SUPPLEMENT DATED SEPTEMBER 19, 1997
TO THE PRINCIPAL MUTUAL FUND PROSPECTUS
DATED MAY 1, 1997
At the Special Meeting of Shareholders held September 16, 1997, the shareholders
of each Fund approved the following actions:
Effective January 1, 1998, the following changes will be made:
1. Each Fund will adopt an Agreement and Plan of Reorganization and Liquidation
under which the existing Funds will become an account of the Principal
Variable Contracts Fund, Inc.
Current Fund Account
------------ -------
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal Money Market Fund, Inc. Money Market Account
Principal World Fund, Inc. International Account
2. Principal Capital Accumulation Fund, Principal Government Securities Fund and
Principal Money Market Fund each will eliminate the fundamental investment
restrictions prohibiting the Fund from purchasing shares of other investment
companies and prohibiting the Fund from joint participation in any securities
trading account.
3. Principal Capital Accumulation Fund will eliminate the fundamental investment
restrictions prohibiting the Fund from purchasing restricted securities and
from investing in repurchase agreements. The Fund will adopt a
non-fundamental investment restriction providing that the Fund may not
"Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven days."
4. Principal Government Securities Fund will modify the fundamental investment
restriction prohibiting the Fund from purchasing other than obligations
issued or guaranteed by the United States Government or its agencies or
instrumentalities. The Fund will be permitted to maintain reasonable amounts
in cash or purchase short-term debt securities that are not issued or
guaranteed by the United States Government or its agencies or
instrumentalities.
5. Principal Money Market Fund will amend the fundamental investment
restrictions to allow the Fund to: i) invest more than 5% (but not more than
25%) of total Fund assets in the securities of a single issuer; ii) purchase
the securities of an issuer if the purchase does not cause more than 10% of
the outstanding voting securities of the issuer to be held by the Fund (other
than securities issued or guaranteed by the United States Government or its
agencies or instrumentalities); and iii) invest that percentage of its total
assets in securities nor readily marketable as is allowed by federal
securities rules or interpretations.
<PAGE>
SUPPLEMENT DATED SEPTEMBER 19, 1997
TO THE PRINCIPAL MUTUAL FUND PROSPECTUS
DATED MAY 1, 1997
At the Special Meeting of Shareholders held September 16, 1997, the shareholders
of each Fund approved the following actions:
Effective January 1, 1998, the following changes will be made:
1. Each Fund will adopt an Agreement and Plan of Reorganization and
Liquidation under which the existing Funds will become an account of
the Principal Variable Contracts Fund, Inc.
Current Fund Account
------------ -------
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal High Yield Fund, Inc. High Yield Account
Principal Money Market Fund, Inc. Money Market Account
2. Principal Capital Accumulation Fund, Principal Government Securities
Fund and Principal Money Market Fund each will eliminate the
fundamental investment restrictions prohibiting the Fund from
purchasing shares of other investment companies and prohibiting the
Fund from joint participation in any securities trading account.
3. Principal Capital Accumulation Fund will eliminate the fundamental
investment restrictions prohibiting the Fund from purchasing restricted
securities and from investing in repurchase agreements. The Fund will
adopt a non-fundamental investment restriction providing that the Fund
may not "Invest more than 15% of its total assets in securities not
readily marketable and in repurchase agreements maturing in more than
seven days."
4. Principal Government Securities Fund will modify the fundamental
investment restriction prohibiting the Fund from purchasing other than
obligations issued or guaranteed by the United States Government or its
agencies or instrumentalities. The Fund will be permitted to maintain
reasonable amounts in cash or purchase short-term debt securities that
are not issued or guaranteed by the United States Government or its
agencies or instrumentalities.
5. Principal Money Market Fund will amend the fundamental investment
restrictions to allow the Fund to: i) invest more than 5% (but not more
than 25%) of total Fund assets in the securities of a single issuer;
ii) purchase the securities of an issuer if the purchase does not cause
more than 10% of the outstanding voting securities of the issuer to be
held by the Fund (other than securities issued or guaranteed by the
United States Government or its agencies or instrumentalities); and
iii) invest that percentage of its total assets in securities nor
readily marketable as is allowed by federal securities rules or
interpretations.
<PAGE>
SUPPLEMENT DATED SEPTEMBER 19, 1997
TO THE PRINCIPAL MUTUAL FUND PROSPECTUS
DATED MAY 1, 1997
At the Special Meeting of Shareholders held September 16, 1997, the shareholders
of each Fund approved the following actions:
Effective January 1, 1998, the following changes will be made:
1. Each Fund will adopt an Agreement and Plan of Reorganization and
Liquidation under which the existing Funds will become an account of
the Principal Variable Contracts Fund, Inc.
Current Fund Account
------------ -------
Principal Aggressive Growth Fund, Inc. Aggressive Growth Account
Principal Asset Allocation Fund, Inc. Asset Allocation Account
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal Money Market Fund, Inc Money Market Account.
Principal World Fund, Inc. International Account
2. Principal Capital Accumulation Fund, Principal Government Securities
Fund and Principal Money Market Fund each will eliminate the
fundamental investment restrictions prohibiting the Fund from
purchasing shares of other investment companies and prohibiting the
Fund from joint participation in any securities trading account.
3. Principal Capital Accumulation Fund will eliminate the fundamental
investment restrictions prohibiting the Fund from purchasing restricted
securities and from investing in repurchase agreements. The Fund will
adopt a non-fundamental investment restriction providing that the Fund
may not "Invest more than 15% of its total assets in securities not
readily marketable and in repurchase agreements maturing in more than
seven days."
4. Principal Government Securities Fund will modify the fundamental
investment restriction prohibiting the Fund from purchasing other than
obligations issued or guaranteed by the United States Government or its
agencies or instrumentalities. The Fund will be permitted to maintain
reasonable amounts in cash or purchase short-term debt securities that
are not issued or guaranteed by the United States Government or its
agencies or instrumentalities.
5. Principal Money Market Fund will amend the fundamental investment
restrictions to allow the Fund to: i) invest more than 5% (but not more
than 25%) of total Fund assets in the securities of a single issuer;
ii) purchase the securities of an issuer if the purchase does not cause
more than 10% of the outstanding voting securities of the issuer to be
held by the Fund (other than securities issued or guaranteed by the
United States Government or its agencies or instrumentalities); and
iii) invest that percentage of its total assets in securities nor
readily marketable as is allowed by federal securities rules or
interpretations.
The Principal(R) Mutual Funds ("Principal Funds") described in this
Prospectus are a family of separately incorporated, diversified, open-end
management investment companies, commonly called mutual funds, which provide the
following range of investment objectives:
Growth-Oriented Funds
PRINCIPAL Aggressive Growth Fund, Inc. seeks to provide long-term capital
appreciation by investing primarily in growth-oriented common stocks of medium
and large capitalization U.S. corporations and, to a limited extent, foreign
corporations.
PRINCIPAL Asset Allocation Fund, Inc. seeks to generate a total investment
return consistent with the preservation of capital.
PRINCIPAL Balanced Fund, Inc. seeks to generate a total return consisting of
current income and capital appreciation while assuming reasonable risks in
furtherance of the investment objective.
PRINCIPAL Capital Accumulation Fund, Inc. seeks to achieve primarily long-term
capital appreciation and secondary growth of investment income through the
purchase primarily of common stocks, but the Fund may invest in other
securities.
PRINCIPAL Emerging Growth Fund, Inc. seeks to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
PRINCIPAL Growth Fund, Inc. seeks growth of capital through the purchase
primarily of common stocks, but the Fund may invest in other securities.
PRINCIPAL World Fund, Inc. seeks long-term growth of capital by investing in a
portfolio of equity securities of companies domiciled in any of the nations of
the world.
Income-Oriented Funds
PRINCIPAL Bond Fund, Inc. seeks to provide as high a level of income as is
consistent with preservation of capital and prudent investment risk.
PRINCIPAL Government Securities Fund, Inc. seeks a high level of current income,
liquidity and safety of principal. The Fund seeks to achieve its objective
through the purchase of obligations issued or guaranteed by the United States
Government or its agencies, with emphasis on Government National Mortgage
Association Certificates ("GNMA Certificates"). Fund shares are not guaranteed
by the United States Government.
Money Market Fund
PRINCIPAL Money Market Fund, Inc. seeks as high a level of income available from
short-term securities as is considered consistent with preservation of principal
and maintenance of liquidity by investing all of its assets in a portfolio of
money market instruments.
An investment in the Money Market fund is neither insured nor guaranteed by
the U.S. Government. There can be no assurance the Money Market Funds will be
able to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Funds that
an investor ought to know before investing. It should be read and retained for
future reference.
Additional information about the Funds has been filed with the Securities
and Exchange Commission, including a document called Statement of Additional
Information, dated May 1, 1997. The Statement of Additional Information is
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Mutual Funds
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is May 1, 1997.
TABLE OF CONTENTS
Page
Summary .............................................................. 3
Financial Highlights................................................... 5
Investment Objectives, Policies and Restrictions....................... 10
Certain Investment Policies and Restrictions........................... 19
Manager and Sub-Advisors ............................................. 22
Duties Performed by the Manager and Sub-Advisors....................... 23
Managers' Comments..................................................... 24
Determination of Net Asset Value of Fund Shares........................ 30
Performance Calculation................................................ 31
Income Dividends, Distributions and Tax Status......................... 32
Eligible Purchasers and Purchase of Shares............................. 33
Shareholder Rights .................................................... 33
Redemption of Shares................................................... 34
Additional Information................................................. 35
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, the securities of any of the Funds in any jurisdiction in which
such sale, offer to sell, or solicitation may not be lawfully made. No dealer,
salesperson, or other person has been authorized to give any information or to
make any representations, other than those contained in this Prospectus, in
connection with the offer contained in this Prospectus, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Funds or the Funds' Manager.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Funds are separately incorporated, open-end diversified
management investment companies.
Who may purchase shares of the Funds?
Shares of the Funds are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of each Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Funds offer investors?
Professional Investment Management: Experienced securities analysts provide
each Fund with professional investment management.
Diversification: Each Fund will diversify by investing in securities issued
by a number of issuers doing business in a variety of industries and/or located
in different geographical regions. Diversification reduces investment risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Funds creates administrative efficiencies.
Redeemability: Upon request each Fund will redeem its shares and promptly
pay the investor the current net asset value of the shares redeemed. See
"Redemption of Shares."
What are the Funds' investment objectives?
Growth-Oriented Funds
The investment objective of Principal Aggressive Growth Fund, Inc.
(sometimes referred to as the Aggressive Growth Fund) is to provide long-term
capital appreciation by investing primarily in growth-oriented common stocks of
medium and large capitalization U.S. corporations and, to a limited extent,
foreign corporations.
The investment objective of Principal Asset Allocation Fund, Inc.
(sometimes referred to as the Asset Allocation Fund) is to generate a total
investment return consistent with the preservation of capital. The Fund intends
to pursue a flexible investment policy in seeking to achieve this investment
objective.
The investment objective of Principal Balanced Fund, Inc. (sometimes
referred to as the Balanced Fund) is to seek to generate a total return
consisting of current income and capital appreciation while assuming reasonable
risks in furtherance of this objective.
The primary investment objective of Principal Capital Accumulation Fund,
Inc. (sometimes referred to as the Capital Accumulation Fund) is long-term
capital appreciation and its secondary investment objective is growth of
investment income. The Fund seeks to achieve its investment objectives through
the purchase primarily of common stocks, but the Fund may invest in other
securities.
The investment objective of Principal Emerging Growth Fund, Inc. (sometimes
referred to as the Emerging Growth Fund) is to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
The investment objective of Principal Growth Fund, Inc. (sometimes referred
to as the Growth Fund) is growth of capital. The Fund seeks to achieve its
objective through the purchase primarily of common stocks, but the Fund may
invest in other securities.
The investment objective of Principal World Fund, Inc. (sometimes referred
to as the World Fund) is to seek long-term growth of capital by investing in a
portfolio of equity securities domiciled in any of the nations of the world.
Income-Oriented Funds
The investment objective of Principal Bond Fund, Inc. (sometimes referred
to as the Bond Fund) is to provide as high a level of income as is consistent
with preservation of capital and prudent investment risk.
The investment objective of Principal Government Securities Fund, Inc.
(sometimes referred to as the Government Securities Fund) is to seek a high
level of current income, liquidity and safety of principal. The Fund seeks to
achieve its objective through the purchase of obligations issued or guaranteed
by the United States Government or its agencies, with emphasis on Government
National Mortgage Association Certificates ("GNMA Certificates"). Fund shares
are not guaranteed by the United States Government.
Money Market Fund
The investment objective of Principal Money Market Fund, Inc. (sometimes
referred to as the Money Market Fund) is to seek as high a level of current
income available from short-term securities as is considered consistent with
preservation of principal and maintenance of liquidity by investing all of its
assets in a portfolio of money market instruments.
There can be no assurance that the investment objectives of any of the
Funds will be realized. See "Investment Objectives, Policies and Restrictions."
Who serves as Manager for the Funds?
Princor Management Corporation, a corporation organized in 1969 by
Principal Mutual Life Insurance Company, is the Manager for each of the Funds.
It is also the dividend disbursing and transfer agent for the Principal Funds.
In order to provide investment advisory service for certain funds the Manager
has executed sub-advisory agreements with Invista Capital Management, Inc.
(Balanced Fund, Growth Fund and World Fund) and Morgan Stanley Asset Management
Inc. (Aggressive Growth Fund and Asset Allocation Fund). Subsequent references
to these corporations may be as "Invista", "MSAM" or "Sub-Advisor". See "Manager
and Sub-Advisors."
What fees and expenses apply to ownership of shares of the Funds?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Funds.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Fund Fee Expenses Expenses
Aggressive Growth Fund .80% .05% .85%
Asset Allocation Fund .80% .07% .87%
Balanced Fund .60% .03% .63%
Bond Fund .50% .03% .53%
Capital Accumulation Fund .48% .01% .49%
Emerging Growth Fund .64% .02% .66%
Government Securities Fund .50% .02% .52%
Growth Fund .50% .02% .52%
Money Market Fund .50% .06% .56%
World Fund .75% .15% .90%
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Period (in years)
---------------------------------------------
Fund 1 3 5 10
Aggressive Growth Fund $9 $27 $47 $105
Asset Allocation Fund $9 $28 $48 $107
Balanced Fund $6 $20 $35 $79
Bond Fund $5 $17 $30 $66
Capital Accumulation Fund $5 $16 $27 $62
Emerging Growth Fund $7 $21 $37 $82
Government Securities Fund $5 $17 $29 $65
Growth Fund $5 $17 $29 $65
Money Market Fund $6 $18 $31 $70
World Fund $9 $29 $50 $111
This Example is based on the Annual Fund Operating expenses for each Fund
described above. Please remember that the Example should not be considered
a representation of past or future expenses and that actual expenses may be
greater or less than shown.
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in the Funds will bear directly or
indirectly. See "Duties Performed by the Manager and Sub-Advisors."
FINANCIAL HIGHLIGHTS
The following financial highlights for the periods ended December 31, 1996
and prior thereto are derived from financial statements which have been audited
by Ernst & Young LLP, independent auditors, whose report has been incorporated
by reference herein. The financial highlights should be read in conjunction with
the financial statements, related notes, and other financial information
incorporated by reference herein. Audited financial statements may be obtained
by shareholders, without charge, by telephoning 1-800-451-5447.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
___________________________________ ____________________________________________________
Net Realized
and
Net Asset Unrealized Total Dividends Excess
Value at Net Gain from from Net Distributions Distributions
Beginning Investment (Loss) on Investment Investment from from Total
of Period Income Investments Operations Income Capital Gains Capital Gains Distributions
Principal Aggressive
Growth Fund, Inc.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $12.94 $ .11 $ 3.38 $3.49 $(.11) $(1.80) $ -- $(1.91)
1995 10.11 .13 4.31 4.44 (.13) (1.48) -- (1.61)
Period Ended December 31,
1994(a) 9.92 .05 .24 .29 (.05) (.05) -- (.10)
Principal Asset
Allocation Fund, Inc.
Year Ended December 31,
1996 11.11 .36 1.06 1.42 (.36) (.69) -- (1.05)
1995 9.79 .40 1.62 2.02 (.40) (.30) -- (.70)
Period Ended December 31,
1994(a) 9.98 .23 (.18) .05 (.23) -- (.01) (.24)
Principal Balanced
Fund, Inc.(d)
Year Ended December 31,
1996 13.97 .40 1.41 1.81 (.40) (.94) -- (1.34)
1995 11.95 .45 2.44 2.89 (.45) (.42) -- (.87)
1994 12.77 .37 (.64) (.27) (.37) (.18) -- (.55)
1993 12.58 .42 .95 1.37 (.42) (.76) -- (1.18)
Six Months Ended
December 31, 1992(e) 12.93 .23 .75 .98 (.47) (.86) -- (1.33)
Year Ended June 30,
1992 11.33 .47 1.61 2.08 (.48) -- -- (.48)
1991 10.79 .54 .59 1.13 (.57) (.02) -- (.59)
1990 11.89 .60 (.48) .12 (.63) (.59) -- (1.22)
1989 11.75 .62 .30 .92 (.55) (.23) -- (.78)
Period Ended June 30,
1988(f) 10.00 .27 1.51 1.78 (.03) -- -- (.03)
Principal Bond Fund, Inc.
Year Ended December 31,
1996 11.73 .68 (.40) .28 (.68) -- -- (.68)
1995 10.12 .62 1.62 2.24 (.63) -- -- (.63)
1994 11.16 .72 (1.04) (.32) (.72) -- -- (.72)
1993 10.77 .88 .38 1.26 (.87) -- -- (.87)
Six Months Ended
December 31, 1992(e) 11.08 .45 .13 .58 (.89) -- -- (.89)
Year Ended June 30,
1992 10.64 .91 .46 1.37 (.93) -- -- (.93)
1991 10.72 .94 (.06) .88 (.96) -- -- (.96)
1990 10.92 .95 (.21) .74 (.94) -- -- (.94)
1989 10.68 1.15 .17 1.32 (.96) (.12) -- (1.08)
Period Ended June 30,
1988(f) 10.00 .32 .40 .72 (.04) -- -- (.04)
Principal Capital
Accumulation Fund, Inc.
Year Ended December 31,
1996 27.80 .57 5.82 6.39 (.58) (3.77) -- (4.35)
1995 23.44 .60 6.69 7.29 (.60) (2.33) -- (2.93)
1994 24.61 .62 (.49) .13 (.61) (.69) -- (1.30)
1993 25.19 .61 1.32 1.93 (.60) (1.91) -- (2.51)
Six Months Ended
December 31, 1992(e) 26.03 .31 1.84 2.15 (.64) (2.35) -- (2.99)
Year Ended June 30,
1992 23.35 .65 2.70 3.35 (.67) -- -- (.67)
1991 22.48 .74 1.22 1.96 (.79) (.30) -- (1.09)
1990 23.63 .79 .14 .93 (.81) (1.27) -- (2.08)
1989 23.23 .77 1.32 2.09 (.68) (1.01) -- (1.69)
1988 27.51 .60 (1.50) (.90) (.69) (2.69) -- (3.38)
1987 25.48 .40 4.46 4.86 (.50) (2.33) -- (2.83)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
______________________________________________________
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
Principal Aggressive
Growth Fund, Inc.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $14.52 28.05% $ 90,106 .85% 1.05% 166.9% $.0541
1995 12.94 44.19% 33,643 .90% 1.34% 172.9% N/A
Period Ended December 31,
1994(a) 10.11 2.59%(b) 13,770 1.03%(c) 1.06%(c) 105.6%(c) N/A
Principal Asset
Allocation Fund, Inc.
Year Ended December 31,
1996 11.48 12.92% 61,631 .87% 3.45% 108.2% .0497
1995 11.11 20.66% 41,074 .89% 4.07% 47.1% N/A
Period Ended December 31,
1994(a) 9.79 .52%(b) 28,041 .95%(c) 4.27%(c) 60.7%(c) N/A
Principal Balanced
Fund, Inc.(d)
Year Ended December 31,
1996 14.44 13.13% 93,158 .63% 3.45% 22.6% .0417
1995 13.97 24.58% 45,403 .66% 4.12% 25.7% N/A
1994 11.95 (2.09)% 25,043 .69% 3.42% 31.5% N/A
1993 12.77 11.06% 21,399 .69% 3.30% 15.8% N/A
Six Months Ended
December 31, 1992(e) 12.58 8.00%(b) 18,842 .73%(c) 3.71%(c) 38.4%(c) N/A
Year Ended June 30,
1992 12.93 18.78% 17,344 .72% 3.80% 26.6% N/A
1991 11.33 11.36% 14,555 .73% 5.27% 27.1% N/A
1990 10.79 .87% 13,016 .74% 5.52% 33.1% N/A
1989 11.89 8.55% 12,751 .74% 5.55% 29.3% N/A
Period Ended June 30,
1988(f) 11.75 17.70%(b) 11,469 .80%(c) 4.96%(c) 41.7%(c) N/A
Principal Bond Fund, Inc.
Year Ended December 31,
1996 11.33 2.36% 63,387 .53% 7.00% 1.7% N/A
1995 11.73 22.17% 35,878 .56% 7.28% 5.9% N/A
1994 10.12 (2.90)% 17,108 .58% 7.86% 18.2% N/A
1993 11.16 11.67% 14,387 .59% 7.57% 14.0% N/A
Six Months Ended
December 31, 1992(e) 10.77 5.33%(b) 12,790 .62%(c) 8.10%(c) 6.7%(c) N/A
Year Ended June 30,
1992 11.08 13.57% 12,024 .62% 8.47% 6.1% N/A
1991 10.64 8.94% 10,552 .63% 9.17% 2.7% N/A
1990 10.72 7.15% 9,658 .64% 9.09% 0.0% N/A
1989 10.92 13.51% 9,007 .64% 9.18% 12.2% N/A
Period Ended June 30,
1988(f) 10.68 6.06%(b) 17,598 .58%(c) 8.11%(c) 68.8%(c) N/A
Principal Capital
Accumulation Fund, Inc.
Year Ended December 31,
1996 29.84 23.50% 205,019 .49% 2.06% 48.5% .0426
1995 27.80 31.91% 135,640 .51% 2.25% 49.2% N/A
1994 23.44 .49% 120,572 .51% 2.36% 44.5% N/A
1993 24.61 7.79% 128,515 .51% 2.49% 25.8% N/A
Six Months Ended
December 31, 1992(e) 25.19 8.81%(b) 105,355 .55%(c) 2.56%(c) 39.7%(c) N/A
Year Ended June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8% N/A
1991 23.35 9.46% 76,537 .53% 3.53% 14.0% N/A
1990 22.48 3.94% 74,008 .56% 3.56% 30.2% N/A
1989 23.63 10.02% 68,132 .57% 3.53% 23.5% N/A
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7% N/A
1987 27.51 22.17% 57,478 .63% 1.99% 16.1% N/A
</TABLE>
Notes to financial highlights
(a) Period from June 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Aggressive Growth Fund, Inc. and $.01 per share for Principal
Asset Allocation Fund, Inc. for the period from the initial purchase of
shares on May 23, 1994 through May 31, 1994, was recognized, none of which
was distributed to the sole stockholder, Principal Mutual Life Insurance
Company, during the period. Additionally, Principal Aggressive Growth Fund,
Inc. and Principal Asset Allocation Fund, Inc. incurred unrealized losses
on investments of $.09 and $.03 per share, respectively, during the initial
interm period. This represented activities of each fund prior to the
initial public offering of fund shares.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Effective May 1, 1994, the name of Principal Managed Fund, Inc. was changed
to Principal Balanced Fund, Inc.
(e) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(f) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December
10, 1987 through December 17, 1987 was recognized, all of which was
distributed to the Fund's sole stockholder, Principal Mutual Life Insurance
Company. This represented activity of the fund prior to the initial
offering of shares to eligible purchasers.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
___________________________________ ____________________________________________________
Net Realized
and
Net Asset Unrealized Total Dividends Excess
Value at Net Gain from from Net Distributions Distributions
Beginning Investment (Loss) on Investment Investment from from Total
of Period Income Investments Operations Income Capital Gains Capital Gains Distributions
Principal Emerging Growth
Fund, Inc. (a)
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $25.33 $.22 $5.07 $5.29 $(.22) $(.66) $ -- $ (.88)
1995 19.97 .22 5.57 5.79 (.22) (.21) -- (.43)
1994 20.79 .14 .03 .17 (.14) (.85) -- (.99)
1993 18.91 .17 3.47 3.64 (.17) (1.59) -- (1.76)
Six Months Ended
December 31, 1992(b) 15.97 .10 3.09 3.19 (.21) (.04) -- (.25)
Year Ended June 30,
1992 13.93 .21 2.04 2.25 (.21) -- -- (.21)
1991 14.25 .20 .50 .70 (.23) (.79) -- (1.02)
1990 13.35 .24 .87 1.11 (.20) (.01) -- (.21)
1989 12.85 .16 1.35 1.51 (.11) (.90) -- (1.01)
Period Ended June 30,
1988(e) 10.00 .05 2.83 2.88 (.03) -- -- (.03)
Principal Government
Securities Fund, Inc.
Year Ended December 31,
1996 10.55 .59 (.24) .35 (.59) -- -- (.59)
1995 9.38 .60 1.18 1.78 (.61) -- -- (.61)
1994 10.61 .76 (1.24) (.48) (.75) -- -- (.75)
1993 10.28 .71 .33 1.04 (.71) -- -- (.71)
Six Months Ended
December 31, 1992(b) 10.93 .40 .04 .44 (.78) -- (.31) (1.09)
Year Ended June 30,
1992 10.24 .80 .71 1.51 (.81) -- (.01) (.82)
1991 10.05 .80 .24 1.04 (.81) -- (.04) (.85)
1990 10.05 .78 -- .78 (.78) -- -- (.78)
1989 9.37 .80 .34 1.14 (.46) -- -- (.46)
1988 9.47 .78 (.09) .69 (.79) -- -- (.79)
Period Ended June 30,
1987(f) 10.00 .18 (.59) (.41) (.12) -- -- (.12)
Principal Growth Fund, Inc.
Year Ended December 31,
1996 12.43 .16 1.39 1.55 (.16) (.03) -- (.19)
1995 10.10 .17 2.42 2.59 (.17) -- (.09) (.26)
Period Ended December 31,
1994(g) 9.60 .07 .51 .58 (.08) -- -- (.08)
Principal Money Market
Fund, Inc.
Year Ended December 31,
1996 1.000 .049 -- .049 (.049) -- -- (.049)
1995 1.000 .054 -- .054 (.054) -- -- (.054)
1994 1.000 .037 -- .037 (.037) -- -- (.037)
1993 1.000 .027 -- .027 (.027) -- -- (.027)
Six Months Ended
December 31, 1992(b) 1.000 .016 -- .016 (.016) -- -- (.016)
Year Ended June 30,
1992 1.000 .046 -- .046 (.046) -- -- (.046)
1991 1.000 .070 -- .070 (.070) -- -- (.070)
1990 1.000 .077 -- .077 (.077) -- -- (.077)
1989 1.000 .083 -- .083 (.083) -- -- (.083)
1988 1.000 .064 -- .064 (.064) -- -- (.064)
1987 1.000 .057 -- .057 (.057) -- -- (.057)
Principal World Fund, Inc.
Year Ended December 31,
1996 10.72 .22 2.46 2.68 (.22) (.16) -- (.38)
1995 9.56 .19 1.16 1.35 (.18) -- (.01) (.19)
Period Ended December 31,
1994(g) 9.94 .03 (.33) (.30) (.05) (.02) (.01) (.08)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
______________________________________________________
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
Principal Emerging Growth
Fund, Inc. (a)
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $29.74 21.11% $137,161 .66% 1.07% 8.8% $.0379
1995 25.33 29.01% 58,520 .70% 1.23% 13.1% N/A
1994 19.97 .78% 23,912 .74% 1.15% 12.0% N/A
1993 20.79 19.28% 12,188 .78% .89% 22.4% N/A
Six Months Ended
December 31, 1992(b) 18.91 20.12%(c) 9,693 .81%(d) 1.24%(d) 8.6%(d) N/A
Year Ended June 30,
1992 15.97 16.19% 7,829 .82% 1.33% 10.1% N/A
1991 13.93 5.72% 6,579 .89% 1.70% 11.1% N/A
1990 14.25 8.32% 6,067 .88% 1.74% 17.9% N/A
1989 13.35 13.08% 5,509 .90% 1.31% 21.4% N/A
Period Ended June 30,
1988(e) 12.85 28.72%(c) 4,857 .94%(d) .64%(d) 4.6%(d) N/A
Principal Government
Securities Fund, Inc.
Year Ended December 31,
1996 10.31 3.35% 85,100 .52% 6.46% 8.4% N/A
1995 10.55 19.07% 50,079 .55% 6.73% 9.8% N/A
1994 9.38 (4.53)% 36,121 .56% 7.05% 23.2% N/A
1993 10.61 10.07% 36,659 .55% 7.07% 20.4% N/A
Six Months Ended
December 31, 1992(b) 10.28 4.10%(c) 31,760 .59%(d) 7.35%(d) 34.5%(d) N/A
Year Ended June 30,
1992 10.93 15.34% 33,022 .58% 7.84% 38.9% N/A
1991 10.24 10.94% 26,021 .59% 8.31% 4.2% N/A
1990 10.05 8.16% 21,488 .61% 8.48% 18.7% N/A
1989 10.05 12.61% 15,890 .63% 8.68% 3.7% N/A
1988 9.37 7.69% 12,902 .66% 8.47% 2.7% N/A
Period Ended June 30,
1987(f) 9.47 (.94)%(c) 10,778 .64%(d) 8.50%(d) 0.2%(d) N/A
Principal Growth Fund, Inc.
Year Ended December 31,
1996 13.79 12.51% 99,612 .52% 1.61% 2.0% .0401
1995 12.43 25.62% 42,708 .58% 2.08% 6.9% N/A
Period Ended December 31,
1994(g) 10.10 5.42%(c) 13,086 .75%(d) 2.39%(d) 0.9%(d) N/A
Principal Money Market
Fund, Inc.
Year Ended December 31,
1996 1.000 5.07% 46,244 .56% 5.00% N/A N/A
1995 1.000 5.59% 32,670 .58% 5.32% N/A N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A N/A
Six Months Ended
December 31, 1992(b) 1.000 1.54%(c) 27,680 .59%(d) 3.10%(d) N/A N/A
Year Ended June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A N/A
Principal World Fund, Inc.
Year Ended December 31,
1996 13.02 25.09% 71,682 .90% 2.28% 12.5% .0120
1995 10.72 14.17% 30,566 .95% 2.26% 15.6% N/A
Period Ended December 31,
1994(g) 9.56 (3.37)%(c) 13,746 1.24%(d) 1.31%(d) 14.4%(d) N/A
</TABLE>
Notes to financial highlights
(a) Effective May 1, 1992, the name of Principal Aggressive Growth Fund, Inc.
was changed to Principal Emerging Growth Fund, Inc.
(b) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(c) Total return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December
10, 1987 through December 17, 1987 was recognized, all of which was
distributed to the Fund's sole stockholder, Principal Mutual Life Insurance
Company. This represented activity of the fund prior to the initial
offering of shares to eligible purchasers.
(f) Period from April 9, 1987, date shares first offered to the public, through
June 30, 1987. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on October 31, 1987 through
December 17, 1987 was recognized, all of which was distributed to the
Fund's sole stockholder, Principal Mutual Life Insurance Company. This
represented activity of the Fund prior to the initial offering of shares to
eligible purchasers.
