B ......................................... 5,040,642 --
Class R .......................................... 11,918,726 N/A
Shares issued in reinvestment of dividends:
Class A ........................................... 26,466,497 1,669,792
Class B ........................................... 66,630 85
Class R .......................................... 273,695 N/A
Shares redeemed:
Class A ......................................... (2,931,480,148) (267,157,398)
Class B ......................................... (2,497,006) (27,749)
Class R .......................................... (6,074,611) N/A
Net Decrease (532,426,071) (72,626,460)
Year Ended October 31, 1997:
Shares sold:
Class A .......................................... 3,393,711,785 372,738,780
Class B ......................................... 3,168,600 --
Class R .......................................... 6,448,386 N/A
Shares issued in reinvestment of dividends:
Class A ........................................... 38,790,163 2,914,790
Class B ........................................... 29,671 595
Class R .......................................... 129,398 N/A
Shares redeemed:
Class A ......................................... (3,291,392,367) (375,196,233)
Class B ......................................... (2,725,899) --
Class R .......................................... (3,921,162) N/A
Net Increase 144,238,575 457,932
</TABLE>
Note 5 -- Line of Credit
The Money Market Funds participate with other funds and portfolios managed by
Principal Management Corporation in an unsecured joint line of credit with a
bank, which allows the funds to borrow up to $60,000,000, collectively.
Borrowings are made solely to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Interest is charged to each fund,
based on its borrowings, at a rate equal to the Fed Funds Rate plus .50%.
Additionally, a commitment fee is charged at the annual rate of .08% on the
average unused portion of the line of credit. The commitment fee is allocated
among the participating funds and portfolios in proportion to their average net
assets during each quarter. At October 31, 1998, Principal Cash Management Fund,
Inc. had an outstanding borrowing of $660,000 at an annual rate of 5.93%.
Note 6 -- Year 2000 Problem (Unaudited)
Like other mutual funds, financial and business organizations and individuals
around the world, the Money Market Funds could be adversely affected if the
computer systems used by the Manager and other service providers do not properly
process and calculate date-related information and data from and after January
1, 2000. This is commonly known as the "Year 2000 Problem." The Manager is
taking steps it believes are reasonably designed to address the Year 2000
Problem with respect to computer systems it uses and to obtain reasonable
assurances that comparable steps are being taken by each fund's other major
service providers. At this time, however there can be no assurance that these
steps will be sufficient to avoid any adverse impact to the funds.
SCHEDULES OF INVESTMENTS
PRINCIPAL CASH MANAGEMENT FUND, INC.
Principal
Amount Value
Commercial Paper (88.64%)
Asset-Backed Securities (15.46%)
CXC, INC.;
5.47%; 11/16/1998 $2,750,000 $ 2,743,732
5.50%; 11/23/1998 4,250,000 4,235,715
5.15%; 12/9/1998 1,800,000 1,790,215
5.18%; 1/25/1999 6,000,000 5,926,617
Ciesco L.P.;
5.43%; 11/2/1998 2,750,000 2,749,585
5.38%; 12/9/1998 1,500,000 1,491,490
Corporate Asset Funding Co.;
5.49%; 11/6/1998 5,000,000 4,996,188
5.35%; 11/19/1998 2,100,000 2,094,383
5.23%; 11/25/1998 5,300,000 5,281,432
Corporate Receivables Corp.;
5.45%; 11/4/1998 2,300,000 2,298,964
5.25%; 12/3/1998 5,000,000 4,976,666
5.55%; 12/17/1998 5,000,000 4,966,458
Receivables Capital Corp.;
5.30%; 11/12/1998 4,175,000 4,168,239
47,719,684
Business Credit Institutions (8.23%)
Aon Corp.;
5.32%; 11/2/1998 3,300,000 3,299,512
5.38%; 11/6/1998 2,500,000 2,498,132
5.53%; 11/9/1998 1,025,000 1,023,740
5.45%; 11/16/1998 3,900,000 3,891,144
CIT Group Holding, Inc.;
5.18%; 12/31/1998 4,000,000 3,965,467
General Electric Capital Corp.;
5.07%; 12/31/1998 1,700,000 1,685,635
5.44%; 1/15/1999 1,500,000 1,483,000
5.43%; 2/19/1999 1,000,000 983,408
5.45%; 3/8/1999 825,000 809,138
5.44%; 3/9/1999 1,100,000 1,078,724
5.42%; 3/12/1999 2,500,000 2,450,693
5.45%; 3/19/1999 1,100,000 1,077,019
5.42%; 4/16/1999 1,225,000 1,194,385
25,439,997
Combination Utility Services (0.55%)
Citizens Utilities Co.;
5.25%; 11/24/1998 1,700,000 1,694,298
Commercial Banks (5.54%)
J.P. Morgan & Co., Inc.;
5.47%; 11/10/1998 4,000,000 3,994,530
5.42%; 11/18/1998 3,500,000 3,491,042
