Registration No. 33-14538
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------
POST-EFFECTIVE AMENDMENT NO. 11 TO
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
and
REGISTRATION STATEMENT
under
THE INVESTMENT COMPANY ACT OF 1940
--------
PRINCIPAL HIGH YIELD FUND, INC.
(Exact name of Registrant as specified in Charter)
The Principal Financial Group
Des Moines, Iowa 50392
(Address of principal executive offices)
--------
Telephone Number (515) 248-3842
--------
MICHAEL D. ROUGHTON Copy to:
The Principal Financial Group JOHN W. BLOUCH, L.L.P.
Des Moines, Iowa 50392 Suite 405 West
1025 Thomas Jefferson Street, N.W.
Washington, DC 20007-0805
(Name and address of agent for service)
----------
It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)of Rule 485
X on May 1, 1997 pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a)(1) of Rule 485
on (date) pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
----------
Pursuant to the provisions of Rule 24f-2 under the Investment Company Act
of 1940, Registrant has registered an indefinite number of shares under the
Securities Act of 1933; Registrant filed a Rule 24f-2 Notice for the fiscal year
ended December 31, 1996 on February 27, 1997.
<PAGE>
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%. 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, 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)
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.
PART B
PRINCIPAL AGGRESSIVE GROWTH FUND, INC.
PRINCIPAL ASSET ALLOCATION FUND, INC.
PRINCIPAL BALANCED FUND, INC.
PRINCIPAL BOND FUND, INC.
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
PRINCIPAL EMERGING GROWTH FUND, INC.
PRINCIPAL GOVERNMENT SECURITIES FUND, INC.
PRINCIPAL GROWTH FUND, INC.
PRINCIPAL HIGH YIELD FUND, INC.
PRINCIPAL MONEY MARKET FUND, INC.
PRINCIPAL WORLD FUND, INC.
Statement of Additional Information
dated May 1, 1997
This Statement of Additional Information provides information about each
of the above Funds in addition to the information that is contained in the
Funds' Prospectus, dated May 1, 1997.
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Funds' Prospectus, a copy of which can be
obtained free of charge by writing or telephoning:
Principal Funds
The Principal Financial Group
Des Moines, Iowa 50392-0200
Telephone: 1-800-247-4123
<PAGE>
TABLE OF CONTENTS
Investment Policies and Restrictions of the Fund............................. 2
Growth-Oriented Funds................................................. 2
Income-Oriented Funds................................................. 7
Money Market Fund..................................................... 10
Fund Investments............................................................. 12
Directors and Officers of the Fund........................................... 23
Manager and Sub-Advisors .................................................... 24
Cost of Manager's Services .................................................. 25
Brokerage on Purchases and Sales of Securities............................... 27
Determination of Net Asset Value of Fund Shares.............................. 29
Performance Calculation...................................................... 31
Tax Status................................................................... 33
General Information and History.............................................. 33
Financial Statements......................................................... 35
Appendix A................................................................... 36
- 1 -
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS OF THE FUNDS
The following information about the Principal Funds, a family of
separately incorporated, diversified, open-end management investment companies,
commonly called mutual funds, supplements the information provided in the
Prospectus under the caption "Investment Objectives, Policies and Restrictions."
There are three categories of Principal Funds: Growth-Oriented Funds,
which include five Funds which seek primarily capital appreciation through
investments in equity securities (Aggressive Growth Fund, Capital Accumulation
Fund, Emerging Growth Fund, Growth Fund and World Fund) and two Funds which seek
a total investment return including both capital appreciation and income through
investments in equity and debt securities (Asset Allocation Fund and Balanced
Fund); Income-Oriented Funds, which include three funds which seek primarily a
high level of income through investments in debt securities (Bond Fund,
Government Securities Fund and High Yield Fund) and a Money Market Fund, which
seeks primarily a high level of income through investments in short-term debt
securities.
In seeking to achieve its investment objective, each Fund has adopted as
matters of fundamental policy certain investment restrictions which cannot be
changed without approval by the holders of the lesser of: (i) 67% of the Fund's
shares present or represented at a shareholders' meeting at which the holders of
more than 50% of such shares are present or represented by proxy; or (ii) more
than 50% of the outstanding shares of the Fund. Similar shareholder approval is
required to change the investment objective of each of the Funds. The following
discussion provides for each Fund a statement of its investment objective, a
description of its investment restrictions that are matters of fundamental
policy and a description of any investment restrictions it may have adopted that
are not matters of fundamental policy and may be changed without shareholder
approval. For purposes of the investment restrictions, all percentage and rating
limitations apply at the time of acquisition of a security, and any subsequent
change in any applicable percentage resulting from market fluctuations or in a
rating by a rating service will not require elimination of any security from the
portfolio. Unless specifically identified as a matter of fundamental policy,
each investment policy discussed in the Prospectus or the Statement of
Additional Information is not fundamental and may be changed by the respective
Fund's Board of Directors.
GROWTH-ORIENTED FUNDS
Investment Objectives
Principal Aggressive Growth Fund, Inc. ("Aggressive Growth Fund")
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. ("Asset Allocation Fund") seeks
to generate a total investment return consistent with the preservation
of capital.
Principal Balanced Fund, Inc. ("Balanced Fund") seeks to generate a
total investment return consisting of current income and capital
appreciation while assuming reasonable risks in furtherance of the
investment objective.
Principal Capital Accumulation Fund, Inc. ("Capital Accumulation
Fund") seeks to achieve primarily long-term capital appreciation and
secondarily growth of investment income through the purchase primarily
of common stocks, but the Fund may invest in other securities.
Principal Emerging Growth Fund, Inc. ("Emerging Growth Fund") seeks to
achieve capital appreciation by investing primarily in securities of
emerging and other growth-oriented companies.
Principal Growth Fund, Inc. ("Growth Fund") seeks growth of capital
through the purchase primarily of common stocks, but the Fund may
invest in other securities.
Principal World Fund, Inc. ("World Fund") seeks long-term growth of
capital by investing in a portfolio of equity securities of companies
domiciled in any of the nations of the world.
Investment Restrictions
Aggressive Growth Fund, Asset Allocation Fund, Balanced Fund, Emerging
Growth Fund, Growth Fund and World Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Aggressive
Growth Fund, Asset Allocation Fund, Balanced Fund, Emerging Growth Fund, Growth
Fund and World Fund each may not:
(1) Issue any senior securities as defined in the Investment Company
Act of 1940. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in accordance
with restrictions described below do not involve the issuance of a
senior security.
(2) Purchase or retain in its portfolio securities of any issuer if
those officers or directors of the Fund or its Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(3) Invest in commodities or commodity contracts, but it may purchase
and sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which
are secured by real estate and securities of issuers which invest
or deal in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Fund's total assets at
the time of the borrowing. The Balanced Fund may borrow only from
banks.
(6) Make loans, except that the Fund may (i) purchase and hold debt
obligations in accordance with its investment objective and
policies, (ii) enter into repurchase agreements, and (iii) lend its
portfolio securities without limitation against collateral
(consisting of cash or securities issued or guaranteed by the
United States Government or its agencies or instrumentalities)
equal at all times to not less than 100% of the value of the
securities loaned.
(7) Invest more than 5% of its total assets in the securities of any
one issuer (other than obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities)
except that this limitation shall apply only with respect to 75% of
the total assets of the Aggressive Growth Fund, Asset Allocation
Fund, Growth Fund and World Fund; or purchase more than 10% of the
outstanding voting securities of any one issuer.
(8) Act as an underwriter of securities, except to the extent the Fund
may be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(9) Concentrate its investments in any particular industry or
industries, except that the Fund may invest not more than 25% of
the value of its total assets in a single industry.
(10) Sell securities short (except where the Fund holds or has the right
to obtain at no added cost a long position in the securities sold
that equals or exceeds the securities sold short) or purchase any
securities on margin, except it may obtain such short-term credits
as are necessary for the clearance of transactions. The deposit or
payment of margin in connection with transactions in options and
financial futures contracts is not considered the purchase of
securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in securities of
issuers which invest in or sponsor such programs.
Each of these Funds has also adopted the following restrictions which are
not fundamental policies and may be changed without shareholder approval. It is
contrary to each Fund's present policy to:
(1) Invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market, including all covered spread options and the assets used as
cover for any options written in the Over-the-Counter market are
included as part of this 10% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2%
may be invested in warrants that are not listed on the New York or
American Stock Exchange. The 2% limitation for the World Fund does
not apply to warrants listed on the Toronto Stock Exchange or the
Chicago Board Options Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Fund's investments in
all such issuers to exceed 5% of the value of its total assets.
(4) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on futures contracts are not deemed to be
pledges or other encumbrances.
(5) Invest in companies for the purpose of exercising control or
management.