(g) Period from May 1, 1994, date shares first offered to the public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Growth Fund, Inc. and $.04 per share for Principal World Fund,
Inc. for the period from the initial purchase of shares on March 23, 1994
through April 30, 1994, was recognized, none of which was distributed to
the sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, Principal Growth Fund, Inc. and Principal World Fund,
Inc. incurred unrealized losses on investments of $.41 and $.10 per share,
respectively, during the initial interim period. This represented
activities of each fund prior to the initial public offering of fund
shares.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Fund are described below.
There can be no assurance that the objectives of the Funds will be realized.
GROWTH-ORIENTED FUNDS
The Principal Funds currently include five Funds which seek capital
appreciation through investments in equity securities (Principal Aggressive
Growth Fund, Principal Capital Accumulation Fund, Principal Emerging Growth
Fund, Principal Growth Fund and Principal World Fund) and two Funds which seek a
total investment return including both capital appreciation and income through
investments in equity and debt securities (Principal Asset Allocation Fund and
Principal Balanced Fund). These seven Funds are collectively referred to as the
Growth-Oriented Funds.
The Growth-Oriented Funds may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and American Depositary Receipts based
on any of the foregoing securities. The Aggressive Growth, Capital Accumulation,
Emerging Growth, Growth and World Funds will seek to be fully invested under
normal conditions in equity securities. When, in the opinion of the Manager or
Sub-Advisor, current market or economic conditions warrant, a Growth-Oriented
Fund may for temporary defensive purposes place all or a portion of its assets
in cash, on which the Fund would earn no income, cash equivalents, bank
certificates of deposit, bankers acceptances, repurchase agreements, commercial
paper, commercial paper master notes which are floating rate debt instruments
without a fixed maturity, United States Government securities, and preferred
stocks and debt securities, whether or not convertible into or carrying rights
for common stock. A Growth-Oriented Fund may also maintain reasonable amounts in
cash or short-term debt securities for daily cash management purposes or pending
selection of particular long-term investments.
Principal Aggressive Growth Fund
The Aggressive Growth Fund's investment objective is to provide long-term
capital appreciation by investing primarily in growth-oriented common stocks of
medium and large capitalization U.S. corporations and, to a limited extent,
foreign corporations. Common stocks for this purpose include common stocks and
equivalents, such as securities convertible into common stocks and securities
having common stock characteristics, such as rights and warrants to purchase
common stocks. Under normal circumstances, the Fund will invest at least 65% of
the value of its total assets in common stocks.
The Fund employs a flexible and eclectic investment process in pursuit of
its investment objective. In selecting stocks for the Fund, the Sub-Advisor,
MSAM, concentrates on a universe of rapidly growing, high quality companies and
lower but accelerating earnings growth situations. The Sub-Advisor's universe of
potential investments generally comprises companies with market capitalizations
of $750 million or more and is not restricted to specific market sectors. The
Sub-Advisor uses its research capabilities, analytical resources and judgment to
assess economic, industry and market trends, as well as individual company
developments, to select promising growth investments for the Fund. The
Sub-Advisor concentrates on companies with strong, communicative managements and
clearly defined strategies for growth. In addition, the Sub-Advisor rigorously
assesses company developments, including changes in strategic direction,
management focus and current and likely future earnings results. Valuation is
important to the Sub-Advisor but is viewed in the context of prospects for
sustainable earnings growth and the potential for positive earnings surprises
vis-a-vis consensus expectations. The Fund is free to invest in any common stock
which in the Sub-Advisor's judgment provides above average potential for capital
appreciation.
In selecting investments for the Fund, the Sub-Advisor emphasizes
individual security selection. The Fund's investments will generally be
diversified by industry but concentrated sector positions may result from the
investment process. The Fund has a long-term investment perspective; however,
the Sub-Advisor may take advantage of short-term opportunities that are
consistent with its objective by selling recently purchased securities which
have increased in value.
The Fund may invest in common stock and convertible securities of domestic
and foreign corporations. However, the Fund does not expect to invest more than
25% of its total assets at the time of purchase in securities of foreign
companies. The Fund may invest in securities of foreign issuers directly or in
the form of Depositary Receipts. The Fundmay enter into forward foreign currency
exchange contracts which provide for the purchase or sale of foreign currencies
in connection with the settlement of foreign securities transactions or to hedge
the underlying currency exposure related to foreign investments. The Fund will
not enter into these commitments for speculative purposes. Investors should
recognize that investing in foreign companies involves certain special
considerations which are not typically associated with investing in U.S.
companies. See "Foreign Securities" and "Currency Contracts."
The Fund may invest in convertible securities of domestic and, subject to
the above restrictions, foreign issuers on occasions when, due to market
conditions, it is more advantageous to purchase such securities than common
stock. Convertible securities entitle the holder to exchange the securities for
a specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time and to receive interest or
dividends until the holder elects to exercise the conversion privilege. Since
the Fund invests in both common stocks and convertible securities, the risks of
investing in the general equity markets may be tempered to a degree by the
Fund's investments in convertible securities which are often not as volatile as
equity securities.
Principal Asset Allocation Fund
The Asset Allocation Fund seeks to generate a total investment return
consistent with preservation of capital. In seeking to achieve its objective,
the Fund intends to pursue a flexible investment policy by investing primarily
in the common stock and other securities having common stock characteristics of
large and small domestic or foreign companies that appear to be undervalued
relative to their earnings results or potential, or whose earnings growth
prospects appear to be more attractive than the economy as a whole, and domestic
or foreign fixed-income securities, including high yield securities when, in the
judgement of the Sub-Advisor, MSAM, it is appropriate to do so.
The securities in which the Fund invests will be identified as belonging to
an "asset class." Asset classes may include, but are not limited to, small
capitalization (companies whose market value is less than $1 billion) value
stocks, large capitalization (companies with a market value in excess of $1
billion) value stocks, small capitalization growth stocks, large capitalization
growth stocks, common stocks of foreign corporations, domestic fixed-income
securities, domestic high yield fixed-income securities, foreign fixed-income
securities, and money market instruments (debt securities maturing in one year
or less). "Value" stocks are generally defined as companies with distinctly
below average stock price to earnings ratios and stock price to book value
ratios, and higher than average dividend yields. "Growth" stocks are generally
defined as those companies whose earnings are expected to grow more rapidly than
the economy as a whole.
The allocation among asset classes is designed to lessen overall investment
risk through participation in a variety of types of investments in several
markets. Reallocation among asset classes, or the elimination of an asset class
for a period of time, will occur when in the Sub-Advisor's judgement such shift
offers the investor better prospects of achieving the overall investment
objective of the Fund. Under normal conditions, abrupt shifts among asset
classes will not occur and it is not the policy of the Sub-Advisor to attempt
market timing. The Sub-Advisor does not undertake to maintain a specific portion
of the Fund in any asset class, but expects that over time the investment mix
will be within the following ranges: 25% to 75% in equities, 20% to 60% in
fixed-income securities and 0% to 40% in money market instruments. Factors
involved with this decision will depend upon the judgement of the Sub-Advisor as
to general market and economic conditions, trends and investment yields and
interest rates and changes in fiscal or monetary policies. The Sub-Advisor will
seek to minimize declines in the net asset value per share; however, there is no
guarantee this goal can be achieved.
The Fund may invest in all types of common stocks and other equities and
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Fund may invest in both
exchange listed and over-the-counter securities, including American Depositary
Receipts ("ADRs") and closed end mutual funds. The Fund's investments in
corporate bonds and debentures and money market instruments are not restricted
by credit ratings or other objective investment criteria, except with respect to
bank certificates of deposit as set forth below. See "Below-Investment Grade
Bonds" for a discussion of the risks associated with these securities. Normally,
investments in below investment grade bonds are not expected to exceed 20% of
Fund assets. Securities purchases may be either U.S. dollar or Non-U.S. dollar
denominated.
To achieve its investment objective, the Fund may at times emphasize the
generation of interest income by investing in short, medium or long-term
fixed-income securities. Investment in those securities may also be made with a
view to realizing capital appreciation when the Sub-Advisor believes that
declining interest rates may increase market values.
Money market instruments in which the Fund may invest may include U.S.
Treasury bills, bank certificates of deposit, bankers acceptances, repurchase
agreements, commercial paper and commercial paper master notes which are
floating rate debt instruments without a fixed maturity, and non-U.S. dollar
denominated money market instruments. The Fund will only invest in domestic bank
certificates of deposit issued by banks which are members of the Federal Reserve
System that have total deposits in excess of $1 billion.
The Fund may invest in U.S. government securities including U.S. Treasury
obligations and obligations of certain agencies such as the Government National
Mortgage Association which are supported by the full faith and credit of the
United States, as well as obligations of certain other federal agencies or
instrumentalities which are backed only by the right of the issuer to borrow
limited funds from the U.S. Treasury, by the discretionary authority of the U.S.
government to purchase such obligations or by the credit of the agency or
instrumentality itself.
Principal Balanced Fund
The investment objective of Principal Balanced Fund is to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of the investment objective. The term
"reasonable risks" refers to investment decisions that in the judgment of the
Sub-Advisor, Invista, do not present a greater than normal risk of loss in light
of current or anticipated future market and economic conditions, trends in
yields and interest rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Fund invests primarily
in growth and income-oriented common stocks (including securities convertible
into common stocks), corporate bonds and debentures and short-term money market
instruments. The Fund may also invest in other equity securities, and in debt
securities issued or guaranteed by the United States Government and its agencies
or instrumentalities. The Fund seeks to generate real (inflation plus) growth
during favorable investment periods and may emphasize income and capital
preservation strategies during uncertain investment periods. The Sub-Advisor
will seek to minimize declines in the net asset value per share. However, there
is no guarantee that the Sub-Advisor will be successful in achieving this goal.
The portions of the Fund's total assets invested in equity securities, debt
securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Fund's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Sub-Advisor as to general market and economic conditions, trends in investment
yields and interest rates and changes in fiscal or monetary policies.
The Fund may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Fund may invest in both
exchange-listed and over-the-counter securities, in small or large companies,
and in well-established or unseasoned companies. Also, the Fund's investments in
corporate bonds and debentures and money market instruments are not restricted
by credit ratings or other objective investment criteria, except with respect to
bank certificates of deposit as set forth below. Some of the fixed income
securities in which the Fund may invest may be considered to include speculative
characteristics and the Fund may purchase such securities that are in default
but does not currently intend to invest more than 5% of its assets in securities
rated below BBB by Standard & Poor's or Baa by Moody's. See "Below
Investment-Grade Bonds" for a discussion of the risks associated with these
securities. The rating services' descriptions of BBB or Baa securities are as
follows: Moody's Investors Service, Inc. Bond Ratings -- Baa: Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories. The Fund will not concentrate its
investments in any industry.
In selecting common stocks, the Sub-Advisor seeks companies which it
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Sub-Advisor determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Sub-Advisor may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Fund may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Fund may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The short-term money market investments in which the Fund may invest
include the following: U.S. Treasury bills, bank certificates of deposit,
bankers' acceptances, repurchase agreements, commercial paper and commercial
paper master notes which are floating rate debt instruments without a fixed
maturity. The Fund will only invest in domestic bank certificates of deposit
issued by banks which are members of the Federal Reserve System that have total
deposits in excess of $1 billion.
The United States government securities in which the Fund may invest
include U.S. Treasury obligations and obligations of certain agencies, such as
the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Principal Capital Accumulation Fund
The primary objective of Principal Capital Accumulation Fund is long-term
capital appreciation. A secondary objective is growth of investment income.
The Fund will invest primarily in common stocks, but it may invest in other
securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. In pursuit of the
Fund's investment objectives, investments will be made in securities which as a
group appear to offer long-term prospects for capital and income growth.
Securities chosen for investment may include those of companies which the
Manager believes can reasonably be expected to share in the growth of the
nation's economy over the long term.
Principal Emerging Growth Fund
The objective of Principal Emerging Growth Fund is to achieve capital
appreciation. The strategy of this Fund is to invest primarily in the common
stocks and securities (both debt and preferred stock) convertible into common
stocks of emerging and other growth-oriented companies that, in the judgment of
the Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the Emerging Growth Fund may invest, for any period of
time, in any industry, in any kind of growth-oriented company, whether new and
unseasoned or well known and established.
There can be, of course, no assurance that the Fund will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Fund invests, the Fund believes that its shares are
suitable only for persons who are prepared to experience above-average
fluctuations in net asset value, to assume above-average investment risk in
search of above-average return, and to consider the Fund as a long-term
investment and not as a vehicle for seeking short-term profits. Moreover, since
the Fund will not be seeking current income, investors should not view a
purchase of Fund shares as a complete investment program.
Principal Growth Fund
The objective of Principal Growth Fund is growth of capital. Realization of
current income will be incidental to the objective of growth of capital.
The Fund will invest primarily in common stocks, but it may invest in other
equity securities. In making selections for the Fund's investment portfolio, the
Sub-Advisor, Invista, will use an approach described broadly as that of
fundamental analysis, which is discussed in the Statement of Additional
Information. In pursuit of the Fund's investment objective, investments will be
made in securities which as a group appear to possess potential for appreciation
in market value. Common stocks chosen for investment may include those of
companies which have a record of sales and earnings growth that exceeds the
growth rate of corporate profits of the S&P 500 or which offer new products or
new services. The policy of investing in securities which have a high potential
for growth of capital can mean that the assets of the Fund may be subject to
greater risk than securities which do not have such potential.
Principal World Fund
The investment objective of Principal World Fund is to seek long-term
growth of capital through investment in a portfolio of equity securities of
companies domiciled in any of the nations of the world. In choosing investments
in equity securities of foreign and United States corporations, the Sub-Advisor,
Invista, intends to pay particular attention to long-term earnings prospects and
the relationship of then-current prices to such prospects. Short-term trading is
not generally intended, but occasional investments may be made for the purpose
of seeking short-term or medium-term gain. The Fund expects its investment
objective to be met over long periods which may include several market cycles.
For a description of certain investment risks associated with foreign
securities, see "Foreign Securities."
For temporary defensive purposes, the World Fund may invest in the same
kinds of securities as the other Growth-Oriented Funds whether issued by
domestic or foreign corporations, governments, or governmental agencies,
instrumentalities or political subdivisions and whether denominated in United
States dollars or some other currency.
The Fund intends that its investments normally will be allocated among
various countries. Although there is no limitation on the percentage of assets
that may be invested in any one country or denominated in any one currency, the
Fund intends under normal market conditions to have at least 65% of its assets
invested in securities issued by corporations of at least five countries, one of
which may be the United States. Investments may be made anywhere in the world,
but it is expected that primary consideration will be given to investing in the
securities issued by corporations of Western Europe, North America and
Australasia (Australia, Japan and Far East Asia) that have developed economies.
Changes in investments may be made as prospects change for particular countries,
industries or companies.
The Fund may invest in the securities of other investment companies but may
not invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities of any one
investment company, or acquire more than 3% of the outstanding voting securities
of any one investment company except in connection with a merger, consolidation
or plan of reorganization. The Fund's Manager will waive its management fee on
the Fund's assets invested in securities of other open-end investment companies.
The Fund will generally invest only in those investment companies that have
investment policies requiring investment in securities comparable in quality to
those in which the Fund invests.
INCOME-ORIENTED FUNDS
The Principal Funds currently include two Funds which seek a high level of
income through investments in fixed-income securities (Principal Bond Fund and
Principal Government Securities Fund) collectively referred to as the
"Income-Oriented Funds." An investment in either of the Income-Oriented Funds
involves market risks associated with movements in interest rates. The market
value of the Funds' investments will fluctuate in response to changes in
interest rates and other factors. During periods of falling interest rates, the
values of outstanding long-term fixed-income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. Changes by recognized rating agencies in their
ratings of any fixed-income security and in the ability of an issuer to make
payments of interest and principal may also affect the value of these
investments. Changes in the value of portfolio securities will affect the Funds'
net asset values but will not affect cash income derived from the securities
unless a change results from a failure of an issuer to pay interest or principal
when due. Each Fund's rating limitations apply at the time of acquisition of a
security, and any subsequent change in a rating by a rating service will not
require elimination of a security from the Fund's portfolio. The Statement of
Additional Information contains descriptions of ratings of Moody's Investors
Service, Inc. ("Moody's") and Standard and Poor's Corporation ("S&P").
Principal Bond Fund
The investment objective of Principal Bond Fund is to provide as high a
level of income as is consistent with preservation of capital and prudent
investment risk.
In seeking to achieve the investment objective, the Fund will predominantly
invest in marketable fixed-income securities. Investments will be made generally
on a long-term basis, but the Fund may make short-term investments from time to
time as deemed prudent by the Manager. Longer maturities typically provide
better yields but will subject the Fund to a greater possibility of substantial
changes in the values of its portfolio securities as interest rates change.
Under normal circumstances, the Fund will invest at least 65% of its
assets, exclusive of cash items, in one or more of the following kinds of
securities: (i) corporate debt securities and taxable municipal obligations,
which at the time of purchase have an investment grade rating within the four
highest grades used by Standard & Poor's Corporation (AAA, AA, A or BBB) or by
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa) or which, if lower-rated or
nonrated, are comparable in quality in the opinion of the Fund's Manager; (ii)
similar Canadian corporate, Provincial and Federal Government securities payable
in U.S. funds; and (iii) securities issued or guaranteed by the United States
Government or its agencies or instrumentalities. The balance of the Fund's
assets may be invested in other fixed income securities, including domestic and
foreign corporate debt securities or preferred stocks, in common stocks that
provide returns that compare favorably with the yields on fixed income
investments, and in common stocks acquired upon conversion of debt securities or
preferred stocks or upon exercise of warrants acquired with debt securities or
otherwise and foreign government securities. The debt securities and preferred
stocks in which the Fund invests may be convertible or nonconvertible. The Fund
does not intend to purchase debt securities rated lower than Ba3 by Moody's or
BB - by S & P (bonds which are judged to have speculative elements; their future
cannot be considered as well-assured). See "Below Investment-Grade Bonds" for a
discussion of the risks associated with these securities. The rating services'
descriptions of BBB or Baa securities are as follows: Moody's Investors Service,
Inc. Bond Ratings -- Baa: Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. Standard &
Poor's Corporation Bond Ratings -- BBB: Debt rated "BBB" is regarded as having
an adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher-rated
categories.
During the year ended December 31, 1996, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Aaa .18%
Aa .81%
A 24.05%
Baa 68.04%
Ba 6.92%
* The above percentages for A rated securities include .57% respectively,
unrated securities which have been determined by the Manager to be of comparable
quality.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by Standard & Poor's or P-1 or P-2 by Moody's,
unrated commercial paper issued by corporations with outstanding debt securities
rated in the four highest grades by Standard & Poor's and Moody's and bank
certificates of deposit and bankers' acceptances issued or guaranteed by
national or state banks and repurchase agreements considered by the Fund to have
investment quality. Under unusual market or economic conditions, the Fund may
for temporary defense purposes invest up to 100% of its assets in cash or cash
equivalents.
Principal Government Securities Fund
The objective of Principal Government Securities Fund is a high level of
current income, liquidity and safety of principal.
The Fund will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities include
Government National Mortgage Association ("GNMA") Certificates of the modified
pass-through type, Federal National Mortgage Association ("FNMA") Obligations,
Federal Home Loan Mortgage Corporation ("FHLMC") Certificates and Student Loan
Marketing Association ("SLMA") Certificates and other U.S. Government
Securities. GNMA is a wholly-owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned
corporation, FHLMC, a federal corporation, and SLMA, a government sponsored
stockholder-owned organization, are instrumentalities of the United States. The
securities and guarantees of FNMA, FHLMC and SLMA are not backed, directly or
indirectly, by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Fund may maintain reasonable
amounts of cash or short-term debt securities for daily cash management purposes
or pending selection of particular long-term investments.
Depending on market conditions, up to 55% of the assets may be invested in
GNMA Certificates. GNMA is a United States Government corporation within the
Department of Housing and Urban Development. GNMA Certificates are
mortgage-backed securities representing an interest in a pool of mortgage loans.
Such loans are made by lenders such as mortgage bankers, insurance companies,
commercial banks and savings and loan associations. Then, they are either
insured by the Federal Housing Administration (FHA) or they are guaranteed by
the Veterans Administration (VA) or Farmers Home Administration (FmHA). The
lender or other prospective issuer creates a specific pool of such mortgages,
which it submits to GNMA for approval. After approval, a GNMA Certificate is
typically offered by the issuer to investors through securities dealers.
GNMA Certificates differ from bonds in that the principal is scheduled to
be paid back by the borrower on a monthly basis over the life of the loan rather
than returned in a lump sum at maturity. Modified pass-through GNMA
certificates, which are the only kind in which the Fund intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of whether or not the mortgagor has made such payment.
The timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government.
Although the payment of interest and principal is guaranteed, the guarantee
does not extend to the value of a GNMA Certificate or the value of the shares of
the Fund. The market value of a GNMA Certificate typically will fluctuate to
reflect changes in prevailing interest rates. It falls when rates increase (as
does the market value of other debt securities) and it rises when rates decline
(but it may not rise on a comparable basis with other debt securities because of
its prepayment feature), and, therefore, may be more or less than the face
amount of the GNMA Certificate, which reflects the aggregate principal amount of
the underlying mortgages. As a result, the net asset value of Fund shares will
fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Fund at prevailing
interest rates which may be less than the rate on the GNMA Certificate.
Prepayments are likely to increase as the interest rate for new mortgages moves
lower than the rate on the GNMA Certificate. Moreover, if the GNMA Certificate
had been purchased at a premium above principal because its rate exceeded
prevailing rates, the premium is not guaranteed and a decline in value to par
may result in a loss of the premium especially in the event of prepayment.
To the extent deemed appropriate by the Fund's Manager, the Fund intends to
purchase GNMA Certificates directly from Principal Mutual Life Insurance Company
and other issuers as well as from securities dealers. The Fund will purchase
directly from issuers only if it can obtain a price advantage by not paying the
commission or mark-up that would be required if the Certificates were purchased
from a securities dealer. The Securities and Exchange Commission has issued an
order under the Investment Company Act of 1940 that permits the Fund to purchase
GNMA Certificates directly from Principal Mutual Life Insurance Company subject
to certain conditions.
The FNMA and FHLMC securities in which the Fund invests are very similar to
GNMA certificates as described above but are not guaranteed by the full faith
and credit of the United States but rather by the agency itself. FNMA and FHLMC
securities are rated Aaa by Moody's and AAA by Standard & Poor's. These ratings
reflect the status of FNMA and FHLMC as federal agencies as well as the
important role each plays in financing purchases of homes in the U.S.
Student Loan Marketing Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Fund
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by the agency and is traded regularly in denominations similar to
those in which government obligations are traded.
The Fund will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, the Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities for inclusion
in its portfolio in anticipation of a decline in interest rates.
As a hedge against changes in interest rates, the Fund may enter into
contracts with dealers in GNMA Certificates whereby the Fund agrees to purchase
or sell an agreed-upon principal amount of GNMA Certificates at a specified
price on a certain date. The Fund may enter into similar purchase agreements
with issuers of GNMA Certificates other than Principal Mutual Life Insurance
Company. The Fund may also purchase optional delivery standby commitments which
give the Fund the right to sell particular GNMA Certificates at a specified
price on a specified date. Failure of the other party to such a contract or
commitment to abide by the terms thereof could result in a loss to the Fund. To
the extent the Fund engages in delayed delivery transactions it will do so for
the purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for the purpose of investment leverage or to
speculate on interest rate changes. Liability accrues to the Fund at the time it
becomes obligated to purchase such securities, although delivery and payment
occur at a later date. From the time the Fund becomes obligated to purchase
securities on a delayed delivery basis the Fund has all the rights and risks
attendant to the ownership of a security. At the time the Fund enters into a
binding obligation to purchase such securities, Fund assets of a dollar amount
sufficient to make payment for the securities to be purchased will be
segregated. The availability of liquid assets for this purpose and the effect of
asset segregation on the Fund's ability to meet its current obligations, to
honor requests for redemption and to have its investment portfolio managed
properly will limit the extent to which the Fund may engage in forward
commitment agreements. Except as may be imposed by these factors, there is no
limit on the percent of the Fund's total assets that may be committed to
transactions in such agreements.
MONEY MARKET FUND
The Principal Funds also include a Fund which invests primarily in
short-term securities, Principal Money Market Fund. Securities in which the
Money Market Fund will invest may not yield as high a level of current income as
securities of low quality and longer maturities which generally have less
liquidity, greater market risk and more fluctuation.
The Money Market Fund will limit its portfolio investments to United States
dollar denominated instruments that its board of directors determines present
minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in respect
to a class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security at the time of issuance was a long-term security that has a
remaining maturity of 397 calendar days or less, and whose issuer has
received from a nationally recognized statistical rating organization
a rating, with respect to a class of short-term debt obligations (or
any security within that class) that is now comparable in priority and
security with the security, in one of the two highest rating
categories for short-term debt obligations; or
(3) An unrated security that is of comparable quality to a security
meeting the requirements of (1) or (2) above, as determined by the
board of directors.
The Fund will not invest more than 5% of its total assets in the following
securities:
(1) Securities which, when acquired by the Fund (either initially or upon
any subsequent rollover), are rated below the highest rating category
for short-term debt obligations;
(2) Securities which, at the time of issuance were long-term securities
but when acquired by the Fund have a remaining maturity of 397
calendar days or less, if the issuer of such securities is rated, with
respect to a class of comparable short-term debt obligations, below
the highest rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Fund's board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Fund will
maintain a dollar-weighted average portfolio maturity of 90 days or
less.
The objective of Principal Money Market Fund is to seek as high a level of
current income available from short-term securities as is considered consistent
with preservation of principal and maintenance of liquidity by investing its
assets in a portfolio of money market instruments. These money market
instruments are U.S. Government Securities, U.S. Government Agency Securities,
Bank Obligations, Commercial Paper, Short-term Corporate Debt and Repurchase
Agreements, which are described briefly below and in more detail in the
Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
The Fund intends to hold its investments until maturity, but may on
occasion trade securities to take advantage of market variations. Also, revised
valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at times when such sales might otherwise not be
desirable. The Fund's right to borrow to facilitate redemptions may reduce the
need for such sales. It is the Fund's policy to be as fully invested as
reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the Fund expects
to usually transact purchases and sales of portfolio securities with issuers or
dealers on a net basis, it is not anticipated that the Fund will pay any
significant brokerage commissions. The Fund is free to dispose of portfolio
securities at any time, when changes in circumstances or conditions make such a
move desirable in light of the investment objective.
A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Fund invests. The
rate of return and the net asset value will be affected by such other factors as
sales of portfolio securities prior to maturity and the Fund's operating
expenses.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Funds
may use in an effort to achieve their respective investment objectives.
Diversification
Each Fund is subject to the diversification requirements of Section 817(h)
of the Internal Revenue Code (the "Code") which must be met at the end of each
quarter of the year (or within 30 days thereafter). Regulations issued by the
Secretary of the Treasury have the effect of requiring each Fund to invest no
more than 55% of its total assets in securities of any one issuer, no more than
70% in the securities of any two issuers, no more than 80% in the securities of
any three issuers, and no more than 90% in the securities of any four issuers.
For this purpose, the United States Treasury and each U.S. Government agency and
instrumentality is considered to be a separate issuer. Thus, the Government
Securities Fund intends to invest in U.S. Treasury securities and in securities
issued by at least four U.S. Government agencies or instrumentalities in the
amounts necessary to meet those diversification requirements at the end of each
quarter of the year (or within thirty days thereafter).
In the event any of the Funds do not meet the diversification requirements
of Section 817(h) of the Code, the contracts funded by shares of the Funds will
not be treated as annuities or life insurance for Federal income tax purposes
and the owners of the Funds will be subject to taxation on their share of the
dividends and distributions paid by the Funds.
Foreign Securities
Each of the following Principal Funds has adopted investment restrictions
that limit its investments in foreign securities to the indicated percentage of
its assets: Asset Allocation and World Funds - 100%; Aggressive Growth Fund -
25%; Bond, Capital Accumulation - 20%; Balanced, Emerging Growth and Growth
Funds - 10%. Investment in foreign securities presents certain risks including
those resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. A Fund's investment in foreign securities may also result
in higher custodial costs and the costs associated with currency conversions.
Currency Contracts
The Aggressive Growth, Asset Allocation and World Funds may each enter into
forward currency contracts, currency futures contracts and options thereon and
options on currencies for hedging and other non-speculative purposes. A forward
currency contract involves a privately negotiated obligation to purchase or sell
a specific currency at a future date at a price set at the time of the contract.
The Funds will not enter into a transaction to hedge currency exposure to an
extent greater in effect than the aggregate market value of the securities held
or to be purchased by the Fund that are denominated or generally quoted in or
currently convertible into the currency. When the Fund enters into a contract to
buy or sell a foreign currency, it generally will hold an amount of that
currency, liquid securities denominated in that currency or a forward contract
for such securities equal to the Fund's obligation, or it will segregate liquid
high grade debt obligations equal to the amount of the Fund's obligations. The
use of currency contracts involves many of the same risks as transactions in
futures contracts and options as well as the risk of government action through
exchange controls or otherwise that would restrict the ability of the Fund to
deliver or receive currency.
Repurchase Agreements and Securities Loans
Each of the Funds, except the Capital Accumulation Fund, may enter into
repurchase agreements with, and each of the Funds, except the Capital
Accumulation and Money Market Funds, may lend its portfolio securities to,
unaffiliated broker-dealers and other unaffiliated qualified financial
institutions. These transactions must be fully collateralized at all times, but
involve some credit risk to the Fund if the other party should default on its
obligations, and the Fund is delayed or prevented from recovering on the
collateral. See the Funds' Statement of Additional Information for further
information regarding the credit risks associated with repurchase agreements and
the standards adopted by each Fund's Board of Directors to deal with those
risks. None of the Funds intend either (i) to enter into repurchase agreements
that mature in more than seven days if any such investment, together with any
other illiquid securities held by the Fund, would amount to more than 10% of its
total assets or (ii) to loan securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Funds may enter into forward commitment
agreements which call for the Fund to purchase or sell a security on a future
date and at a price fixed at the time the Fund enters into the agreement. Each
of the Funds may also acquire rights to sell its investments to other parties,
either on demand or at specific intervals.
Warrants
Each of the Funds, except the Money Market and Government Securities Funds,
may invest in warrants up to 5% of its assets, of which not more than 2% may be
invested in warrants that are not listed on the New York or American Stock
Exchange. For the World Fund, the 2% limitation also does not apply to warrants
listed on the Toronto Stock Exchange or the Chicago Board Options Exchange.
Borrowing
As a matter of fundamental policy, each Fund may borrow money only for
temporary or emergency purposes. The Balanced Fund, Bond Fund, Capital
Accumulation Fund and Money Market Fund may borrow only from banks. Further,
each may borrow only in an amount not exceeding 5% of its assets, except the
Capital Accumulation Fund which may borrow only in an amount not exceeding the
lesser of (i) 5% of the value of its assets less liabilities other than such
borrowings, or (ii) 10% of its assets taken at cost at the time the borrowing is
made, and the Money Market Fund which may borrow only in an amount not exceeding
the lesser of (i) 5% of the value of its assets, or (ii) 10% of the value of its
net assets taken at cost at the time the borrowing is made.
Options
The Aggressive Growth Fund, Asset Allocation Fund, Balanced Fund, Bond
Fund, Emerging Growth Fund, Government Securities Fund, Growth Fund and World
Fund may purchase covered spread options, which would give the Fund the right to
sell a security that it owns at a fixed dollar spread or yield spread in
relationship to another security that the Fund does not own, but which is used
as a benchmark. These same Funds may also purchase and sell financial futures
contracts, options on financial futures contracts and options on securities and
securities indices, but will not invest more than 5% of their assets in the
purchase of options on securities, securities indices and financial futures
contracts or in initial margin and premiums on financial futures contracts and
options thereon. The Funds may write options on securities and securities
indices to generate additional revenue and for hedging purposes and may enter
into transactions in financial futures contracts and options on those contracts
for hedging purposes.