5.25%; 12/7/1998 4,500,000 4,476,375
5.25%; 12/8/1998 2,225,000 2,212,994
5.50%; 12/21/1998 500,000 496,181
Norwest Corp.;
5.20%; 12/16/1998 2,450,000 2,434,075
17,105,197
Crude Petroleum & Natural Gas (1.22%)
Chevron Oil Funance Co.;
5.20%; 11/4/1998 $ 825,000 $ 824,643
Chevron U.K. Investment PLC;
4.90%; 3/18/1999 3,000,000 2,944,058
3,768,701
Cutlery, Handtools &
Hardware (0.32%)
Stanley Works; 5.49%;
11/19/1998 1,000,000 997,255
Department Stores (4.65%)
Sears Roebuck Acceptance Corp.;
5.51%; 11/23/1998 2,000,000 1,993,266
5.40%; 12/11/1998 2,250,000 2,236,500
5.38%; 12/16/1998 1,500,000 1,489,913
5.38%; 12/18/1998 1,700,000 1,688,059
5.17%; 1/22/1999 2,300,000 2,272,915
5.12%; 1/29/1999 3,250,000 3,208,862
5.10%; 2/1/1999 1,500,000 1,480,450
14,369,965
Drugs (2.88%)
Receivables Capital Corp.;
5.37%; 11/3/1998 786,000 785,766
5.36%; 11/9/1998 1,775,000 1,772,886
5.22%; 11/25/1998 700,000 697,564
5.15%; 1/13/1999 4,250,000 4,205,617
5.21%; 1/21/1999 1,468,000 1,450,791
8,912,624
Electric Services (1.51%)
CommEd Fuel Co., Inc.;
5.30%; 11/17/1998 3,625,000 3,616,461
Tampa Electric Co.;
5.22%; 12/14/1998 1,050,000 1,043,453
4,659,914
Insurance Agents, Brokers &
Services (1.32%)
Marsh & McLennan Cos.;
5.45%; 2/26/1999 4,150,000 4,076,493
Investment Offices (4.83%)
Morgan Stanley Group, Inc.;
5.50%; 11/20/1998 4,240,000 4,227,692
5.20%; 1/22/1999 2,000,000 1,976,311
5.30%; 2/25/1999 2,775,000 2,727,609
4.90%; 3/26/1999 2,000,000 1,960,528
4.93%; 4/1/1999 2,500,000 2,448,303
4.84%; 4/23/1999 1,625,000 1,587,204
14,927,647
Life Insurance (2.09%)
American General Corp.;
5.42%; 11/18/1998 1,500,000 1,496,161
5.08%; 12/08/1998 2,000,000 1,989,558
5.06%; 12/14/1998 3,000,000 2,981,868
6,467,587
Miscellaneous Electrical Equipment &
Supplies (0.63%)
General Electric Co.;
5.09%; 11/30/1998 1,950,000 1,942,004
Miscellaneous Investing (4.65%)
Delaware Funding Corp.;
5.19%; 11/17/1998 $3,500,000 $ 3,491,927
5.20%; 11/18/1998 2,175,000 2,169,659
5.45%; 11/20/1998 3,000,000 2,991,371
5.24%; 12/1/1998 2,750,000 2,737,992
5.15%; 12/22/1998 3,000,000 2,978,112
14,369,061
Miscellaneous Manufacturers (3.25%)
Dover Corp.;
5.45%; 11/13/1998 4,750,000 4,741,371
5.47%; 11/13/1998 3,500,000 3,493,618
5.22%; 1/14/1999 1,810,000 1,790,579
10,025,568
Mortgage Bankers & Brokers (3.61%)
Countrywide Home Loan, Inc.;
5.48%; 11/24/1998 4,500,000 4,484,245
5.45%; 11/30/1998 2,750,000 2,737,927
5.22%; 2/12/1999 4,000,000 3,940,260
11,162,432
Personal Credit Institutions (16.57%)
Associates First Capital Corp.;
5.42%; 11/4/1998 400,000 399,819
5.25%; 11/5/1998 1,975,000 1,973,848
5.30%; 11/5/1998 975,000 974,426
5.29%; 12/1/1998 3,000,000 2,986,775
5.20%; 12/23/1998 5,500,000 5,458,689
Avco Financial Services, Inc.;
5.25%; 12/21/1998 1,750,000 1,737,240
Comoloco, Inc.;
5.46%; 12/18/1998 1,500,000 1,489,308
5.47%; 12/18/1998 1,000,000 992,859
5.44%; 1/15/1999 1,000,000 988,667
5.51%; 1/25/1999 1,000,000 986,990
5.53%; 2/9/1999 1,500,000 1,476,958
5.50%; 2/23/1999 1,500,000 1,473,875
5.44%; 3/8/1999 1,000,000 980,809
5.42%; 5/14/1999 1,200,000 1,164,951
4.72%; 5/20/1999 2,500,000 2,434,444
4.62%; 7/23/1999 1,250,000 1,207,650
Ford Motor Credit Co.;
5.16%; 12/4/1998 1,925,000 1,915,895
General Motors Acceptance Corp.;
5.51%; 11/6/1998 2,600,000 2,598,010
5.11%; 1/15/99 1,350,000 1,335,628
Household Finance Corp.;
5.10%; 11/3/1998 700,000 699,802
5.10%; 11/9/1998 1,075,000 1,074,694
5.15%; 12/30/1998 3,000,000 2,974,679
5.08%; 2/26/1999 2,000,000 1,966,980
Norwest Financial, Inc.;
5.10%; 2/2/1999 4,375,000 4,317,359
5.14%; 2/5/1999 500,000 493,147
5.07%; 3/12/1999 1,525,000 1,496,865
5.45%; 4/5/1999 1,000,000 976,535
5.40%; 5/7/1999 1,500,000 1,457,925
Transamerica Finance Corp.;
5.50%; 11/10/1998 3,175,000 3,170,634
51,205,461
Retail Stores, NEC (0.84%)
Toys 'R' Us, Inc.;
5.20%; 11/25/1998 2,600,000 2,590,986
Security Brokers & Dealers (10.49%)
Bear Stearns Cos., Inc.;
5.51%; 11/19/1998 $5,625,000 $ 5,609,503
5.14%; 12/2/1998 5,000,000 4,977,869
Goldman Sachs Group L.P.;
5.50%; 11/20/1998 2,850,000 2,841,727
5.50%; 11/24/1998 1,625,000 1,619,290
5.10%; 3/19/1999 2,500,000 2,451,125
Merrill Lynch & Co., Inc.;
5.09%; 12/4/1998 3,900,000 3,881,826
5.11%; 12/10/1998 6,150,000 6,115,981
5.48%; 2/9/1999 1,000,000 984,778
5.45%; 2/23/1999 1,000,000 982,742
5.46%; 4/1/1999 2,000,000 1,954,197
5.45%; 4/9/1999 1,000,000 975,929
32,394,967
Total Commercial Paper 273,829,841
Bonds (9.23%)
Beverages (0.12%)
Pepsico, Inc. Debentures;
7.63%; 11/1/1998 375,000 375,000
Business Credit Institutions (2.53%)
American Express Credit Corp.