(6) Invest more than 10% (25% for the Aggressive Growth Fund) of its
total assets in securities of foreign issuers. This restriction
does not pertain to the World Fund or the Asset Allocation Fund.
(7) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
Options on financial futures contracts and options on securities
indices will be used solely for hedging purposes; not for
speculation.
(8) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(9) Invest in arbitrage transactions.
(10) Invest in real estate limited partnership interests.
The Balanced Fund and Emerging Growth Fund have also adopted the
following restrictions which are not fundamental policies and may be changed
without shareholder approval. It is contrary to each such Fund's present policy
to:
(1) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization
or by purchase in the open market of securities of closed-end
companies where no underwriter or dealer's commission or profit,
other than a customary broker's commission, is involved, and if
immediately thereafter not more than 10% of the value of the Fund's
total assets would be invested in such securities.
The Aggressive Growth Fund, Asset Allocation Fund, Growth Fund and World
Fund have also adopted the following restriction which is not a fundamental
policy and may be changed without shareholder approval. It is contrary to each
such Fund's present policy to:
(1) Invest its assets in the securities of any investment company
except that the Fund may invest not more than 10% of its assets in
securities of other investment companies, invest not more than 5%
of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation or plan of reorganization, and the Fund may
purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
Capital Accumulation Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Capital
Accumulation Fund may not:
(1) Concentrate its investments in any one industry. No more than 25%
of the value of its total assets will be invested in any one
industry.
(2) Purchase the securities of any issuer if the purchase will cause
more than 5% of the value of its total assets to be invested in the
securities of any one issuer (except U. S. Government securities).
(3) Purchase the securities of any issuer if the purchase will cause
more than 10% of the voting securities, or any other class of
securities of the issuer, to be held by the Fund.
(4) Underwrite securities of other issuers, except that the Fund may
acquire portfolio securities under circumstances where if sold the
Fund might be deemed an underwriter for purposes of the Securities
Act of 1933. The Fund will not purchase securities, including
obligations acquired in private offerings (see (14) below), which
are subject to legal or contractual restrictions upon resale or are
otherwise not readily marketable, if the purchase will cause more
than 10% of the value of its assets to be invested in such
securities.
(5) Purchase securities of any company with a record of less than three
years' continuous operation (including that of predecessors) if the
purchase would cause the value of the Fund's aggregate investments
in all such companies to exceed 5% of the Fund's total assets.
(6) Engage in the purchase and sale of illiquid interests in real
estate. For this purpose, readily marketable interests in real
estate investment trusts are not interests in real estate.
(7) Engage in the purchase and sale of commodities or commodity
contracts.
(8) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization.
(9) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or its Manager owning
beneficially more than one-half of one percent (0.5%) of the
securities of the issuer together own beneficially more than 5% of
such securities.
(10) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
Fund will not participate on a joint or joint and several basis in
any trading account in securities or effect a short sale of any
security, except in connection with an underwriting in which it is
a participant in the circumstances specified in (4) above. The Fund
will not issue or acquire put and call options.
(11) Invest in companies for the purpose of exercising control or
management.
(12) Invest more than 5% of its assets at the time of purchase in rights
and warrants (other than those that have been acquired in units or
attached to other securities).
(13) Invest more than 20% of its total assets in securities of foreign
issuers.
In addition:
(14) The Fund may make loans only through the purchase in private
offerings of debentures or other evidences of indebtedness of types
customarily purchased by institutional investors, but such
purchases shall be subject to the limitation contained in (4)
above.*
(15) The Fund does not propose to borrow money except for temporary or
emergency purposes from banks in an amount not to exceed the lesser
of (i) 5% of the value of the Fund's assets, less liabilities other
than such borrowings, or (ii) 10% of the Fund's assets taken at
cost at the time such borrowing is made. The Fund may not pledge,
mortgage, or hypothecate its assets (at value) to an extent greater
than 15% of the gross assets taken at cost.
(16) It is contrary to the Fund's present policy to purchase warrants in
excess of 5% of its total assets of which 2% may be invested in
warrants that are not listed on the New York or American Stock
Exchange.
* It is anticipated that any debt securities acquired subject to
"Restriction 14" will be convertible into or carry rights or
warrants to purchase common stock or to participate in earnings,
unless acquired for temporary defensive or liquidity purposes.
INCOME-ORIENTED FUNDS
Investment Objectives
Principal Bond Fund, Inc. ("Bond Fund") 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. ("Government Securities
Fund") seeks a high level of current income, liquidity and safety
of principal by purchasing obligations issued or guaranteed by the
United States Government or its agencies, with emphasis on
Government National Mortgage Association Certificates ("GNMA
Certificates"). The guarantee by the United States Government
extends only to principal and interest; Fund shares are not
guaranteed by the United States Government. There are certain risks
unique to GNMA Certificates.
Principal High Yield Fund, Inc. ("High Yield Fund") seeks high
current income primarily by purchasing high yielding, lower or
non-rated fixed income securities which are believed to not involve
undue risk to income or principal. Capital growth is a secondary
objective when consistent with the objective of high current
income.
Investment Restrictions
Bond Fund, High Yield Fund
Each of the following numbered restrictions is a matter of
fundamental policy and may not be changed without shareholder approval.
The Bond Fund and High Yield Fund each may not:
(1) Issue any senior securities as defined in the Investment Company
Act of 1940. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in accordance
with restrictions described below do not involve the issuance of a
senior security.
(2) Purchase or retain in its portfolio securities of any issuer if
those officers or directors of the fund or its Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(3) Invest in commodities or commodity contracts, but it may purchase
and sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which
are secured by real estate and securities of issuers which invest
or deal in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Fund's total assets at
the time of the borrowing. The Bond Fund and High Yield Fund may
borrow only from banks.
(6) Make loans, except that the Fund may (i) purchase and hold debt
obligations in accordance with its investment objective and
policies, (ii) enter into repurchase agreements, and (iii) lend its
portfolio securities without limitation against collateral
(consisting of cash or securities issued or guaranteed by the
United States Government or its agencies or instrumentalities)
equal at all times to not less than 100% of the value of the
securities loaned.
(7) Invest more than 5% of its total assets in the securities of any
one issuer (other than obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities); or
purchase more than 10% of the outstanding voting securities of any
one issuer.
(8) Act as an underwriter of securities, except to the extent the Fund
may be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(9) Concentrate its investments in any particular industry or
industries, except that the Bond Fund and High Yield Fund each may
invest not more than 25% of the value of its total assets in a
single industry.
(10) Sell securities short (except where the Fund holds or has the right
to obtain at no added cost a long position in the securities sold
that equals or exceeds the securities sold short) or purchase any
securities on margin, except it may obtain such short-term credits
as are necessary for the clearance of transactions. The deposit or
payment of margin in connection with transactions in options and
financial futures contracts is not considered the purchase of
securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in securities of
issuers which invest in or sponsor such programs.
Each of these Funds has also adopted the following restrictions which are
not fundamental policies and may be changed without shareholder approval. It is
contrary to each Fund's present policy to:
(1) Invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market, including all covered spread options and the assets used as
cover for any options written in the Over-the-Counter market are
included as part of this 10% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2%
may be invested in warrants that are not listed on the New York or
American Stock Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Fund's investments in
all such issuers to exceed 5% of the value of its total assets.
(4) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization
or by purchase in the open market of securities of closed-end
companies where no underwriter or dealer's commission or profit,
other than a customary broker's commission, is involved, and if
immediately thereafter not more than 10% of the value of the Fund's
total assets would be invested in such securities.
(5) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on futures contracts are not deemed to be
pledges or other encumbrances.
(6) Invest in companies for the purpose of exercising control or
management.
(7) Invest more than 20% of its total assets in securities of foreign
issuers.
(8) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
Options on financial futures contracts and options on securities
indices will be used solely for hedging purposes; not for
speculation.
(9) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(10) Invest in arbitrage transactions.
(11) Invest in real estate limited partnership interests.
Government Securities Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Government
Securities Fund may not:
(1) Issue any senior securities as defined in the Act except insofar as
the Fund may be deemed to have issued a senior security by reason
of (a) purchasing any securities on a standby, when-issued or
delayed delivery basis; or (b) borrowing money in accordance with
restrictions described below.
(2) Purchase any securities other than obligations issued or guaranteed
by the United States Government or its agencies or
instrumentalities. There is no limit on the amount of its assets
which may be invested in the securities of any one issuer of such
obligations.
(3) Act as an underwriter of securities, except to the extent the Fund
may be deemed to be an underwriter in connection with the sale of
GNMA certificates held in its portfolio.
(4) Engage in the purchase and sale of interests in real estate,
including interests in real estate investment trusts (although it
will invest in securities secured by real estate or interests
therein, such as mortgage-backed securities) or invest in
commodities or commodity contracts, oil and gas interests, or
mineral exploration or development programs.