Below Investment Grade Bonds
Below investment-grade bonds are securities rated Ba1 or lower by Moody's
Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("S&P") or unrated securities which the Fund's Manager or
Sub-Advisor believes are of comparable quality. These securities are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and to repay principal in accordance with the terms of the
obligation. The Funds, except the Asset Allocation Fund, do not intend to invest
in securities rated lower than Ba3 by Moody's or BB by S&P. The Asset Allocation
Fund does not intend to invest in securities rated below Caa by Moody's and
below CCC by S&P. The Asset Allocation Fund normally will not invest more than
20% of its assets in below investment grade securities. The Bond Fund may not
invest more than 35% of its assets in such securities. The Balanced Fund does
not intend to invest more than 5% of its assets in such securities.
The rating services' descriptions of below investment grade securities
rating categories in which the Funds may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small. Caa:
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the high end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB, B, CCC, CC: Debt rated
"BB", "B", "CCC" and "CC" is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The "BB" rating may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
Below investment-grade securities present special risks to investors. The
market value of lower-rated securities may be more volatile than that of
higher-rated securities and generally tends to reflect the market's perception
of the creditworthiness of the issuer and short-term market developments to a
greater extent than more highly rated securities, which reflect primarily
fluctuations in general levels of interest rates. Periods of economic
uncertainty and change can be expected to result in increased volatility in the
market value of lower-rated securities. Further, such securities may be subject
to greater risks of loss of income and principal, particularly in the event of
adverse economic changes or increased interest rates, because their issuers
generally are not as financially secure or as creditworthy as issuers of
higher-rated securities. Additionally, to the extent that there is not a
national market system for secondary trading of lower-rated securities, there
may be a low volume of trading in such securities which may make it more
difficult to value or sell those securities than higher-rated securities.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield securities,
especially in a thinly traded market.
Investors should recognize that the market for below investment-grade
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the Funds and the ability of the
issuers of the securities held by the Funds to pay principal and interest. A
default by an issuer may result in a Fund incurring additional expenses to seek
recovery of the amounts due it.
Some of the securities in which the Funds invest may contain call
provisions. If the issuer of such a security exercises a call provision in a
declining interest rate market, the Fund would have to replace the security with
a lower-yielding security, resulting in a decreased return for investors.
Further, a higher-yielding security's value will decrease in a rising interest
rate market, which will be reflected in the Fund's net asset value per share.
Congress recently enacted legislation requiring federally-insured savings
and loan associations to divest themselves of investments in high yield
securities. This legislation might increase the supply of securities available
for purchase in the secondary market and, potentially, lower the value of the
securities held by the Funds.
The Statement of Additional Information includes further information
concerning the Funds' investment policies and applicable investment
restrictions. Each Fund's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for a Fund are not fundamental and
may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISORS
The Manager for the Funds is Princor Management Corporation (the
"Manager"), an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the State of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969,
and since that time has managed various mutual funds sponsored by Principal
Mutual Life Insurance Company. As of December 31, 1996, the Manager served as
investment advisor for 26 such funds with assets totaling approximately $4.0
billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced Fund, Growth
Fund and World Fund. The Manager will reimburse Invista for the cost of
providing these services. Invista, an indirectly wholly-owned subsidiary of
Principal Mutual Life Insurance company and an affiliate of the Manager, was
founded in 1985 and manages investments for institutional investors, including
Principal Mutual Life. Assets under management at December 31, 1996 were
approximately $19.6 billion. Invista's address is 1500 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
The Manager has also executed an agreement with Morgan Stanley Asset
Management Inc. ("MSAM") under which MSAM has agreed to assume the obligations
of the Manager to provide investment advisory services for the Aggressive Growth
Fund and Asset Allocation Fund. The Manager pays MSAM a fee for such investment
advisory services. MSAM, with principal offices at 1221 Avenue of the Americas,
New York, NY 10020, provides a broad range of portfolio management services to
customers in the United States and abroad. At December 31, 1996, MSAM managed
investments totaling approximately $72.6 billion, including approximately $54.9
billion under active management and $17.7 billion as Named Fiduciary or
Fiduciary Adviser.
The Manager, Invista, or MSAM has assigned certain individuals the primary
responsibility for the day-to-day management of each Fund's portfolio. The
persons primarily responsible for the day-to-day management of each Fund are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Fund Responsible Since Person Primarily Responsible
___________________ ____________________ ____________________________________________________________________________
<S> <C> <C>
Aggressive Growth May, 1994 Kurt Feuerman (MBA degree, Columbia University; M.A. degree, Syracuse
(Fund's inception) University). Managing Director, Morgan Stanley Asset Management Inc.
and Morgan Stanley & Co. Incorporated.
Asset Allocation May, 1994 Francine J. Bovich (MBA degree, New York University). Principal, Morgan
(Fund's inception) Stanley Asset Management Inc. and Morgan Stanley & Co. Incorporated.
May, 1994 Kurt Feuerman (MBA degree, Columbia University; M.A. degree, Syracuse
(Fund's inception) University). Managing Director, Morgan Stanley Asset Management Inc.
and Morgan Stanley & Co. Incorporated.
April, 1996 Stephen C. Sexauer (MBA degree, University of Chicago). Principal,
Morgan Stanley Asset Management Inc. and Morgan Stanley & Co. Incorporated.
Balanced April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President, Invista
Capital Management, Inc.
Bond November, 1996 Scott A. Bennett, CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company.
Capital Accumulation November, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice
(Fund's inception) President, Invista Capital Management, Inc.; Co-Manager since November,
1996: Catherine A. Green, CFA, (MBA degree, Drake University).
Vice President, Invista Capital Management, Inc.
Emerging Growth December, 1987 Michael R. Hamilton, (BMBA degree, Bellarmine College). Vice President,
and Growth (Fund's inception) Invista Capital Management, Inc.
and May, 1994 (Fund's
inception), respectively
Government Securities April, 1987 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
(Fund's inception) Capital Management, Inc.
World April, 1994 Scott D. Opsal, CFA (MBA degree, University of Minnesota). Executive
Vice President, Invista Capital Management, Inc.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISORS
Under Maryland law, the business and affairs of each of the Funds are
managed under the direction of its Board of Directors. The investment services
and certain other services referred to under the heading "Cost of Manager's
Services" in the Statement of Additional Information are furnished to the Funds
under the terms of a Management Agreement between each of the Funds and the
Manager and, for some of the Funds, a Sub-Advisory Agreement between the Manager
and Invista or the Manager and MSAM. The Manager, Invista, or MSAM, advises the
Funds on investment policies and on the composition of the Funds' portfolios. In
this connection, the Manager, or Sub-Advisor, furnishes to the Board of
Directors of each Fund a recommended investment program consistent with that
Fund's investment objective and policies. The Manager, or Sub-Advisor, is
authorized, within the scope of the approved investment program, to determine
which securities are to be bought or sold, and in what amounts.
The compensation paid by each Fund to the Manager for the fiscal year ended
December 31, 1996 was, on an annual basis, equal to the following percentage of
average net assets:
Total
Manager's Annualized
Fund Fee Expenses
- ----------------------------------------------------------------------
Aggressive Growth Fund .80% .85%
Asset Allocation Fund .80% .87%
Balanced Fund .60% .63%
Bond Fund .50% .53%
Capital Accumulation Fund .48% .49%
Emerging Growth Fund .64% .66%
Government Securities Fund .50% .52%
Growth Fund .50% .52%
Money Market Fund .50% .56%
World Fund .75% .90%
The compensation being paid by the Aggressive Growth Fund, Asset Allocation
Fund and World Fund for investment management services is higher than that paid
by most funds to their advisor, but it is not higher than the fees paid by many
funds with similar investment objectives and policies.
The Manager and Sub-Advisors may purchase at their own expense statistical
and other information or services from outside sources, including Principal
Mutual Life Insurance Company. An Investment Service Agreement between the
Manager, Principal Mutual Life Insurance Company and each Fund, except the
Aggressive Growth Fund and Asset Allocation Fund, provides that Principal Mutual
Life Insurance Company will furnish certain personnel, services and facilities
required by the Manager in connection with its performance of the Management
Agreements, and that the Manager will reimburse Principal Mutual Life Insurance
Company for its costs incurred in this regard. The Investment Service Agreements
for the Capital Accumulation, Emerging Growth and Government Securities Funds
also include as a party Invista Capital Management, Inc., an indirectly
wholly-owned subsidiary of Principal Mutual Life Insurance Company, and also
provide that the subsidiaries of Principal Mutual Life Insurance Company will
furnish the same items and be reimbursed by the Manager for their costs incurred
in this regard.
The Funds may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc., a broker-dealer that is an affiliate of the Distributor and
Manager for each of the Funds. The Fund may also execute transactions for
portfolio securities through Morgan Stanley & Co. Incorporated, an affiliate of
Morgan Stanley Asset Management Inc.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company.
MANAGERS' COMMENTS
Princor Management Corporation, Invista and MSAM are staffed with
investment professionals who manage each individual fund. Comments by these
individuals in the following paragraphs summarize in capsule form the general
strategy and recent results of each fund over the past year. The accompanying
charts display results for the past 10 years or the life of the fund, whichever
is shorter. Average Annual Total Return figures provided for each fund in the
graphs below reflect all expenses of the fund and assume all distributions are
reinvested at net asset value. The figures do not reflect expenses of the
variable life insurance contracts or variable annuity contracts that purchase
fund shares; performance figures for the divisions of the contracts would be
lower than performance figures for the funds due to the additional contract
expenses. Past performance is not predictive of future performance. Returns and
net asset values fluctuate. Shares are redeemable at current net asset value,
which may be more or less than original cost.
The various indices included in the following graphs are unmanaged and do
not reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.
Growth-Oriented Funds
Principal Aggressive Growth Fund
(Kurt Feuerman)
Since it first became available on June 1, 1994, the Principal Aggressive
Growth Fund has generated an annualized return of 28.05% versus 23.63% for the
S&P 500 and 19.18% for the Lipper Growth Fund Average. In 1996 the Fund returned
28.05% versus 22.96% for the S&P 500 and 19.24% for the Lipper Growth Fund
Average.
For the third consecutive year, substantial overweighting of the portfolio
in the tobacco sector contributed positively to relative performance. After a
market-smashing total return of 62% in 1995 (including dividends), Philip Morris
stock surged late in 1996 for a full-year total return of 25%. Philip Morris was
the largest single holding in the portfolio throughout most of 1995 and 1996.
At year-end 1996, Philip Morris stock at $113 represented about 5% of the
Fund's portfolio. Philip Morris as well as other positions in RJR Nabisco, Loews
and Consolidated Cigar as a group will clearly be subject to bouts of selling
pressure since the industry is under attack from a number of directions.
However, tobacco stocks are in the midst of a multi-year trend of upward
revaluation. Combined with strong underlying growth fundamentals, this creates a
powerful investment opportunity which many investors are missing.
Entering into 1997, the S&P 500 Index has outperformed the vast majority of
active managers for three consecutive years. Also, the Index has outpaced the
earnings growth of the underlying companies. One could argue that there are many
positive factors driving the U.S. markets higher and that these factors could
persist; stable interest rates, solid economic growth without inflationary
pressures, the opening up of emerging markets, the acceptance of shareholder
value as the key motivator of corporate managements, and the huge cash flow
coming into stocks supported by powerful demographic trends.
Still, there is no doubt that many large cap, "blue chip," stocks have
outperformed their own businesses. General Electric, for example, rose 40% in
1996 while earnings per share grew about 15%. Another example would be Merck, a
stock up 77% in 1995 and 24% in 1996, with earnings in those two years up only
12% and 20%, respectively.
Morgan Stanley's estimate is that active managers will have an easier time
beating the Index this year. This will be more likely to occur if smaller
company stocks do well. While large cap managers continue to feel comfortable
with many large cap names, at the margin there are opportunities in secondary
stocks, especially high beta growth issues that have missed the recent market
move, but where company fundamentals are intact.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year Since Inception Date 6/1/94 10 Year
28.05% 28.05% --
Comparison of Change in Value of $10,000 Investment in the
Aggressive Growth Fund, S&P 500 and Lipper Growth Fund Average
--------------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Growth
December 31, Return Index Average
10,000 10,000 10,000
1994 10,259 10,230 10,055
1995 14,793 14,069 13,151
1996 18,942 17,297 15,681
Note: Past performance is not predictive of future performance.
Principal Asset Allocation Fund
(Francine J. Bovich)
In a volatile year for financial assets, the U.S. stock market continued
its strong performance (+23.2%) but ranked 11th in global markets beaten by
fully half of the international markets (in U.S. dollars), notably Spain
(+40.1%), Sweden (+37.2%) and Hong Kong (+33.1%). Markets were boosted by
abundant liquidity provided through loose monetary policy, moderate economic
growth and a benign inflation environment.
Bond markets in local currency also had a good year with returns ranging
from 5.9% in Japan to 24.2% in Italy. In the U.S., mixed economic data and
expectations of monetary tightening drove bond prices down well into the third
quarter until the Federal reserve announced that interest rates would remain
unchanged. In contrast, the European bond markets rallied throughout the year
driven by monetary easing from the core European central banks, weakening
currencies, optimism surrounding the prospects of the European Monetary Union,
and improving inflation data. Japanese bond yields fell to all-time lows on the
prospect of substantial fiscal tightening in 1997, the fragility of some
financial institutions, and doubts about the strength of the economic recovery.
Against a declining interest rate backdrop, high yielding debt rallied as
investors clamored for yield.
Throughout the year, we maintained our diversified investment policy. At
year-end 1996, the Fund was invested: 32% domestic stocks, 26% international
stocks, 20% U.S. domestic bonds, 9% domestic high yield bonds, 11% real estate
investment trusts ("REITs"), and 2% short-term investments. For 1996, the Fund
continued its positive performance gaining 12.9% relative to the Lipper Flexible
Portfolio Fund average gain of 13.6%.
Within domestic stocks, commitments to large cap growth companies and REITs
significantly enhanced returns. In the growth segment, overweight commitments to
consumer cyclicals, consumer staples and financial sectors were the primary
contributors to positive results. Our REIT portfolio benefited from an overall
positive backdrop and selected commitments to the office, industrial, and hotel
sectors. In addition, we allocated a portion of the portfolio to "California
Recovery" companies which performed well.
In aggregate, the international stock results lagged the S&P 500 primarily
due to the performance of Japan. Japanese stocks declined -15.5% based on the
same concerns that drove bond yields to historic lows. In contrast, European
stocks were a brighter spot thanks to the continuing efforts of most continental
governments to achieve the Maastricht criteria. Asian market returns were led by
Hong Kong, which benefited from lessened political fears and an improved
economic outlook. Latin America enjoyed stellar performance throughout the year
and was a primary contributor to the international ADR's outperformance (+11.3%)
relative to the EAFE benchmark gain of 6.1%. The economic recovery that began in
1995 and continued throughout 1996 attracted renewed capital flows to the region
and the Fund benefited from overweight positions in Brazil and Mexico.
Over the near term, we expect the U.S. market to be driven higher by the
continuation of the positive capital market trends experienced in 1996. However,
U.S. stocks are not cheap, the market cycle is very long in the tooth, and is
vulnerable to strong economic data and/or an untoward event. International
stocks have benefited from many of the same factors which propelled the U.S.
markets, but on a relative basis to the U.S., valuations are not as high. In
addition, prospects for further declines in interest rates and improved economic
and earnings growth in Asia, Latin America and Europe remain probable, albeit on
a lagged basis.
After a year of declining global interest rates, we expect increased
volatility as investors analyze every data point to detect a policy change. Fed
watchers will be particularly active given Mr. Greenspan's concern about
"irrational exuberance." We begin the year overweighted to yield sectors and
believe that a higher income strategy will serve to moderate price volatility.
Total Returns *
As of December 31, 1996
---------------------------------------------------------
1 Year Since Inception Date 6/1/94 10 Year
12.92% 12.95% --
Comparison of Change in Value of $10,000 Investment in the Asset
Allocation Fund, S&P 500 and Lipper Flexible Portfolio Fund Average
------------------------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Flexible Portfolio
December 31, Return Index Index
10,000 10,000 10,000
1994 10,052 10,230 10,008
1995 12,128 14,069 12,518
1996 13,696 17,297 14,220
Note: Past performance is not predictive of future performance.
Principal Balanced Fund
(Judith A. Vogel)
This balanced portfolio combines stocks, bonds and cash in a relatively
conservative mix which seeks to provide both capital appreciation and income to
the shareholder without taking on undue risk. The asset allocation of the Fund
generally approximates 60% stocks and 40% bonds. In the year ended December 31,
1996 the stock market produced exceptional results. Aided by a healthy economy,
continued corporate profit growth, and a good dose of investor enthusiasm, the
S&P 500 Stock Index advanced nearly 23%. Conditions in the bond market were less
supportive over the year. Long-term interest rates rose 0.70% in 1996, with a
lot of volatility along the way, causing the bond returns to hover between zero
and 3% for the year. Demonstrating its balanced nature, the Fund produced a 13%
annual return, about midway between stock and bond market results and very near
the Lipper Balanced Fund Average. The bond portion of the Fund's portfolio is
comprised of U.S. Government notes and bonds with an emphasis on safety of
principal. The stock portion of the portfolio is concentrated in companies with
stable or growing earnings that are not terribly sensitive to economic activity.
After six years of economic expansion resulting in high rates of resource
utilization, corporate profit growth is likely to come down, causing a scarcity
of earnings growth. Companies that can continue to grow earnings will be
afforded premium valuations. There is no independent market index against which
to measure returns of balanced portfolios, however, we show the S&P 500 Stock
Index for your information.
Total Returns *
As of December 31, 1996
---------------------------------------------------
Since Inception
1 Year 5 Year Date 12/18/87
13.13% 11.57% 12.16%
Comparison of Change in Value of $10,000 Investment in the
Balanced Fund, S&P 500 and Lipper Balanced Fund Average
----------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Mid Cap
December 31, Return Index Index
10,000 10,000 10,000
1988 11,637 11,661 11,229
1989 12,982 15,356 13,429
1990 12,147 14,877 13,355
1991 16,321 19,412 16,930
1992 18,410 20,891 18,122
1993 20,447 22,992 20,066
1994 20,019 23,294 19,561
1995 24,941 32,037 24,482
1996 28,215 39,388 27,851
Note: Past performance is not predictive of future performance.
Principal Capital Accumulation Fund
(David L. White and Catherine A. Green)
The strategy with this portfolio is to hold common stocks of companies
based on a valuation that is attractive when compared to the market. The
analytical staff looks at companies' current valuations compared to the market,
then at historical information to compare valuations to historical averages. The
focus is on the fundamentals of an industry and the company to determine the
current and future outlook as these potential investments. From there the
portfolio is constructed to provide a diversified set of investments.
The Fund outperformed the S&P 500 Index and Lipper Growth and Income Fund
Average for 1996. The strength of the market was in much fewer stocks than in
the past. The volatility between industries was much greater than the overall
results. The Fund benefited from several areas of exposure. Banks and health
care were the strongest areas for the Fund during the year. The focus has been
away from the more cyclical areas of the economy which also helped during the
year. As the economic cycle progresses, the market places more emphasis on
companies with consistent earnings growth, and we have tended to overweight
these areas of the market. As the market performance continues to narrow,
however, it becomes increasingly difficult to select the correct areas of
overperformance.
Total Returns *
As of December 31, 1996
----------------------------------------
1 Year 5 Year 10 Year
23.50% 14.08% 13.08%
Comparison of Change in Value of $10,000 Investment in the
Capital Accumulation Fund, S&P 500 and Lipper Growth and Income Fund Average
----------------------------------------------------------------------------
Fund S&P 500 Lipper
Year Ended Total Stock Growth & Income
December 31, Return Index Fund Average
10,000 10,000 10,000
1987 10,647 10,526 10,184
1988 12,183 12,274 11,814
1989 14,155 16,163 14,596
1990 12,759 15,659 13,946
1991 17,693 20,433 18,002
1992 19,377 21,990 19,618
1993 20,888 24,201 21,884
1994 20,990 24,519 21,678
1995 27,688 33,722 28,360
1996 34,193 41,460 34,253
Note: Past performance is not predictive of future performance.
Principal Emerging Growth Fund
(Michael R. Hamilton)
The equity market was strong in 1996, but within the market there were two
different trends. Large-cap stocks performed much better than small-cap stocks.
The Emerging Growth Fund returned 19.13% compared with the Lipper Mid Cap
Average of 17.9%. The Fund and the Lipper Average trailed the S&P 500 Index
because of their emphasis on small cap stocks. While both trailed the S&P 500,
this was a good year for the fund.
The financial market continues to grapple with the paradox of strong
economic growth with no apparent inflation. Productivity will be key in 1997 if
inflation is to remain benign. The Fund's portfolio continues to be focused on
companies that should enhance productivity of both labor and capital. Several of
the technology, service and cyclical areas support this emphasis. The portfolio
is also overweighted in the financial sector as bank consolidation continues.
Continued profit growth will be important in 1997 as well. Companies with
more predictable and visible earnings growth are preferred. This continues to be
those that are low cost producers and have competitive barriers to entry.
Selectivity in all sectors will be crucial to outperformance.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
21.11% 16.64% 17.73%
Comparison of Change in Value of $10,000 Investment
in the Emerging Growth Fund, S&P 500 and
Lipper Mid Cap Fund Average
-----------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 MID CAP
December 31, Return Index Index
10,000 10,000 10,000
1988 12,369 11,661 11,476
1989 15,070 15,356 14,586
1990 13,186 14,877 14,067
1991 20,240 19,412 21,275
1992 23,264 20,891 23,213
1993 27,750 22,992 26,625
1994 27,967 23,294 26,079
1995 36,080 32,037 34,469
1996 43,697 39,388 40,646
Note: Past performance is not predictive of future performance.
Principal Growth Fund
(Michael R. Hamilton)
The Growth Fund struggled against the market in 1996; struggle being
relative as 12.23% return is respectable from a historical perspective. The S&P
500 Index last year was heavily influenced by the top 25 holdings in the Index.
These are very large companies. The Fund is more diversified than the Index and
therefore its results were more representative of the broader market. With the
market continuing to struggle against the potential of an economic boom on one
hand, versus a slowing or recession on the other, the market could be subjected
to emotional swings depending on the inflation outlook.
The Fund's portfolio still has a large focus on health care given the
demographics of the United States. This was not a strong sector in 1996,
particularly the managed care companies of which the portfolio has a large
exposure. Also, the portfolio has large positions in technology and growth
cyclicals. These companies should do well if the economy continues to move
forward which is indicated by current data.
The portfolio contains many companies that are able to compete on a world
wide basis. This is important as global competition continues.
Total Returns *
As of December 31, 1996
-------------------------------------------------------
1 Year Since Inception Date 5/2/94 10 Year
12.51% 16.12% --
Comparison of Change in Value of $10,000 Investment in the
Growth Fund, S&P 500 and Lipper Growth Fund Average
---------------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Growth
December 31, Return Index Index
10,000 10,000 10,000
1994 10,542 10,397 10,090
1995 13,243 14,299 13,197
1996 14,899 17,580 15,736
Note: Past performance is not predictive of future performance.
Principal World Fund
(Scott D. Opsal)
The Principal World Fund's 26.2% total return in 1996 was driven by broad
based market rallies across Europe. Several European markets have climbed more
than 20% in 1996, with Japan and Italy being the only major markets not
reflecting strong gains. The Fund's investment strategy of holding stocks in
smaller European economies produced outperformance as interest rate moves have
been favorable this year. Long bond yields in secondary European markets fell
while rates in the stronger core countries have inched up. The Fund's
overexposure to the falling rate markets and underexposure to the rising rate
markets was a significant positive factor producing returns that exceeded EAFE's
6.1% and the average international fund in 1996.
The Fund also benefited from non-cyclical stockholdings in Europe. Food,
drug, technology, and stable growth cyclicals have outperformed the heavier
cyclical industries. The Fund's move into non-cyclical growth stocks early in
the year proved timely. The Fund remains underweighted in Japan due to poor
valuations and a weak economic outlook. Japan has been the worst performing
major market, and the Fund's lack of exposure to this market also boosted
relative returns.
Adverse currency changes diminished the Fund's returns as measured in U.S.
dollars by an estimated 2%. We believe the EAFE index has suffered a currency
loss exceeding 4%, and the average manager has lost an estimated 3%. Thus, the
Fund's investment strategy placed it in markets suffering relatively small
foreign exchange losses thereby aiding relative return performance.
The Principal World Fund is subject to specific risks associated with
foreign currency rates, foreign taxation and foreign economies.
Total Returns *
As of December 31, 1996
----------------------------------------------------
1 Year Since Inception Date 5/2/94 10 Year
25.09% 12.83% --
Comparison of Change in Value of $10,000 Investment in the
World Fund, EAFE and Lipper International Fund Average
------------------------------------------------------------
Fund Morgan Stanley Lipper
Year Ended Total EAFE International
December 31, Return Index Index
10,000 10,000 10,000
1994 9,663 9,990 9,758
1995 11,032 11,110 10,676
1996 13,800 11,781 11,934
Note: Past performance is not predictive of future performance.
Important Notes of the Growth-Oriented Funds:
Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Growth Fund Average: This average consists of funds which normally invest
in companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices. The one-year average currently contains 669 funds.
Lipper Flexible Portfolio Fund Average: This average consists of funds which
allocate their investments across various asset classes, including domestic
common stocks, bonds and money market instruments, with a focus on total return.
The one-year average currently contains 186 funds.
Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average currently contains 272 mutual funds.
Lipper Growth & Income Fund Average: this average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one year average currently contains 522 funds.
Lipper Mid Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average currently contains 154 funds.
Morgan Stanley Capital International EAFE (Europe, Australia and Far East)
Index: This average reflects an arithmetic, market value weighted average of
performance of 1,920 listed securities which are listed on the stock exchanges
of the following countries: Australia, Austria, Belgium, Denmark, Netherlands,
New Zealand, Norway, Singapore/Malaysia, Spain, Sweden, Switzerland, and the
United Kingdom.
Lipper International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average currently contains 331 funds.
Income-Oriented Funds
Principal Bond Fund
(Scott A. Bennett)
The Principal Bond Fund's performance in 1996 lagged when compared to 1995.
1995 was a banner year, mainly because of dramatically declining interest rates.
During 1996 interest rates increased throughout most of the year based on fears
of increasing inflation. This hurt the Fund's relative performance as the
duration target of 7 years (actual duration at 12/31/96 was 6.98 years) is
longer than the average BBB rated bond fund and the BAA Lehman Corporate Index.
Relative performance was also negatively impacted by the lack of a significant
amount of less than investment grade bonds in the portfolio. High yield (less
than investment grade) debt performed extremely well during 1996, with many of
the top performing funds in the Lipper BAA universe having significant exposures
to this asset class.
Over the long-term, the Fund continues to outperform the average BBB fund.
This is attributed to remaining fully invested and not trying to guess interest
rates. The BBB corporate bond class continued to be an attractive asset class in
1996, outperforming all other taxable investment grade classes. Spreads
continued to narrow during the year with defaults low and a large amount of
funds chasing the available bonds.
Total Returns *
As of December 31, 1996
- --------------------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
2.36% 8.20% 9.55%
Comparison of Change in Value of $10,000 Investment in the Bond Fund, Lehman
Brothers BAA Corporate Index and Lipper Corporate Debt BBB Rated Fund Average
-----------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total BAA BBB
December 31, Return Index Avg
10,000 10,000 10,000
1988 10,991 11,129 10,900
1989 12,514 12,699 12,060
1990 13,167 13,595 12,751
1991 15,369 16,113 15,020
1992 16,810 17,512 16,258
1993 18,771 19,665 18,261
1994 18,227 18,707 17,447
1995 22,268 22,959 20,948
1996 22,794 23,882 21,616
Note: Past performance is not predictive of future performance.
Principal Government Securities Fund
(Martin J. Schafer)
Interest rates rose in 1996, which dampened absolute fixed income returns.
The Fund underperformed the Lipper U.S. Mortgage Fund Average and the Lehman MBS
Index in 1996 due to its slightly longer duration. However, since the Fund's
inception of 4/9/87 it has outperformed the Lipper U.S. Mortgage Fund Average
and is competitive with the Lehman MBS Index.
Results were enhanced last year through identification and selection of
certain undervalued sectors of mortgage- backed securities for a portion of the
portfolio. These securities have now become very popular with Wall Street and
other investors, resulting in their increasing in value.
The current portfolio is well positioned for the period ahead. It has a
number of securities that are "seasoned" (e.g., original 30 year loans that have
been outstanding for three years or more) and therefore valued more highly in
the marketplace. There are few securities priced above par, so prepayment risk
is negligible. If the future continues to be an era of economic prosperity we
should continue to see strong housing markets and housing turnover that will
cause prepayments on our securities to exceed market expectations. These
repayments are welcomed, as the portfolio is priced at a discount and the Fund
will be paid-off at par.
Total Returns *
As of December 31, 1996
- --------------------------------------------------
1 Year 5 Year Since Inception Date 4/9/87
3.35% 6.68% 8.63%
Comparison of Change in Value of $10,000 Investment in the Government Securities
Fund, Lehman Brothers Mortgage Index and Lipper U.S. Mortgage Fund Average
- --------------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total Mortgage U.S. Mortgage
December 31, Return Index Index
10,000 10,000 10,000
1987 10,099 10,204 10,104
1988 10,939 11,094 10,858
1989 12,645 12,808 12,224
1990 13,852 14,183 13,370
1991 16,200 16,410 15,348
1992 17,308 17,551 16,285
1993 19,051 18,751 17,499
1994 18,188 18,450 16,769
1995 21,656 21,549 19,491
1996 22,381 22,702 20,245
Note: Past performance is not predictive of future performance.
Important Notes of the Income-Oriented Funds:
Lehman Brothers, BAA Corporate Index: an unmanaged index of all publicly issued
fixed rate nonconvertible, dollar-denominated, SEC-registered corporate debt
rated Baa or BBB by Moody's or S&P.
Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average
currently contains 102 mutual funds.
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgages/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average currently contains 59 mutual funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE OF FUND SHARES
The net asset value of each Fund's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange,
except on days on which changes in the value of the Fund's portfolio securities
will not materially affect the current net asset value of the Fund's redeemable
securities, on days during which a Fund receives no order for the purchase or
sale of its redeemable securities and no tender of such a security for
redemption, and on customary national business holidays. The net asset value per
share of each Fund is determined by dividing the value of the Fund's securities
plus all other assets, less all liabilities, by the number of Fund shares
outstanding.
Growth-Oriented and Income-Oriented Funds
The following valuation information applies to the Growth-Oriented and
Income-Oriented Funds. Securities for which market quotations are readily
available are valued using those quotations. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.
As previously described, some of the Funds may purchase foreign securities
whose trading is substantially completed each day at various times prior to the
close of the New York Stock Exchange. The values of such securities used in
computing net asset value per share are usually determined as of such times.
Occasionally, events which affect the values of such securities and foreign
currency exchange rates may occur between the times at which they are generally
determined and the close of the New York Stock Exchange and would therefore not
be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
by the Manager or Sub-Advisor under procedures established and regularly
reviewed by the Board of Directors. To the extent the Fund invests in foreign
securities listed on foreign exchanges which trade on days on which the Fund
does not determine its net asset value, for example Saturdays and other
customary national U.S. Holidays, the Fund's net asset value could be
significantly affected on days when shareholders have no access to the Fund.
Money Market Fund
The Money Market Fund values its securities at amortized cost. For a
description of this calculation procedure see the Funds' Statement of Additional
Information.