Debentures; 8.50%; 6/15/1999 490,000 497,865
CIT Group Holdings, Inc.
Medium-Term Notes;
5.88%; 11/9/1998 750,000 750,014
Senior Notes;
6.38%; 5/21/1999 1,000,000 1,003,097
John Deere Capital Corp.
Notes; 6.30%; 6/1/1999 800,000 802,071
Ford Motor Credit Co.
Debentures; 8.88%; 6/15/1999 500,000 509,150
Notes; 5.63%; 12/15/1998 2,000,000 1,999,621
5.63%;1/15/1999 540,000 539,750
8.00%; 1/15/1999 200,000 200,835
7.25%; 5/15/1999 1,500,000 1,510,879
7,813,282
Consumer Products (0.57%)
Philip Morris Co., Inc. Notes;
7.75%; 5/1/1999 1,735,000 1,753,203
Department Stores (0.16%)
Sears Roebuck Acceptance Corp.
Medium-Term Notes;
6.38%; 2/16/1999 500,000 500,839
Electric Services (0.42%)
Southern California Edison Co.
1st Ref. Mortgage Bonds;
7.50%; 4/15/1999 1,300,000 1,311,608
Life Insurance (1.42%)
Transamerica Financial Corp.
Senior Notes;
6.80%; 3/15/1999 4,365,000 4,381,222
Miscellaneous Equipment Rental &
Leasing (0.63%)
International Lease Finance Corp. Notes;
5.75%; 1/15/1999 $1,205,000 $ 1,205,504
7.50%; 3/1/1999 750,000 753,985
1,959,489
Mortgage Bankers & Brokers (0.11%)
Xerox Credit Corp. Debentures;
10.00%; 4/1/1999 325,000 330,394
Motor Vehicles & Equipment (0.69%)
General Motors Acceptance Corp.
Debentures; 8.40%; 10/15/1999 1,690,000 1,739,239
Notes; 8.63%; 6/15/1999 400,000 407,610
2,146,849
Personal Credit Institutions (2.58%)
American General Finance Corp.
Notes; 7.70%; 10/15/1999 475,000 486,205
Senior Notes; 6.88%; 7/1/1999 400,000 402,753
Associates Corp. of North America
Senior Notes;
6.25%; 3/15/1999 1,250,000 1,252,128
7.25%; 9/1/1999 315,000 318,791
Avco Financial Services, Inc.
Senior Notes;
7.25%; 7/15/1999 2,560,000 2,585,558
8.50%; 10/15/1999 650,000 668,461
Household Finance Corp. Notes;
7.75%; 6/1/1999 1,200,000 1,213,045
8.95%; 9/15/1999 250,000 257,888
Norwest Financial, Inc. Senior Notes;
6.25%; 3/15/1999 755,000 756,774
7,941,603
Total Bonds 28,513,489
Total Portfolio Investments (97.87%) 302,343,330
Cash, receivables and other assets,
net of liabilities (2.13%) 6,590,255
Total Net Assets (100.00%) $308,933,585
PRINCIPAL TAX-EXEMPT CASH MANAGEMENT
FUND, INC.
Principal
Amount Value
Short-Term Tax-Exempt Bonds (98.63%)
Alaska (3.13%)
Alaska Industrial Dev. & Export
Authority, IDB Current Ref. Bonds,
Series 1988A; LOC Bank of America;
Lot #6; 3.20%; 11/8/1998*; 7/1/2001 $380,000 $380,002
Lot #7; 3.20%; 11/8/1998*; 7/1/2001 95,000 95,000
Lot #8; 3.20%; 11/8/1998*; 7/1/2005 145,000 145,000
Lot #9; 3.20%; 11/8/1998*; 7/1/2005 205,000 205,000
825,002
Arizona (3.80%)
Chandler County, Arizona, IDA, F/R
Monthly IDR, Parsons Municipal
Services, Series 1983; LOC
Bank of America;
3.45%; 11/15/1998*; 12/15/2009 1,000,000 1,000,000
Colorado (4.36%)
City of Thornton, Colorado, F/R
Monthly IDR, Service Merchandise
Co., Inc., Series 1984; LOC CIBC;
3.40%; 11/15/1998*; 12/15/1999 100,000 100,000
South Denver Metropolis District,
City & County of Denver, Colorado,
General Obligation Bonds, Series
1985; LOC Barclays Bank;
3.70%; 11/30/1998**; 12/1/2005 1,050,000 1,050,000
1,150,000
Georgia (4.55%)
Hapeville, Georgia, Dev. Authority,
Adj. Tender IDR Bonds, Hapeville
Hotel Ltd., Partnership Project
Series 1985; LOC Deutch Bank
Corp.; 3.70%; 11/2/1998*; 11/1/2015 1,200,000 1,200,000
Illinois (11.01%)
City of Burbank, Illinois, F/R Monthly
IDR, Service Merchandise Co., Inc.,
Series 1984; LOC CIBC;
3.40%; 11/15/1998*; 9/15/2024 1,000,000 1,000,000
City of Galesburg, Illinois, Knox College
Project, Series 1996; LOC LaSalle
National Bank;
3.10%; 11/8/1998*; 3/1/2031 600,000 600,000
City of Naperville, Illinois, Economic
Dev. Rev. Bonds, Service Merchandise
Co., Inc.; LOC CIBC;
3.40%; 11/15/1998*; 11/30/2024 1,300,000 1,300,000
2,900,000
Iowa (9.87%)
City of Storm Lake, Iowa, Private
College Rev. Bonds, Buena Vista
College, Series 1993; LOC Norwest
Bank Minnesota, N. A.;
3.20%; 11/8/1998*; 12/1/2003 $ 500,000 $ 500,000
Iowa Finance Authority Housing H/Care,
Rev. Bonds, Wesley Project, Series 1997;
LOC Norwest Bank Minnesota, N.A.;
3.20%; 11/8/1998*; 4/1/2005 500,000 500,000
Iowa Higher Education Loan Authority
Fac., Rev. Bonds, St. Ambrose, Series
1997; LOC Norwest Bank Minnesota,
N.A.; 3.20%; 11/8/1998* 2/1/2007 500,000 500,000
Woodbury County, Iowa, Education Fac.