(5) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization.
(6) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or its Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(7) Sell securities short or purchase any securities on margin, except
it may obtain such short-term credits as are necessary for the
clearance of transactions. The deposit or payment of margin in
connection with transactions in options and financial futures
contracts is not considered the purchase of securities on margin.
(8) Invest in companies for the purpose of exercising control or
management.
(9) Make loans, except that the Fund may purchase or hold debt
obligations in accordance with the investment restrictions set
forth in paragraph (2) and may enter into repurchase agreements for
such securities, and may lend its portfolio securities without
limitation against collateral consisting of cash, or securities
issued or guaranteed by the United States Government or its
agencies or instrumentalities, which is equal at all times to 100%
of the value of the securities loaned.
(10) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Fund's total assets at
the time of the borrowing.
(11) Enter into repurchase agreements maturing in more than seven days
if, as a result thereof, more than 10% of the value of the Fund's
total assets would be invested in such repurchase agreements and
other assets without readily available market quotations.
(12) Participate on a joint or joint and several basis in any trading
account in securities.
(13) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
(14) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
The Government Fund has also adopted the following restriction which is
not a fundamental policy and may be changed without shareholder approval. It is
contrary to the Government Fund's present policy to:
(1) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on future contracts are not deemed to be
pledges or other encumbrances.
MONEY MARKET FUND
Investment Objective
Principal Money Market Fund, Inc. ("Money Market Fund") seeks as
high a level of income available from short-term securities as is
considered consistent with preservation of principal and
maintenance of liquidity by investing in a portfolio of money
market instruments.
Investment Restrictions
Money Market Fund
Each of the following numbered restrictions is a matter of
fundamental policy and may not be changed without shareholder approval.
The Money Market Fund may not:
(1) Concentrate its investments in any one industry. No more than 25%
of the value of its total assets will be invested in securities of
issuers having their principal activities in any one industry,
other than securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities, or obligations of domestic
branches of U.S. banks and savings institutions. (See "Bank
Obligations").
(2) Purchase the securities of any issuer if the purchase will cause
more than 5% of the value of its total assets to be invested in the
securities of any one issuer (except securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities).
(3) Purchase the securities of any issuer if the purchase will cause
more than 10% of any class of securities of the issuer to be held
by the Fund (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities).
(4) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under the federal securities laws; or knowingly
purchase any security restricted as to disposition under the
federal securities laws.
(5) Purchase securities of any company with a record of less than 3
years continuous operation (including that of predecessors) if the
purchase would cause the value of the Fund's aggregate investments
in all such companies to exceed 5% of the value of the Fund's total
assets.
(6) Engage in the purchase and sale of illiquid interests in real
estate, including interests in real estate investment trusts
(although it may invest in securities secured by real estate or
interests therein) or invest in commodities or commodity contracts,
oil and gas interests, or mineral exploration or development
programs.
(7) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization.
(8) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or its Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(9) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
Fund will not participate on a joint or joint and several basis in
any trading account in securities or effect a short sale of any
security. The Fund will not issue or acquire put and call options,
straddles or spreads or any combination thereof.
(10) Invest in companies for the purpose of exercising control or
management.
(11) Make loans to others except through the purchase of debt
obligations in which the Fund is authorized to invest and by
entering into repurchase agreements (see "Fund Investments").
(12) Borrow money, except from banks for temporary or emergency
purposes, including the meeting of redemption requests which might
otherwise require the untimely disposition of securities, in an
amount not to exceed the lesser of (1) 5% of the value of the
Fund's assets, or (ii) 10% of the value of the Fund's net assets
taken at cost at the time such borrowing is made. The Fund will not
issue senior securities except in connection with such borrowings.
The Fund may not pledge, mortgage, or hypothecate its assets (at
value) to an extent greater than 10% of the net assets.
(13) Invest in uncertificated time deposits maturing in more than seven
days; uncertificated time deposits maturing from two business days
through seven calendar days may not exceed 10% of the value of the
Fund's total assets.
(14) Enter into repurchase agreements maturing in more than seven days
if, as a result thereof, more than 10% of the value of the Fund's
total assets would be invested in such repurchase agreements and
other assets (excluding time deposits) without readily available
market quotations.
FUND INVESTMENTS
The following information further supplements the discussion of the
Funds' investment objectives and policies in the Prospectus under the caption
"INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS."
Selections of equity securities for the Funds, except the Aggressive
Growth and Asset Allocation Funds, are made based upon an approach described
broadly as that of fundamental analysis. Three basic steps are involved in this
analysis. First is the continuing study of basic economic factors in an effort
to conclude what the future general economic climate is likely to be over the
next one to two years. Second, given some conviction as to the likely economic
climate, the Fund attempts to identify the prospects for the major industrial,
commercial and financial segments of the economy, by looking at such factors as
demand for products, capacity to produce, operating costs, pricing structure,
marketing techniques, adequacy of raw materials and components, domestic and
foreign competition, and research productivity, to ascertain prospects for each
industry for the near and intermediate term. Finally, determinations are made
regarding earnings prospects for individual companies within each industry by
considering the same types of factors described above. These earnings prospects
are then evaluated in relation to the current price of the securities of each
company.
Although the Funds may pursue the investment practices described under
the captions Restricted Securities, Foreign Securities, Spread Transactions,
Options on Securities and Securities Indices, and Futures Contracts and Options
on Futures Contracts, Currency Contracts, Repurchase Agreements, Lending of
Portfolio Securities and When Issued and Delay of Delivery Securities, none of
the Funds either committed during the last fiscal year or currently intends to
commit during the present fiscal year more than 5% of its net assets to any of
the practices, with the following exceptions. Investments in foreign securities
by the Aggressive Growth, Asset Allocation and World Funds are expected to
exceed 5% of each fund's net assets.
Restricted Securities
Each of the following Principal Funds has adopted investment restrictions
as non-fundamental policies that limit its investments in restricted securities
and other illiquid securities to 10% of its assets: Aggressive Growth, Asset
Allocation, Balanced, Bond, Capital Accumulation, Emerging Growth, Growth, High
Yield and World Funds.
Generally, restricted securities are not readily marketable because they
are subject to legal or contractual restrictions upon resale. They may be sold
only in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 or in a transaction which is exempt from
the registration requirements of that act. When registration is required, a Fund
may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may by permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell. Restricted securities and other securities not readily
marketable will be priced at fair value as determined in good faith by or under
the direction of the Board of Directors.
Foreign Securities
Each of the following Principal Funds has adopted investment restrictions
as non-fundamental policies that limit its investments in foreign securities to
the indicated percentage of its assets: Asset Allocation and World Funds - 100%
; Aggressive Growth Fund - 25%; Bond, Capital Accumulation, High Yield 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. Each Fund's investment in foreign securities may also
result in higher custodial costs and the costs associated with currency
conversions.
Spread Transactions, Options on Securities and Securities Indices, and Futures
Contracts and Options on Futures Contracts
The Aggressive Growth, Asset Allocation, Balanced, Bond, Emerging Growth,
Government Securities, Growth, High Yield and World Funds may each engage in the
practices described under this heading. None of the Funds will invest more than
5% of its assets in the purchase of call and put options on individual
securities, securities indices and futures contracts. In the following
discussion, the terms "the Fund," "each Fund" or "the Funds" refer to each of
these Funds.
Spread Transactions
Each Fund may purchase from securities dealers covered spread options.
Such covered spread options are not presently exchange listed or traded. The
purchase of a spread option gives the Fund the right to put, or sell, a security
that it owns at a fixed dollar spread or fixed yield spread in relationship to
another security that the Fund does not own, but which is used as a benchmark.
The risk to the Fund in purchasing covered spread options is the cost of the
premium paid for the spread option and any transaction costs. In addition, there
is no assurance that closing transactions will be available. The purchase of
spread options can be used to protect each Fund against adverse changes in
prevailing credit quality spreads, i.e., the yield spread between high quality
and lower quality securities. The security covering the spread option will be
maintained in a segregated account by each Fund's custodian. The Funds do not
consider a security covered by a spread option to be "pledged" as that term is
used in the Funds' policy limiting the pledging or mortgaging of assets.
Options on Securities and Securities Indices
Each Fund may write (sell) and purchase call and put options on
securities in which it may invest and on securities indices based on securities
in which the Fund may invest. The Funds may write call and put options to
generate additional revenue, and may write and purchase call and put options in
seeking to hedge against a decline in the value of securities owned or an
increase in the price of securities which the Fund plans to purchase.