PERFORMANCE CALCULATION
From time to time, the Funds may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Funds. The Funds' yield and total return
figures described below will vary depending upon market conditions, the
composition of the Funds' portfolios and operating expenses. These factors and
possible differences in the methods used in calculating yield and total return
should be considered when comparing the Funds' performance figures to
performance figures published for other investment vehicles. The Funds may also
quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices. Any performance data quoted for the Funds represents only
historical performance and is not intended to indicate future performance of the
Funds. The calculation of average annual total return and yield for the Funds
does not include fees and charges of the separate accounts that invest in the
Funds and, therefore, does not reflect the investment performance of those
separate accounts. For further information on how the Funds calculate yield and
total return figures, see the Statement of Additional Information.
Average Annual Total Return
Each Fund may advertise its respective average annual total return. Average
annual total return for each Fund is computed by calculating the average annual
compounded rate of return over the stated period that would equate an initial
$1,000 investment to the ending redeemable value assuming the reinvestment of
all dividends and capital gains distributions at net asset value. The same
assumptions are made when computing cumulative total return by dividing the
ending redeemable value by the initial investment. The Funds may also quote
rankings, yields or returns as published by independent statistical services or
publishers, and information regarding the performance of certain market indices.
Yield and Effective Yield
From time to time the Money Market Fund may advertise its respective yield
and effective yield. The yield of the Fund refers to the income generated by an
investment in the Fund over a seven-day period. This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
The yield for the Money Market Fund will fluctuate daily as the income
earned on the investments of the Fund fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Fund is an open-end investment company and there is no
guarantee that the net asset value or any stated rate of return will remain
constant. A shareholder's investment in the Fund is not insured. Investors
comparing results of the Fund with investment results and yields from other
sources such as banks or savings and loan associations should understand these
distinctions. Historical and comparative yield information may, from time to
time, be presented by the Fund.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
It is the policy of each Fund to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Funds intend to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which a
Fund so qualifies it will be exempt from federal income tax upon the amounts so
distributed to investors.
Any dividends from the net investment income of the Funds (except the Money
Market Fund) will normally be payable to the shareholders annually, and any net
realized gains will be distributed annually. All dividends and capital gains
distributions are applied to purchase additional Fund shares at net asset value
as of the payment date without the imposition of any sales charge.
Each Fund will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Funds to consult with tax advisors on the federal and
state tax aspects of their investments and redemptions.
Money Market Fund
The Money Market Fund declares dividends of all its daily net investment
income on each day the Fund's net asset value per share is determined. Dividends
are payable daily and are automatically reinvested in full and fractional shares
of the Fund at the then current net asset value unless a shareholder requests
payment in cash.
Net investment income, for dividend purposes, consists of (1) accrued
interest income plus or minus accrued discount or amortized premium; plus or
minus (2) all net short-term realized gains and losses; minus (3) all accrued
expenses of the Fund. Expenses of the Fund are accrued each day. Net income will
be calculated immediately prior to the determination of net asset value per
share of the Fund.
Since the Fund's policy is, under normal circumstances, to hold portfolio
securities to maturity and to value portfolio securities at amortized cost, it
does not expect any capital gains or losses. If the Fund does experience gains,
however, it could result in an increase in dividends. Capital losses could
result in a decrease in dividends. If for some extraordinary reason the Fund
realizes net long-term capital gains, it will distribute them once every 12
months.
Since the net income of the Fund (including realized gains and losses on
the portfolio securities) is declared as a dividend each time the net income of
the Fund is determined, the net asset value per share of the Fund normally
remains at $1.00 immediately after each determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Fund,
representing reinvestment of dividend income, is reflected by an increase in the
number of shares of the Fund in the account.
Normally the Fund will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Fund determined
at any time is a negative amount, the net asset value per share will be reduced
below $1.00. If this happens, the Fund may endeavor to restore the net asset
value per share to $1.00 by reducing the number of outstanding shares by
redeeming proportionately from shareholders without the payment of any monetary
consideration, such number of full and fractional shares as is necessary to
maintain a net asset value per share of $1.00. Each shareholder will be deemed
to have agreed to such a redemption in these circumstances by investing in the
Fund. The Fund may seek to achieve the same objective of restoring the net asset
value per share to $1.00 by not declaring dividends from net income on
subsequent days until restoration, with the result that the net asset value per
share would increase to the extent of positive net income which is not declared
as a dividend, or any other method approved by the Board of Directors.
The Board of Directors may revise the above dividend policy, or postpone
the payment of dividends, if the Fund should have or anticipate any large
presently unexpected expense, loss or fluctuation in net assets which in the
opinion of the Board might have a significant adverse affect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Funds. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Fund shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of each
Fund reserves the right to broaden or limit the designation of Eligible
Purchasers.
Principal Aggressive Growth, Principal Asset Allocation, Principal
Balanced, Principal Bond, Principal Capital Accumulation, Principal Emerging
Growth, Principal Government Securities, Principal Growth, Principal Money
Market and Principal World Funds each serve as an underlying investment medium
for variable annuity contracts and variable life insurance policies that are
funded in separate accounts established by Principal Mutual Life Insurance
Company. It is conceivable that in the future it may be disadvantageous for
variable life insurance separate accounts and variable annuity separate accounts
to invest in the Funds simultaneously. Although neither Principal Mutual Life
Insurance Company nor the Funds currently foresee any such disadvantages either
to variable life insurance policy owners or to variable annuity contract owners,
each Fund's Board of Directors intends to monitor events in order to identify
any material conflicts between such policy owners and contract owners and to
determine what action, if any, should be taken in response thereto. Such action
could include the sale of Fund shares by one or more of the separate accounts,
which could have adverse consequences. Material conflicts could result from, for
example, (1) changes in state insurance laws, (2) changes in Federal income tax
law, (3) changes in the investment management of the Fund, or (4) differences in
voting instructions between those given by policy owners and those given by
contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Funds. There are no sales charges on the Funds'
shares. There are no restrictions on amounts to be invested in the Funds'
shares.
Shareholder accounts for each Fund will be maintained under an open account
system. Under this system, an account is automatically opened and maintained for
each new investor. Each investment is confirmed by sending the investor a
statement of account showing the current purchase and the total number of shares
then owned. The statement of account is treated by each Fund as evidence of
ownership of Fund shares in lieu of stock certificates, and unless written
request is made to the Fund, stock certificates will not be issued or delivered
to investors. Certificates, which can be stolen or lost, are unnecessary except
for special purposes such as collateral for a loan. Fractional interests in the
Funds' shares are reflected to three decimal places in the statement of account,
but any stock certificates will be issued only for full shares owned.
If an offer to purchase shares is received by any of the Funds before the
close of trading on the New York Stock Exchange, the shares will be issued at
the offering price (net asset value of Fund shares) computed on that day. If an
offer is received after the close of trading or on a day which is not a trading
day, the shares will be issued at the offering price computed on the first
succeeding day on which a price is determined. Dividends on the Money Market
Fund shares will be paid on the next day following the effective date of a
purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each of the Principal Funds.
Each Fund share is entitled to one vote either in person or by proxy at all
shareholder meetings for that Fund. This includes the right to vote on the
election of directors, selection of independent accountants and other matters
submitted to meetings of shareholders. Each share has equal rights with every
other share as to dividends, earnings, voting, assets and redemption. Shares are
fully paid and non-assessable, and have no preemptive or conversion rights.
Shares may be issued as full or fractional shares, and each fractional share has
proportionately the same rights, including voting, as are provided for a full
share. Shareholders of each of these Funds may remove any director with or
without cause by the vote of a majority of the votes entitled to be cast at a
meeting of shareholders.
The bylaws of each Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of each Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Funds intend to hold shareholder meetings only when required by
law and at such other times as may be deemed appropriate by their respective
Boards of Directors.
Shareholder inquiries should be directed to the applicable Fund at The
Principal Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Funds' shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of a Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Fund's shares allocated
to each of its separate accounts registered under the Investment Company Act of
1940 and attributable to variable annuity contracts or variable life insurance
policies participating therein in accordance with instructions received from
contract or policy holders, participants and annuitants. Other shares of each
Fund held by each registered separate account, including those for which no
timely instructions are received, are voted in proportion to the instructions
that are received with respect to contracts or policies participating in that
separate account. Shares of each of the Funds held in the general account of
Principal Mutual Life Insurance Company or in its unregistered separate accounts
are voted in proportion to the instructions that are received with respect to
contracts and policies participating in its registered and unregistered separate
accounts. If Principal Mutual determines pursuant to applicable law that a
Fund's shares held in one or more separate accounts or in its general account
need not be voted pursuant to instructions received with respect to
participating contracts or policies, it then may vote those Fund shares in its
own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Fund will redeem its shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Fund requesting redemption of any part or all of the
shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, the Fund will not require a signature guarantee as a part of a
proper endorsement; otherwise the shareholder's signature must be guaranteed by
either a commercial bank, trust company, credit union, savings and loan
association, national securities exchange member, or by a brokerage firm. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Fund in proper and complete form. The amount received for shares
upon redemption may be more or less than the cost of such shares depending upon
the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Fund may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Fund of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Fund
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Fund. A Fund will
redeem only those shares for which it has received good payment. To avoid the
inconvenience of such a delay, shares may be purchased with a certified check,
bank cashier's check or money order. During the period prior to the time a
redemption from the Money Market Fund is effective, dividends on such shares
will accrue and be payable and the shareholder will be entitled to exercise all
other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Funds may be transferred to an
Eligible Purchaser. However, whenever any of the Funds is requested to transfer
shares to other than an Eligible Purchaser, the Fund has the right at its
election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Fund must notify the transferee or transferees of such shares
in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Funds
except the World Fund. The custodian for the World Fund is Chase Manhattan Bank,
Global Securities Services, Chase Metro Tech Center, Brooklyn, New York 11245.
The custodians perform no managerial or policymaking functions for the Funds.
Organization and Share Ownership: The Funds were incorporated in the state
of Maryland on the following dates: Aggressive Growth Fund - August 20, 1993;
Asset Allocation Fund - August 20, 1993; Balanced Fund - November 26, 1986; Bond
Fund - November 26, 1986; Capital Accumulation Fund - May 26, 1989 (effective
November 1, 1989 succeeded to the business of a predecessor Fund that had been
incorporated in Delaware on February 6, 1969); Emerging Growth Fund - February
20, 1987; Government Securities Fund - June 7, 1985; Growth Fund - August 20,
1993; Money Market Fund - June 10, 1982; and World Fund - August 20, 1993.
Principal Mutual Life Insurance Company owns 100% of each Fund's outstanding
shares.
Capitalization: The authorized capital stock of each Fund consists of
100,000,000 shares of common stock (500,000,000 for Principal Money Market Fund,
Inc.), $.01 par value.
Financial Statements: Copies of the financial statements of each Fund will
be mailed to each shareholder of that Fund semi-annually. At the close of each
fiscal year, each Fund's financial statements will be audited by a firm of
independent auditors. The firm of Ernst & Young LLP has been appointed to audit
the financial statements of each Fund for their respective present fiscal years.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the
Funds have filed with the Securities and Exchange Commission. The Funds'
Statement of Additional Information is hereby incorporated by reference into
this Prospectus. A copy of the Funds' Statement of Additional Information can be
obtained upon request, free of charge, by writing or telephoning the Fund. You
may obtain a copy of Part C of the Registration Statements filed with the
Securities and Exchange Commission, Washington, D.C., from the Commission upon
payment of the prescribed fees.
Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for each of the Principal Funds.
The Principal(R) Mutual Funds ("Principal Funds") described in this
Prospectus are a family of separately incorporated, diversified, open-end
management investment companies, commonly called mutual funds, which provide the
following range of investment objectives:
Growth-Oriented Funds
PRINCIPAL Balanced Fund, Inc. seeks to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of the investment objective.
PRINCIPAL Capital Accumulation Fund, Inc. seeks to achieve primarily long-term
capital appreciation and secondary growth of investment income through the
purchase primarily of common stocks, but the Fund may invest in other
securities.
PRINCIPAL Emerging Growth Fund, Inc. seeks to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
Income-Oriented Funds
PRINCIPAL Bond Fund, Inc. seeks to provide as high a level of income as is
consistent with preservation of capital and prudent investment risk.
PRINCIPAL High Yield Fund, Inc. seeks high current income. Capital growth is a
secondary objective when consistent with the objective of high current income.
The Fund seeks to achieve its objective primarily through the purchase of high
yielding, lower or non-rated fixed income securities commonly referred to as
"junk bonds." Bonds of this type are considered to be speculative with regard to
payment of interest and return of principal. Purchasers should carefully assess
the risks associated with an investment in this fund.
Money Market Fund
PRINCIPAL Money Market Fund, Inc. seeks as high a level of income available from
short-term securities as is considered consistent with preservation of principal
and maintenance of liquidity by investing all of its assets in a portfolio of
money market instruments.
An investment in any of the funds is neither insured nor guaranteed by the
U.S. Government. There can be no assurance the Money Market Funds will be able
to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Funds that
an investor ought to know before investing. It should be read and retained for
future reference.
Additional information about the Funds has been filed with the Securities
and Exchange Commission, including a document called Statement of Additional
Information, dated May 1, 1997. The Statement of Additional Information is
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Mutual Funds
A Member of
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is May 1, 1997.
TABLE OF CONTENTS
Page
Summary ............................................................... 3
Financial Highlights.................................................... 5
Investment Objectives, Policies and Restrictions........................ 10
Certain Investment Policies and Restrictions............................ 15
Manager and Sub-Advisor ............................................... 16
Duties Performed by the Manager and Sub-Advisor......................... 17
Managers' Comments...................................................... 17
Determination of Net Asset Value of Fund Shares......................... 18
Performance Calculation................................................. 21
Income Dividends, Distributions and Tax Status.......................... 21
Eligible Purchasers and Purchase of Shares.............................. 22
Shareholder Rights ..................................................... 23
Redemption of Shares.................................................... 24
Additional Information.................................................. 25
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, the securities of any of the Funds in any jurisdiction in which
such sale, offer to sell, or solicitation may not be lawfully made. No dealer,
salesperson, or other person has been authorized to give any information or to
make any representations, other than those contained in this Prospectus, in
connection with the offer contained in this Prospectus, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Funds or the Funds' Manager.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Funds are separately incorporated, open-end diversified
management investment companies.
Who may purchase shares of the Funds?
Shares of the Funds are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of each Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Funds offer investors?
Professional Investment Management: Experienced securities analysts provide
each Fund with professional investment management.
Diversification: Each Fund will diversify by investing in securities issued
by a number of issuers doing business in a variety of industries and/or located
in different geographical regions. Diversification reduces investment risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Funds creates administrative efficiencies.
Redeemability: Upon request each Fund will redeem its shares and promptly
pay the investor the current net asset value of the shares redeemed. See
"Redemption of Shares."
What are the Funds' investment objectives?
Growth-Oriented Funds
The investment objective of Principal Balanced Fund, Inc. (sometimes
referred to as the Balanced Fund) is to seek to generate a total return
consisting of current income and capital appreciation while assuming reasonable
risks in furtherance of this objective. The Fund intends to pursue a flexible
investment policy in seeking to achieve this investment objective.
The primary investment objective of Principal Capital Accumulation Fund,
Inc. (sometimes referred to as the Capital Accumulation Fund) is long-term
capital appreciation and its secondary investment objective is growth of
investment income. The Fund seeks to achieve its investment objectives through
the purchase primarily of common stocks, but the Fund may invest in other
securities.
The investment objective of Principal Emerging Growth Fund, Inc. (sometimes
referred to as the Emerging Growth Fund) is to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
Income-Oriented Funds
The investment objective of Principal Bond Fund, Inc. (sometimes referred
to as the Bond Fund) is to provide as high a level of income as is consistent
with preservation of capital and prudent investment risk.
The primary investment objective of Principal High Yield Fund, Inc.
(sometimes referred to as the High Yield Fund) is to seek high current income.
Capital growth is a secondary objective when consistent with the objective of
high current income. The Fund will invest primarily in high yielding, lower or
non-rated fixed income securities.
Money Market Fund
The investment objective of Principal Money Market Fund, Inc. (sometimes
referred to as the Money Market Fund) is to seek as high a level of current
income available from short-term securities as is considered consistent with
preservation of principal and maintenance of liquidity by investing all of its
assets in a portfolio of money market instruments.
There can be no assurance that the investment objectives of any of the
Funds will be realized. See "Investment Objectives, Policies and Restrictions."
Who serves as Manager for the Funds?
Princor Management Corporation, a corporation organized in 1969 by
Principal Mutual Life Insurance Company, is the Manager for each of the Funds.
It is also the dividend disbursing and transfer agent for the Principal Funds.
In order to provide investment advisory services for the Balanced Fund, the
Manager has executed a sub-advisory agreement with Invista Capital Management,
Inc.
("Invista" or "Sub-Advisor"). See "Manager and Sub-Advisor."
What fees and expenses apply to ownership of shares of the Funds?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Funds.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Fund Fee Expenses Expenses
Balanced Fund .60% .03% .63%
Bond Fund .50% .03% .53%
Capital Accumulation Fund .48% .01% .49%
Emerging Growth Fund .64% .02% .66%
High Yield Fund .60% .10% .70%
Money Market Fund .50% .06% .56%
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Period (in years)
_____________________________________________
Fund 1 3 5 10
Balanced Fund $6 $20 $35 $79
Bond Fund $5 $17 $30 $66
Capital Accumulation Fund $5 $16 $27 $62
Emerging Growth Fund $7 $21 $37 $82
High Yield Fund $7 $22 $39 $87
Money Market Fund $6 $18 $31 $70
This Example is based on the Annual Fund Operating expenses for each Fund
described above. Please remember that the Example should not be considered
a representation of past or future expenses and that actual expenses may be
greater or less than shown.
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in the Funds will bear directly or
indirectly. See "Duties Performed by the Manager."
FINANCIAL HIGHLIGHTS
The following financial highlights for the periods ended December 31, 1996
and prior thereto are derived from financial statements which have been audited
by Ernst & Young LLP, independent auditors, whose report has been incorporated
by reference herein. The financial highlights should be read in conjunction with
the financial statements, related notes, and other financial information
incorporated by reference herein. Audited financial statements may be obtained
by shareholders, without charge, by telephoning 1-800-451-5447.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
___________________________________ ____________________________________________________
Net Realized
and
Net Asset Unrealized Total Dividends Excess
Value at Net Gain from from Net Distributions Distributions
Beginning Investment (Loss) on Investment Investment from from Total
of Period Income Investments Operations Income Capital Gains Capital Gains Distributions
Principal Balanced
Fund, Inc. (a)
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $13.97 $ .40 $ 1.41 $1.81 $(.40) $ (.94) $ -- $(1.34)
1995 11.95 .45 2.44 2.89 (.45) (.42) -- (.87)
1994 12.77 .37 (.64) (.27) (.37) (.18) -- (.55)
1993 12.58 .42 .95 1.37 (.42) (.76) -- (1.18)
Six Months Ended
December 31, 1992(b) 12.93 .23 .75 .98 (.47) (.86) -- (1.33)
Year Ended June 30,
1992 11.33 .47 1.61 2.08 (.48) -- -- (.48)
1991 10.79 .54 .59 1.13 (.57) (.02) -- (.59)
1990 11.89 .60 (.48) .12 (.63) (.59) -- (1.22)
1989 11.75 .62 .30 .92 (.55) (.23) -- (.78)
Period Ended June 30,
1988(e) 10.00 .27 1.51 1.78 (.03) -- -- (.03)
Principal Bond Fund, Inc.
Year Ended December 31,
1996 11.73 .68 (.40) .28 (.68) -- -- (.68)
1995 10.12 .62 1.62 2.24 (.63) -- -- (.63)
1994 11.16 .72 (1.04) (.32) (.72) -- -- (.72)
1993 10.77 .88 .38 1.26 (.87) -- -- (.87)
Six Months Ended
December 31, 1992(b) 11.08 .45 .13 .58 (.89) -- -- (.89)
Year Ended June 30,
1992 10.64 .91 .46 1.37 (.93) -- -- (.93)
1991 10.72 .94 (.06) .88 (.96) -- -- (.96)
1990 10.92 .95 (.21) .74 (.94) -- -- (.94)
1989 10.68 1.15 .17 1.32 (.96) (.12) -- (1.08)
Period Ended June 30,
1988(e) 10.00 .32 .40 .72 (.04) -- -- (.04)
Principal Capital Accumulation
Fund, Inc.
Year Ended December 31,
1996 27.80 .57 5.82 6.39 (.58) (3.77) -- (4.35)
1995 23.44 .60 6.69 7.29 (.60) (2.33) -- (2.93)
1994 24.61 .62 (.49) .13 (.61) (.69) -- (1.30)
1993 25.19 .61 1.32 1.93 (.60) (1.91) -- (2.51)
Six Months Ended
December 31, 1992(b) 26.03 .31 1.84 2.15 (.64) (2.35) -- (2.99)
Year Ended June 30,
1992 23.35 .65 2.70 3.35 (.67) -- -- (.67)
1991 22.48 .74 1.22 1.96 (.79) (.30) -- (1.09)
1990 23.63 .79 .14 .93 (.81) (1.27) -- (2.08)
1989 23.23 .77 1.32 2.09 (.68) (1.01) -- (1.69)
1988 27.51 .60 (1.50) (.90) (.69) (2.69) -- (3.38)
1987 25.48 .40 4.46 4.86 (.50) (2.33) -- (2.83)
Principal Emerging Growth
Fund, Inc. (f)
Year Ended December 31,
1996 25.33 .22 5.07 5.29 (.22) (.66) -- (.88)
1995 19.97 .22 5.57 5.79 (.22) (.21) -- (.43)
1994 20.79 .14 .03 .17 (.14) (.85) -- (.99)
1993 18.91 .17 3.47 3.64 (.17) (1.59) -- (1.76)
Six Months Ended
December 31, 1992(b) 15.97 .10 3.09 3.19 (.21) (.04) -- (.25)
Year Ended June 30,
1992 13.93 .21 2.04 2.25 (.21) -- -- (.21)
1991 14.25 .20 .50 .70 (.23) (.79) -- (1.02)
1990 13.35 .24 .87 1.11 (.20) (.01) -- (.21)
1989 12.85 .16 1.35 1.51 (.11) (.90) -- (1.01)
Period Ended June 30,
1988(e) 10.00 .05 2.83 2.88 (.03) -- -- (.03)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
______________________________________________________
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
Principal Balanced
Fund, Inc. (a)
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $14.44 13.13% $ 93,158 .63% 3.45% 22.6% $.0417
1995 13.97 24.58% 45,403 .66% 4.12% 25.7% N/A
1994 11.95 (2.09)% 25,043 .69% 3.42% 31.5% N/A
1993 12.77 11.06% 21,399 .69% 3.30% 15.8% N/A
Six Months Ended
December 31, 1992(b) 12.58 8.00%(c) 18,842 .73%(d) 3.71%(d) 38.4%(d) N/A
Year Ended June 30,
1992 12.93 18.78% 17,344 .72% 3.80% 26.6% N/A
1991 11.33 11.36% 14,555 .73% 5.27% 27.1% N/A
1990 10.79 .87% 13,016 .74% 5.52% 33.1% N/A
1989 11.89 8.55% 12,751 .74% 5.55% 29.3% N/A
Period Ended June 30,
1988(e) 11.75 17.70%(c) 11,469 .80%(d) 4.96%(d) 41.7%(d) N/A
Principal Bond Fund, Inc.
Year Ended December 31,
1996 11.33 2.36% 63,387 .53% 7.00% 1.7% N/A
1995 11.73 22.17% 35,878 .56% 7.28% 5.9% N/A
1994 10.12 (2.90)% 17,108 .58% 7.86% 18.2% N/A
1993 11.16 11.67% 14,387 .59% 7.57% 14.0% N/A
Six Months Ended
December 31, 1992(b) 10.77 5.33%(c) 12,790 .62%(d) 8.10%(d) 6.7%(d) N/A
Year Ended June 30,
1992 11.08 13.57% 12,024 .62% 8.47% 6.1% N/A
1991 10.64 8.94% 10,552 .63% 9.17% 2.7% N/A
1990 10.72 7.15% 9,658 .64% 9.09% 0.0% N/A
1989 10.92 13.51% 9,007 .64% 9.18% 12.2% N/A
Period Ended June 30,
1988(e) 10.68 6.06%(c) 17,598 .58%(d) 8.11%(d) 68.8%(d) N/A
Principal Capital Accumulation
Fund, Inc.
Year Ended December 31,
1996 29.84 23.50% 205,019 .49% 2.06% 48.5% .0426
1995 27.80 31.91% 135,640 .51% 2.25% 49.2% N/A
1994 23.44 .49% 120,572 .51% 2.36% 44.5% N/A
1993 24.61 7.79% 128,515 .51% 2.49% 25.8% N/A
Six Months Ended
December 31, 1992(b) 25.19 8.81%(c) 105,355 .55%(d) 2.56%(d) 39.7%(d) N/A
Year Ended June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8% N/A
1991 23.35 9.46% 76,537 .53% 3.53% 14.0% N/A
1990 22.48 3.94% 74,008 .56% 3.56% 30.2% N/A
1989 23.63 10.02% 68,132 .57% 3.53% 23.5% N/A
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7% N/A
1987 27.51 22.17% 57,478 .63% 1.99% 16.1% N/A
Principal Emerging Growth
Fund, Inc. (f)
Year Ended December 31,
1996 29.74 21.11% 137,161 .66% 1.07% 8.8% .0379
1995 25.33 29.01% 58,520 .70% 1.23% 13.1% N/A
1994 19.97 .78% 23,912 .74% 1.15% 12.0% N/A
1993 20.79 19.28% 12,188 .78% .89% 22.4% N/A
Six Months Ended
December 31, 1992(b) 18.91 20.12%(c) 9,693 .81%(d) 1.24%(d) 8.6%(d) N/A
Year Ended June 30,
1992 15.97 16.19% 7,829 .82% 1.33% 10.1% N/A
1991 13.93 5.72% 6,579 .89% 1.70% 11.1% N/A
1990 14.25 8.32% 6,067 .88% 1.74% 17.9% N/A
1989 13.35 13.08% 5,509 .90% 1.31% 21.4% N/A
Period Ended June 30,
1988(e) 12.85 28.72%(c) 4,857 .94%(d) .64%(d) 4.6%(d) N/A
</TABLE>
Notes to financial highlights
(a) Effective May 1, 1994, the name of Principal Managed Fund, Inc. was changed
to Principal Balanced Fund, Inc.
(b) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(c) Total return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December
10, 1987 through December 17, 1987 was recognized, all of which was
distributed to the Fund's sole stockholder, Principal Mutual Life Insurance
Company. This represented activity of the fund prior to the initial
offering of shares to eligible purchasers.
(f) Effective May 1, 1992, the name of Principal Aggressive Growth Fund, Inc.
was changed to Principal Emerging Growth Fund, Inc.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
___________________________________ ____________________________________________________
Net Realized
and
Net Asset Unrealized Total Dividends Excess
Value at Net Gain from from Net Distributions Distributions
Beginning Investment (Loss) on Investment Investment from from Total
of Period Income Investments Operations Income Capital Gains Capital Gains Distributions
Principal High Yield
Fund, Inc.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $ 8.39 $ .80 $ .30 $1.10 $ (.77) $ -- $ -- $ (.77)
1995 7.91 .76 .51 1.27 (.77) (.02) -- (.79)
1994 8.62 .77 (.72) .05 (.76) -- -- (.76)
1993 8.38 .80 .23 1.03 (.79) -- -- (.79)
Six Months Ended
December 31, 1992(a) 8.93 .45 (.10) .35 (.90) -- -- (.90)
Year Ended June 30,
1992 8.28 .92 .66 1.58 (.93) -- -- (.93)
1991 8.96 .99 (.53) .46 (1.14) -- -- (1.14)
1990 10.37 1.21 (1.35) (.14) (1.22) (.05) -- (1.27)
1989 11.01 1.23 (.45) .78 (1.21) (.21) -- (1.42)
Period Ended June 30,
1988(d) 10.00 .67 .49 1.16 (.15) -- -- (.15)
Principal Money Market
Fund, Inc.
Year Ended December 31,
1996 1.000 .049 -- .049 (.049) -- -- (.049)
1995 1.000 .054 -- .054 (.054) -- -- (.054)
1994 1.000 .037 -- .037 (.037) -- -- (.037)
1993 1.000 .027 -- .027 (.027) -- -- (.027)
Six Months Ended
December 31, 1992(a) 1.000 .016 -- .016 (.016) -- -- (.016)
Year Ended June 30,
1992 1.000 .046 -- .046 (.046) -- -- (.046)
1991 1.000 .070 -- .070 (.070) -- -- (.070)
1990 1.000 .077 -- .077 (.077) -- -- (.077)
1989 1.000 .083 -- .083 (.083) -- -- (.083)
1988 1.000 .064 -- .064 (.064) -- -- (.064)
1987 1.000 .057 -- .057 (.057) -- -- (.057)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
______________________________________________________
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
Principal High Yield
Fund, Inc.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $ 8.72 13.13% $13,740 .70% 9.21% 32.0% N/A
1995 8.39 16.08% 11,830 .73% 9.09% 35.1% N/A
1994 7.91 .62% 9,697 .73% 9.02% 30.6% N/A
1993 8.62 12.31% 9,576 .74% 8.80% 28.7% N/A
Six Months Ended
December 31, 1992(a) 8.38 4.06%(b) 8,924 .77%(c) 10.33%(c) 20.6%(c) N/A
Year Ended June 30,
1992 8.93 20.70% 8,556 .77% 11.00% 31.3% N/A
1991 8.28 6.35% 7,085 .82% 12.58% 6.4% N/A
1990 8.96 (1.46)% 6,643 .83% 13.07% 24.2% N/A
1989 10.37 7.88% 6,741 .95% 11.89% 27.8% N/A
Period Ended June 30,
1988(d) 11.01 11.25%(b) 6,703 .78%(c) 11.71%(c) 58.2%(c) N/A
Principal Money Market
Fund, Inc.
Year Ended December 31,
1996 1.000 5.07% 46,244 .56% 5.00% N/A N/A
1995 1.000 5.59% 32,670 .58% 5.32% N/A N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A N/A
Six Months Ended
December 31, 1992(a) 1.000 1.54%(b) 27,680 .59%(c) 3.10%(c) N/A N/A
Year Ended June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A N/A
</TABLE>
Notes to financial highlights
(a) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December 10,
1987 through December 17, 1987 was recognized, all of which was distributed
to the Fund's sole stockholder, Principal Mutual Life Insurance Company.
This represented activity of the fund prior to the initial offering of
shares to eligible purchasers.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Fund are described below.
There can be no assurance that the objectives of the Funds will be realized.
GROWTH-ORIENTED FUNDS
The Principal Funds currently include two Funds which seek capital
appreciation through investments in equity securities (Principal Capital
Accumulation Fund and Principal Emerging Growth Fund) and one Fund which seeks a
total investment return including both capital appreciation and income through
investments in equity and debt securities (Principal Balanced Fund). These three
Funds are collectively referred to as the Growth-Oriented Funds.
The Growth-Oriented Funds may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and American Depository Receipts based
on any of the foregoing securities. The Capital Accumulation and Emerging Growth
Funds will seek to be fully invested under normal conditions in equity
securities. When in the opinion of the Manager current market or economic
conditions warrant, a Growth-Oriented Fund may for temporary defensive purposes
place all or a portion of its assets in cash, on which the Fund would earn no
income, cash equivalents, bank certificates of deposit, bankers acceptances,
repurchase agreements, commercial paper, commercial paper master notes which are
floating rate debt instruments without a fixed maturity, United States
Government securities, and preferred stocks and debt securities, whether or not
convertible into or carrying rights for common stock. A Growth-Oriented Fund may
also maintain reasonable amounts in cash or short-term debt securities for daily
cash management purposes or pending selection of particular long-term
investments.