Rev. Bonds, Siouxland, Series 1996;
LOC Firstar Bank Milwaukee, N.A.;
3.15%; 11/8/1998*; 11/1/2016 500,000 500,000
Woodbury County, Iowa, Education Fac.
Rev. Bonds, Siouxland, Series 1997;
LOC Norwest Bank Minnesota, N.A.;
3.20%; 11/8/1998*; 5/1/2016 600,000 600,000
2,600,000
Louisiana (3.80%)
Jefferson Parish, Louisiana, IDB Rev.
Ref. Bonds, George J. Achel, Sr.
Project, Series 1986; LOC Barclays
Bank; 3.20%; 11/8/1998*; 12/1/20041,000,000 1,000,000
Maryland (0.49%)
Montgomery County, Maryland, F/R
Monthly IDA, Information Systems
& Networks; LOC NationsBank, N.A.;
3.65%; 11/8/1998*; 4/1/2014 130,000 130,000
Michigan (1.12%)
Township of Cornell, Michigan,
The Economic Dev. Corp.,
Environmental Improvement
Rev. Ref. Bonds, Series 1986,
Mead Escanaba Paper Co. Project;
LOC Bank of America;
3.60%; 11/2/1998*; 11/1/2016 295,000 295,000
Minnesota (3.80%)
City of Coon Rapids, Minnesota
Rev. Bonds for Health Central
System, Series 1985; LOC Norwest
Bank Minnesota, N.A.;
3.15%; 11/8/1998*; 8/1/2015 500,000 500,000
City of Rochester, Minnesota, Health Care
Fac. Rev. Bonds, Mayo Foundation/
Mayo Medical Center, Adj. Tender,
Series 1992C;
3.35%; 11/16/1998**; 11/15/2021 250,000 250,000
3.50%; 12/8/1998**; 11/15/2021 250,000 250,000
1,000,000
Nebraska (3.80%)
Lincoln Electric System
Commercial Paper Notes;
3.35%; 11/3/1998 500,000 500,000
3.35%; 1/22/1999 500,000 500,000
1,000,000
New Hampshire (3.80%)
New Hampshire IDA, F/R Monthly 1983
Hudson, Oerlikon-Buhrle USA/Balzers;
LOC UBS AG;
3.50%; 11/8/1998*; 7/1/2013 $1,000,000 $1,000,000
New York (6.64%)
New York State Energy Research &
Dev. Authority for New York State
Electric & Gas Corp.; Series 1985-D;
LOC UBS AG;
3.80%; 12/1/1998**; 12/1/2015 750,000 750,000
New York State Energy Research &
Dev. Authority Pollution Control
Rev. Bonds, Long Island Lighting
Co.; Series 1985B; LOC Deutsche
Bank; 3.58%; 3/1/1999**; 3/1/2016 1,000,000 1,000,000
1,750,000
North Carolina (4.21%)
University of North Carolina
Foundation, Inc., Series 1989;
LOC NationsBank, N.A.;
3.15%; 11/8/1998*; 10/1/2009 1,110,000 1,110,000
Ohio (4.94%)
Toledo-Lucas County, Ohio, Port
Fac. Ref. Rev. Bonds, CSX
Transport Project, Series 1992;
LOC Bank of Nova Scotia;
3.25%; 11/6/1998**; 12/15/2021 500,000 500,000
3.15%; 1/19/1999**; 12/15/2021 500,000 500,000
Village of Evendale, Ohio, SHV Real
Estate Income Project;
LOC ABN-AMRO;
3.00%; 11/8/1998*; 9/1/2015 300,000 300,000
1,300,000
Pennsylvania (6.07%)
Bucks County, Pennsylvania, IDA SHV
Real Estate, Inc. Project, Series 1985;
LOC ABN-AMRO Bank;
3.15%; 11/8/1998*; 7/1/2015 600,000 600,000
Delaware County, Pennsylvania, Fac.
Rev. Tax & Rev. Anticipation Notes,
Series 1985; Guaranteed by United
Parcel Service;
3.60%; 11/2/1998*; 12/1/2015 1,000,000 1,000,000
1,600,000
Tennessee (1.90%)
Knox, Tennessee, IDB F/R Monthly
IDR 1983, Service Merchandise Co.,
Inc.; LOC CIBC;
3.40%; 11/15/1998*; 12/15/2008 500,000 500,000
Texas (14.12%)
Coppell, Texas, Industrial Dev. Corp.,
IDA 1984, Minyard Properties
Project; LOC Citibank;
3.30%; 11/8/1998*; 12/1/2001 870,000 870,000
Grapevine, Texas, Industrial Dev. Corp.,
American Airlines;
LOC Morgan Guaranty;
Series 1984 B3;
3.65%; 11/2/1998*; 12/1/2024 $ 800,000 $ 800,000
Series 1984 B4;
3.65%; 11/2/1998*; 12/1/2024 400,000 400,000
3.65%; 11/2/1998*; 12/1/2024 100,000 100,000
Lone Star Airport Improvement Authority,
American Airlines, Series 1984;
LOC Royal Bank of Canada;
Series 1984 A2;
3.65%; 11/2/1998*; 12/1/2014 100,000 100,000
Series 1984 A5;
3.65%; 11/2/1998*; 12/1/2014 100,000 100,000
Series 1984 B1;
3.65%; 11/2/1998*; 12/1/2014 800,000 800,000
Series 1984 B5;
3.65%; 11/2/1998*; 12/1/2014 400,000 400,000
Montgomery County, Texas, Industrial
Dev. Corp. Ref. Bonds,
Series 1986A; Dal-Tile Corp.