Writing Covered Call and Put Options. When a Fund writes a call
option, it gives the purchaser of the option, in return for the premium it
receives, the right to buy from the Fund the underlying security at a specified
price at any time before the option expires. When a Fund writes a put option, it
gives the purchaser of the option, in return for the premium it receives, the
right to sell to the Fund the underlying security at a specified price at any
time before the option expires.
The premium received by a Fund, when it writes a put or call option,
reflects, among other factors, the current market price of the underlying
security, the relationship of the exercise price to the market price, the time
period until the expiration of the option and interest rates. The premium will
generate additional income for the Fund if the option expires unexercised or is
closed out at a profit. By writing a call, a Fund limits its opportunity to
profit from any increase in the market value of the underlying security above
the exercise price of the option, but it retains the risk of loss if the price
of the security should decline. By writing a put, a Fund assumes the risk that
it may have to purchase the underlying security at a price that may be higher
than its market value at time of exercise.
The Funds write only covered options and will comply with applicable
regulatory and exchange cover requirements. The Funds usually will own the
underlying security covered by any outstanding call option that it has written.
With respect to an outstanding put option that it has written, each Fund will
deposit and maintain with its custodian cash, U.S. Government securities or
other liquid securities with a value at least equal to the exercise price of the
option.
Once a Fund has written an option, it may terminate its obligation,
before the option is exercised, by effecting a closing transaction, which is
accomplished by the Fund's purchasing an option of the same series as the option
previously written. The Funds will have a gain or loss depending on whether the
premium received when the option was written exceeds the closing purchase price
plus related transaction costs.
Purchasing Call and Put Options. When a Fund purchases a call
option, it receives, in return for the premium it pays, the right to buy from
the writer of the option the underlying security at a specified price at any
time before the option expires. The Fund may purchase call options in
anticipation of an increase in the market value of securities that it intends
ultimately to buy. During the life of the call option, the Fund would be able to
buy the underlying security at the exercise price regardless of any increase in
the market price of the underlying security. In order for a call option to
result in a gain, the market price of the underlying security must rise to a
level that exceeds the sum of the exercise price, the premium paid and
transaction costs.
When a Fund purchases a put option, it receives, in return for the
premium it pays, the right to sell to the writer of the option the underlying
security at a specified price at any time before the option expires. The Fund
may purchase put options in anticipation of a decline in the market value of the
underlying security. During the life of the put option, the Fund would be able
to sell the underlying security at the exercise price regardless of any decline
in the market price of the underlying security. In order for a put option to
result in a gain, the market price of the underlying security must decline,
during the option period, below the exercise price sufficiently to cover the
premium and transaction costs.
Once a Fund has purchased an option, it may close out its position by
selling an option of the same series as the option previously purchased. The
Fund will have a gain or loss depending on whether the closing sale price
exceeds the initial purchase price plus related transaction costs.
Options on Securities Indices. Each Fund may purchase and sell put
and call options on any securities index based on securities in which the Fund
may invest. Securities index options are designed to reflect price fluctuations
in a group of securities or segment of the securities market rather than price
fluctuations in a single security. Options on securities indices are similar to
options on securities, except that the exercise of securities index options
requires cash payments and does not involve the actual purchase or sale of
securities. The Funds would engage in transactions in put and call options on
securities indices for the same purposes as they would engage in transactions in
options on securities. When a Fund writes call options on securities indices, it
will hold in its portfolio underlying securities which, in the judgment of the
Manager or the Sub-Advisor, correlate closely with the securities index and
which have a value at least equal to the aggregate amount of the securities
index options.
Risks Associated with Options Transactions. An options position may
be closed out only on an exchange which provides a secondary market for an
option of the same series. Although the Funds will generally purchase or write
only those options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market on an exchange will exist
for any particular option, or at any particular time. For some options, no
secondary market on an exchange or elsewhere may exist. If a Fund is unable to
effect closing sale transactions in options it has purchased, the Fund would
have to exercise its options in order to realize any profit and may incur
transaction costs upon the purchase or sale of underlying securities pursuant
thereto. If a Fund is unable to effect a closing purchase transaction for a
covered option that it has written, it will not be able to sell the underlying
securities, or dispose of the assets held in a segregated account, until the
option expires or is exercised. A Fund's ability to terminate option positions
established in the over-the-counter market may be more limited than for
exchange-traded options and may also involve the risk 35 that broker-dealers
participating in such transactions might fail to meet their obligations.
Futures Contracts and Options on Futures
Each Fund may purchase and sell financial futures contracts and options
on those contracts. Financial futures contracts are commodities contracts based
on financial instruments such as U.S. Treasury bonds or bills or on securities
indices such as the S&P 500 Index. Futures contracts, options on futures
contracts and the commodity exchanges on which they are traded are regulated by
the Commodity Futures Trading Commission ("CFTC"). Through the purchase and sale
of futures contracts and related options, a Fund may seek to hedge against a
decline in securities owned by the Fund or an increase in the price of
securities which the Fund plans to purchase.
Futures Contracts. When a Fund sells a futures contract based on a
financial instrument, the Fund becomes obligated to deliver that kind of
instrument at a specified future time for a specified price. When a Fund
purchases that kind of contract, it becomes obligated to take delivery of the
instrument at a specified time and to pay the specified price. In most
instances, these contracts are closed out by entering into an offsetting
transaction before the settlement date, thereby canceling the obligation to make
or take delivery of specific securities. The Fund realizes a gain or loss
depending on whether the price of an offsetting purchase plus transaction costs
are less or more than the price of the initial sale or on whether the price of
an offsetting sale is more or less than the price of the initial purchase plus
transaction costs. Although the Funds will usually liquidate futures contracts
on financial instruments in this manner, they may instead make or take delivery
of the underlying securities whenever it appears economically advantageous to do
so.
A futures contract based on a securities index provides for the purchase
or sale of a group of securities at a specified future time for a specified
price. These contracts do not require actual delivery of securities, but result
in a cash settlement based upon the difference in value of the index between the
time the contract was entered into and the time it is liquidated, which may be
at its expiration or earlier if it is closed out by entering into an offsetting
transaction.
When a futures contract is purchased or sold a brokerage commission is
paid, but unlike the purchase or sale of a security or option, no price or
premium is paid or received. Instead, an amount of cash or U.S. Government
securities, which varies, but is generally about 5% of the contract amount, is
deposited by the Fund with its custodian for the benefit of the futures
commission merchant through which the Fund engages in the transaction. This
amount is known as "initial margin." It does not involve the borrowing of funds
by the Fund to finance the transaction, but instead represents a "good faith"
deposit assuring the performance of both the purchaser and the seller under the
futures contract. It is returned to the Fund upon termination of the futures
contract, if all the Fund's contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin,"
are required to be made on a daily basis as the price of the futures contract
fluctuates, making the long or short positions in the futures contract more or
less valuable, a process known as "marking to market." If the position is closed
out by taking an opposite position prior to the settlement date of the futures
contract, a final determination of variation margin is made, additional cash is
required to be paid to or released by the broker, and the Fund realizes a loss
or gain.
In using futures contracts, the Funds will seek to establish more
certainly than would otherwise be possible the effective price of or rate of
return on portfolio securities or securities that the Fund proposes to acquire.
A Fund, for example, may sell futures contracts in anticipation of a rise in
interest rates which would cause a decline in the value of its debt investments.
When this kind of hedging is successful, the futures contracts should increase
in value when the Fund's debt securities decline in value and thereby keep the
Fund's net asset value from declining as much as it otherwise would. A Fund may
also sell futures contracts on securities indices in anticipation of or during a
stock market decline in an endeavor to offset a decrease in the market value of
its equity investments. When a Fund is not fully invested and anticipates an
increase in the cost of securities it intends to purchase, it may purchase
financial futures contracts. When increases in the prices of equities are
expected, a Fund may purchase futures contracts on securities indices in order
to gain rapid market exposure that may partially or entirely offset increases in
the cost of the equity securities it intends to purchase.
Options on Futures. The Funds may also purchase and write call and
put options on futures contracts. A call option on a futures contract gives the
purchaser the right, in return for the premium paid, to purchase a futures
contract (assume a long position) at a specified exercise price at any time
before the option expires. A put option gives the purchaser the right, in return
for the premium paid, to sell a futures contract (assume a short position), for
a specified exercise price, at any time before the option expires.
Upon the exercise of a call, the writer of the option is obligated to
sell the futures contract (to deliver a long position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a put, the
writer of the option is obligated to purchase the futures contract (deliver a
short position to the option holder) at the option exercise price, which will
presumably be higher than the current market price of the contract in the
futures market. However, as with the trading of futures, most options are closed
out prior to their expiration by the purchase or sale of an offsetting option at
a market price that will reflect an increase or a decrease from the premium
originally paid.