Principal Balanced Fund
The investment objective of Principal Balanced Fund is to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of the investment objective. The term
"reasonable risks" refers to investment decisions that in the Manager's judgment
do not present a greater than normal risk of loss in light of current or
anticipated future market and economic conditions, trends in yields and interest
rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Fund invests primarily
in growth and income-oriented common stocks (including securities convertible
into common stocks), corporate bonds and debentures and short-term money market
instruments. The Fund may also invest in other equity securities, and in debt
securities issued or guaranteed by the United States Government and its agencies
or instrumentalities. The Fund seeks to generate real (inflation plus) growth
during favorable investment periods and may emphasize income and capital
preservation strategies during uncertain investment periods. The Manager will
seek to minimize declines in the net asset value per share. However, there is no
guarantee that the Manager will be successful in achieving this goal.
The portions of the Fund's total assets invested in equity securities, debt
securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Fund's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Manager as to general market and economic conditions, trends in investment
yields and interest rates and changes in fiscal or monetary policies.
The Fund may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Fund may invest in both
exchange-listed and over-the-counter securities, in small or large companies,
and in well-established or unseasoned companies. Also, the Fund's investments in
corporate bonds and debentures and money market instruments are not restricted
by credit ratings or other objective investment criteria, except with respect to
bank certificates of deposit as set forth below. Some of the fixed income
securities in which the Fund may invest may be considered to include speculative
characteristics and the Fund may purchase such securities that are in default
but does not currently intend to invest more than 5% of its assets in securities
rated below BBB by Standard & Poor's or Baa by Moody's. See the discussion of
the Principal High Yield Fund for information concerning risks associated with
below-investment grade bonds. The Fund will not concentrate its investments in
any industry.
In selecting common stocks, the Manager seeks companies which the Manager
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Manager determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Manager may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Fund may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Fund may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The short-term money market investments in which the Fund may invest
include the following: U.S. Treasury bills, bank certificates of deposit,
bankers' acceptances, repurchase agreements, commercial paper and commercial
paper master notes which are floating rate debt instruments without a fixed
maturity. The Fund will only invest in domestic bank certificates of deposit
issued by banks which are members of the Federal Reserve System that have total
deposits in excess of one billion dollars.
The United States government securities in which the Fund may invest
include U.S. Treasury obligations and obligations of certain agencies, such as
the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Principal Capital Accumulation Fund
The primary objective of Principal Capital Accumulation Fund is long-term
capital appreciation. A secondary objective is growth of investment income.
The Fund will invest primarily in common stocks, but it may invest in other
securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. In pursuit of the
Fund's investment objectives, investments will be made in securities which as a
group appear to offer long-term prospects for capital and income growth.
Securities chosen for investment may include those of companies which the
Manager believes can reasonably be expected to share in the growth of the
nation's economy over the long term.
Principal Emerging Growth Fund
The objective of Principal Emerging Growth Fund is to achieve capital
appreciation. The strategy of this Fund is to invest primarily in the common
stocks and securities (both debt and preferred stock) convertible into common
stocks of emerging and other growth-oriented companies that, in the judgment of
the Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the Emerging Growth Fund may invest, for any period of
time, in any industry, in any kind of growth-oriented company, whether new and
unseasoned or well known and established.
There can be, of course, no assurance that the Fund will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Fund invests, the Fund believes that its shares are
suitable only for persons who are prepared to experience above-average
fluctuations in net asset value, to assume above-average investment risk in
search of above-average return, and to consider the Fund as a long-term
investment and not as a vehicle for seeking short-term profits. Moreover, since
the Fund will not be seeking current income, investors should not view a
purchase of Fund shares as a complete investment program.
INCOME-ORIENTED FUNDS
The Principal Funds currently include two Funds which seek a high level of
income through investments in fixed-income securities (Principal Bond Fund and
Principal High Yield Fund) collectively referred to as the "Income-Oriented
Funds." An investment in any of the Income-Oriented Funds involves market risks
associated with movements in interest rates. The market value of the Funds'
investments will fluctuate in response to changes in interest rates and other
factors. During periods of falling interest rates, the values of outstanding
long-term fixed-income securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. Changes
by recognized rating agencies in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities will affect the Funds' net asset values but will not affect cash
income derived from the securities unless a change results from a failure of an
issuer to pay interest or principal when due. Each Fund's rating limitations
apply at the time of acquisition of a security, and any subsequent change in a
rating by a rating service will not require elimination of a security from the
Fund's portfolio. The Statement of Additional Information contains descriptions
of ratings of Moody's Investors Service, Inc. ("Moody's") and Standard and
Poor's Corporation ("S&P").
Principal Bond Fund
The investment objective of Principal Bond Fund is to provide as high a
level of income as is consistent with preservation of capital and prudent
investment risk.
In seeking to achieve the investment objective, the Fund will predominantly
invest in marketable fixed-income securities. Investments will be made generally
on a long-term basis, but the Fund may make short-term investments from time to
time as deemed prudent by the Manager. Longer maturities typically provide
better yields but will subject the Fund to a greater possibility of substantial
changes in the values of its portfolio securities as interest rates change.
Under normal circumstances, the Fund will invest at least 65% of its
assets, exclusive of cash items, in one or more of the following kinds of
securities: (i) corporate debt securities and taxable municipal obligations,
which at the time of purchase have an investment grade rating within the four
highest grades used by Standard & Poor's Corporation (AAA, AA, A or BBB) or by
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa) or which, if lower-rated or
nonrated, are comparable in quality in the opinion of the Fund's Manager; (ii)
similar Canadian corporate, Provincial and Federal Government securities payable
in U.S. funds; and (iii) securities issued or guaranteed by the United States
Government or its agencies or instrumentalities. The balance of the Fund's
assets may be invested in other fixed income securities, including domestic and
foreign corporate debt securities or preferred stocks, in common stocks that
provide returns that compare favorably with the yields on fixed income
investments, and in common stocks acquired upon conversion of debt securities or
preferred stocks or upon exercise of warrants acquired with debt securities or
otherwise and foreign government securities. The debt securities and preferred
stocks in which the Fund invests may be convertible or nonconvertible. The Fund
does not intend to purchase debt securities rated lower than Ba3 by Moody's or
BB - by S & P (bonds which are judged to have speculative elements; their future
cannot be considered as well-assured). See the discussion of the Principal High
Yield Fund for information concerning risks associated with below investment
grade bonds.
During the year ended December 31, 1996, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Aaa .18%
Aa .81%
A 24.05%
Baa 68.04%
Ba 6.92%
* The above percentages for A rated securities include .57% unrated
securities which have been determined by the Manager to be of comparable
quality.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by Standard & Poor's or P-1 or P-2 by Moody's,
unrated commercial paper issued by corporations with outstanding debt securities
rated in the four highest grades by Standard & Poor's and Moody's and bank
certificates of deposit and bankers' acceptances issued or guaranteed by
national or state banks and repurchase agreements considered by the Fund to have
investment quality. Under unusual market or economic conditions, the Fund may
for temporary defense purposes invest up to 100% of its assets in cash or cash
equivalents.
Principal High Yield Fund
Principal High Yield Fund's primary investment objective is high current
income. Capital growth is a secondary objective when consistent with the
objective of high current income. This Fund is designed for investors willing to
assume additional risk in return for above average income.
In seeking to attain the Fund's objective of high current income, the Fund
invests primarily in high yielding, lower or non-rated (high risk) fixed-income
securities, commonly known as "junk bonds," constituting a diversified portfolio
which the Fund Manager believes does not involve undue risk to income or
principal. Normally, at least 80% of the Fund's assets will be invested in debt
securities, convertible securities (both debt and preferred stock) or preferred
stocks that are consistent with its primary investment objective of high current
income. The Fund's remaining assets may be held in cash or cash equivalents, or
invested in common stocks and other equity securities when these types of
investments are consistent with the objective of high current income.
The Fund seeks to invest its assets in securities rated Ba1 or lower by
Moody's Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("S&P") or in unrated securities which the Fund's Manager believes
are of comparable quality. These securities are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and to repay principal in accordance with the terms of the obligation. The Fund
will not invest in securities rated Caa or lower by Moody's and CCC or lower by
S&P.
The rating services' descriptions of securities rating categories in which
the Fund may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the high end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB, B, CCC, CC: Debt rated
"BB", "B", "CCC" and "CC" is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
The higher-yielding, lower-rated securities in which the High Yield Fund
invests present special risks to investors. The market value of lower-rated
securities may be more volatile than that of higher-rated securities and
generally tends to reflect the market's perception of the creditworthiness of
the issuer and short-term market developments to a greater extent than more
highly rated securities, which reflect primarily fluctuations in general levels
of interest rates. Periods of economic uncertainty and change can be expected to
result in increased volatility in the market value of lower-rated securities.
Further, such securities may be subject to greater risks of loss of income and
principal, particularly in the event of adverse economic changes or increased
interest rates, because their issuers generally are not as financially secure or
as creditworthy as issuers of higher-rated securities. Additionally, to the
extent that there is not a national market system for secondary trading of
lower-rated securities, there may be a low volume of trading in such securities
which may make it more difficult to value or sell those securities than
higher-rated securities. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market.
Investors should recognize that the market for higher yielding, lower-rated
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the High Yield Fund and the ability
of the issuers of the securities held by it to pay principal and interest. A
default by an issuer may result in the Fund incurring additional expenses to
seek recovery of the amounts due it.
Some of the securities in which the Fund invests contain call provisions.
If the issuer of such a security exercises a call provision in a declining
interest rate market, the Fund would have to replace the security with a
lower-yielding security, resulting in a decreased return for investors. Further,
a higher-yielding security's value will decrease in a rising interest rate
market, which will be reflected in the Fund's net asset value per share.
Congress recently enacted legislation requiring federally-insured savings
and loan associations to divest themselves of investments in high yield
securities. This legislation might increase the supply of securities available
for purchase in the secondary market and, potentially, lower the value of the
securities held by the Fund.
Investors should carefully consider their ability to assume the risks of
investing in lower-rated securities before making an investment in the High
Yield Fund and should be prepared to maintain their investment during periods of
adverse market conditions.
Investors should not rely on the Fund for their short-term financial needs.
The Fund seeks to minimize the risks of investing in lower-rated securities
through diversification, investment analysis and attention to current
developments in interest rates and economic conditions. Because the Fund invests
primarily in securities in the lower rating categories, the achievement of the
Fund's goals is more dependent on the Manager's ability than would be the case
if the Fund were investing in securities in the higher rating categories.
Although the Fund's Manager considers security ratings when making investment
decisions, it performs its own investment analysis and does not rely principally
on the ratings assigned by the rating services. There are risks in applying
credit ratings as a method for evaluating high yield securities. For example,
credit ratings evaluate the safety of principal and interest payments, not the
market value risk of high yield securities, and credit rating agencies may fail
to make timely changes in credit ratings to reflect subsequent events. The
Manager's analysis includes traditional security analysis considerations such as
the issuer's experience and managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, and its responsiveness to
changes in business conditions and interest rates. It also considers relative
values based on anticipated cash flow, interest or dividend coverage, asset
coverage and earnings prospects. In addition, the Manager analyzes general
business conditions and other factors such as anticipated changes in economic
activity and interest rates, the availability of new investment opportunities,
and the economic outlook for specific industries. The Manager continuously
monitors the issuers of portfolio securities to determine if the issuers will
have sufficient cash flow and profits to meet required principal and interest
payments and to assure the securities' liquidity so the Fund can meet redemption
requests. During the year ended December 31, 1996 the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's,
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Baa 2.63%
Ba 38.86%
B 56.47%
C 2.04%
The above percentages for B and Ba rated securities include 2.72% and
- -1.13%, respectively, unrated securities which have been determined by the
Manager to be of comparable quality.
There may be times when, in the Manager's judgment, unusual market or
economic conditions make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times the
Manager may employ alternative strategies, primarily seeking to reduce
fluctuations in the value of the Fund's assets. In implementing these
"defensive" strategies, the Fund may temporarily invest in money-market
instruments of all types, higher-rated fixed-income securities or any other
fixed-income securities that the Fund considers consistent with such strategy.
The yield to maturity on these securities would generally be lower than the
yield to maturity on lower-rated fixed-income securities. It is impossible to
predict when, or for how long, such alternative strategies will be utilized.
The Fund's Manager buys and sells securities for the Fund principally in
response to its evaluation of an issuer's continuing ability to meet its
obligations, the availability of better investment opportunities, and its
assessment of changes in business conditions and interest rates. From time to
time, consistent with its investment objectives, the Fund may sell securities
that have appreciated in value because of declines in interest rates. It may
also trade securities for the purpose of seeking short-term profits. Securities
may be sold in anticipation of a market decline or bought in anticipation of a
market rise. They may also be traded for securities of comparable quality and
maturity to take advantage of perceived short-term disparities in market values
or yields.
MONEY MARKET FUND
The Principal Funds also include a Fund which invests primarily in
short-term securities, Principal Money Market Fund. Securities in which the
Money Market Fund will invest may not yield as high a level of current income as
securities of low quality and longer maturities which generally have less
liquidity, greater market risk and more fluctuation.
The Money Market Fund will limit its portfolio investments to United States
dollar denominated instruments that its board of directors determines present
minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in respect to
a class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security at the time of issuance was a long-term security that has a
remaining maturity of 397 calendar days or less, and whose issuer has
received from a nationally recognized statistical rating organization a
rating, with respect to a class of short-term debt obligations (or any
security within that class) that is now comparable in priority and
security with the security, in one of the two highest rating categories
for short-term debt obligations; or
(3) An unrated security that is of comparable quality to a security
meeting the requirements of (1) or (2) above, as determined by the
board of directors.
The Fund will not invest more than 5% of its total assets in the following
securities:
(1) Securities which, when acquired by the Fund (either initially or upon
any subsequent rollover), are rated below the highest rating category
for short-term debt obligations;
(2) Securities which, at the time of issuance were long-term securities but
when acquired by the Fund have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Fund's board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Fund will
maintain a dollar-weighted average portfolio maturity of 90 days or
less.
The objective of Principal Money Market Fund is to seek as high a level of
current income available from short-term securities as is considered consistent
with preservation of principal and maintenance of liquidity by investing its
assets in a portfolio of money market instruments. These money market
instruments are U.S. Government Securities, U.S. Government Agency Securities,
Bank Obligations, Commercial Paper, Short-term Corporate Debt and Repurchase
Agreements, which are described briefly below and in more detail in the
Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
The Fund intends to hold its investments until maturity, but may on
occasion trade securities to take advantage of market variations. Also, revised
valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at times when such sales might otherwise not be
desirable. The Fund's right to borrow to facilitate redemptions may reduce the
need for such sales. It is the Fund's policy to be as fully invested as
reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the Fund expects
to usually transact purchases and sales of portfolio securities with issuers or
dealers on a net basis, it is not anticipated that the Fund will pay any
significant brokerage commissions. The Fund is free to dispose of portfolio
securities at any time, when changes in circumstances or conditions make such a
move desirable in light of the investment objective.
A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Fund invests. The
rate of return and the net asset value will be affected by such other factors as
sales of portfolio securities prior to maturity and the Fund's operating
expenses.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Funds
may use in an effort to achieve their respective investment objectives.
Diversification
Each Fund is subject to the diversification requirements of Section 817(h)
of the Internal Revenue Code (the "Code") which must be met at the end of each
quarter of the year (or within 30 days thereafter). Regulations issued by the
Secretary of the Treasury have the effect of requiring each Fund to invest no
more than 55% of its total assets in securities of any one issuer, no more than
70% in the securities of any two issuers, no more than 80% in the securities of
any three issuers, and no more than 90% in the securities of any four issuers.
For this purpose, the United States Treasury and each U.S. Government agency and
instrumentality is considered to be a separate issuer. Thus, the Government
Securities Fund intends to invest in U.S. Treasury securities and in securities
issued by at least four U.S. Government agencies or instrumentalities in the
amounts necessary to meet those diversification requirements at the end of each
quarter of the year (or within thirty days thereafter).
In the event any of the Funds do not meet the diversification requirements
of Section 817(h) of the Code, the contracts funded by shares of the Funds will
not be treated as annuities or life insurance for Federal income tax purposes
and the owners of the Funds will be subject to taxation on their share of the
dividends and distributions paid by the Funds.
Foreign Securities
Each of the following Principal Funds has adopted investment restrictions that
limit its investments in foreign securities to the indicated percentage of its
assets: Bond, Capital Accumulation and High Yield - 20%; Balanced Fund and
Emerging Growth - 10%. Debt securities issued in the United States pursuant to a
registration statement filed with the Securities and Exchange Commission are not
considered "foreign securities" for purposes of this investment limitation.
Investment in foreign securities presents certain risks including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. A Fund's investment in foreign securities may also result
in higher custodial costs and the costs associated with currency conversions.
Repurchase Agreements
Each of the Funds, except the Capital Accumulation, may enter into
repurchase agreements with, and each of the Funds, except the Capital
Accumulation and Money Market Funds, may lend its portfolio securities to,
unaffiliated broker-dealers and other unaffiliated qualified financial
institutions. These transactions must be fully collateralized at all times, but
involve some credit risk to the Fund if the other party should default on its
obligations, and the Fund is delayed or prevented from recovering on the
collateral. See the Funds' Statement of Additional Information for further
information regarding the credit risks associated with repurchase agreements and
the standards adopted by each Fund's Board of Directors to deal with those
risks. None of the Funds intend either (i) to enter into repurchase agreements
that mature in more than seven days if any such investment, together with any
other illiquid securities held by the Fund, would amount to more than 10% of its
total assets or (ii) to loan securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Funds may enter into forward commitment
agreements which call for the Fund to purchase or sell a security on a future
date and at a price fixed at the time the Fund enters into the agreement. Each
of these Funds may also acquire rights to sell its investments to other parties,
either on demand or at specific intervals.
Warrants
Each of the Funds, except the Money Market Fund, may invest in warrants up
to 5% of its assets, of which not more than 2% may be invested in warrants that
are not listed on the New York or American Stock Exchange.
Borrowing
As a matter of fundamental policy, each Fund may borrow money only for
temporary or emergency purposes. The Balanced Fund, Bond Fund, Capital
Accumulation Fund, High Yield Fund and Money Market Fund may borrow only from
banks. Further, each may borrow only in an amount not exceeding 5% of its
assets, except the Capital Accumulation Fund which may borrow only in an amount
not exceeding the lesser of (i) 5% of the value of its assets less liabilities
other than such borrowings, or (ii) 10% of its assets taken at cost at the time
the borrowing is made, and the Money Market Fund which may borrow only in an
amount not exceeding the lesser of (i) 5% of the value of its assets, or (ii)
10% of the value of its net assets taken at cost at the time the borrowing is
made.
Options
The Balanced Fund, Bond Fund, Emerging Growth Fund and High Yield Fund may
purchase covered spread options, which would give the Fund the right to sell a
security that it owns at a fixed dollar spread or yield spread in relationship
to another security that the Fund does not own, but which is used as a
benchmark. These same Funds may also purchase and sell financial futures
contracts, options on financial futures contracts and options on securities and
securities indices, but will not invest more than 5% of their assets in the
purchase of options on securities, securities indices and financial futures
contracts or in initial margin and premiums on financial futures contracts and
options thereon. The Funds may write options on securities and securities
indices to generate additional revenue and for hedging purposes and may enter
into transactions in financial futures contracts and options on those contracts
for hedging purposes.
The Statement of Additional Information includes further information
concerning the Funds' investment policies and applicable investment
restrictions. Each Fund's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for a Fund are not fundamental and
may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISOR
The Manager for the Funds is Princor Management Corporation (the
"Manager"), an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the State of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969,
and since that time has managed various mutual funds sponsored by Principal
Mutual Life Insurance Company. As of December 31, 1996, the Manager served as
investment advisor for 26 such funds with assets totaling approximately $4.0
billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced Fund. The
Manager will reimburse Invista for the cost of providing these services.
Invista, an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance company and an affiliate of the Manager, was founded in 1985 and
manages investments for institutional investors, including Principal Mutual
Life. Assets under management at December 31, 1996 were approximately $19.6
billion. Invista's address is 1500 Hub Tower, 699 Walnut, Des Moines, Iowa
50309.
The Manager or Invista has assigned certain individuals the primary
responsibility for the day-to-day management of each Fund's portfolio. The
persons primarily responsible for the day-to-day management of each Fund are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Fund Responsible Since Person Primarily Responsible
- -------------------- ----------------- -----------------------------------------------------------------------------
<S> <C> <C>
Balanced April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President,
Invista Capital Management, Inc.
Bond November, 1996 Scott A. Bennett, CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company.
Capital Accumulation November, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice President,
(Fund's inception) Invista Capital Management, Inc.; Co-Manager since November, 1996: Catherine A.
Green, CFA, (MBA degree, Drake University). Vice President, Invista Capital
Management, Inc.
Emerging Growth December, 1987 Michael R. Hamilton, (BMBA degree, Bellarmine College). Vice President, Invista
(Fund's inception) Capital Management, Inc.
High Yield December, 1987 James K. Hovey, CFA (MBA degree University of Iowa). Director - Investment
(Fund's inception) Securities, Principal Mutual Life Insurance Company.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISOR
Under Maryland law, the business and affairs of each of the Funds are
managed under the direction of its Board of Directors. The investment services
and certain other services referred to under the heading "Cost of Manager's
Services" in the Statement of Additional Information are furnished to the Funds
under the terms of a Management Agreement between each of the Funds and the
Manager, and for the Balanced Fund, a Sub-Advisory Agreement between the Manager
and Invista. The Manager, or Invista, advises the Funds on investment policies
and on the composition of the Funds' portfolios. In this connection, the
Manager, or Invista, furnishes to the Board of Directors of each Fund a
recommended investment program consistent with that Fund's investment objective
and policies. The Manager, or Invista, is authorized, within the scope of the
approved investment program, to determine which securities are to be bought or
sold, and in what amounts.
The compensation paid by each Fund to the Manager for the fiscal year ended
December 31, 1996 was, on an annual basis, equal to the following percentage of
average net assets:
Total
Manager's Annualized
Fund Fee Expenses
Balanced Fund .60% .63%
Bond Fund .50% .53%
Capital Accumulation Fund .48% .49%
Emerging Growth Fund .64% .66%
High Yield Fund .60% .70%
Money Market Fund .50% .56%
The Manager, or Invista, may purchase at its own expense statistical and
other information or services from outside sources, including Principal Mutual
Life Insurance Company. An Investment Service Agreement between each Fund, the
Manager and Principal Mutual Life Insurance Company provides that Principal
Mutual Life Insurance Company will furnish certain personnel, services and
facilities required by the Manager in connection with its performance of the
Management Agreements, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard. The Investment Service
Agreements for the Capital Accumulation and Emerging Growth also include as a
party Invista Capital Management, Inc., an indirectly wholly-owned subsidiary of
Principal Mutual Life Insurance Company, and also provide that the subsidiaries
of Principal Mutual Life Insurance Company will furnish the same items and be
reimbursed by the Manager for their costs incurred in this regard.
The Funds may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc., a broker-dealer that is an affiliate of the Distributor and
Manager for each of the Funds.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company.
MANAGERS' COMMENTS
Princor Management Corporation and Invista are staffed with investment
professionals who manage each individual fund. Comments by these individuals in
the following paragraphs summarize in capsule form the general strategy and
recent results of each fund over the past year. The accompanying charts display
results for the past 10 years or the life of the fund, whichever is shorter.
Average Annual Total Return figures provided for each fund in the graphs below
reflect all expenses of the fund and assume all distributions are reinvested at
net asset value. The figures do not reflect expenses of the variable life
insurance contracts or variable annuity contracts that purchase fund shares;
performance figures for the divisions of the contracts would be lower than
performance figures for the funds due to the additional contract expenses. Past
performance is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
The various indices included in the graphs below are unmanaged and do not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.
Growth-Oriented Funds
Principal Balanced Fund
(Judith A. Vogel)
This balanced portfolio combines stocks, bonds and cash in a relatively
conservative mix which seeks to provide both capital appreciation and income to
the shareholder without taking on undue risk. The asset allocation of the Fund
generally approximates 60% stocks and 40% bonds. In the year ended December 31,
1996 the stock market produced exceptional results. Aided by a healthy economy,
continued corporate profit growth, and a good dose of investor enthusiasm, the
S&P 500 Stock Index advanced nearly 23%. Conditions in the bond market were less
supportive over the year. Long-term interest rates rose 0.70% in 1996, with a
lot of volatility along the way, causing the bond returns to hover between zero
and 3% for the year. Demonstrating its balanced nature, the Fund produced a 13%
annual return, about midway between stock and bond market results and very near
the Lipper Balanced Fund Average. The bond portion of the Fund's portfolio is
comprised of U.S. Government notes and bonds with an emphasis on safety of
principal. The stock portion of the portfolio is concentrated in companies with
stable or growing earnings that are not terribly sensitive to economic activity.
After six years of economic expansion resulting in high rates of resource
utilization, corporate profit growth is likely to come down, causing a scarcity
of earnings growth. Companies that can continue to grow earnings will be
afforded premium valuations. There is no independent market index against which
to measure returns of balanced portfolios, however, we show the S&P 500 Stock
Index for your information.
Total Returns *
As of December 31, 1996
---------------------------------------------------
Since Inception
1 Year 5 Year Date 12/18/87
13.13% 11.57% 12.16%
Comparison of Change in Value of $10,000 Investment in the
Balanced Fund, S&P 500 and Lipper Balanced Fund Average
----------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Mid Cap
December 31, Return Index Index
10,000 10,000 10,000
1988 11,637 11,661 11,229
1989 12,982 15,356 13,429
1990 12,147 14,877 13,355
1991 16,321 19,412 16,930
1992 18,410 20,891 18,122
1993 20,447 22,992 20,066
1994 20,019 23,294 19,561
1995 24,941 32,037 24,482
1996 28,215 39,388 27,851
Note: Past performance is not predictive of future performance.
Principal Capital Accumulation Fund
(David L. White)
The strategy with this portfolio is to hold common stocks of companies
based on a valuation that is attractive when compared to the market. The
analytical staff looks at companies' current valuations compared to the market,
then at historical information to compare valuations to historical averages. The
focus is on the fundamentals of an industry and the company to determine the
current and future outlook as these potential investments. From there the
portfolio is constructed to provide a diversified set of investments.
The Fund outperformed the S&P 500 Index and Lipper Growth and Income Fund
Average for 1996. The strength of the market was in much fewer stocks than in
the past. The volatility between industries was much greater than the overall
results. The Fund benefited from several areas of exposure. Banks and health
care were the strongest areas for the Fund during the year. The focus has been
away from the more cyclical areas of the economy which also helped during the
year. As the economic cycle progresses, the market places more emphasis on
companies with consistent earnings growth, and we have tended to overweight
these areas of the market. As the market performance continues to narrow,
however, it becomes increasingly difficult to select the correct areas of
overperformance.
Total Returns *
As of December 31, 1996
----------------------------------------
1 Year 5 Year 10 Year
23.50% 14.08% 13.08%
Comparison of Change in Value of $10,000 Investment in the
Capital Accumulation Fund, S&P 500 and Lipper Growth and Income Fund Average
----------------------------------------------------------------------------
Fund S&P 500 Lipper
Year Ended Total Stock Growth & Income
December 31, Return Index Fund Average
10,000 10,000 10,000
1987 10,647 10,526 10,184
1988 12,183 12,274 11,814
1989 14,155 16,163 14,596
1990 12,759 15,659 13,946
1991 17,693 20,433 18,002
1992 19,377 21,990 19,618
1993 20,888 24,201 21,884
1994 20,990 24,519 21,678
1995 27,688 33,722 28,360
1996 34,193 41,460 34,253
Note: Past performance is not predictive of future performance.
Principal Emerging Growth Fund
(Michael R. Hamilton)
The equity market was strong in 1996, but within the market there were two
different trends. Large-cap stocks performed much better than small-cap stocks.
The Emerging Growth Fund returned 19.13% compared with the Lipper Mid Cap
Average of 17.9%. The Fund and the Lipper Average trailed the S&P 500 Index
because of their emphasis on small cap stocks. While both trailed the S&P 500,
this was a good year for the fund.
The financial market continues to grapple with the paradox of strong
economic growth with no apparent inflation. Productivity will be key in 1997 if
inflation is to remain benign. The Fund's portfolio continues to be focused on
companies that should enhance productivity of both labor and capital. Several of
the technology, service and cyclical areas support this emphasis. The portfolio
is also overweighted in the financial sector as bank consolidation continues.
Continued profit growth will be important in 1997 as well. Companies with
more predictable and visible earnings growth are preferred. This continues to be
those that are low cost producers and have competitive barriers to entry.
Selectivity in all sectors will be crucial to outperformance.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
21.11% 16.64% 17.73%
Comparison of Change in Value of $10,000 Investment
in the Emerging Growth Fund, S&P 500 and
Lipper Mid Cap Fund Average
-----------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 MID CAP
December 31, Return Index Index
10,000 10,000 10,000
1988 12,369 11,661 11,476
1989 15,070 15,356 14,586
1990 13,186 14,877 14,067
1991 20,240 19,412 21,275
1992 23,264 20,891 23,213
1993 27,750 22,992 26,625
1994 27,967 23,294 26,079
1995 36,080 32,037 34,469
1996 43,697 39,388 40,646
Note: Past performance is not predictive of future performance.
Important Notes of the Growth-Oriented Funds:
Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average currently contains 272 mutual funds.
Lipper Growth & Income Fund Average: this average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one year average currently contains 522 funds.
Lipper Mid Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average currently contains 154 funds.
Income-Oriented Funds
Principal Bond Fund
(Scott A. Bennett)
The Principal Bond Fund's performance in 1996 lagged when compared to 1995.
1995 was a banner year, mainly because of dramatically declining interest rates.
During 1996 interest rates increased throughout most of the year based on fears
of increasing inflation. This hurt the Fund's relative performance as the
duration target of 7 years (actual duration at 12/31/96 was 6.98 years) is
longer than the average BBB rated bond fund and the BAA Lehman Corporate Index.
Relative performance was also negatively impacted by the lack of a significant
amount of less than investment grade bonds in the portfolio. High yield (less
than investment grade) debt performed extremely well during 1996, with many of
the top performing funds in the Lipper BAA universe having significant exposures
to this asset class.
Over the long-term, the Fund continues to outperform the average BBB fund.
This is attributed to remaining fully invested and not trying to guess interest
rates. The BBB corporate bond class continued to be an attractive asset class in
1996, outperforming all other taxable investment grade classes. Spreads
continued to narrow during the year with defaults low and a large amount of
funds chasing the available bonds.
Total Returns *
As of December 31, 1996
- --------------------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
2.36% 8.20% 9.55%
Comparison of Change in Value of $10,000 Investment in the Bond Fund, Lehman
Brothers BAA Corporate Index and Lipper Corporate Debt BBB Rated Fund Average
-----------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total BAA BBB
December 31, Return Index Avg
10,000 10,000 10,000
1988 10,991 11,129 10,900
1989 12,514 12,699 12,060
1990 13,167 13,595 12,751
1991 15,369 16,113 15,020
1992 16,810 17,512 16,258
1993 18,771 19,665 18,261
1994 18,227 18,707 17,447
1995 22,268 22,959 20,948
1996 22,794 23,882 21,616
Note: Past performance is not predictive of future performance.
Principal High Yield Fund
(James K. Hovey)
While most bond investments had very low returns for 1996, high yield bonds
in general and the Principal High Yield Fund included had a good year. The
Fund's total return for 1996 was 13.13% which compares to 11.35% for the Lehman
Brothers High Yield Index and 13.67% for the Lipper High Current Yield Fund
Average. For comparison, 10 year U.S. Treasury bonds had a total return for 1996
of 0.04%. This low return was caused by increasing interest rates causing the
value of Treasury bonds to fall.