Project; LOC Credit Suisse;
3.20%; 11/8/1998*; 12/1/2003 150,000 150,000
3,720,000
West Virginia (3.80%)
Putnam County, West Virginia, F/R
Monthly IDR 1981, FMC Corp.
Project; LOC Bank of New York;
3.60%; 11/8/1998*; 10/1/2011 1,000,000 1,000,000
Wyoming (3.42%)
Lincoln County, Wyoming, Pollution
Control Ref. Bonds, Pacificorp
Project, Series 1991; LOC
UBS AG;
3.35%; 11/5/1998**; 1/1/2016 500,000 500,000
3.20%; 3/11/1999**; 1/1/2016 400,000 400,000
900,000
Total Portfolio Investments (98.63%) 25,980,002
Cash, receivables and other assets,
net of liabilities (1.37%) 360,312
Total Net Assets (100.00%) $26,340,314
* Demand Date
** Put Date
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31 (except as noted):
<TABLE>
<CAPTION>
PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
- -------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b)............................. .051 .050 .049 .052 .033
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
Total from Investment Operations .051 .050 .049 .052 .033
Less Dividends From Net Investment Income............... (.051) (.050) (.049) (.052) (.033)
Net Asset Value, End of Period.......................... $1.000 $1.000 $1.000 $1.000 $1.000
Total Return(c)......................................... 5.10% 4.96% 5.00% 5.36% 2.67%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $294,918 $836,072 $694,962 $623,864 $332,346
Ratio of Expenses to Average Net Assets(b)........... .56%(e) .63% .66% .72% .70%
Ratio of Net Investment Income to Average Net Assets. 5.12% 4.98% 4.88% 5.24% 3.27%
PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class B shares 1998 1997 1996 1995(g)
- -------------------------------------------------------- ---- ---- ---- ----
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b)............................. .042 .041 .041 .041
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- --
Total from Investment Operations .042 .041 .041 .041
Less Dividends from Net Investment Income............... (.042) (.041) (.041) (.041)
Net Asset Value, End of Period.......................... $1.000 $1.000 $1.000 $1.000
Total Return(c)......................................... 4.25% 4.05% 4.13% 4.19%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $3,602 $992 $520 $208
Ratio of Expenses to Average Net Assets(b)........... 1.41%(e) 1.47% 1.50% 1.42%(f)
Ratio of Net Investment Income to Average Net Assets. 4.23% 4.08% 4.08% 4.50%(f)
PRINCIPAL CASH MANAGEMENT FUND, INC.(a)
Class R shares 1998 1997 1996(h)
- -------------------------------------------------------- ---- ---- ----
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income(b)............................. .046 .044 .030
Net Realized and Unrealized Gain (Loss) on Investments -- -- --
Total from Investment Operations .046 .044 .030
Less Dividends from Net Investment Income............... (.046) (.044) (.030)
Net Asset Value, End of Period.......................... $1.000 $1.000 $1.000
Total Return(c)......................................... 4.56% 4.16% 2.97%(d)
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $10,414 $4,296 $1,639
Ratio of Expenses to Average Net Assets(b)........... 1.05%(e) 1.26% .99%(f)
Ratio of Net Investment Income to Average Net Assets. 4.62% 4.40% 4.41%(f)
See accompanying notes.
</TABLE>
Selected data for a share of Capital Stock outstanding throughout each year
ended October 31:
<TABLE>
<CAPTION>
PRINCIPAL TAX-EXEMPT CASH MANAGEMENT FUND, INC.(a)
Class A shares 1998 1997 1996 1995 1994
- -------------------------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.................... $1.000 $1.000 $1.000 $1.000 $1.000
Net Investment Income from Operations(b)................ .028 .029 .029 .032 .021
Less Dividends from Net Investment Income............... (.028) (.029) (.029) (.032) (.021)
Net Asset Value, End of Period.......................... $1.000 $1.000 $1.000 $1.000 $1.000
Total Return(c)......................................... 2.89% 2.89% 2.92% 3.24% 2.11%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)............. $26,340 $98,939 $98,482 $99,887 $79,736
Ratio of Expenses to Average Net Assets(b)........... .72% .70% .71% .69% .67%
Ratio of Net Investment Income to Average Net Assets. 2.84% 2.93% 2.87% 3.19% 2.08%
See accompanying notes.
</TABLE>
Notes to Financial Highlights
(a) Effective January 1, 1998, the following changes were made to the names of
the Money Market Funds:
<TABLE>
<CAPTION>
Former Fund Name New Fund Name
<S> <C>
Princor Cash Management Fund, Inc. Principal Cash Management Fund, Inc.
Princor Tax-Exempt Cash Management Fund, Inc. Principal Tax-Exempt Cash Management Fund, Inc.