Options on futures can be used to hedge substantially the same risks as
might be addressed by the direct purchase or sale of the underlying futures
contracts. For example, if a Fund anticipated a rise in interest rates and a
decline in the market value of the debt securities in its portfolio, it might
purchase put options or write call options on futures contracts instead of
selling futures contracts.
If a Fund purchases an option on a futures contract, it may obtain
benefits similar to those that would result if it held the futures position
itself. But in contrast to a futures transaction, the purchase of an option
involves the payment of a premium in addition to transaction costs. In the event
of an adverse market movement, however, the Fund will not be subject to a risk
of loss on the option transaction beyond the price of the premium it paid plus
its transaction costs.
When a Fund writes an option on a futures contract, the premium paid by
the purchaser is deposited with the Fund's custodian, and the Fund must maintain
with its custodian all or a portion of the initial margin requirement on the
underlying futures contract. The Fund assumes a risk of adverse movement in the
price of the underlying futures contract comparable to that involved in holding
a futures position. Subsequent payments to and from the broker, similar to
variation margin payments, are made as the premium and the initial margin
requirement are marked to market daily. The premium may partially offset an
unfavorable change in the value of portfolio securities, if the option is not
exercised, or it may reduce the amount of any loss incurred by the Fund if the
option is exercised.
Risks Associated with Futures Transactions. There are a number of
risks associated with transactions in futures contracts and related options. A
Fund's successful use of futures contracts is subject to the Manager's and the
Sub-Advisor's ability to predict correctly the factors affecting the market
values of the Fund's portfolio securities. For example, if a Fund was hedged
against the possibility of an increase in interest rates which would adversely
affect debt securities held by the Fund and the prices of those debt securities
instead increased, the Fund would lose part or all of the benefit of the
increased value of its securities which it hedged because it would have
offsetting losses in its futures positions. Other risks include imperfect
correlation between price movements in the financial instrument or securities
index underlying the futures contract, on the one hand, and the price movements
of either the futures contract itself or the securities held by the Fund, on the
other hand. If the prices do not move in the same direction or to the same
extent, the transaction may result in trading losses.
Prior to exercise or expiration, a position in futures may be terminated
only by entering into a closing purchase or sale transaction. This requires a
secondary market on the relevant contract market. The Fund will enter into a
futures contract or related option only if there appears to be a liquid
secondary market therefor. There can be no assurance, however, that such a
liquid secondary market will exist for any particular futures contract or
related option at any specific time. Thus, it may not be possible to close out a
futures position once it has been established. Under such circumstances, the
Fund would continue to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such situations, if the Fund
has insufficient cash, it may be required to sell portfolio securities to meet
daily variation margin requirements at a time when it may be disadvantageous to
do so. In addition, the Fund may be required to perform under the terms of the
futures contracts it holds. The inability to close out futures positions also
could have an adverse impact on the Fund's ability effectively to hedge its
portfolio.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. This daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
Limitations on the Use of Futures and Options on Futures. Each Fund
intends to come within an exclusion from the definition of "commodity pool
operator" provided by CFTC regulations by complying with certain limitations on
the use of futures and related options prescribed by those regulations.
None of the Funds will purchase or sell futures contracts or options
thereon if immediately thereafter the aggregate initial margin and premiums
exceed 5% of the fair market value of the Fund's assets, after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into (except that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount generally may be excluded in computing
the 5%).
The Funds will enter into futures contracts and related options
transactions only for bona fide hedging purposes as permitted by the CFTC and
for other appropriate risk management purposes, if any, which the CFTC may deem
appropriate for mutual funds excluded from the regulations governing commodity
pool operators. The Funds are not permitted to engage in speculative futures
trading. Each Fund will determine that the price fluctuations in the futures
contracts and options on futures used for hedging or risk management purposes
are substantially related to price fluctuations in securities held by the Fund
or which it expects to purchase. In pursuing traditional hedging activities,
each Fund will sell futures contracts or acquire puts to protect against a
decline in the price of securities that the Fund owns, and each Fund will
purchase futures contracts or calls on futures contracts to protect the Fund
against an increase in the price of securities the Fund intends to purchase
before it is in a position to do so.
When a Fund purchases a futures contract, or purchases a call option on a
futures contract, it will maintain an amount of cash, cash equivalents or
short-term high grade fixed income securities in a segregated account with the
Fund's custodian, so that the amount so segregated plus the amount of initial
margin held for the account of its broker equals the market value of the futures
contract.
The Funds will not maintain open short positions in futures contracts,
call options written on futures contracts, and call options written on
securities indices if, in the aggregate, the value of the open positions (marked
to market) exceeds the current market value of that portion of its securities
portfolio being hedged by those futures and options plus or minus the unrealized
gain or loss on those open positions, adjusted for the historical volatility
relationship between that portion of the portfolio and the contracts (i.e., the
Beta volatility factor). To the extent a Fund has written call options on
specific securities in that portion of its portfolio, the value of those
securities will be deducted from the current market value of that portion of the
securities portfolio. If this limitation should be exceeded at any time, the
Fund will take prompt action to close out the appropriate number of open short
positions to bring its open futures and options positions within this
limitation.
Currency Contracts
The Aggressive Growth, Asset Allocation and World Funds may engage in
currency transactions with securities dealers, financial institutions or other
parties that are deemed creditworthy by the Fund's Sub-Advisor to hedge the
value of portfolio securities denominated in particular currencies against
fluctuations in relative value. Currency transactions include forward currency
contracts, exchange-listed currency futures contracts and options thereon and
exchange-listed and over-the-counter options on currencies. A forward currency
contract involves a privately negotiated obligation to purchase or sell (with
delivery generally required) a specific currency at a future date, which may be
any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract.
The Funds will engage in currency transactions only for hedging and other
non-speculative purposes, including transaction hedging and position hedging.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. The Funds will not enter into a transaction
to hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
The Funds may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or decline
in value relative to other currencies to which the Fund has or in which the Fund
expects to have exposure. To reduce the effect of currency fluctuations on the
value of existing or anticipated holdings of its securities, the Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
a Fund's holding is exposed is difficult to hedge generally or difficult to
hedge against the dollar. Proxy hedging entails entering into a forward contract
to sell a currency, the changes in the value of which are generally considered
to be linked to a currency or currencies in which some or all of a Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
Except when a Fund enters into a forward contract in connection with the
purchase or sale of a security denominated in a foreign currency or for other
non-speculative purposes, which requires no segregation, a currency contract
that obligates the Fund to buy or sell a foreign currency will generally require
the Fund to hold an amount of that currency or liquid securities denominated in
that currency equal to the Fund's obligations or to segregate liquid high grade
debt obligations equal to the amount of the Fund's obligations.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that a Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sale of currency and related instruments can be adversely affected by government
exchange controls, limitations or restrictions on repatriation of currency, and
manipulations or exchange restrictions imposed by governments. These forms of
governmental actions can result in losses to a Fund if it is unable to deliver
or receive currency or monies in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Currency exchange rates may
also fluctuate based on factors extrinsic to a country's economy. Buyers and
sellers of currency futures contracts are subject to the same risks that apply
to the use of futures contracts generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures contracts is relative
new, and the ability to establish and close out positions on these options is
subject to the maintenance of a liquid market that may not always be available.
Repurchase Agreements
All Principal Funds, except the Capital Accumulation, may invest in
repurchase agreements. None of the Funds will enter into repurchase agreements
that do not mature within seven days if any such investment, together with other
illiquid securities held by the Fund, would amount to more than 10% of its
assets. Repurchase agreements will typically involve the acquisition by the Fund
of debt securities from a selling financial institution such as a bank, savings
and loan association or broker-dealer. A repurchase agreement provides that the
Fund will sell back to the seller and that the seller will repurchase the
underlying securities at a specified price and at a fixed time in the future.
Repurchase agreements may be viewed as loans by a Fund collateralized by the
underlying securities ("collateral"). This arrangement results in a fixed rate
of return that is not subject to market fluctuation during the Fund's holding
period. Although repurchase agreements involve certain risks not associated with
direct investments in debt securities, each of the Funds follows procedures
established by its Board of Directors which are designed to minimize such risks.
These procedures include entering into repurchase agreements only with large,
well-capitalized and well-established financial institutions, which have been
approved by the Fund's Board of Directors and which the Fund's Manager believes
present minimum credit risks. In addition, the value of the collateral
underlying the repurchase agreement will always be at least equal to the
repurchase price, including accrued interest. In the event of a default or
bankruptcy by a selling financial institution, the affected Fund bears a risk of
loss. In seeking to liquidate the collateral, a Fund may be delayed in or
prevented from exercising its rights and may incur certain costs. Further to the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Fund could suffer a loss.