High yield bonds are somewhat insulated from interest rate movements due to
their characteristic of a large risk premium or spread that can offset general
interest rate movements for assets with less credit risk. In 1996, the risk
premium for high yield bonds declined enough to not only offset the risk free
interest rate increase, but also to allow price increases of many high yield
bonds. While the annual total return performance was similar to both Lipper and
Lehman, the Fund underperformed both during the first two quarters and
outperformed during the third and fourth quarters of the year. Our Fund has a B+
average credit rating and has approximately the same amount of BB exposure as B
exposure. This more closely resembles the Lehman index while high yield mutual
funds, as reflected by the Lipper average, typically have a riskier credit
profile than our Fund. This risk profile was an advantage to the Lipper average
over the first two quarters as risk premium tightening was more pronounced in
riskier bonds. Our Fund significantly outperformed in the fourth quarter due to
excellent performance by individual securities that were upgraded or for which
tender offers had been received at attractive levels. Our Fund also benefited
over the course of the year by not having any credit defaults. The return
performance of the Fund during 1996 is a good indicator of how high yield is a
worthwhile asset class that can enhance diversification. The decline of risk
premiums will make outperformance of other types of income oriented funds more
difficult going forward, but also makes our conservative risk position even more
appropriate.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
13.13% 11.20% 9.89%
Comparison of Change in Value of $10,000 Investment in the High Yield Fund,
Lehman Brothers High Yield Index and Lipper High Current Yield Fund Average
Fund Lehman Lipper
Year Ended Total High Yield Narrow
December 31, Return Index Index
10,000 10,000 10,000
1988 11,492 11,524 11,298
1989 11,735 11,620 11,239
1990 10,831 10,506 10,059
1991 13,788 15,346 13,876
1992 15,798 17,764 16,352
1993 17,743 20,803 19,500
1994 17,854 20,593 18,753
1995 20,725 24,549 21,844
1996 23,446 27,335 24,830
Note: Past performance is not predictive of future performance.
Important Notes of the Income-Oriented Funds:
Lehman Brothers, BAA Corporate Index: an unmanaged index of all publicly issued
fixed rate nonconvertible, dollar-denominated, SEC-registered corporate debt
rated Baa or BBB by Moody's or S&P.
Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average
currently contains 102 mutual funds.
Lehman Brothers High Yield Index: an unmanaged index of all publicly issued
fixed, dollar-denominated, SEC-registered corporate debt rated Ba1 or lower with
at least $100 million outstanding and one-year or more to maturity.
Lipper High Current Yield Fund Average: this average consists of mutual funds
investing in high (relative) current yield fixed income securities with no
quality or maturity restrictions. The mutual funds tend to invest in lower grade
debt issues. The one year average currently contains 148 mutual funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE OF FUND SHARES
The net asset value of each Fund's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange,
except on days on which changes in the value of the Fund's portfolio securities
will not materially affect the current net asset value of the Fund's redeemable
securities, on days during which a Fund receives no order for the purchase or
sale of its redeemable securities and no tender of such a security for
redemption, and on customary national business holidays. The net asset value per
share of each Fund is determined by dividing the value of the Fund's securities
plus all other assets, less all liabilities, by the number of Fund shares
outstanding.
Growth-Oriented and Income-Oriented Funds
The following valuation information applies to the Growth-Oriented and
Income-Oriented Funds. Securities for which market quotations are readily
available are valued using those quotations. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.
As previously described, some of the Funds may purchase foreign securities
whose trading is substantially completed each day at various times prior to the
close of the New York Stock Exchange. The values of such securities used in
computing net asset value per share are usually determined as of such times.
Occasionally, events which affect the values of such securities and foreign
currency exchange rates may occur between the times at which they are generally
determined and the close of the New York Stock Exchange and would therefore not
be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
by the Manager under procedures established and regularly reviewed by the Board
of Directors. To the extent the Fund invests in foreign securities listed on
foreign exchanges which trade on days on which the Fund does not determine its
net asset value, for example Saturdays and other customary national U.S.
Holidays, the Fund's net asset value could be significantly affected on days
when shareholders have no access to the Fund.
Money Market Fund
The Money Market Fund values its securities at amortized cost. For a
description of this calculation procedure see the Funds' Statement of Additional
Information.
PERFORMANCE CALCULATION
From time to time, the Funds may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Funds. The Funds' yield and total return
figures described below will vary depending upon market conditions, the
composition of the Funds' portfolios and operating expenses. These factors and
possible differences in the methods used in calculating yield and total return
should be considered when comparing the Funds' performance figures to
performance figures published for other investment vehicles. The Funds may also
quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices. Any performance data quoted for the Funds represents only
historical performance and is not intended to indicate future performance of the
Funds. The calculation of average annual total return and yield for the Funds
does not include fees and charges of the separate accounts that invest in the
Funds and, therefore, does not reflect the investment performance of those
separate accounts. For further information on how the Funds calculate yield and
total return figures, see the Statement of Additional Information.
Average Annual Total Return
Each Fund may advertise its respective average annual total return. Average
annual total return for each Fund is computed by calculating the average annual
compounded rate of return over the stated period that would equate an initial
$1,000 investment to the ending redeemable value assuming the reinvestment of
all dividends and capital gains distributions at net asset value. The same
assumptions are made when computing cumulative total return by dividing the
ending redeemable value by the initial investment. The Funds may also quote
rankings, yields or returns as published by independent statistical services or
publishers, and information regarding the performance of certain market indices.
Yield and Effective Yield
From time to time the Money Market Fund may advertise its respective yield
and effective yield. The yield of the Fund refers to the income generated by an
investment in the Fund over a seven-day period. This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
The yield for the Money Market Fund will fluctuate daily as the income
earned on the investments of the Fund fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Fund is an open-end investment company and there is no
guarantee that the net asset value or any stated rate of return will remain
constant. A shareholder's investment in the Fund is not insured. Investors
comparing results of the Fund with investment results and yields from other
sources such as banks or savings and loan associations should understand these
distinctions. Historical and comparative yield information may, from time to
time, be presented by the Fund.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
It is the policy of each Fund to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Funds intend to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which a
Fund so qualifies it will be exempt from federal income tax upon the amounts so
distributed to investors.
Any dividends from the net investment income of the Funds (except the Money
Market Fund) will normally be payable to the shareholders annually, and any net
realized gains will be distributed annually. All dividends and capital gains
distributions are applied to purchase additional Fund shares at net asset value
as of the payment date without the imposition of any sales charge.
Each Fund will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Funds to consult with tax advisors on the federal and
state tax aspects of their investments and redemptions.
Money Market Fund
The Money Market Fund declares dividends of all its daily net investment
income on each day the Fund's net asset value per share is determined. Dividends
are payable daily and are automatically reinvested in full and fractional shares
of the Fund at the then current net asset value unless a shareholder requests
payment in cash.
Net investment income, for dividend purposes, consists of (1) accrued
interest income plus or minus accrued discount or amortized premium; plus or
minus (2) all net short-term realized gains and losses; minus (3) all accrued
expenses of the Fund. Expenses of the Fund are accrued each day. Net income will
be calculated immediately prior to the determination of net asset value per
share of the Fund.
Since the Fund's policy is, under normal circumstances, to hold portfolio
securities to maturity and to value portfolio securities at amortized cost, it
does not expect any capital gains or losses. If the Fund does experience gains,
however, it could result in an increase in dividends. Capital losses could
result in a decrease in dividends. If for some extraordinary reason the Fund
realizes net long-term capital gains, it will distribute them once every 12
months.
Since the net income of the Fund (including realized gains and losses on
the portfolio securities) is declared as a dividend each time the net income of
the Fund is determined, the net asset value per share of the Fund normally
remains at $1.00 immediately after each determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Fund,
representing reinvestment of dividend income, is reflected by an increase in the
number of shares of the Fund in the account.
Normally the Fund will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Fund determined
at any time is a negative amount, the net asset value per share will be reduced
below $1.00. If this happens, the Fund may endeavor to restore the net asset
value per share to $1.00 by reducing the number of outstanding shares by
redeeming proportionately from shareholders without the payment of any monetary
consideration, such number of full and fractional shares as is necessary to
maintain a net asset value per share of $1.00. Each shareholder will be deemed
to have agreed to such a redemption in these circumstances by investing in the
Fund. The Fund may seek to achieve the same objective of restoring the net asset
value per share to $1.00 by not declaring dividends from net income on
subsequent days until restoration, with the result that the net asset value per
share would increase to the extent of positive net income which is not declared
as a dividend, or any other method approved by the Board of Directors.
The Board of Directors may revise the above dividend policy, or postpone
the payment of dividends, if the Fund should have or anticipate any large
presently unexpected expense, loss or fluctuation in net assets which in the
opinion of the Board might have a significant adverse affect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Funds. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Fund shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of each
Fund reserves the right to broaden or limit the designation of Eligible
Purchasers.
Principal Balanced, Principal Bond, Principal Capital Accumulation Fund,
Principal Emerging Growth and Principal Money Market Fund each serve as an
underlying investment medium for variable annuity contracts and variable life
insurance policies that are funded in separate accounts established by Principal
Mutual Life Insurance Company. It is conceivable that in the future it may be
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the Funds simultaneously. Although
neither Principal Mutual Life Insurance Company nor the Funds currently foresee
any such disadvantages either to variable life insurance policy owners or to
variable annuity contract owners, each Fund's Board of Directors intends to
monitor events in order to identify any material conflicts between such policy
owners and contract owners and to determine what action, if any, should be taken
in response thereto. Such action could include the sale of Fund shares by one or
more of the separate accounts, which could have adverse consequences. Material
conflicts could result from, for example, (1) changes in state insurance laws,
(2) changes in Federal income tax law, (3) changes in the investment management
of the Fund, or (4) differences in voting instructions between those given by
policy owners and those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Funds. There are no sales charges on the Funds'
shares. There are no restrictions on amounts to be invested in the Funds'
shares.
Shareholder accounts for each Fund will be maintained under an open account
system. Under this system, an account is automatically opened and maintained for
each new investor. Each investment is confirmed by sending the investor a
statement of account showing the current purchase and the total number of shares
then owned. The statement of account is treated by each Fund as evidence of
ownership of Fund shares in lieu of stock certificates, and unless written
request is made to the Fund, stock certificates will not be issued or delivered
to investors. Certificates, which can be stolen or lost, are unnecessary except
for special purposes such as collateral for a loan. Fractional interests in the
Funds' shares are reflected to three decimal places in the statement of account,
but any stock certificates will be issued only for full shares owned.
If an offer to purchase shares is received by any of the Funds before the
close of trading on the New York Stock Exchange, the shares will be issued at
the offering price (net asset value of Fund shares) computed on that day. If an
offer is received after the close of trading or on a day which is not a trading
day, the shares will be issued at the offering price computed on the first
succeeding day on which a price is determined. Dividends on the Money Market
Fund shares will be paid on the next day following the effective date of a
purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each of the Principal Funds.
Each Fund share is entitled to one vote either in person or by proxy at all
shareholder meetings for that Fund. This includes the right to vote on the
election of directors, selection of independent accountants and other matters
submitted to meetings of shareholders. Each share has equal rights with every
other share as to dividends, earnings, voting, assets and redemption. Shares are
fully paid and non-assessable, and have no preemptive or conversion rights.
Shares may be issued as full or fractional shares, and each fractional share has
proportionately the same rights, including voting, as are provided for a full
share. Shareholders of each of these Funds may remove any director with or
without cause by the vote of a majority of the votes entitled to be cast at a
meeting of shareholders.
The bylaws of each Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of each Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Funds intend to hold shareholder meetings only when required by
law and at such other times as may be deemed appropriate by their respective
Boards of Directors.
Shareholder inquiries should be directed to the applicable Fund at The
Principal Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Funds' shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of a Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Fund's shares allocated
to each of its separate accounts registered under the Investment Company Act of
1940 and attributable to variable annuity contracts or variable life insurance
policies participating therein in accordance with instructions received from
contract or policy holders, participants and annuitants. Other shares of each
Fund held by each registered separate account, including those for which no
timely instructions are received, are voted in proportion to the instructions
that are received with respect to contracts or policies participating in that
separate account. Shares of each of the Funds held in the general account of
Principal Mutual Life Insurance Company or in its unregistered separate accounts
are voted in proportion to the instructions that are received with respect to
contracts and policies participating in its registered and unregistered separate
accounts. If Principal Mutual determines pursuant to applicable law that a
Fund's shares held in one or more separate accounts or in its general account
need not be voted pursuant to instructions received with respect to
participating contracts or policies, it then may vote those Fund shares in its
own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Fund will redeem its shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Fund requesting redemption of any part or all of the
shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, the Fund will not require a signature guarantee as a part of a
proper endorsement; otherwise the shareholder's signature must be guaranteed by
either a commercial bank, trust company, credit union, savings and loan
association, national securities exchange member, or by a brokerage firm. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Fund in proper and complete form. The amount received for shares
upon redemption may be more or less than the cost of such shares depending upon
the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Fund may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Fund of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Fund
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Fund. A Fund will
redeem only those shares for which it has good payment. To avoid the
inconvenience of such a delay, shares may be purchased with a certified check,
bank cashier's check or money order. During the period prior to the time a
redemption from the Money Market Fund is effective, dividends on such shares
will accrue and be payable and the shareholder will be entitled to exercise all
other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Funds may be transferred to an
Eligible Purchaser. However, whenever any of the Funds is requested to transfer
shares to other than an Eligible Purchaser, the Fund has the right at its
election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Fund must notify the transferee or transferees of such shares
in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Funds. The
custodian performs no managerial or policymaking functions for the Funds.
Organization and Share Ownership: The Funds were incorporated in the state
of Maryland on the following dates: Balanced Fund - November 26, 1986; Bond Fund
- - November 26, 1986; Capital Accumulation Fund - May 26, 1989 (effective
November 1, 1989 succeeded to the business of a predecessor Fund that had been
incorporated in Delaware on February 6, 1969); Emerging Growth Fund - February
20, 1987; High Yield Fund - December 2, 1986; and Money Market Fund - June 10,
1982. Principal Mutual Life Insurance Company owns 100% of each Fund's
outstanding shares.
Capitalization: The authorized capital stock of each Fund consists of
100,000,000 shares of common stock (500,000,000 for Principal Money Market Fund,
Inc.), $.01 par value.
Financial Statements: Copies of the financial statements of each Fund will
be mailed to each shareholder of that Fund semi-annually. At the close of each
fiscal year, each Fund's financial statements will be audited by a firm of
independent auditors. The firm of Ernst & Young LLP has been appointed to audit
the financial statements of each Fund for their respective present fiscal years.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the
Funds have filed with the Securities and Exchange Commission. The Funds'
Statement of Additional Information is hereby incorporated by reference into
this Prospectus. A copy of the Funds' Statement of Additional Information can be
obtained upon request, free of charge, by writing or telephoning the Fund. You
may obtain a copy of Part C of the Registration Statements filed with the
Securities and Exchange Commission, Washington, D.C., from the Commission upon
payment of the prescribed fees.
Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for each of the Principal Funds.
The Principal(R) Mutual Funds ("Principal Funds") described in this
Prospectus are a family of separately incorporated, diversified, open-end
management investment companies, commonly called mutual funds, which provide the
following range of investment objectives:
Growth-Oriented Funds
PRINCIPAL Balanced Fund, Inc. seeks to generate a total return consisting of
current income and capital appreciation while assuming reasonable risks in
furtherance of the investment objective.
PRINCIPAL Capital Accumulation Fund, Inc. seeks to achieve primarily long-term
capital appreciation and secondary growth of investment income through the
purchase primarily of common stocks, but the Fund may invest in other
securities.
PRINCIPAL Emerging Growth Fund, Inc. seeks to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
PRINCIPAL Growth Fund, Inc. seeks growth of capital through the purchase
primarily of common stocks, but the Fund may invest in other securities.
PRINCIPAL World Fund, Inc. seeks long-term growth of capital by investing in a
portfolio of equity securities of companies domiciled in any of the nations of
the world.
Income-Oriented Funds
PRINCIPAL Bond Fund, Inc. seeks to provide as high a level of income as is
consistent with preservation of capital and prudent investment risk.
PRINCIPAL Government Securities Fund, Inc. seeks a high level of current income,
liquidity and safety of principal. The Fund seeks to achieve its objective
through the purchase of obligations issued or guaranteed by the United States
Government or its agencies, with emphasis on Government National Mortgage
Association Certificates ("GNMA Certificates"). Fund shares are not guaranteed
by the United States Government.
Money Market Fund
PRINCIPAL Money Market Fund, Inc. seeks as high a level of income available from
short-term securities as is considered consistent with preservation of principal
and maintenance of liquidity by investing all of its assets in a portfolio of
money market instruments.
An investment in the Money Market fund is neither insured nor guaranteed by
the U.S. Government. There can be no assurance the Money Market Funds will be
able to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Funds that
an investor ought to know before investing. It should be read and retained for
future reference.
Additional information about the Funds has been filed with the Securities
and Exchange Commission, including a document called Statement of Additional
Information, dated May 1, 1997. The Statement of Additional Information is
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Mutual Funds
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is May 1, 1997.
TABLE OF CONTENTS
Page
Summary .............................................................. 3
Financial Highlights................................................... 5
Investment Objectives, Policies and Restrictions....................... 10
Certain Investment Policies and Restrictions........................... 16
Manager and Sub-Advisor .............................................. 19
Duties Performed by the Manager and Sub-Advisor........................ 20
Managers' Comments..................................................... 21
Determination of Net Asset Value of Fund Shares........................ 25
Performance Calculation................................................ 26
Income Dividends, Distributions and Tax Status......................... 27
Eligible Purchasers and Purchase of Shares............................. 28
Shareholder Rights .................................................... 28
Redemption of Shares................................................... 29
Additional Information................................................. 30
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, the securities of any of the Funds in any jurisdiction in which
such sale, offer to sell, or solicitation may not be lawfully made. No dealer,
salesperson, or other person has been authorized to give any information or to
make any representations, other than those contained in this Prospectus, in
connection with the offer contained in this Prospectus, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Funds or the Funds' Manager.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Funds are separately incorporated, open-end diversified
management investment companies.
Who may purchase shares of the Funds?
Shares of the Funds are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of each Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Funds offer investors?
Professional Investment Management: Experienced securities analysts provide
each Fund with professional investment management.
Diversification: Each Fund will diversify by investing in securities issued
by a number of issuers doing business in a variety of industries and/or located
in different geographical regions. Diversification reduces investment risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Funds creates administrative efficiencies.
Redeemability: Upon request each Fund will redeem its shares and promptly
pay the investor the current net asset value of the shares redeemed. See
"Redemption of Shares."
What are the Funds' investment objectives?
Growth-Oriented Funds
The investment objective of Principal Balanced Fund, Inc. (sometimes
referred to as the Balanced Fund) is to seek to generate a total return
consisting of current income and capital appreciation while assuming reasonable
risks in furtherance of this objective.
The primary investment objective of Principal Capital Accumulation Fund,
Inc. (sometimes referred to as the Capital Accumulation Fund) is long-term
capital appreciation and its secondary investment objective is growth of
investment income. The Fund seeks to achieve its investment objectives through
the purchase primarily of common stocks, but the Fund may invest in other
securities.
The investment objective of Principal Emerging Growth Fund, Inc. (sometimes
referred to as the Emerging Growth Fund) is to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
The investment objective of Principal Growth Fund, Inc. (sometimes referred
to as the Growth Fund) is growth of capital. The Fund seeks to achieve its
objective through the purchase primarily of common stocks, but the Fund may
invest in other securities.
The investment objective of Principal World Fund, Inc. (sometimes referred
to as the World Fund) is to seek long-term growth of capital by investing in a
portfolio of equity securities domiciled in any of the nations of the world.
Income-Oriented Funds
The investment objective of Principal Bond Fund, Inc. (sometimes referred
to as the Bond Fund) is to provide as high a level of income as is consistent
with preservation of capital and prudent investment risk.
The investment objective of Principal Government Securities Fund, Inc.
(sometimes referred to as the Government Securities Fund) is to seek a high
level of current income, liquidity and safety of principal. The Fund seeks to
achieve its objective through the purchase of obligations issued or guaranteed
by the United States Government or its agencies, with emphasis on Government
National Mortgage Association Certificates ("GNMA Certificates"). Fund shares
are not guaranteed by the United States Government.
Money Market Fund
The investment objective of Principal Money Market Fund, Inc. (sometimes
referred to as the Money Market Fund) is to seek as high a level of current
income available from short-term securities as is considered consistent with
preservation of principal and maintenance of liquidity by investing all of its
assets in a portfolio of money market instruments.
There can be no assurance that the investment objectives of any of the
Funds will be realized. See "Investment Objectives, Policies and Restrictions."
Who serves as Manager for the Funds?
Princor Management Corporation, a corporation organized in 1969 by
Principal Mutual Life Insurance Company, is the Manager for each of the Funds.
It is also the dividend disbursing and transfer agent for the Principal Funds.
In order to provide investment advisory services for the Balanced, Growth and
World Funds the Manager has executed sub-advisory agreements with Invista
Capital Management, Inc. ("Invista" or "Sub-Advisor"). See "Manager and
Sub-Advisor."
What fees and expenses apply to ownership of shares of the Funds?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Funds.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Fund Fee Expenses Expenses
Balanced Fund .60 .03 .63
Bond Fund .50 .03 .53
Capital Accumulation Fund .48 .01 .49
Emerging Growth Fund .64 .02 .66
Government Securities Fund .50 .02 .52
Growth Fund .50 .02 .52
Money Market Fund .50 .06 .56
World Fund .75 .15 .90
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Period (in years)
_____________________________________________
Fund 1 3 5 10
Balanced Fund $6 $20 $35 $79
Bond Fund $5 $17 $30 $66
Capital Accumulation Fund $5 $16 $27 $62
Emerging Growth Fund $7 $21 $37 $82
Government Securities Fund $5 $17 $29 $65
Growth Fund $5 $17 $29 $65
Money Market Fund $6 $18 $31 $70
World Fund $9 $29 $50 $111
This Example is based on the Annual Fund Operating expenses for each Fund
described above. Please remember that the Example should not be considered
a representation of past or future expenses and that actual expenses may be
greater or less than shown.
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in the Funds will bear directly or
indirectly. See "Duties Performed by the Manager and Sub-Advisor."
FINANCIAL HIGHLIGHTS
The following financial highlights for the periods ended December 31, 1996
and prior thereto are derived from financial statements which have been audited
by Ernst & Young LLP, independent auditors, whose report has been incorporated
by reference herein. The financial highlights should be read in conjunction with
the financial statements, related notes, and other financial information
incorporated by reference herein. Audited financial statements may be obtained
by shareholders, without charge, by telephoning 1-800-451-5447.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
___________________________________ ____________________________________________________
Net Realized
and
Net Asset Unrealized Total Dividends Excess
Value at Net Gain from from Net Distributions Distributions
Beginning Investment (Loss) on Investment Investment from from Total
of Period Income Investments Operations Income Capital Gains Capital Gains Distributions
Principal Balanced
Fund, Inc.(a)
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $13.97 $ .40 $ 1.41 $1.81 $(.40) $(.94) $ -- $(1.34)
1995 11.95 .45 2.44 2.89 (.45) (.42) -- (.87)
1994 12.77 .37 (.64) (.27) (.37) (.18) -- (.55)
1993 12.58 .42 .95 1.37 (.42) (.76) -- (1.18)
Six Months Ended
December 31, 1992(d) 12.93 .23 .75 .98 (.47) (.86) -- (1.33)
Year Ended June 30,
1992 11.33 .47 1.61 2.08 (.48) -- -- (.48)
1991 10.79 .54 .59 1.13 (.57) (.02) -- (.59)
1990 11.89 .60 (.48) .12 (.63) (.59) -- (1.22)
1989 11.75 .62 .30 .92 (.55) (.23) -- (.78)
Period Ended June 30,
1988(e) 10.00 .27 1.51 1.78 (.03) -- -- (.03)
Principal Bond Fund, Inc.
Year Ended December 31,
1996 11.73 .68 (.40) .28 (.68) -- -- (.68)
1995 10.12 .62 1.62 2.24 (.63) -- -- (.63)
1994 11.16 .72 (1.04) (.32) (.72) -- -- (.72)
1993 10.77 .88 .38 1.26 (.87) -- -- (.87)
Six Months Ended
December 31, 1992(d) 11.08 .45 .13 .58 (.89) -- -- (.89)
Year Ended June 30,
1992 10.64 .91 .46 1.37 (.93) -- -- (.93)
1991 10.72 .94 (.06) .88 (.96) -- -- (.96)
1990 10.92 .95 (.21) .74 (.94) -- -- (.94)
1989 10.68 1.15 .17 1.32 (.96) (.12) -- (1.08)
Period Ended June 30,
1988(e) 10.00 .32 .40 .72 (.04) -- -- (.04)
Principal Capital
Accumulation Fund, Inc.
Year Ended December 31,
1996 27.80 .57 5.82 6.39 (.58) (3.77) -- (4.35)
1995 23.44 .60 6.69 7.29 (.60) (2.33) -- (2.93)
1994 24.61 .62 (.49) .13 (.61) (.69) -- (1.30)
1993 25.19 .61 1.32 1.93 (.60) (1.91) -- (2.51)
Six Months Ended
December 31, 1992(d) 26.03 .31 1.84 2.15 (.64) (2.35) -- (2.99)
Year Ended June 30,
1992 23.35 .65 2.70 3.35 (.67) -- -- (.67)
1991 22.48 .74 1.22 1.96 (.79) (.30) -- (1.09)
1990 23.63 .79 .14 .93 (.81) (1.27) -- (2.08)
1989 23.23 .77 1.32 2.09 (.68) (1.01) -- (1.69)
1988 27.51 .60 (1.50) (.90) (.69) (2.69) -- (3.38)
1987 25.48 .40 4.46 4.86 (.50) (2.33) -- (2.83)
Principal Emerging Growth
Fund, Inc. (f)
Year Ended December 31,
1996 25.33 .22 5.07 5.29 (.22) (.66) -- (.88)
1995 19.97 .22 5.57 5.79 (.22) (.21) -- (.43)
1994 20.79 .14 .03 .17 (.14) (.85) -- (.99)
1993 18.91 .17 3.47 3.64 (.17) (1.59) -- (1.76)
Six Months Ended
December 31, 1992(d) 15.97 .10 3.09 3.19 (.21) (.04) -- (.25)
Year Ended June 30,
1992 13.93 .21 2.04 2.25 (.21) -- -- (.21)
1991 14.25 .20 .50 .70 (.23) (.79) -- (1.02)
1990 13.35 .24 .87 1.11 (.20) (.01) -- (.21)
1989 12.85 .16 1.35 1.51 (.11) (.90) -- (1.01)
Period Ended June 30,
1988(e) 10.00 .05 2.83 2.88 (.03) -- -- (.03)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
______________________________________________________
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
Principal Balanced
Fund, Inc.(a)
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $14.44 13.13% $ 93,158 .63% 3.45% 22.6% $.0417
1995 13.97 24.58% 45,403 .66% 4.12% 25.7% N/A
1994 11.95 (2.09)% 25,043 .69% 3.42% 31.5% N/A
1993 12.77 11.06% 21,399 .69% 3.30% 15.8% N/A
Six Months Ended
December 31, 1992(d) 12.58 8.00%(b) 18,842 .73%(c) 3.71%(c) 38.4%(c) N/A
Year Ended June 30,
1992 12.93 18.78% 17,344 .72% 3.80% 26.6% N/A
1991 11.33 11.36% 14,555 .73% 5.27% 27.1% N/A
1990 10.79 .87% 13,016 .74% 5.52% 33.1% N/A
1989 11.89 8.55% 12,751 .74% 5.55% 29.3% N/A
Period Ended June 30,
1988(e) 11.75 17.70%(b) 11,469 .80%(c) 4.96%(c) 41.7%(c) N/A
Principal Bond Fund, Inc.
Year Ended December 31,
1996 11.33 2.36% 63,387 .53% 7.00% 1.7% N/A
1995 11.73 22.17% 35,878 .56% 7.28% 5.9% N/A
1994 10.12 (2.90)% 17,108 .58% 7.86% 18.2% N/A
1993 11.16 11.67% 14,387 .59% 7.57% 14.0% N/A
Six Months Ended
December 31, 1992(d) 10.77 5.33%(b) 12,790 .62%(c) 8.10%(c) 6.7%(c) N/A
Year Ended June 30,
1992 11.08 13.57% 12,024 .62% 8.47% 6.1% N/A
1991 10.64 8.94% 10,552 .63% 9.17% 2.7% N/A
1990 10.72 7.15% 9,658 .64% 9.09% 0.0% N/A
1989 10.92 13.51% 9,007 .64% 9.18% 12.2% N/A
Period Ended June 30,
1988(e) 10.68 6.06%(b) 17,598 .58%(c) 8.11%(c) 68.8%(c) N/A
Principal Capital
Accumulation Fund, Inc.
Year Ended December 31,
1996 29.84 23.50% 205,019 .49% 2.06% 48.5% .0426
1995 27.80 31.91% 135,640 .51% 2.25% 49.2% N/A
1994 23.44 .49% 120,572 .51% 2.36% 44.5% N/A
1993 24.61 7.79% 128,515 .51% 2.49% 25.8% N/A
Six Months Ended
December 31, 1992(d) 25.19 8.81%(b) 105,355 .55%(c) 2.56%(c) 39.7%(c) N/A
Year Ended June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8% N/A
1991 23.35 9.46% 76,537 .53% 3.53% 14.0% N/A
1990 22.48 3.94% 74,008 .56% 3.56% 30.2% N/A
1989 23.63 10.02% 68,132 .57% 3.53% 23.5% N/A
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7% N/A
1987 27.51 22.17% 57,478 .63% 1.99% 16.1% N/A
Principal Emerging Growth
Fund, Inc. (f)
Year Ended December 31,
1996 29.74 21.11% 137,161 .66% 1.07% 8.8% .0379
1995 25.33 29.01% 58,520 .70% 1.23% 13.1% N/A
1994 19.97 .78% 23,912 .74% 1.15% 12.0% N/A
1993 20.79 19.28% 12,188 .78% .89% 22.4% N/A
Six Months Ended
December 31, 1992(d) 18.91 20.12%(b) 9,693 .81%(c) 1.24%(c) 8.6%(c) N/A
Year Ended June 30,
1992 15.97 16.19% 7,829 .82% 1.33% 10.1% N/A
1991 13.93 5.72% 6,579 .89% 1.70% 11.1% N/A
1990 14.25 8.32% 6,067 .88% 1.74% 17.9% N/A
1989 13.35 13.08% 5,509 .90% 1.31% 21.4% N/A
Period Ended June 30,
1988(e) 12.85 28.72%(b) 4,857 .94%(c) .64%(c) 4.6%(c) N/A
</TABLE>
Notes to financial highlights
(a) Effective May 1, 1994, the name of Principal Managed Fund, Inc. was changed
to Principal Balanced Fund, Inc.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(e) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December
10, 1987 through December 17, 1987 was recognized, all of which was
distributed to the Fund's sole stockholder, Principal Mutual Life Insurance
Company. This represented activity of the fund prior to the initial
offering of shares to eligible purchasers.