</TABLE>
(b) Without the Manager's voluntary waiver of a portion of certain of its
expenses (see Note 3 to the financial statements) for the periods
indicated, the Money Market Funds would have had per share net investment
income and the ratios of expenses to average net assets as shown:
<TABLE>
<CAPTION>
Year Ended Ratio of
October 31, Per Share Expenses
Except Net Investment to Average Amount
as Noted Income Net Assets Waived
<S> <C> <C> <C> <C>
Principal Cash Management Fund, Inc.:
Class A 1998(e) $.051 .56% $ --
1997 .050 .63 --
1996 .049 .67 7,102
1995 .052 .78 296,255
1994 .031 .90 595,343
Class B 1998(e) .041 1.49 1,343
1997 .036 2.14 5,492
1996 .029 3.94 6,140
1995(g) .041(f) 1.63(f) 104
Class R 1998(e) .046 1.05 --
1997 .043 1.34 2,441
Principal Tax-Exempt Cash Management Fund, Inc.:
Class A 1998 .026 .81 58,145
1997 .029 .73 27,978
1996 .028 .77 69,107
1995 .031 .84 138,574
1994 .019 .85 150,515
</TABLE>
(c) Total return is calculated without the front-end sales charge or contingent
deferred sales charge.
(d) Total return amounts have not been annualized.
(e) Management fee waivers apply to November 1, 1997 through February 28, 1998.
(f) Computed on an annualized basis.
(g) Period from December 9, 1994, date Class B shares first offered to the
public, through October 31, 1995.
(h) Period from February 29, 1996, date Class R shares first offered to
eligible purchasers, through October 31, 1996.
The Boards of Directors and Shareholders
Principal Balanced Fund, Inc.
Principal Blue Chip Fund, Inc.
Principal Capital Value Fund, Inc.
Principal Growth Fund, Inc.
Principal MidCap Fund, Inc.
Principal Real Estate Fund, Inc.
Principal SmallCap Fund, Inc.
Principal Utilities Fund, Inc.
Principal International Emerging Markets Fund, Inc.
Principal International Fund, Inc.
Principal International SmallCap Fund, Inc.
Principal Bond Fund, Inc.
Principal Government Securities Income Fund, Inc.
Principal High Yield Fund, Inc.
Principal Limited Term Bond Fund, Inc.
Principal Tax-Exempt Bond Fund, Inc.
Principal Cash Management Fund, Inc.
Principal Tax-Exempt Cash Management Fund, Inc.
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of The Principal Domestic Growth Funds
(comprising, respectively, Principal Balanced Fund, Inc., Principal Blue Chip
Fund, Inc., Principal Capital Value Fund, Inc., Principal MidCap Fund, Inc.,
Principal Growth Fund, Inc., Principal Real Estate Fund, Inc., Principal
SmallCap Fund, Inc. and Principal Utilities Fund, Inc.), The Principal
International Growth Funds (comprising, respectively, Principal International
Emerging Markets Fund, Inc., Principal International Fund, Inc. and Principal
International SmallCap Fund, Inc.), The Principal Income Funds (comprising,
respectively, Principal Bond Fund, Inc., Principal Government Securities Income
Fund, Inc., Principal High Yield Fund, Inc., Principal Limited Term Bond Fund,
Inc. and Principal Tax-Exempt Bond Fund, Inc.) and The Principal Money Market
Funds (comprising, respectively, Principal Cash Management Fund, Inc. and
Principal Tax-Exempt Cash Management Fund, Inc.) as of October 31, 1998, and the
related statements of operations, statements of changes in net assets and
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 and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1998, by correspondence with the custodians
and brokers. As to securities relating to uncompleted transactions, we performed
other audit procedures. 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 each
of the respective funds constituting The Principal Domestic Growth Funds, The
Principal International Growth Funds, The Principal Income Funds and The
Principal Money Market Funds at October 31, 1998, and the results of their
operations, the changes in their net assets 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
November 25, 1998
Information for federal income tax purposes is presented as an aid to
shareholders in reporting the dividend distributions shown below. Shareholders
should consult a tax adviser on how to report these distributions for state and
local purposes.
<TABLE>
<CAPTION>
Periods Ended October 31, 1998
Per Share Per Share
Income Dividend Distributions Capital Gain Distributions
Total
Total Dividends
Payable Per Total Deductible Payable Long- Short- Capital Gain and
Date Share Dividends Percentage* Date Term** Term*** Distributions Distributions
Principal Balanced
Fund, Inc.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A Shares 12/24/97 $.0850 23.48% 12/04/97 $ .7849 $.2432
3/24/98 .0900 25.92%
6/24/98 .0950 25.36%
9/24/98 .1050 26.71%
$.3750 $1.0281 $1.4031
B Shares 12/24/97 $.0548 23.48% 12/04/97 $ .7849 $.2432
3/24/98 .0595 25.92%
6/24/98 .0646 25.36%
9/24/98 .0776 26.71%
$.2565 $1.0281 $1.2846
R Shares 12/24/97 $.0610 23.48% 12/04/97 $ .7849 $.2432
3/24/98 .0672 25.92%
6/24/98 .0724 25.36%
9/24/98 .0841 26.71%
$.2847 $1.0281 $1.3128
Principal Blue Chip
Fund, Inc.
A Shares 12/24/97 $.0500 76.14% 12/04/97 $2.0241 .0569
3/24/98 .0475 87.31%
6/24/98 .0107 75.81%
9/24/98 .0100 79.61%
$.1182 $2.081 $ 2.6267
B Shares 12/24/97 $.0133 76.14% 12/04/97 $2.0241 .0569
3/24/98 .0089 87.31%
6/24/98 -- 00.00%
9/24/98 -- 00.00%
$.0222 $2.081 $ 2.1032
R Shares 12/24/97 $.0226 76.14% 12/04/97 $2.0241 .0569
3/24/98 .0190 87.31%
6/24/98 -- 00.00%
9/24/98 -- 00.00%
$.0416 $2.081 $ 2.1226
Principal Capital
Value Fund, Inc.