Lending of Portfolio Securities
All Principal Funds, except the Capital Accumulation and Money Market
Funds, may lend their portfolio securities. None of the Principal Funds intends
to lend its portfolio securities if as a result the aggregate of such loans made
by the Fund would exceed 30% of its total assets. Portfolio securities may be
loaned to unaffiliated broker-dealers and other unaffiliated qualified financial
institutions provided that such loans are callable at any time on not more than
five business days' notice and that cash or government securities equal to at
least 100% of the market value of the securities loaned, determined daily, is
deposited by the borrower with the Fund and is maintained each business day in a
segregated account. While such securities are on loan, the borrower will pay the
Fund any income accruing thereon, and the Fund may invest any cash collateral,
thereby earning additional income, or may receive an agreed upon fee from the
borrower. Borrowed securities must be returned when the loan is terminated. Any
gain or loss in the market price of the borrowed securities which occurs during
the term of the loan inures to the Fund and its shareholders. A Fund may pay
reasonable administrative, custodial and other fees in connection with such
loans and may pay a negotiated portion of the interest earned on the cash or
government securities pledged as collateral to the borrower or placing broker. A
Fund does not vote securities that have been loaned, but it will call a loan of
securities in anticipation of an important vote.
When-Issued and Delayed Delivery Securities
Each of the Principal Funds may from time to time purchase securities on
a when-issued basis and may purchase or sell securities on a delayed delivery
basis. The price of such a transaction is fixed at the time of the commitment,
but delivery and payment take place on a later settlement date, which may be a
month or more after the date of the commitment. No interest accrues to the
purchaser during this period, and the securities are subject to market
fluctuation, which involves the risk for the purchaser that yields available in
the market at the time of delivery may be higher than those obtained in the
transaction. Each Fund will only purchase securities on a when-issued or delayed
delivery basis with the intention of acquiring the securities, but a Fund may
sell the securities before the settlement date, if such action is deemed
advisable. At the time a Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of the securities in determining its net
asset value. Each Fund will also establish a segregated account with its
custodian bank in which it will maintain cash or cash equivalents, United States
Government securities and other high grade debt obligations equal in value to
the Fund's commitments for such when-issued or delayed delivery securities. The
availability of liquid assets for this purpose and the effect of asset
segregation on a 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 a Fund's total assets that may be committed to transactions in such
agreements.
Money Market Instruments
The Money Market Fund will invest all of its available assets in money
market instruments maturing in 397 days or less. The types of instruments which
this Fund may purchase are described below.
(1) U.S. Government Securities -- Securities issued or guaranteed by
the U.S. Government, including treasury bills, notes and bonds.
(2) U.S. Government Agency Securities -- Obligations issued or
guaranteed by agencies or instrumentalities of the U.S. Government.
U.S. agency obligations include, but are not limited to, the
Student Loan Marketing Association, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association. U.S.
instrumentality obligations include, but are not limited to, the
Export-Import Bank and Farmers Home Administration. Some
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, such as those issued by Federal Intermediate
Credit Banks, are supported by the right of the issuer to borrower
from the Treasury, others such as those issued by the Federal
National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality, and others, such as those issued by the Student
Loan Marketing Association, only by the credit of the agency or
instrumentality.
(3) Bank Obligations -- Certificates of deposit, time deposits and
bankers' acceptances of U.S. commercial banks having total assets
of at least one billion dollars, and of the overseas branches of
U.S. commercial banks and foreign banks, which in the Manager's
opinion, are of comparable quality, provided each such bank with
its branches has total assets of at least five billion dollars, and
certificates, including time deposits of domestic savings and loan
associations having at least one billion dollars in assets which
are insured by the Federal Savings and Loan Insurance Corporation.
The Fund may acquire obligations of U.S. banks which are not
members of the Federal Reserve System or of the Federal Deposit
Insurance Corporation. Any obligations of foreign banks shall be
denominated in U.S. dollars. Obligations of foreign banks and
obligations of overseas branches of U.S. banks are subject to
somewhat different regulations and risks than those of U.S.
domestic banks. For example, an issuing bank may be able to
maintain that the liability for an investment is solely that of the
overseas branch which could expose the Fund to a greater risk of
loss. In addition, obligations of foreign banks or of overseas
branches of U.S. banks may be affected by governmental action in
the country of domicile of the branch or parent bank. Examples of
adverse foreign governmental actions include the imposition of
currency controls, the imposition of withholding taxes on interest
income payable on such obligations, interest limitations, seizure
or nationalization of assets, or the declaration of a moratorium.
Deposits in foreign banks or foreign branches of U.S. banks are not
covered by the Federal Deposit Insurance Corporation. The Fund will
only buy short-term instruments where the risks of adverse
governmental action are believed by the Manager to be minimal. The
Fund will consider these factors along with other appropriate
factors in making an investment decision to acquire such
obligations and will only acquire those which, in the opinion of
management, are of an investment quality comparable to other debt
securities bought by the Fund. The Fund may invest in certificates
of deposit of selected banks having less than one billion dollars
of assets providing the certificates do not exceed the level of
insurance (currently $100,000) provided by the applicable
government agency.
A certificate of deposit is issued against funds deposited in a
bank or savings and loan association for a definite period of time,
at a specified rate of return. Normally they are negotiable.
However, the Fund may occasionally invest in certificates of
deposit which are not negotiable. Such certificates may provide for
interest penalties in the event of withdrawal prior to their
maturity. A bankers' acceptance is a short-term credit instrument
issued by corporations to finance the import, export, transfer or
storage of goods. They are termed "accepted" when a bank guarantees
their payment at maturity and reflect the obligation of both the
bank and drawer to pay the face amount of the instrument at
maturity.
(4) Commercial Paper -- Short-term promissory notes issued by
corporations which at time of purchase are rated A-1 or better by
Standard and Poor's ("S&P") or Prime-1 or better by Moody's
Investors Service, Inc. ("Moody's") or, if not rated, issued or
guaranteed by a corporation with outstanding debt rated AA or
better by S&P or Aa or better by Moody's. The Fund will not invest
in master demand notes. (See Appendix A.)
(5) Short-term Corporate Debt -- Corporate notes, bonds and debentures
which at the time of purchase are rated AA or better by S&P or Aa
or better by Moody's provided such securities have one year or less
remaining to maturity. (See Appendix A.)
(6) Repurchase Agreements -- Instruments under which securities are
purchased from a bank or securities dealer with an agreement by the
seller to repurchase the securities at the same price plus interest
at a specified rate. (See "FUND INVESTMENTS - Repurchase
Agreements.")
The ratings of Moody's and S&P, which are described in Appendix A,
represent their opinions as to the quality of the money market instruments which
they undertake to rate. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. These ratings are the initial
criteria for selection of portfolio investments, but the Manager will further
evaluate these securities.
Portfolio Turnover
Portfolio turnover will normally differ for each Fund, may vary from year
to year, as well as within a year, and may be affected by portfolio sales
necessary to meet cash requirements for redemptions of Fund shares. The
portfolio turnover rate for a Fund is calculated by dividing the lesser of
purchases or sales of its portfolio securities during the fiscal year by the
monthly average of the value of its portfolio securities (excluding from the
computation all securities, including options, with maturities at the time of
acquisition of one year or less). A high rate of portfolio turnover generally
involves correspondingly greater brokerage commission expenses, which must be
borne directly by the Fund. Although the rate of portfolio turnover will not be
a limiting factor when it is deemed appropriate to purchase or sell securities
for a Fund, each Fund intends to limit turnover so that realized short-term
gains on securities held for less than three months do not exceed 30% of gross
income in order to qualify as a "regulated investment company" under the
Internal Revenue Code. This requirement may in some cases limit the ability of a
Fund to effect certain portfolio transactions. No portfolio turnover rate can be
calculated for the Money Market Funds because of the short maturities of the
securities in which they invest. The portfolio turnover rates for each of the
other Funds for its most recent and immediately preceding fiscal periods,
respectively, were as follows: Aggressive Growth - 166.9% and 172.9%; Asset
Allocation - 108.2% and 47.1%; Balanced - 22.6% and 25.7%; Bond - 1.7% and 5.9%;
Capital Accumulation 48.5% and 49.2%; Emerging Growth - 8.8% and 13.1%;
Government Securities - 8.4% and 9.8%; Growth - 2.0% and 6.9%; High Yield -
32.0% and 35.1%; World - 12.5% and 15.6%.
DIRECTORS AND OFFICERS OF THE FUNDS
The following listing discloses the principal occupations and other
principal business affiliations of the Funds' Officers and Directors during the
past five years. All mailing addresses are The Principal Financial Group, Des
Moines, Iowa 50392, unless otherwise indicated.
James D. Davis, 63, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.
Roy W. Ehrle, 69, Director. 2424 Jordan Trail, West Des Moines, Iowa.
Vice Chairman, Principal Mutual Life Insurance Company, Retired.
@Pamela A. Ferguson, 53, Director. P.O. Box 805, Grinnell, Iowa.