(f) Effective May 1, 1992, the name of Principal Aggressive Growth Fund, Inc.
was changed to Principal Emerging Growth Fund, Inc.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
___________________________________ ____________________________________________________
Net Realized
and
Net Asset Unrealized Total Dividends Excess
Value at Net Gain from from Net Distributions Distributions
Beginning Investment (Loss) on Investment Investment from from Total
of Period Income Investments Operations Income Capital Gains Capital Gains Distributions
Principal Government
Securities Fund, Inc.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $10.55 $.59 $ (.24) $ .35 $(.59) $ -- $ -- $ (.59)
1995 9.38 .60 1.18 1.78 (.61) -- -- (.61)
1994 10.61 .76 (1.24) (.48) (.75) -- -- (.75)
1993 10.28 .71 .33 1.04 (.71) -- -- (.71)
Six Months Ended
December 31, 1992(a) 10.93 .40 .04 .44 (.78) -- (.31) (1.09)
Year Ended June 30,
1992 10.24 .80 .71 1.51 (.81) -- (.01) (.82)
1991 10.05 .80 .24 1.04 (.81) -- (.04) (.85)
1990 10.05 .78 -- .78 (.78) -- -- (.78)
1989 9.37 .80 .34 1.14 (.46) -- -- (.46)
1988 9.47 .78 (.09) .69 (.79) -- -- (.79)
Period Ended June 30,
1987(d) 10.00 .18 (.59) (.41) (.12) -- -- (.12)
Principal Growth Fund, Inc.
Year Ended December 31,
1996 12.43 .16 1.39 1.55 (.16) (.03) -- (.19)
1995 10.10 .17 2.42 2.59 (.17) -- (.09) (.26)
Period Ended December 31,
1994(e) 9.60 .07 .51 .58 (.08) -- -- (.08)
Principal Money Market
Fund, Inc.
Year Ended December 31,
1996 1.000 .049 -- .049 (.049) -- -- (.049)
1995 1.000 .054 -- .054 (.054) -- -- (.054)
1994 1.000 .037 -- .037 (.037) -- -- (.037)
1993 1.000 .027 -- .027 (.027) -- -- (.027)
Six Months Ended
December 31, 1992(a) 1.000 .016 -- .016 (.016) -- -- (.016)
Year Ended June 30,
1992 1.000 .046 -- .046 (.046) -- -- (.046)
1991 1.000 .070 -- .070 (.070) -- -- (.070)
1990 1.000 .077 -- .077 (.077) -- -- (.077)
1989 1.000 .083 -- .083 (.083) -- -- (.083)
1988 1.000 .064 -- .064 (.064) -- -- (.064)
1987 1.000 .057 -- .057 (.057) -- -- (.057)
Principal World Fund, Inc.
Year Ended December 31,
1996 10.72 .22 2.46 2.68 (.22) (.16) -- (.38)
1995 9.56 .19 1.16 1.35 (.18) -- (.01) (.19)
Period Ended December 31,
1994(e) 9.94 .03 (.33) (.30) (.05) (.02) (.01) (.08)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
______________________________________________________
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
Principal Government
Securities Fund, Inc.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $10.31 3.35% $85,100 .52% 6.46% 8.4% N/A
1995 10.55 19.07% 50,079 .55% 6.73% 9.8% N/A
1994 9.38 (4.53)% 36,121 .56% 7.05% 23.2% N/A
1993 10.61 10.07% 36,659 .55% 7.07% 20.4% N/A
Six Months Ended
December 31, 1992(a) 10.28 4.10%(b) 31,760 .59%(c) 7.35%(c) 34.5%(c) N/A
Year Ended June 30,
1992 10.93 15.34% 33,022 .58% 7.84% 38.9% N/A
1991 10.24 10.94% 26,021 .59% 8.31% 4.2% N/A
1990 10.05 8.16% 21,488 .61% 8.48% 18.7% N/A
1989 10.05 12.61% 15,890 .63% 8.68% 3.7% N/A
1988 9.37 7.69% 12,902 .66% 8.47% 2.7% N/A
Period Ended June 30,
1987(d) 9.47 (.94)%(b) 10,778 .64%(c) 8.50%(c) 0.2%(c) N/A
Principal Growth Fund, Inc.
Year Ended December 31,
1996 13.79 12.51% 99,612 .52% 1.61% 2.0%$ .0401
1995 12.43 25.62% 42,708 .58% 2.08% 6.9% N/A
Period Ended December 31,
1994(e) 10.10 5.42%(b) 13,086 .75%(c) 2.39%(c) 0.9%(c) N/A
Principal Money Market
Fund, Inc.
Year Ended December 31,
1996 1.000 5.07% 46,244 .56% 5.00% N/A N/A
1995 1.000 5.59% 32,670 .58% 5.32% N/A N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A N/A
Six Months Ended
December 31, 1992(a) 1.000 1.54%(b) 27,680 .59%(c) 3.10%(c) N/A N/A
Year Ended June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A N/A
Principal World Fund, Inc.
Year Ended December 31,
1996 13.02 25.09% 71,682 .90% 2.28% 12.5% .0120
1995 10.72 14.17% 30,566 .95% 2.26% 15.6% N/A
Period Ended December 31,
1994(e) 9.56 (3.37)%(b) 13,746 1.24%(c) 1.31%(c) 14.4%(c) N/A
</TABLE>
Notes to financial highlights
(a) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Period from April 9, 1987, date shares first offered to the public, through
June 30, 1987. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on October 31, 1987 through
December 17, 1987 was recognized, all of which was distributed to the
Fund's sole stockholder, Principal Mutual Life Insurance Company. This
represented activity of the Fund prior to the initial offering of shares to
eligible purchasers.
(e) Period from May 1, 1994, date shares first offered to the public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Growth Fund, Inc. and $.04 per share for Principal World Fund,
Inc. for the period from the initial purchase of shares on March 23, 1994
through April 30, 1994, was recognized, none of which was distributed to
the sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, Principal Growth Fund, Inc. and Principal World Fund,
Inc. incurred unrealized losses on investments of $.41 and $.10 per share,
respectively, during the initial interim period. This represented
activities of each fund prior to the initial public offering of fund
shares.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Fund are described below.
There can be no assurance that the objectives of the Funds will be realized.
GROWTH-ORIENTED FUNDS
The Principal Funds currently include four Funds which seek capital
appreciation through investments in equity securities (Principal Capital
Accumulation Fund, Principal Emerging Growth Fund, Principal Growth Fund and
Principal World Fund) and one Fund which seeks a total investment return
including both capital appreciation and income through investments in equity and
debt securities (Principal Balanced Fund). These five Funds are collectively
referred to as the Growth-Oriented Funds.
The Growth-Oriented Funds may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and American Depositary Receipts based
on any of the foregoing securities. The Capital Accumulation, Emerging Growth,
Growth and World Funds will seek to be fully invested under normal conditions in
equity securities. When, in the opinion of the Manager or Sub-Advisor, current
market or economic conditions warrant, a Growth-Oriented Fund may for temporary
defensive purposes place all or a portion of its assets in cash, on which the
Fund would earn no income, cash equivalents, bank certificates of deposit,
bankers acceptances, repurchase agreements, commercial paper, commercial paper
master notes which are floating rate debt instruments without a fixed maturity,
United States Government securities, and preferred stocks and debt securities,
whether or not convertible into or carrying rights for common stock. A
Growth-Oriented Fund may also maintain reasonable amounts in cash or short-term
debt securities for daily cash management purposes or pending selection of
particular long-term investments.
Principal Balanced Fund
The investment objective of Principal Balanced Fund is to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of the investment objective. The term
"reasonable risks" refers to investment decisions that in the judgment of the
Sub-Advisor, Invista, do not present a greater than normal risk of loss in light
of current or anticipated future market and economic conditions, trends in
yields and interest rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Fund invests primarily
in growth and income-oriented common stocks (including securities convertible
into common stocks), corporate bonds and debentures and short-term money market
instruments. The Fund may also invest in other equity securities, and in debt
securities issued or guaranteed by the United States Government and its agencies
or instrumentalities. The Fund seeks to generate real (inflation plus) growth
during favorable investment periods and may emphasize income and capital
preservation strategies during uncertain investment periods. The Sub-Advisor
will seek to minimize declines in the net asset value per share. However, there
is no guarantee that the Sub-Advisor will be successful in achieving this goal.
The portions of the Fund's total assets invested in equity securities, debt
securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Fund's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Sub-Advisor as to general market and economic conditions, trends in investment
yields and interest rates and changes in fiscal or monetary policies.
The Fund may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Fund may invest in both
exchange-listed and over-the-counter securities, in small or large companies,
and in well-established or unseasoned companies. Also, the Fund's investments in
corporate bonds and debentures and money market instruments are not restricted
by credit ratings or other objective investment criteria, except with respect to
bank certificates of deposit as set forth below. Some of the fixed income
securities in which the Fund may invest may be considered to include speculative
characteristics and the Fund may purchase such securities that are in default
but does not currently intend to invest more than 5% of its assets in securities
rated below BBB by Standard & Poor's or Baa by Moody's. See "Below
Investment-Grade Bonds" for a discussion of the risks associated with these
securities. The rating services' descriptions of BBB or Baa securities are as
follows: Moody's Investors Service, Inc. Bond Ratings -- Baa: Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories. The Fund will not concentrate its
investments in any industry.
In selecting common stocks, the Sub-Advisor seeks companies which it
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Sub-Advisor determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Sub-Advisor may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Fund may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Fund may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The short-term money market investments in which the Fund may invest
include the following: U.S. Treasury bills, bank certificates of deposit,
bankers' acceptances, repurchase agreements, commercial paper and commercial
paper master notes which are floating rate debt instruments without a fixed
maturity. The Fund will only invest in domestic bank certificates of deposit
issued by banks which are members of the Federal Reserve System that have total
deposits in excess of $1 billion.
The United States government securities in which the Fund may invest
include U.S. Treasury obligations and obligations of certain agencies, such as
the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Principal Capital Accumulation Fund
The primary objective of Principal Capital Accumulation Fund is long-term
capital appreciation. A secondary objective is growth of investment income.
The Fund will invest primarily in common stocks, but it may invest in other
securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. In pursuit of the
Fund's investment objectives, investments will be made in securities which as a
group appear to offer long-term prospects for capital and income growth.
Securities chosen for investment may include those of companies which the
Manager believes can reasonably be expected to share in the growth of the
nation's economy over the long term.
Principal Emerging Growth Fund
The objective of Principal Emerging Growth Fund is to achieve capital
appreciation. The strategy of this Fund is to invest primarily in the common
stocks and securities (both debt and preferred stock) convertible into common
stocks of emerging and other growth-oriented companies that, in the judgment of
the Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the Emerging Growth Fund may invest, for any period of
time, in any industry, in any kind of growth-oriented company, whether new and
unseasoned or well known and established.
There can be, of course, no assurance that the Fund will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Fund invests, the Fund believes that its shares are
suitable only for persons who are prepared to experience above-average
fluctuations in net asset value, to assume above-average investment risk in
search of above-average return, and to consider the Fund as a long-term
investment and not as a vehicle for seeking short-term profits. Moreover, since
the Fund will not be seeking current income, investors should not view a
purchase of Fund shares as a complete investment program.
Principal Growth Fund
The objective of Principal Growth Fund is growth of capital. Realization of
current income will be incidental to the objective of growth of capital.
The Fund will invest primarily in common stocks, but it may invest in other
equity securities. In making selections for the Fund's investment portfolio, the
Sub-Advisor, Invista, will use an approach described broadly as that of
fundamental analysis, which is discussed in the Statement of Additional
Information. In pursuit of the Fund's investment objective, investments will be
made in securities which as a group appear to possess potential for appreciation
in market value. Common stocks chosen for investment may include those of
companies which have a record of sales and earnings growth that exceeds the
growth rate of corporate profits of the S&P 500 or which offer new products or
new services. The policy of investing in securities which have a high potential
for growth of capital can mean that the assets of the Fund may be subject to
greater risk than securities which do not have such potential.
Principal World Fund
The investment objective of Principal World Fund is to seek long-term
growth of capital through investment in a portfolio of equity securities of
companies domiciled in any of the nations of the world. In choosing investments
in equity securities of foreign and United States corporations, the Sub-Advisor,
Invista, intends to pay particular attention to long-term earnings prospects and
the relationship of then-current prices to such prospects. Short-term trading is
not generally intended, but occasional investments may be made for the purpose
of seeking short-term or medium-term gain. The Fund expects its investment
objective to be met over long periods which may include several market cycles.
For a description of certain investment risks associated with foreign
securities, see "Foreign Securities."
For temporary defensive purposes, the World Fund may invest in the same
kinds of securities as the other Growth-Oriented Funds whether issued by
domestic or foreign corporations, governments, or governmental agencies,
instrumentalities or political subdivisions and whether denominated in United
States dollars or some other currency.
The Fund intends that its investments normally will be allocated among
various countries. Although there is no limitation on the percentage of assets
that may be invested in any one country or denominated in any one currency, the
Fund intends under normal market conditions to have at least 65% of its assets
invested in securities issued by corporations of at least five countries, one of
which may be the United States. Investments may be made anywhere in the world,
but it is expected that primary consideration will be given to investing in the
securities issued by corporations of Western Europe, North America and
Australasia (Australia, Japan and Far East Asia) that have developed economies.
Changes in investments may be made as prospects change for particular countries,
industries or companies.
The Fund may invest in the securities of other investment companies but may
not invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities of any one
investment company, or acquire more than 3% of the outstanding voting securities
of any one investment company except in connection with a merger, consolidation
or plan of reorganization. The Fund's Manager will waive its management fee on
the Fund's assets invested in securities of other open-end investment companies.
The Fund will generally invest only in those investment companies that have
investment policies requiring investment in securities comparable in quality to
those in which the Fund invests.
INCOME-ORIENTED FUNDS
The Principal Funds currently include two Funds which seek a high level of
income through investments in fixed-income securities (Principal Bond Fund and
Principal Government Securities Fund) collectively referred to as the
"Income-Oriented Funds." An investment in either of the Income-Oriented Funds
involves market risks associated with movements in interest rates. The market
value of the Funds' investments will fluctuate in response to changes in
interest rates and other factors. During periods of falling interest rates, the
values of outstanding long-term fixed-income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. Changes by recognized rating agencies in their
ratings of any fixed-income security and in the ability of an issuer to make
payments of interest and principal may also affect the value of these
investments. Changes in the value of portfolio securities will affect the Funds'
net asset values but will not affect cash income derived from the securities
unless a change results from a failure of an issuer to pay interest or principal
when due. Each Fund's rating limitations apply at the time of acquisition of a
security, and any subsequent change in a rating by a rating service will not
require elimination of a security from the Fund's portfolio. The Statement of
Additional Information contains descriptions of ratings of Moody's Investors
Service, Inc. ("Moody's") and Standard and Poor's Corporation ("S&P").
Principal Bond Fund
The investment objective of Principal Bond Fund is to provide as high a
level of income as is consistent with preservation of capital and prudent
investment risk.
In seeking to achieve the investment objective, the Fund will predominantly
invest in marketable fixed-income securities. Investments will be made generally
on a long-term basis, but the Fund may make short-term investments from time to
time as deemed prudent by the Manager. Longer maturities typically provide
better yields but will subject the Fund to a greater possibility of substantial
changes in the values of its portfolio securities as interest rates change.
Under normal circumstances, the Fund will invest at least 65% of its
assets, exclusive of cash items, in one or more of the following kinds of
securities: (i) corporate debt securities and taxable municipal obligations,
which at the time of purchase have an investment grade rating within the four
highest grades used by Standard & Poor's Corporation (AAA, AA, A or BBB) or by
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa) or which, if lower-rated or
nonrated, are comparable in quality in the opinion of the Fund's Manager; (ii)
similar Canadian corporate, Provincial and Federal Government securities payable
in U.S. funds; and (iii) securities issued or guaranteed by the United States
Government or its agencies or instrumentalities. The balance of the Fund's
assets may be invested in other fixed income securities, including domestic and
foreign corporate debt securities or preferred stocks, in common stocks that
provide returns that compare favorably with the yields on fixed income
investments, and in common stocks acquired upon conversion of debt securities or
preferred stocks or upon exercise of warrants acquired with debt securities or
otherwise and foreign government securities. The debt securities and preferred
stocks in which the Fund invests may be convertible or nonconvertible. The Fund
does not intend to purchase debt securities rated lower than Ba3 by Moody's or
BB - by S & P (bonds which are judged to have speculative elements; their future
cannot be considered as well-assured). See "Below Investment-Grade Bonds" for a
discussion of the risks associated with these securities. The rating services'
descriptions of BBB or Baa securities are as follows: Moody's Investors Service,
Inc. Bond Ratings -- Baa: Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. Standard &
Poor's Corporation Bond Ratings -- BBB: Debt rated "BBB" is regarded as having
an adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher-rated
categories.
During the year ended December 31, 1996, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Aaa .18%
Aa .81%
A 24.05%
Baa 68.04%
Ba 6.92%
The above percentages for A rated securities include .57%, unrated
securities which have been determined by the Manager to be of comparable
quality.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by Standard & Poor's or P-1 or P-2 by Moody's,
unrated commercial paper issued by corporations with outstanding debt securities
rated in the four highest grades by Standard & Poor's and Moody's and bank
certificates of deposit and bankers' acceptances issued or guaranteed by
national or state banks and repurchase agreements considered by the Fund to have
investment quality. Under unusual market or economic conditions, the Fund may
for temporary defense purposes invest up to 100% of its assets in cash or cash
equivalents.
Principal Government Securities Fund
The objective of Principal Government Securities Fund is a high level of
current income, liquidity and safety of principal.
The Fund will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities include
Government National Mortgage Association ("GNMA") Certificates of the modified
pass-through type, Federal National Mortgage Association ("FNMA") Obligations,
Federal Home Loan Mortgage Corporation ("FHLMC") Certificates and Student Loan
Marketing Association ("SLMA") Certificates and other U.S. Government
Securities. GNMA is a wholly-owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned
corporation, FHLMC, a federal corporation, and SLMA, a government sponsored
stockholder-owned organization, are instrumentalities of the United States. The
securities and guarantees of FNMA, FHLMC and SLMA are not backed, directly or
indirectly, by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Fund may maintain reasonable
amounts of cash or short-term debt securities for daily cash management purposes
or pending selection of particular long-term investments.
Depending on market conditions, up to 55% of the assets may be invested in
GNMA Certificates. GNMA is a United States Government corporation within the
Department of Housing and Urban Development. GNMA Certificates are
mortgage-backed securities representing an interest in a pool of mortgage loans.
Such loans are made by lenders such as mortgage bankers, insurance companies,
commercial banks and savings and loan associations. Then, they are either
insured by the Federal Housing Administration (FHA) or they are guaranteed by
the Veterans Administration (VA) or Farmers Home Administration (FmHA). The
lender or other prospective issuer creates a specific pool of such mortgages,
which it submits to GNMA for approval. After approval, a GNMA Certificate is
typically offered by the issuer to investors through securities dealers.
GNMA Certificates differ from bonds in that the principal is scheduled to
be paid back by the borrower on a monthly basis over the life of the loan rather
than returned in a lump sum at maturity. Modified pass-through GNMA
certificates, which are the only kind in which the Fund intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of whether or not the mortgagor has made such payment.
The timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government.
Although the payment of interest and principal is guaranteed, the guarantee
does not extend to the value of a GNMA Certificate or the value of the shares of
the Fund. The market value of a GNMA Certificate typically will fluctuate to
reflect changes in prevailing interest rates. It falls when rates increase (as
does the market value of other debt securities) and it rises when rates decline
(but it may not rise on a comparable basis with other debt securities because of
its prepayment feature), and, therefore, may be more or less than the face
amount of the GNMA Certificate, which reflects the aggregate principal amount of
the underlying mortgages. As a result, the net asset value of Fund shares will
fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Fund at prevailing
interest rates which may be less than the rate on the GNMA Certificate.
Prepayments are likely to increase as the interest rate for new mortgages moves
lower than the rate on the GNMA Certificate. Moreover, if the GNMA Certificate
had been purchased at a premium above principal because its rate exceeded
prevailing rates, the premium is not guaranteed and a decline in value to par
may result in a loss of the premium especially in the event of prepayment.
To the extent deemed appropriate by the Fund's Manager, the Fund intends to
purchase GNMA Certificates directly from Principal Mutual Life Insurance Company
and other issuers as well as from securities dealers. The Fund will purchase
directly from issuers only if it can obtain a price advantage by not paying the
commission or mark-up that would be required if the Certificates were purchased
from a securities dealer. The Securities and Exchange Commission has issued an
order under the Investment Company Act of 1940 that permits the Fund to purchase
GNMA Certificates directly from Principal Mutual Life Insurance Company subject
to certain conditions.
The FNMA and FHLMC securities in which the Fund invests are very similar to
GNMA certificates as described above but are not guaranteed by the full faith
and credit of the United States but rather by the agency itself. FNMA and FHLMC
securities are rated Aaa by Moody's and AAA by Standard & Poor's. These ratings
reflect the status of FNMA and FHLMC as federal agencies as well as the
important role each plays in financing purchases of homes in the U.S.
Student Loan Marketing Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Fund
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by the agency and is traded regularly in denominations similar to
those in which government obligations are traded.
The Fund will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, the Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities for inclusion
in its portfolio in anticipation of a decline in interest rates.
As a hedge against changes in interest rates, the Fund may enter into
contracts with dealers in GNMA Certificates whereby the Fund agrees to purchase
or sell an agreed-upon principal amount of GNMA Certificates at a specified
price on a certain date. The Fund may enter into similar purchase agreements
with issuers of GNMA Certificates other than Principal Mutual Life Insurance
Company. The Fund may also purchase optional delivery standby commitments which
give the Fund the right to sell particular GNMA Certificates at a specified
price on a specified date. Failure of the other party to such a contract or
commitment to abide by the terms thereof could result in a loss to the Fund. To
the extent the Fund engages in delayed delivery transactions it will do so for
the purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for the purpose of investment leverage or to
speculate on interest rate changes. Liability accrues to the Fund at the time it
becomes obligated to purchase such securities, although delivery and payment
occur at a later date. From the time the Fund becomes obligated to purchase
securities on a delayed delivery basis the Fund has all the rights and risks
attendant to the ownership of a security. At the time the Fund enters into a
binding obligation to purchase such securities, Fund assets of a dollar amount
sufficient to make payment for the securities to be purchased will be
segregated. The availability of liquid assets for this purpose and the effect of
asset segregation on the Fund's ability to meet its current obligations, to
honor requests for redemption and to have its investment portfolio managed
properly will limit the extent to which the Fund may engage in forward
commitment agreements. Except as may be imposed by these factors, there is no
limit on the percent of the Fund's total assets that may be committed to
transactions in such agreements.
MONEY MARKET FUND
The Principal Funds also include a Fund which invests primarily in
short-term securities, Principal Money Market Fund. Securities in which the
Money Market Fund will invest may not yield as high a level of current income as
securities of low quality and longer maturities which generally have less
liquidity, greater market risk and more fluctuation.
The Money Market Fund will limit its portfolio investments to United States
dollar denominated instruments that its board of directors determines present
minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in respect to
a class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security at the time of issuance was a long-term security that has a
remaining maturity of 397 calendar days or less, and whose issuer has
received from a nationally recognized statistical rating organization a
rating, with respect to a class of short-term debt obligations (or any
security within that class) that is now comparable in priority and
security with the security, in one of the two highest rating categories
for short-term debt obligations; or
(3) An unrated security that is of comparable quality to a security
meeting the requirements of (1) or (2) above, as determined by the
board of directors.
The Fund will not invest more than 5% of its total assets in the following
securities:
(1) Securities which, when acquired by the Fund (either initially or upon
any subsequent rollover), are rated below the highest rating category
for short-term debt obligations;
(2) Securities which, at the time of issuance were long-term securities but
when acquired by the Fund have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Fund's board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Fund will
maintain a dollar-weighted average portfolio maturity of 90 days or
less.
The objective of Principal Money Market Fund is to seek as high a level of
current income available from short-term securities as is considered consistent
with preservation of principal and maintenance of liquidity by investing its
assets in a portfolio of money market instruments. These money market
instruments are U.S. Government Securities, U.S. Government Agency Securities,
Bank Obligations, Commercial Paper, Short-term Corporate Debt and Repurchase
Agreements, which are described briefly below and in more detail in the
Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
The Fund intends to hold its investments until maturity, but may on
occasion trade securities to take advantage of market variations. Also, revised
valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at times when such sales might otherwise not be
desirable. The Fund's right to borrow to facilitate redemptions may reduce the
need for such sales. It is the Fund's policy to be as fully invested as
reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the Fund expects
to usually transact purchases and sales of portfolio securities with issuers or
dealers on a net basis, it is not anticipated that the Fund will pay any
significant brokerage commissions. The Fund is free to dispose of portfolio
securities at any time, when changes in circumstances or conditions make such a
move desirable in light of the investment objective.
A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Fund invests. The
rate of return and the net asset value will be affected by such other factors as
sales of portfolio securities prior to maturity and the Fund's operating
expenses.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Funds
may use in an effort to achieve their respective investment objectives.
Diversification
Each Fund is subject to the diversification requirements of Section 817(h)
of the Internal Revenue Code (the "Code") which must be met at the end of each
quarter of the year (or within 30 days thereafter). Regulations issued by the
Secretary of the Treasury have the effect of requiring each Fund to invest no
more than 55% of its total assets in securities of any one issuer, no more than
70% in the securities of any two issuers, no more than 80% in the securities of
any three issuers, and no more than 90% in the securities of any four issuers.
For this purpose, the United States Treasury and each U.S. Government agency and
instrumentality is considered to be a separate issuer. Thus, the Government
Securities Fund intends to invest in U.S. Treasury securities and in securities
issued by at least four U.S. Government agencies or instrumentalities in the
amounts necessary to meet those diversification requirements at the end of each
quarter of the year (or within thirty days thereafter).
In the event any of the Funds do not meet the diversification requirements
of Section 817(h) of the Code, the contracts funded by shares of the Funds will
not be treated as annuities or life insurance for Federal income tax purposes
and the owners of the Funds will be subject to taxation on their share of the
dividends and distributions paid by the Funds.
Foreign Securities
Each of the following Principal Funds has adopted investment restrictions
that limit its investments in foreign securities to the indicated percentage of
its assets: World Fund - 100%; Bond and Capital Accumulation Funds - 20%;
Balanced, Emerging Growth and Growth Funds - 10%. Investment in foreign
securities presents certain risks including those resulting from fluctuations in
currency exchange rates, revaluation of currencies, the imposition of foreign
taxes, future political and economic developments including war, expropriations,
nationalization, the possible imposition of currency exchange controls and other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers, and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic issuers. Moreover, securities of many foreign issuers may
be less liquid and their prices more volatile than those of comparable domestic
issuers. In addition, transactions in foreign securities may be subject to
higher costs, and the time for settlement of transactions in foreign securities
may be longer than the settlement period for domestic issuers. A Fund's
investment in foreign securities may also result in higher custodial costs and
the costs associated with currency conversions.
Currency Contracts
The World Fund may enter into forward currency contracts, currency futures
contracts and options thereon and options on currencies for hedging and other
non-speculative purposes. A forward currency contract involves a privately
negotiated obligation to purchase or sell a specific currency at a future date
at a price set at the time of the contract. The Fund will not enter into a
transaction to hedge currency exposure to an extent greater in effect than the
aggregate market value of the securities held or to be purchased by the Fund
that are denominated or generally quoted in or currently convertible into the
currency. When the Fund enters into a contract to buy or sell a foreign
currency, it generally will hold an amount of that currency, liquid securities
denominated in that currency or a forward contract for such securities equal to
the Fund's obligation, or it will segregate liquid high grade debt obligations
equal to the amount of the Fund's obligations. The use of currency contracts
involves many of the same risks as transactions in futures contracts and options
as well as the risk of government action through exchange controls or otherwise
that would restrict the ability of the Fund to deliver or receive currency.
Repurchase Agreements and Securities Loans
Each of the Funds, except the Capital Accumulation Fund, may enter into
repurchase agreements with, and each of the Funds, except the Capital
Accumulation and Money Market Funds, may lend its portfolio securities to,
unaffiliated broker-dealers and other unaffiliated qualified financial
institutions. These transactions must be fully collateralized at all times, but
involve some credit risk to the Fund if the other party should default on its
obligations, and the Fund is delayed or prevented from recovering on the
collateral. See the Funds' Statement of Additional Information for further
information regarding the credit risks associated with repurchase agreements and
the standards adopted by each Fund's Board of Directors to deal with those
risks. None of the Funds intend either (i) to enter into repurchase agreements
that mature in more than seven days if any such investment, together with any
other illiquid securities held by the Fund, would amount to more than 10% of its
total assets or (ii) to loan securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Funds may enter into forward commitment
agreements which call for the Fund to purchase or sell a security on a future
date and at a price fixed at the time the Fund enters into the agreement. Each
of the Funds may also acquire rights to sell its investments to other parties,
either on demand or at specific intervals.
Warrants
Each of the Funds, except the Money Market and Government Securities Funds,
may invest in warrants up to 5% of its assets, of which not more than 2% may be
invested in warrants that are not listed on the New York or American Stock
Exchange. For the World Fund, the 2% limitation also does not apply to warrants
listed on the Toronto Stock Exchange or the Chicago Board Options Exchange.
Borrowing
As a matter of fundamental policy, each Fund may borrow money only for
temporary or emergency purposes. The Balanced Fund, Bond Fund, Capital
Accumulation Fund and Money Market Fund may borrow only from banks. Further,
each may borrow only in an amount not exceeding 5% of its assets, except the
Capital Accumulation Fund which may borrow only in an amount not exceeding the
lesser of (i) 5% of the value of its assets less liabilities other than such
borrowings, or (ii) 10% of its assets taken at cost at the time the borrowing is
made, and the Money Market Fund which may borrow only in an amount not exceeding
the lesser of (i) 5% of the value of its assets, or (ii) 10% of the value of its
net assets taken at cost at the time the borrowing is made.
Options
The Balanced Fund, Bond Fund, Emerging Growth Fund, Government Securities
Fund, Growth Fund and World Fund may purchase covered spread options, which
would give the Fund the right to sell a security that it owns at a fixed dollar
spread or yield spread in relationship to another security that the Fund does
not own, but which is used as a benchmark. These same Funds may also purchase
and sell financial futures contracts, options on financial futures contracts and
options on securities and securities indices, but will not invest more than 5%
of their assets in the purchase of options on securities, securities indices and
financial futures contracts or in initial margin and premiums on financial
futures contracts and options thereon. The Funds may write options on securities
and securities indices to generate additional revenue and for hedging purposes
and may enter into transactions in financial futures contracts and options on
those contracts for hedging purposes.
Below Investment Grade Bonds
Below investment-grade bonds are securities rated Ba1 or lower by Moody's
Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("S&P") or unrated securities which the Fund's Manager or
Sub-Advisor believes are of comparable quality. These securities are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and to repay principal in accordance with the terms of the
obligation. The Funds do not intend to invest in securities rated lower than Ba3
by Moody's or BB by S&P. The Bond Fund may not invest more than 35% of its
assets in below investment grade securities. The Balanced Fund does not intend
to invest more than 5% of its assets in such securities.
The rating services' descriptions of below investment grade securities
rating categories in which the Funds may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Ba in its bond rating system. The modifier 1
indicates that the security ranks in the high end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB: Debt rated "BB" is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The "BB" rating may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
Below investment-grade securities present special risks to investors. The
market value of lower-rated securities may be more volatile than that of
higher-rated securities and generally tends to reflect the market's perception
of the creditworthiness of the issuer and short-term market developments to a
greater extent than more highly rated securities, which reflect primarily
fluctuations in general levels of interest rates. Periods of economic
uncertainty and change can be expected to result in increased volatility in the
market value of lower-rated securities. Further, such securities may be subject
to greater risks of loss of income and principal, particularly in the event of
adverse economic changes or increased interest rates, because their issuers
generally are not as financially secure or as creditworthy as issuers of
higher-rated securities. Additionally, to the extent that there is not a
national market system for secondary trading of lower-rated securities, there
may be a low volume of trading in such securities which may make it more
difficult to value or sell those securities than higher-rated securities.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield securities,
especially in a thinly traded market.
Investors should recognize that the market for below investment-grade
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the Funds and the ability of the
issuers of the securities held by the Funds to pay principal and interest. A
default by an issuer may result in a Fund incurring additional expenses to seek
recovery of the amounts due it.