A Shares 12/24/97 $.2665 93.49% 12/04/97 $2.0601 $.4121
6/24/98 .2600 92.93%
$.5265 $2.4722 $2.9987
B Shares 12/24/97 $.1388 93.49% 12/04/97 $2.0601 $.4121
6/24/98 .1187 92.93%
$.2575 $2.4722 $2.7297
R Shares 12/24/97 $.1557 93.49% 12/04/97 $2.0601 $.4121
6/24/98 .1363 92.93%
$.2920 $2.4722 $2.7642
Principal Growth
Fund, Inc.
A Shares 12/24/97 $.1825 55.31% 12/04/97 $1.4891
6/24/98 .1600 44.42%
$.3425 $ 1.4891 $ 1.8316
B Shares 12/24/97 $.0593 55.31% 12/04/97 $1.4891
06/24/98 .0297 44.42%
$.0890 $ 1.4891 $ 1.5781
R Shares 12/24/97 $.0154 55.31% 12/04/97 $1.4891
06/24/98 -- 00.00%
$.0154 $ 1.4891 $ 1.5045
Principal
International
Fund, Inc.
A Shares 12/24/97 $.1030 00.00% 12/04/97 $.2006 $.0000
$.1030 $ .2006 $ .3036
B Shares 12/24/97 $.0347 00.00% 12/04/97 $.2006 $.0000
$.0347 $ .2006 $ .2353
R Shares 12/24/97 $.0421 00.00% 12/04/97 $.2006 $.0000
$.0421 $ .2006 $ .2427
Principal MidCap
Fund, Inc.
A Shares 12/04/97 $1.0450 $.0540
$1.0990 $1.0990
B Shares 12/04/97 $1.0450 $.0540
$1.0990 $1.0990
R Shares 12/04/97 $1.0450 $.0540
$1.0990 $1.0990
Principal Real
Estate Fund, Inc.
A Shares 3/24/98 $.0550 00.00%
6/24/98 .0700 00.00%
9/24/98 .0800 00.00%
$.2050 $.2050
B Shares 3/24/98 $.0513 00.00%
6/24/98 .0651 00.00%
9/24/98 .0755 00.00%
$.1919 $.1919
R Shares 3/24/98 $.0530 00.00%
6/24/98 .0686 00.00%
9/24/98 .0809 00.00%
$.2025 $.2025
</TABLE>
Foreign Taxes Paid
Principal International Fund, Inc. makes an election under the Internal
Revenue Code Section 853 to pass through foreign taxes paid by the fund to
its shareholders. The total amount of foreign taxes passed through to
shareholders for the year ended October 31, 1998 totals $0.0290 per share for
Principal International Fund, Inc. This information is given to meet certain
requirements of the Internal Revenue Code and should not be used by
shareholders for preparing their income tax returns. For tax return
preparation purposes, please refer to the information supplied with the 1099
form you receive from the fund's transfer agent.
<TABLE>
<CAPTION>
Period Ended October 31, 1998
Per Share Per Share
Income Dividend Distributions Capital Gain Distributions
Total
Total Dividends
Payable Per Total Deductible Payable Long- Short- Capital Gain and
Date Share Dividends Percentage* Date Term** Term*** Distributions Distributions
Principal Utilities
Fund, Inc.
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A Shares 12/24/97 $.1350 95.80%
3/24/98 .1100 95.72%
6/24/98 .1000 98.75%
9/24/98 .0900 91.87%
$.4350 $ .4350
B Shares 12/24/97 $.1091 95.80%
3/24/98 .0836 95.72%
6/24/98 .0727 98.75%
9/24/98 .0629 91.87%
$.3283 $ .3283
R Shares 12/24/97 $.1097 95.80%
3/24/98 .0826 95.72%
6/24/98 .0719 98.75%
9/24/98 .0621 91.87%
$.3263 $ .3263
<FN>
* Percent qualifying for deduction by shareholders who are corporations.
** Taxable as long-term capital gain.
*** Taxable at ordinary income rates.
</FN>
</TABLE>
Information for federal income tax purposes is presented as an aid to
shareholders in reporting the dividend distributions shown below. Shareholders
should consult a tax adviser on how to report these distributions for state and
local purposes.
Ordinary Income Dividends
The Funds paid the following per share income dividends on the dates indicated:
<TABLE>
<CAPTION>
Per Share Dividends/Payable Date
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund 11/24/97 12/24/97 1/23/98 2/24/98 3/24/98 4/24/98 5/22/98 6/24/98 7/24/98 8/24/98 9/24/98 10/23/98
Principal Bond Fund, Inc.
Class A $.0613 $.0613 $.0588 $.0588 $.0588 $.0588 $.0588 $.0588 $.0600 $.0600 $.0600 $.0600
Class B .0537 .0537 .0514 .0514 .0514 .0514 .0514 .0514 .0529 .0529 .0529 .0529
Class R .0542 .0542 .0512 .0512 .0512 .0512 .0512 .0512 .0533 .0533 .0533 .0533
Principal Government
Securities Income
Fund, Inc.
Class A .0575 .0588 .0588 .0588 .0588 .0588 .0588 .0588 .0588 .0588 .0588 .0588
Class B .0507 .0535 .0535 .0535 .0535 .0535 .0535 .0535 .0535 .0535 .0535 .0535
Class R .0500 .0510 .0510 .0510 .0510 .0510 .0510 .0510 .0510 .0510 .0510 .0510
Principal High Yield
Fund, Inc.
Class A .0563 .0563 .0563 .0563 .0550 .0550 .0550 .0525 .0525 .0525 .0513 .0513
Class B .0500 .0500 .0500 .0489 .0489 .0489 .0489 .0466 .0466 .0466 .0456 .0456
Class R .0517 .0517 .0517 .0497 .0497 .0497 .0497 .0472 .0472 .0472 .0456 .0456
Principal Limited Term Bond
Fund, Inc.