President, Grinnell College since 1991.
@Richard W. Gilbert, 56, Director. 1357 Asbury Avenue, Winnetka, IL.
President, Gilbert Communications, Inc. since 1993. Prior thereto, President and
Publisher, Pioneer Press.
*&J. Barry Griswell, 48, Director and Chairman of the Board. Senior Vice
President, Principal Mutual Life Insurance Company, since 1991. Director and
Chairman of the Board, Princor Management Corporation, Princor Financial
Services Corporation.
*&Stephan L. Jones, 61, Director and President. Vice President, Principal
Mutual Life Insurance Company since 1986. Director and President, Princor
Financial Services Corporation and Princor Management Corporation.
*Ronald E. Keller, 61, Director. Executive Vice President, Principal
Mutual Life Insurance Company since 1992. Prior thereto, Senior Vice President,
Principal Mutual Life Insurance Company. Director, Princor Financial Services
Corporation and Princor Management Corporation. Director and Chairman, Invista
Capital Management, Inc.
@Barbara A. Lukavsky, 56, Director. 3920 Grand Avenue, Des Moines, Iowa.
President, Lu San, Inc.
&Richard G. Peebler, 67, Director. 1916 79th Street, Des Moines, Iowa.
Professor, Drake University, College of Business and Public Administration,
since 1990.
*Craig L. Bassett, 45, Treasurer. Director - Treasury, since 1996. Prior
thereto, Associate Treasurer, Principal Mutual Life Insurance Company since
1988.
*Michael J. Beer, 36, Financial Officer. Vice President and Chief
Operating Officer, Princor Financial Services Corporation and Princor Management
Corporation, since 1995. Prior thereto, Financial Officer.
*David J. Brown, 37, Assistant Counsel. Counsel, Principal Mutual Life
Insurance Company since 1995. Attorney 1994-1995. Prior thereto, Attorney,
Dickinson, Mackaman, Tyler & Hogan, P.C. 1986-1994.
*Michael W. Cumings, 45, Assistant Counsel. Counsel, Principal Mutual
Life Insurance Company since 1989. * Arthur S. Filean, 58, Vice President and
Secretary. Vice President, Princor Financial Services Corporation since 1990.
Vice President, Princor Management Corporation since 1996.
* Ernest H. Gillum, 41, Assistant Secretary. Assistant Vice President,
Registered Products, Princor Financial Services Corporation and Princor
Management Corporation, since 1995. Prior thereto, Product Development and
Compliance Officer.
Jane E. Karli, 40, Assistant Treasurer. Senior Accounting and Custody
Administrator, Principal Mutual Life Insurance Company since 1994; Senior
Investment Cost Accountant 1993-1994; Senior Investment Accountant 1992-1993;
Prior thereto, Manager-Investment Accounting and Treasury.
*Michael D. Roughton, 45, Counsel. Counsel, Principal Mutual Life
Insurance Company since 1994. Prior thereto, Assistant Counsel. Counsel, Invista
Capital Management, Inc., Princor Financial Services Corporation, Principal
Investors Corporation and Princor Management Corporation.
@ Member of Audit and Nominating Committee.
* Affiliated with the Manager of the Fund or its parent and considered an
"Interested Person," as defined in the Investment Company Act of 1940, as
amended.
& Member of the Executive Committee. The Executive Committee is elected
by the Board of Directors and may exercise all the powers of the Board of
Directors, with certain exceptions, when the Board is not in session and shall
report its actions to the Board.
All Directors and Officers listed above hold similar positions with
twenty-four mutual funds sponsored by Principal Mutual Life Insurance Company.
In addition, James D. Davis, Pamela A. Ferguson, Stephan L. Jones, J. Barry
Griswell, Barbara A. Lukavsky, and all of the officers hold similar positions
with one other Fund sponsored by Principal Mutual Life Insurance Company.
During the period ended December 31, 1996, the Funds did not pay any
salaries directly to officers but paid management fees to the Manager as
described herein. During such period, six unaffiliated directors of each Fund
(those who are not officers or directors of the Manager) as a group received the
following amounts in directors' fees ($600 Annual Retainer plus $150 per Board
of Directors or Audit and Nominating Committee meeting attended, and $75 for
attendance at any executive or special committee meetings) plus expenses of
attending the meeting, if any: Aggressive Growth, $7,904; Asset Allocation,
$7,930; Balanced, $7,927; Bond, $7,830; Capital Accumulation, $7,877; Emerging
Growth, $7,905; Government Securities, $7,887; Growth, $7,602; High Yield,
$7,851; Money Market, $8,091; and World, $7,915.
All of the outstanding shares of the Funds are owned by Principal Mutual
Life Insurance Company and its Separate Accounts B and C and Variable Life
Separate Account. As of December 31, 1996, the Officers and Directors of each
Fund as a group owned none of the outstanding shares of any of the Funds.
MANAGER AND SUB-ADVISORS
The Manager of each of the Funds is Princor Management Corporation (the
"Manager"), a wholly-owned subsidiary of Princor Financial Services Corporation
which is a wholly-owned subsidiary of Principal Holding Company. Principal
Holding Company is a holding company which is a wholly-owned subsidiary of
Principal Mutual Life Insurance Company, a mutual life insurance company
organized in 1879 under the laws of the state of Iowa. The address of the
Manager is The Principal Financial Group, Des Moines, Iowa 50392. The Manager
was organized on January 10, 1969 and since that time has managed various mutual
funds sponsored by Principal Mutual Life Insurance Company.
The Manager has executed an agreement with Invista Capital Management,
Inc. ("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced 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.
Each of the persons affiliated with a Fund who is also an affiliated
person of the Manager or a Sub-Advisor is named below, together with the
capacities in which such person is affiliated:
Office Held With Office Held With
Name Each Fund The Manager/Invista
Craig Bassett Treasurer Treasurer (Manager)
Michael J. Beer Financial Officer Vice President &
Financial Officer (Manager)
Ernest H. Gillum Assistant Secretary Product Development and
Compliance Officer
(Manager)
J. Barry Griswell Director and Chairman Director and Chairman of
of the Board the Board (Manager)
Director (Manager)
Stephan L. Jones Director and Director and President
President (Manager)
Ronald E. Keller Director Director (Manager)
Director and Chairman of
the Board (Invista)
Michael D. Roughton Counsel Counsel (Manager; Invista)
COST OF MANAGER'S SERVICES
For providing the investment advisory services, and specified other
services, the Manager, under the terms of the Management Agreement for each
Fund, is entitled to receive a fee computed and accrued daily and payable
monthly, at the following annual rates:
Aggressive
Growth High
and Yield
Asset Emerging and All
Net Asset Value Allocation World Growth Balanced Other
of Fund Funds Fund Fund Funds Funds
- --------------------- ---------- ----- -------- -------- -------
First $100,000,000 .80% .75% .65% .60% .50%
Next 100,000,000 .75% .70% .60% .55% .45%
Next 100,000,000 .70% .65% .55% .50% .40%
Next 100,000,000 .65% .60% .50% .45% .35%
Over 400,000,000 .60% .55% .45% .40% .30%
There is no assurance that any of the Funds' net assets will reach
sufficient amounts to be able to take advantage of the rate decreases. The net
asset value of each Fund on December 31, 1996 and the rate of the fee for each
Fund for investment management services as provided in the Management Agreement
for the fiscal year then ended were as follows:
Management Fee
Net Assets as of For Year Ended
Fund December 31, 1996 December 31, 1996
- -------------------------- ----------------- -----------------
Aggressive Growth $ 90,105,549 .80%
Asset Allocation 61,631,138 .80
Balanced 93,157,669 .60
Bond 63,386,561 .50
Capital Accumulation 205,018,528 .48
Emerging Growth 137,160,881 .64
Government Securities 85,099,858 .50
Growth 99,611,910 .50
High Yield 13,740,343 .60
Money Market 46,244,249 .50
World 71,682,015 .75
Under a Sub-Advisory Agreement between Invista and the Manager, Invista
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the Balanced, Growth and World Funds and is reimbursed
by the Manager for the cost of providing such services.
Under a Sub-Advisory Agreement between MSAM and the Manager, MSAM
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the Aggressive Growth and Asset Allocation Funds. The
Manager pays MSAM a fee, accrued daily and payable monthly, at the following
annual rates:
Net Asset Value of Fund Fee to MSAM
----------------------- ------------
First $40 million .45%
Next $160 million .30%
Next $100 million .25%
Over $300 million .20%
Except for certain Fund expenses set out below, the Manager is
responsible for expenses, administrative duties and services including the
following: Expenses incurred in connection with the registration of the Fund and
Fund shares with the Securities and Exchange Commission and state regulatory
agencies; office space, facilities and costs of keeping the books of the Fund;
compensation of personnel and officers and any directors who are also affiliated
with the Manager; fees for auditors and legal counsel; preparing and printing
Fund prospectuses; administration of shareholder accounts, including issuance,
maintenance of open account system, dividend disbursement, reports to
shareholders, and redemption. However, some or all of these expenses may be
assumed by Principal Mutual Life Insurance Company and some or all of the
administrative duties and services may be delegated by the Manager to Principal
Mutual Life Insurance Company or affiliate thereof.