Some of the securities in which the Funds invest may contain call
provisions. If the issuer of such a security exercises a call provision in a
declining interest rate market, the Fund would have to replace the security with
a lower-yielding security, resulting in a decreased return for investors.
Further, a higher-yielding security's value will decrease in a rising interest
rate market, which will be reflected in the Fund's net asset value per share.
Congress recently enacted legislation requiring federally-insured savings
and loan associations to divest themselves of investments in high yield
securities. This legislation might increase the supply of securities available
for purchase in the secondary market and, potentially, lower the value of the
securities held by the Funds.
The Statement of Additional Information includes further information
concerning the Funds' investment policies and applicable investment
restrictions. Each Fund's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for a Fund are not fundamental and
may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISOR
The Manager for the Funds is Princor Management Corporation (the
"Manager"), an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the State of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969,
and since that time has managed various mutual funds sponsored by Principal
Mutual Life Insurance Company. As of December 31, 1996, the Manager served as
investment advisor for 26 such funds with assets totaling approximately $4.0
billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced Fund, Growth
Fund and World Fund. The Manager will reimburse Invista for the cost of
providing these services. Invista, an indirectly wholly-owned subsidiary of
Principal Mutual Life Insurance company and an affiliate of the Manager, was
founded in 1985 and manages investments for institutional investors, including
Principal Mutual Life. Assets under management at December 31, 1996 were
approximately $19.6 billion. Invista's address is 1500 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
The Manager or Invista has assigned certain individuals the primary
responsibility for the day-to-day management of each Fund's portfolio. The
persons primarily responsible for the day-to-day management of each Fund are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Fund Responsible Since Person Primarily Responsible
____________________ __________________________ ____________________________________________________________________________
<S> <C> <C>
Balanced April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President, Invista
Capital Management, Inc.
Bond November, 1996 Scott A. Bennett, CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company.
Capital Accumulation November, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice
(Fund's inception) President, Invista Capital Management, Inc.; Co-Manager since November,
1996: Catherine A. Green, CFA, (MBA degree, Drake University). Vice
President, Invista Capital Management, Inc.
Emerging Growth December, 1987 Michael R. Hamilton, (BMBA degree, Bellarmine College). Vice President,
and Growth (Fund's inception) Invista Capital Management, Inc.
and May, 1994 (Fund's
inception), respectively
Government Securities April, 1987 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
(Fund's inception) Capital Management, Inc.
World April, 1994 Scott D. Opsal, CFA (MBA degree, University of Minnesota). Executive Vice
President, Invista Capital Management, Inc.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISOR
Under Maryland law, the business and affairs of each of the Funds are
managed under the direction of its Board of Directors. The investment services
and certain other services referred to under the heading "Cost of Manager's
Services" in the Statement of Additional Information are furnished to the Funds
under the terms of a Management Agreement between each of the Funds and the
Manager and, for some of the Funds, a Sub-Advisory Agreement between the Manager
and Invista. The Manager or Invista, advises the Funds on investment policies
and on the composition of the Funds' portfolios. In this connection, the
Manager, or Invista, furnishes to the Board of Directors of each Fund a
recommended investment program consistent with that Fund's investment objective
and policies. The Manager, or Invista, is authorized, within the scope of the
approved investment program, to determine which securities are to be bought or
sold, and in what amounts.
The compensation paid by each Fund to the Manager for the fiscal year ended
December 31, 1996 was, on an annual basis, equal to the following percentage of
average net assets:
Total
Manager's Annualized
Fund Fee Expenses
- --------------------------- --------- ----------
Balanced Fund .60% .63%
Bond Fund .50% .53%
Capital Accumulation Fund .48% .49%
Emerging Growth Fund .64% .66%
Government Securities Fund .50% .52%
Growth Fund .50% .52%
Money Market Fund .50% .56%
World Fund .75% .90%
The compensation being paid by the World Fund for investment management
services is higher than that paid by most funds to their advisor, but it is not
higher than the fees paid by many funds with similar investment objectives and
policies.
The Manager and Sub-Advisor may purchase at their own expense statistical
and other information or services from outside sources, including Principal
Mutual Life Insurance Company. An Investment Service Agreement between the
Manager, Principal Mutual Life Insurance Company and each Fund, provides that
Principal Mutual Life Insurance Company will furnish certain personnel, services
and facilities required by the Manager in connection with its performance of the
Management Agreements, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard. The Investment Service
Agreements for the Capital Accumulation, Emerging Growth and Government
Securities Funds also include as a party Invista Capital Management, Inc., an
indirectly wholly-owned subsidiary of Principal Mutual Life Insurance Company,
and also provide that the subsidiaries of Principal Mutual Life Insurance
Company will furnish the same items and be reimbursed by the Manager for their
costs incurred in this regard.
The Funds may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc., a broker-dealer that is an affiliate of the Distributor and
Manager for each of the Funds.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company.
MANAGERS' COMMENTS
Princor Management Corporation and Invista are staffed with investment
professionals who manage each individual fund. Comments by these individuals in
the following paragraphs summarize in capsule form the general strategy and
recent results of each fund over the past year. The accompanying charts display
results for the past 10 years or the life of the fund, whichever is shorter.
Average Annual Total Return figures provided for each fund in the graphs below
reflect all expenses of the fund and assume all distributions are reinvested at
net asset value. The figures do not reflect expenses of the variable life
insurance contracts or variable annuity contracts that purchase fund shares;
performance figures for the divisions of the contracts would be lower than
performance figures for the funds due to the additional contract expenses. Past
performance is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
The various indices included in the graphs below are unmanaged and do not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.
Growth-Oriented Funds
Principal Balanced Fund
(Judith A. Vogel)
This balanced portfolio combines stocks, bonds and cash in a relatively
conservative mix which seeks to provide both capital appreciation and income to
the shareholder without taking on undue risk. The asset allocation of the Fund
generally approximates 60% stocks and 40% bonds. In the year ended December 31,
1996 the stock market produced exceptional results. Aided by a healthy economy,
continued corporate profit growth, and a good dose of investor enthusiasm, the
S&P 500 Stock Index advanced nearly 23%. Conditions in the bond market were less
supportive over the year. Long-term interest rates rose 0.70% in 1996, with a
lot of volatility along the way, causing the bond returns to hover between zero
and 3% for the year. Demonstrating its balanced nature, the Fund produced a 13%
annual return, about midway between stock and bond market results and very near
the Lipper Balanced Fund Average. The bond portion of the Fund's portfolio is
comprised of U.S. Government notes and bonds with an emphasis on safety of
principal. The stock portion of the portfolio is concentrated in companies with
stable or growing earnings that are not terribly sensitive to economic activity.
After six years of economic expansion resulting in high rates of resource
utilization, corporate profit growth is likely to come down, causing a scarcity
of earnings growth. Companies that can continue to grow earnings will be
afforded premium valuations. There is no independent market index against which
to measure returns of balanced portfolios, however, we show the S&P 500 Stock
Index for your information.
Total Returns *
As of December 31, 1996
---------------------------------------------------
Since Inception
1 Year 5 Year Date 12/18/87
13.13% 11.57% 12.16%
Comparison of Change in Value of $10,000 Investment in the
Balanced Fund, S&P 500 and Lipper Balanced Fund Average
----------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Mid Cap
December 31, Return Index Index
10,000 10,000 10,000
1988 11,637 11,661 11,229
1989 12,982 15,356 13,429
1990 12,147 14,877 13,355
1991 16,321 19,412 16,930
1992 18,410 20,891 18,122
1993 20,447 22,992 20,066
1994 20,019 23,294 19,561
1995 24,941 32,037 24,482
1996 28,215 39,388 27,851
Note: Past performance is not predictive of future performance.
Principal Capital Accumulation Fund
(David L. White and Catherine A. Green)
The strategy with this portfolio is to hold common stocks of companies
based on a valuation that is attractive when compared to the market. The
analytical staff looks at companies' current valuations compared to the market,
then at historical information to compare valuations to historical averages. The
focus is on the fundamentals of an industry and the company to determine the
current and future outlook as these potential investments. From there the
portfolio is constructed to provide a diversified set of investments.
The Fund outperformed the S&P 500 Index and Lipper Growth and Income Fund
Average for 1996. The strength of the market was in much fewer stocks than in
the past. The volatility between industries was much greater than the overall
results. The Fund benefited from several areas of exposure. Banks and health
care were the strongest areas for the Fund during the year. The focus has been
away from the more cyclical areas of the economy which also helped during the
year. As the economic cycle progresses, the market places more emphasis on
companies with consistent earnings growth, and we have tended to overweight
these areas of the market. As the market performance continues to narrow,
however, it becomes increasingly difficult to select the correct areas of
overperformance.
Total Returns *
As of December 31, 1996
----------------------------------------
1 Year 5 Year 10 Year
23.50% 14.08% 13.08%
Comparison of Change in Value of $10,000 Investment in the
Capital Accumulation Fund, S&P 500 and Lipper Growth and Income Fund Average
----------------------------------------------------------------------------
Fund S&P 500 Lipper
Year Ended Total Stock Growth & Income
December 31, Return Index Fund Average
10,000 10,000 10,000
1987 10,647 10,526 10,184
1988 12,183 12,274 11,814
1989 14,155 16,163 14,596
1990 12,759 15,659 13,946
1991 17,693 20,433 18,002
1992 19,377 21,990 19,618
1993 20,888 24,201 21,884
1994 20,990 24,519 21,678
1995 27,688 33,722 28,360
1996 34,193 41,460 34,253
Note: Past performance is not predictive of future performance.
Principal Emerging Growth Fund
(Michael R. Hamilton)
The equity market was strong in 1996, but within the market there were two
different trends. Large-cap stocks performed much better than small-cap stocks.
The Emerging Growth Fund returned 19.13% compared with the Lipper Mid Cap
Average of 17.9%. The Fund and the Lipper Average trailed the S&P 500 Index
because of their emphasis on small cap stocks. While both trailed the S&P 500,
this was a good year for the fund.
The financial market continues to grapple with the paradox of strong
economic growth with no apparent inflation. Productivity will be key in 1997 if
inflation is to remain benign. The Fund's portfolio continues to be focused on
companies that should enhance productivity of both labor and capital. Several of
the technology, service and cyclical areas support this emphasis. The portfolio
is also overweighted in the financial sector as bank consolidation continues.
Continued profit growth will be important in 1997 as well. Companies with
more predictable and visible earnings growth are preferred. This continues to be
those that are low cost producers and have competitive barriers to entry.
Selectivity in all sectors will be crucial to outperformance.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
21.11% 16.64% 17.73%
Comparison of Change in Value of $10,000 Investment
in the Emerging Growth Fund, S&P 500 and
Lipper Mid Cap Fund Average
-----------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 MID CAP
December 31, Return Index Index
10,000 10,000 10,000
1988 12,369 11,661 11,476
1989 15,070 15,356 14,586
1990 13,186 14,877 14,067
1991 20,240 19,412 21,275
1992 23,264 20,891 23,213
1993 27,750 22,992 26,625
1994 27,967 23,294 26,079
1995 36,080 32,037 34,469
1996 43,697 39,388 40,646
Note: Past performance is not predictive of future performance.
Principal Growth Fund
(Michael R. Hamilton)
The Growth Fund struggled against the market in 1996; struggle being
relative as 12.23% return is respectable from a historical perspective. The S&P
500 Index last year was heavily influenced by the top 25 holdings in the Index.
These are very large companies. The Fund is more diversified than the Index and
therefore its results were more representative of the broader market. With the
market continuing to struggle against the potential of an economic boom on one
hand, versus a slowing or recession on the other, the market could be subjected
to emotional swings depending on the inflation outlook.
The Fund's portfolio still has a large focus on health care given the
demographics of the United States. This was not a strong sector in 1996,
particularly the managed care companies of which the portfolio has a large
exposure. Also, the portfolio has large positions in technology and growth
cyclicals. These companies should do well if the economy continues to move
forward which is indicated by current data.
The portfolio contains many companies that are able to compete on a world
wide basis. This is important as global competition continues.
Total Returns *
As of December 31, 1996
-------------------------------------------------------
1 Year Since Inception Date 5/2/94 10 Year
12.51% 16.12% --
Comparison of Change in Value of $10,000 Investment in the
Growth Fund, S&P 500 and Lipper Growth Fund Average
---------------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Growth
December 31, Return Index Index
10,000 10,000 10,000
1994 10,542 10,397 10,090
1995 13,243 14,299 13,197
1996 14,899 17,580 15,736
Note: Past performance is not predictive of future performance.
Principal World Fund
(Scott D. Opsal)
The Principal World Fund's 26.2% total return in 1996 was driven by broad
based market rallies across Europe. Several European markets have climbed more
than 20% in 1996, with Japan and Italy being the only major markets not
reflecting strong gains. The Fund's investment strategy of holding stocks in
smaller European economies produced outperformance as interest rate moves have
been favorable this year. Long bond yields in secondary European markets fell
while rates in the stronger core countries have inched up. The Fund's
overexposure to the falling rate markets and underexposure to the rising rate
markets was a significant positive factor producing returns that exceeded EAFE's
6.1% and the average international fund in 1996.
The Fund also benefited from non-cyclical stockholdings in Europe. Food,
drug, technology, and stable growth cyclicals have outperformed the heavier
cyclical industries. The Fund's move into non-cyclical growth stocks early in
the year proved timely. The Fund remains underweighted in Japan due to poor
valuations and a weak economic outlook. Japan has been the worst performing
major market, and the Fund's lack of exposure to this market also boosted
relative returns.
Adverse currency changes diminished the Fund's returns as measured in U.S.
dollars by an estimated 2%. We believe the EAFE index has suffered a currency
loss exceeding 4%, and the average manager has lost an estimated 3%. Thus, the
Fund's investment strategy placed it in markets suffering relatively small
foreign exchange losses thereby aiding relative return performance.
The Principal World Fund is subject to specific risks associated with
foreign currency rates, foreign taxation and foreign economies.
Total Returns *
As of December 31, 1996
----------------------------------------------------
1 Year Since Inception Date 5/2/94 10 Year
25.09% 12.83% --
Comparison of Change in Value of $10,000 Investment in the
World Fund, EAFE and Lipper International Fund Average
------------------------------------------------------------
Fund Morgan Stanley Lipper
Year Ended Total EAFE International
December 31, Return Index Index
10,000 10,000 10,000
1994 9,663 9,990 9,758
1995 11,032 11,110 10,676
1996 13,800 11,781 11,934
Note: Past performance is not predictive of future performance.
Important Notes of the Growth-Oriented Funds:
Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average currently contains 272 mutual funds.
Lipper Growth Fund Average: This average consists of funds which normally invest
in companies whose long-term earnings are expected to growth significantly
faster than the earnings of the stocks represented in the major unmanaged stock
indices. The one-year average currently contains 669 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 522 funds.
Lipper Mid Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average currently contains 154 funds.
Morgan Stanley EAFE (Europe, Australia and Far East) Index: This average
reflects an arithmetic, market value weighted average of performance of 1,920
listed securities which are listed on the stock exchanges of the following
countries: Australia, Austria, Belgium, Denmark, Netherlands, New Zealand,
Norway, Singapore/Malaysia, Spain, Sweden, Switzerland, and the United Kingdom.
Lipper International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average currently contains 331 funds.
Income-Oriented Funds
Principal Bond Fund
(Scott A. Bennett)
The Principal Bond Fund's performance in 1996 lagged when compared to 1995.
1995 was a banner year, mainly because of dramatically declining interest rates.
During 1996 interest rates increased throughout most of the year based on fears
of increasing inflation. This hurt the Fund's relative performance as the
duration target of 7 years (actual duration at 12/31/96 was 6.98 years) is
longer than the average BBB rated bond fund and the BAA Lehman Corporate Index.
Relative performance was also negatively impacted by the lack of a significant
amount of less than investment grade bonds in the portfolio. High yield (less
than investment grade) debt performed extremely well during 1996, with many of
the top performing funds in the Lipper BAA universe having significant exposures
to this asset class.
Over the long-term, the Fund continues to outperform the average BBB fund.
This is attributed to remaining fully invested and not trying to guess interest
rates. The BBB corporate bond class continued to be an attractive asset class in
1996, outperforming all other taxable investment grade classes. Spreads
continued to narrow during the year with defaults low and a large amount of
funds chasing the available bonds.
Total Returns *
As of December 31, 1996
- --------------------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
2.36% 8.20% 9.55%
Comparison of Change in Value of $10,000 Investment in the Bond Fund, Lehman
Brothers BAA Corporate Index and Lipper Corporate Debt BBB Rated Fund Average
-----------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total BAA BBB
December 31, Return Index Avg
10,000 10,000 10,000
1988 10,991 11,129 10,900
1989 12,514 12,699 12,060
1990 13,167 13,595 12,751
1991 15,369 16,113 15,020
1992 16,810 17,512 16,258
1993 18,771 19,665 18,261
1994 18,227 18,707 17,447
1995 22,268 22,959 20,948
1996 22,794 23,882 21,616
Note: Past performance is not predictive of future performance.
Principal Government Securities Fund
(Martin J. Schafer)
Interest rates rose in 1996, which dampened absolute fixed income returns.
The Fund underperformed the Lipper U.S. Mortgage Fund Average and the Lehman MBS
Index in 1996 due to its slightly longer duration. However, since the Fund's
inception of 4/9/87 it has outperformed the Lipper U.S. Mortgage Fund Average
and is competitive with the Lehman MBS Index.
Results were enhanced last year through identification and selection of
certain undervalued sectors of mortgage-backed securities for a portion of the
portfolio. These securities have now become very popular with Wall Street and
other investors, resulting in their increasing in value.
The current portfolio is well positioned for the period ahead. It has a
number of securities that are "seasoned" (e.g., original 30 year loans that have
been outstanding for three years or more) and therefore valued more highly in
the marketplace. There are few securities priced above par, so prepayment risk
is negligible. If the future continues to be an era of economic prosperity we
should continue to see strong housing markets and housing turnover that will
cause prepayments on our securities to exceed market expectations. These
repayments are welcomed, as the portfolio is priced at a discount and the Fund
will be paid-off at par.
Total Returns *
As of December 31, 1996
- --------------------------------------------------
1 Year 5 Year Since Inception Date 4/9/87
3.35% 6.68% 8.63%
Comparison of Change in Value of $10,000 Investment in the Government Securities
Fund, Lehman Brothers Mortgage Index and Lipper U.S. Mortgage Fund Average
- --------------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total Mortgage U.S. Mortgage
December 31, Return Index Index
10,000 10,000 10,000
1987 10,099 10,204 10,104
1988 10,939 11,094 10,858
1989 12,645 12,808 12,224
1990 13,852 14,183 13,370
1991 16,200 16,410 15,348
1992 17,308 17,551 16,285
1993 19,051 18,751 17,499
1994 18,188 18,450 16,769
1995 21,656 21,549 19,491
1996 22,381 22,702 20,245
Note: Past performance is not predictive of future performance.
Important Notes of the Income-Oriented Funds:
Lehman Brothers, BAA Corporate Index: an unmanaged index of all publicly issued
fixed rate nonconvertible, dollar-denominated, SEC-registered corporate debt
rated Baa or BBB by Moody's or S&P.
Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average
currently contains 102 mutual funds.
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgages/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average currently contains 59 mutual funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE OF FUND SHARES
The net asset value of each Fund's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange,
except on days on which changes in the value of the Fund's portfolio securities
will not materially affect the current net asset value of the Fund's redeemable
securities, on days during which a Fund receives no order for the purchase or
sale of its redeemable securities and no tender of such a security for
redemption, and on customary national business holidays. The net asset value per
share of each Fund is determined by dividing the value of the Fund's securities
plus all other assets, less all liabilities, by the number of Fund shares
outstanding.
Growth-Oriented and Income-Oriented Funds
The following valuation information applies to the Growth-Oriented and
Income-Oriented Funds. Securities for which market quotations are readily
available are valued using those quotations. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.
As previously described, some of the Funds may purchase foreign securities
whose trading is substantially completed each day at various times prior to the
close of the New York Stock Exchange. The values of such securities used in
computing net asset value per share are usually determined as of such times.
Occasionally, events which affect the values of such securities and foreign
currency exchange rates may occur between the times at which they are generally
determined and the close of the New York Stock Exchange and would therefore not
be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
by the Manager or Sub-Advisor under procedures established and regularly
reviewed by the Board of Directors. To the extent the Fund invests in foreign
securities listed on foreign exchanges which trade on days on which the Fund
does not determine its net asset value, for example Saturdays and other
customary national U.S. Holidays, the Fund's net asset value could be
significantly affected on days when shareholders have no access to the Fund.
Money Market Fund
The Money Market Fund values its securities at amortized cost. For a
description of this calculation procedure see the Funds' Statement of Additional
Information.
PERFORMANCE CALCULATION
From time to time, the Funds may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Funds. The Funds' yield and total return
figures described below will vary depending upon market conditions, the
composition of the Funds' portfolios and operating expenses. These factors and
possible differences in the methods used in calculating yield and total return
should be considered when comparing the Funds' performance figures to
performance figures published for other investment vehicles. The Funds may also
quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices. Any performance data quoted for the Funds represents only
historical performance and is not intended to indicate future performance of the
Funds. The calculation of average annual total return and yield for the Funds
does not include fees and charges of the separate accounts that invest in the
Funds and, therefore, does not reflect the investment performance of those
separate accounts. For further information on how the Funds calculate yield and
total return figures, see the Statement of Additional Information.
Average Annual Total Return
Each Fund may advertise its respective average annual total return. Average
annual total return for each Fund is computed by calculating the average annual
compounded rate of return over the stated period that would equate an initial
$1,000 investment to the ending redeemable value assuming the reinvestment of
all dividends and capital gains distributions at net asset value. The same
assumptions are made when computing cumulative total return by dividing the
ending redeemable value by the initial investment. The Funds may also quote
rankings, yields or returns as published by independent statistical services or
publishers, and information regarding the performance of certain market indices.
Yield and Effective Yield
From time to time the Money Market Fund may advertise its respective yield
and effective yield. The yield of the Fund refers to the income generated by an
investment in the Fund over a seven-day period. This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
The yield for the Money Market Fund will fluctuate daily as the income
earned on the investments of the Fund fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Fund is an open-end investment company and there is no
guarantee that the net asset value or any stated rate of return will remain
constant. A shareholder's investment in the Fund is not insured. Investors
comparing results of the Fund with investment results and yields from other
sources such as banks or savings and loan associations should understand these
distinctions. Historical and comparative yield information may, from time to
time, be presented by the Fund.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
It is the policy of each Fund to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Funds intend to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which a
Fund so qualifies it will be exempt from federal income tax upon the amounts so
distributed to investors.
Any dividends from the net investment income of the Funds (except the Money
Market Fund) will normally be payable to the shareholders annually, and any net
realized gains will be distributed annually. All dividends and capital gains
distributions are applied to purchase additional Fund shares at net asset value
as of the payment date without the imposition of any sales charge.
Each Fund will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Funds to consult with tax advisors on the federal and
state tax aspects of their investments and redemptions.
Money Market Fund
The Money Market Fund declares dividends of all its daily net investment
income on each day the Fund's net asset value per share is determined. Dividends
are payable daily and are automatically reinvested in full and fractional shares
of the Fund at the then current net asset value unless a shareholder requests
payment in cash.
Net investment income, for dividend purposes, consists of (1) accrued
interest income plus or minus accrued discount or amortized premium; plus or
minus (2) all net short-term realized gains and losses; minus (3) all accrued
expenses of the Fund. Expenses of the Fund are accrued each day. Net income will
be calculated immediately prior to the determination of net asset value per
share of the Fund.
Since the Fund's policy is, under normal circumstances, to hold portfolio
securities to maturity and to value portfolio securities at amortized cost, it
does not expect any capital gains or losses. If the Fund does experience gains,
however, it could result in an increase in dividends. Capital losses could
result in a decrease in dividends. If for some extraordinary reason the Fund
realizes net long-term capital gains, it will distribute them once every 12
months.
Since the net income of the Fund (including realized gains and losses on
the portfolio securities) is declared as a dividend each time the net income of
the Fund is determined, the net asset value per share of the Fund normally
remains at $1.00 immediately after each determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Fund,
representing reinvestment of dividend income, is reflected by an increase in the
number of shares of the Fund in the account.
Normally the Fund will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Fund determined
at any time is a negative amount, the net asset value per share will be reduced
below $1.00. If this happens, the Fund may endeavor to restore the net asset
value per share to $1.00 by reducing the number of outstanding shares by
redeeming proportionately from shareholders without the payment of any monetary
consideration, such number of full and fractional shares as is necessary to
maintain a net asset value per share of $1.00. Each shareholder will be deemed
to have agreed to such a redemption in these circumstances by investing in the
Fund. The Fund may seek to achieve the same objective of restoring the net asset
value per share to $1.00 by not declaring dividends from net income on
subsequent days until restoration, with the result that the net asset value per
share would increase to the extent of positive net income which is not declared
as a dividend, or any other method approved by the Board of Directors.
The Board of Directors may revise the above dividend policy, or postpone
the payment of dividends, if the Fund should have or anticipate any large
presently unexpected expense, loss or fluctuation in net assets which in the
opinion of the Board might have a significant adverse affect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Funds. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Fund shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of each
Fund reserves the right to broaden or limit the designation of Eligible
Purchasers.
Principal Balanced, Principal Bond, Principal Capital Accumulation Fund,
Principal Emerging Growth, Principal Government Securities, Principal Growth,
Principal Money Market and Principal World Funds each serve as an underlying
investment medium for variable annuity contracts and variable life insurance
policies that are funded in separate accounts established by Principal Mutual
Life Insurance Company. It is conceivable that in the future it may be
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the Funds simultaneously. Although
neither Principal Mutual Life Insurance Company nor the Funds currently foresee
any such disadvantages either to variable life insurance policy owners or to
variable annuity contract owners, each Fund's Board of Directors intends to
monitor events in order to identify any material conflicts between such policy
owners and contract owners and to determine what action, if any, should be taken
in response thereto. Such action could include the sale of Fund shares by one or
more of the separate accounts, which could have adverse consequences. Material
conflicts could result from, for example, (1) changes in state insurance laws,
(2) changes in Federal income tax law, (3) changes in the investment management
of the Fund, or (4) differences in voting instructions between those given by
policy owners and those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Funds. There are no sales charges on the Funds'
shares. There are no restrictions on amounts to be invested in the Funds'
shares.
Shareholder accounts for each Fund will be maintained under an open account
system. Under this system, an account is automatically opened and maintained for
each new investor. Each investment is confirmed by sending the investor a
statement of account showing the current purchase and the total number of shares
then owned. The statement of account is treated by each Fund as evidence of
ownership of Fund shares in lieu of stock certificates, and unless written
request is made to the Fund, stock certificates will not be issued or delivered
to investors. Certificates, which can be stolen or lost, are unnecessary except
for special purposes such as collateral for a loan. Fractional interests in the
Funds' shares are reflected to three decimal places in the statement of account,
but any stock certificates will be issued only for full shares owned.
If an offer to purchase shares is received by any of the Funds before the
close of trading on the New York Stock Exchange, the shares will be issued at
the offering price (net asset value of Fund shares) computed on that day. If an
offer is received after the close of trading or on a day which is not a trading
day, the shares will be issued at the offering price computed on the first
succeeding day on which a price is determined. Dividends on the Money Market
Fund shares will be paid on the next day following the effective date of a
purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each of the Principal Funds.
Each Fund share is entitled to one vote either in person or by proxy at all
shareholder meetings for that Fund. This includes the right to vote on the
election of directors, selection of independent accountants and other matters
submitted to meetings of shareholders. Each share has equal rights with every
other share as to dividends, earnings, voting, assets and redemption. Shares are
fully paid and non-assessable, and have no preemptive or conversion rights.
Shares may be issued as full or fractional shares, and each fractional share has
proportionately the same rights, including voting, as are provided for a full
share. Shareholders of each of these Funds may remove any director with or
without cause by the vote of a majority of the votes entitled to be cast at a
meeting of shareholders.
The bylaws of each Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of each Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Funds intend to hold shareholder meetings only when required by
law and at such other times as may be deemed appropriate by their respective
Boards of Directors.
Shareholder inquiries should be directed to the applicable Fund at The
Principal Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Funds' shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of a Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Fund's shares allocated
to each of its separate accounts registered under the Investment Company Act of
1940 and attributable to variable annuity contracts or variable life insurance
policies participating therein in accordance with instructions received from
contract or policy holders, participants and annuitants. Other shares of each
Fund held by each registered separate account, including those for which no
timely instructions are received, are voted in proportion to the instructions
that are received with respect to contracts or policies participating in that
separate account. Shares of each of the Funds held in the general account of
Principal Mutual Life Insurance Company or in its unregistered separate accounts
are voted in proportion to the instructions that are received with respect to
contracts and policies participating in its registered and unregistered separate
accounts. If Principal Mutual determines pursuant to applicable law that a
Fund's shares held in one or more separate accounts or in its general account
need not be voted pursuant to instructions received with respect to
participating contracts or policies, it then may vote those Fund shares in its
own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Fund will redeem its shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Fund requesting redemption of any part or all of the
shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, the Fund will not require a signature guarantee as a part of a
proper endorsement; otherwise the shareholder's signature must be guaranteed by
either a commercial bank, trust company, credit union, savings and loan
association, national securities exchange member, or by a brokerage firm. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Fund in proper and complete form. The amount received for shares
upon redemption may be more or less than the cost of such shares depending upon
the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Fund may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Fund of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Fund
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Fund. A Fund will
redeem only those shares for which it has good payment. To avoid the
inconvenience of such a delay, shares may be purchased with a certified check,
bank cashier's check or money order. During the period prior to the time a
redemption from the Money Market Fund is effective, dividends on such shares
will accrue and be payable and the shareholder will be entitled to exercise all
other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Funds may be transferred to an
Eligible Purchaser. However, whenever any of the Funds is requested to transfer
shares to other than an Eligible Purchaser, the Fund has the right at its
election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Fund must notify the transferee or transferees of such shares
in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Funds
except the World Fund. The custodian for the World Fund is Chase Manhattan Bank,
Global Securities Services, Chase Metro Tech Center, Brooklyn, New York 11245.
The custodians perform no managerial or policymaking functions for the funds.
Organization and Share Ownership: The Funds were incorporated in the state
of Maryland on the following dates: Balanced Fund - November 26, 1986; Bond Fund
- - November 26, 1986; Capital Accumulation Fund - May 26, 1989 (effective
November 1, 1989 succeeded to the business of a predecessor Fund that had been
incorporated in Delaware on February 6, 1969); Emerging Growth Fund - February
20, 1987; Government Securities Fund - June 7, 1985; Growth Fund - August 20,
1993; Money Market Fund - June 10, 1982; and World Fund August 20, 1993.
Principal Mutual Life Insurance Company owns 100% of each Fund's outstanding
shares.
Capitalization: The authorized capital stock of each Fund consists of
100,000,000 shares of common stock (500,000,000 for Principal Money Market Fund,
Inc.), $.01 par value.
Financial Statements: Copies of the financial statements of each Fund will
be mailed to each shareholder of that Fund semi-annually. At the close of each
fiscal year, each Fund's financial statements will be audited by a firm of
independent auditors. The firm of Ernst & Young LLP has been appointed to audit
the financial statements of each Fund for their respective present fiscal years.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the
Funds have filed with the Securities and Exchange Commission. The Funds'
Statement of Additional Information is hereby incorporated by reference into
this Prospectus. A copy of the Funds' Statement of Additional Information can be
obtained upon request, free of charge, by writing or telephoning the Fund. You
may obtain a copy of Part C of the Registration Statements filed with the
Securities and Exchange Commission, Washington, D.C., from the Commission upon
payment of the prescribed fees.
Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for each of the Principal Funds.