Class A .0500 .0500 .0500 .0500 .0500 .0475 .0475 .0475 .0475 .0475 .0475 .0450
Class B .0452 .0452 .0452 .0452 .0452 .0425 .0425 .0425 .0425 .0425 .0425 .0401
Class R .0462 .0462 .0431 .0431 .0431 .0410 .0410 .0410 .0410 .0410 .0410 .0390
Principal Tax-Exempt Bond
Fund, Inc.*
Class A .0513 .0513 .0513 .0513 .0513 .0513 .0513 .0500 .0500 .0500 .0500 .0500
Class B .0446 .0446 .0446 .0446 .0446 .0446 .0446 .0437 .0437 .0437 .0437 .0437
<FN>
* Dividends from the Principal Tax-Exempt Bond Fund, Inc. were exempt from
federal income taxation for non-corporate shareholders.
</FN>
</TABLE>
FEDERAL INCOME TAX INFORMATION (Continued)
Information for federal income tax purposes is presented as an aid to
shareholders in reporting the dividend distributions shown below. Shareholders
should consult a tax adviser on how to report these distributions for state and
local purposes.
Ordinary Income Dividends
The Funds paid the following per share income dividends on the dates indicated:
<TABLE>
<CAPTION>
Per Share Dividends/Payable Date
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fund 11/20/97 12/19/97 1/20/98 2/20/98 3/20/98 4/20/98 5/20/98 6/19/98 7/20/98 8/20/98 9/18/98 10/20/98
Principal Cash Management
Fund, Inc.
Class A $.0043 $.0044 $.0043 $.0046 $.0040 $.0040 $.0041 $.0043 $.0040 $.0043 $.0043 $.0042
Class B .0036 .0037 .0036 .0038 .0033 .0031 .0034 .0037 .0034 .0035 .0036 .0035
Class R .0038 .0039 .0038 .0041 .0035 .0036 .0037 .0039 .0036 .0040 .0040 .0038
Principal Tax-Exempt Cash
Management Fund, Inc.*
Class A .0026 .0026 .0024 .0024 .0019 .0023 .0026 .0026 .0022 .0023 .0023 .0023
Class B** .0019 .0019 .0005*** -- -- -- -- -- -- -- -- --
<FN>
* Dividends from Principal Tax-Exempt Cash Management Fund, Inc. were exempt
from federal income taxation for non-corporate shareholders.
** On December 29, 1997, Principal Tax-Exempt Cash Management Fund, Inc.
ceased offering Class B shares. All outstanding Class B shares were
redeemed at that date.
*** Dividends declared on Principal Tax-Exempt Cash Management Fund, Inc. Class
B shares from December 21, 1997 through December 29, 1997 (date operations
ceased).
</FN>
</TABLE>
PRINCIPAL MUTUAL FUNDS
Principal Life Insurance Company has sponsored the development of a number of
mutual funds. The funds which make up the Principal Mutual Funds and a brief
description of their respective investment objectives are provided below. For
more complete information about any of the funds, including charges and
expenses, obtain a prospectus from Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200 (telephone
1-800-247-4123). Please read it carefully before you invest or send money.
DOMESTIC GROWTH FUNDS INVESTMENT OBJECTIVE
Principal Balanced Fund, Inc. To seek the generation of a total
return consisting of current
income and capital appreciation
while assuming reasonable risks in
furtherance of this objective.
Principal Blue Chip Fund, Inc. To seek growth of capital and growth
of income by investing primarily in
common stocks of well capitalized,
established companies.
Principal Capital Value Fund, Inc. To seek long-term capital
appreciation and a secondary
objective of growth of investment
income.
Principal Growth Fund, Inc. To seek growth of capital with
realization of current income
incidental to the objective of growth
of capital.
Principal MidCap Fund, Inc. To seek capital appreciation by
investing primarily in securities
of emerging and other growth-oriented
companies.
Principal Real Estate Fund, Inc. To seek the generation of total
return by investing primarily in
equity securities of companies
principally engaged in the real
estate industry.
Principal SmallCap Fund, Inc. To seek long-term growth of capital
by investing primarily in equity
securities of companies with
comparatively smaller market
capitalizations.
Principal Utilities Fund, Inc. To seek current income and long-term
growth of income and capital by
investing primarily in equity and
fixed income securities of companies
in the public utilities industry.
INTERNATIONAL GROWTH FUNDS
Principal International To seek long-term growth of capital
Emerging Markets by investing primarily in equity
Fund, Inc. securities of issuers in emerging
market countries.
Principal International Fund, Inc. To seek long-term growth of capital
by investing in a portfolio of equity
securities of companies domiciled in
any of the nations of the world.
Principal International SmallCap To seek long-term growth of capital
Fund, Inc. by investing primarily in equity
securities of non-United States
companies with comparatively
smaller market capitalizations.
INCOME FUNDS
Principal Bond Fund, Inc. To seek as high a level of income as
is consistent with preservation of
capital and prudent investment risk.
Principal Government Securities To seek a high level of current
Income Fund, Inc. income, liquidity and safety of
principal.
Principal High Yield Fund, Inc. To seek high current income.
Capital growth is a secondary
objective when consistent with
seeking high current income.
Principal Limited Term Bond To seek a high level of current
Fund, Inc. income consistent with a relatively
high level of principal stability by
investing in a portfolio of
securities with a dollar weighted
average maturity of five years or
less.
Principal Tax-Exempt Bond To seek as high a level of current
Fund, Inc. income exempt from federal taxation
as is consistent with preservation
of capital.
MONEY MARKET FUNDS
Principal Cash Management To seek as high a level of current
Fund, Inc. income available from short-term
securities as is considered
consistent with preservation of
principal and maintenance of
liquidity by investing in a portfolio
of money market instruments.
Principal Tax-Exempt Cash To seek, through investment in a
Management Fund, Inc. professionally-managed portfolio of
high quality short-term Municipal
Obligations, as high a level of
current interest income exempt from
federal income tax as is consistent
with stability of principal and
maintenance of liquidity.