Each Fund pays for certain corporate expenses incurred in its operation.
Among such expenses, the Fund pays brokerage commissions on portfolio
transactions, transfer taxes and other charges and fees attributable to
investment transactions, any other local, state or federal taxes, the fees and
expenses of all directors of the Fund who are not persons affiliated with the
Manager, interest, fees for Custodian of the Fund, and the cost of meetings of
shareholders.
Fees paid for investment management services during the periods indicated
were as follows:
Management Fees For Year Ended December 31,
1996 1995 1994
---- ---- ----
Aggressive Growth $491,699 $180,022 $ 53,716 *
Asset Allocation 425,427 272,724 127,034 *
Balanced 420,010 206,614 131,488
Bond 260,242 122,783 72,199
Capital Accumulation 816,437 591,891 637,781
Emerging Growth 606,697 264,411 94,644
Government Securities 360,968 202,554 195,469
Growth 357,833 137,029 24,971 **
High Yield 75,111 64,422 57,369
Money Market 208,822 140,895 125,791
World 376,123 172,258 38,147 **
* Period beginning June 1, 1994 and ended December 31, 1994. ** Period beginning
May 1, 1994 and ended December 31, 1994.
The Management Agreements, Sub-Advisory Agreements and Investment Service
Agreements, pursuant to which Principal Mutual Life Insurance Company has agreed
to furnish certain personnel, services and facilities required by the Manager to
enable it to fulfill its investment advisory responsibilities for each of the
Funds except the Aggressive Growth and Asset Allocation Funds, were last
approved by each such Fund's Board of Directors on September 9, 1996. Each of
these agreements provides for continuation in effect from year to year only so
long as such continuation is specifically approved at least annually either by
the Board of Directors of the Fund or by vote of a majority of the outstanding
voting securities of the Fund, provided that in either event such continuation
shall be approved by vote of a majority of the Directors who are not "interested
persons" (as defined in the Investment Company Act of 1940) of the Manager,
Principal Mutual Life Insurance Company or its subsidiaries, the Fund and, in
the case of the Sub-Advisory Agreement for each of the Funds other than the
Aggressive Growth and Asset Allocation Funds, Invista, and in the case of the
Sub-Advisory Agreement for each of the Aggressive Growth and Asset Allocation
Funds, MSAM, cast in person at a meeting called for the purpose of voting on
such approval. The Agreements may be terminated at any time on 60 days written
notice to the Manager by the Board of Directors of the Fund or by a vote of a
majority of the outstanding securities of the Fund and by the Manager, Invista,
MSAM or Principal Mutual Life Insurance Company, as the case may be, on 60 days
written notice to the Fund. The Agreements will automatically terminate in the
event of their assignment.
BROKERAGE ON PURCHASES AND SALES OF SECURITIES
In distributing brokerage business arising out of the placement of orders
for the purchase and sale of securities for any Fund, the objective of the
Funds' Manager or Sub-Advisor is to obtain the best overall terms. In pursuing
this objective, the Manager, or Sub-Advisor, considers all matters it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and executing capability of the broker or
dealer and the reasonableness of the commission, if any (for the specific
transaction and on a continuing basis). This may mean in some instances that the
Manager, or Sub-Advisor, will pay a broker commissions that are in excess of the
amount of commission another broker might have charged for executing the same
transaction when the Manager, or Sub-Advisor, believes that such commissions are
reasonable in light of (a) the size and difficulty of transactions (b) the
quality of the execution provided and (c) the level of commissions paid relative
to commissions paid by other institutional investors. (Such factors are viewed
both in terms of that particular transaction and in terms of all transactions
that broker executes for accounts over which the Manager, or Sub-Advisor,
exercises investment discretion. The Manager, or Sub-Advisor, may purchase
securities in the over-the-counter market, utilizing the services of principal
market matters, unless better terms can be obtained by purchases through brokers
or dealers, and may purchase securities listed on the New York Stock Exchange
from non-Exchange members in transactions off the Exchange.) The Manager, or
Sub-Advisor, gives consideration in the allocation of business to services
performed by a broker (e.g. the furnishing of statistical data and research
generally consisting of information of the following types: analyses and reports
concerning issuers, industries, economic factors and trends, portfolio strategy
and performance of client accounts). If any such allocation is made, the primary
criteria used will be to obtain the best overall terms for such transactions.
The Manager, or Sub-Advisor, may pay additional commission amounts for research
services but generally does not do so. Such statistical data and research
information received from brokers or dealers may be useful in varying degrees
and the Manager, or Sub-Advisor, may use it in servicing some or all of the
accounts it manages. Some statistical data and research information may not be
useful to the Manager, or Sub-Advisor, in managing the client account, brokerage
for which resulted in the Manager's, or Sub-Advisor's, receipt of the
statistical data and research information. However, in the Manager's, or
Sub-Advisor's, opinion, the value thereof is not determinable and it is not
expected that the Manager's, or Sub-Advisor's, expenses will be significantly
reduced since the receipt of such statistical data and research information is
only supplementary to the Manager's, or Sub-Advisor's, own research efforts. The
Manager, or Sub-Advisor, allocated portfolio transactions for the Aggressive
Growth Fund, Asset Allocation Fund, Balanced Fund, Capital Accumulation Fund,
Emerging Growth Fund, Growth Fund and World Fund to certain brokers during the
fiscal year ended December 31, 1996 due to research services provided by such
brokers. These portfolio transactions resulted in commissions paid to such
brokers by the Funds in the amounts of $15,242, $15,438, $13,692, $29,405,
$2,591, $500, and $3,955, respectively.
Purchases and sales of debt securities and money market instruments
usually will be principal transactions; portfolio securities will normally be
purchased directly from the issuer or from an underwriter or marketmaker for the
securities. Such transactions are usually conducted on a net basis with the Fund
paying no brokerage commissions. Purchases from underwriters will include a
commission or concession paid by the issuer to the underwriter, and the
purchases from dealers serving as marketmakers will include the spread between
the bid and asked prices.
The following table shows the brokerage commissions paid during the
periods indicated. In each year, 100% of the commissions paid by each Fund went
to broker-dealers which provided research, statistical or other factual
information.
Total Brokerage Commissions Paid
---------------------------------------------------------
Fiscal Year Ended
December 31,
Fund 1996 1995 1994
----- ---- ----- ----
Aggressive Growth $250,591 $102,404 $ 37,910 *
Asset Allocation 109,360 35,476 40,055 *
Balanced 46,458 18,780 14,596
Capital Accumulation 183,156 142,577 149,871
Emerging Growth 63,355 31,588 7,527
Growth 45,131 28,870 7,280 **
World 156,842 78,939 43,151 **
* Period beginning June 1, 1994 and ended December 31, 1994.
** Period beginning May 1, 1994 and ended December 31, 1994.
Brokerage commissions paid to affiliates during the year ended December
31, 1996 were as follows:
Commissions Paid to Principal Financial Securities, Inc.
--------------------------------------------------------
Total Dollar As Percent of As Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
- ---- ------------ ----------------- ------------------------------
Capital Accumulation $6,612 3.61% 7.92%
Growth 438 .97% .86%
Commissions Paid to Morgan Stanley and Co.
------------------------------------------
Total Dollar As Percent of As Percent of Dollar Amount
Fund Amount Total Commissions of Commissionable Transactions
- ---- ------------ ----------------- ------------------------------
Balanced $1,300 2.80% 1.82%
Capital Accumulation 3,650 1.99% 1.48%
World 3,176 2.02% 1.78%
Morgan Stanley and Co. Is affiliated with Morgan Stanley Asset
Management, Inc., which acts as a sub-advisor to two mutual funds included in
the Fund complex.
The Manager acts as investment advisor for each of the funds sponsored by
Principal Mutual Life Insurance Company and places orders to trade portfolio
securities for each of these funds, except the Aggressive Growth Fund and Asset
Allocation Fund. If, in carrying out the investment objectives of the funds,
occasions arise when purchases or sales of the same equity securities are to be
made for two or more of the funds at the same time, a computer program will
randomly order the instructions to purchase and, whenever possible, to sell
securities. Securities purchased or proceeds of sales received on each trading
day with respect to such orders shall be allocated to the various funds placing
orders on that trading day by filling each fund's order for that day, in the
sequence arrived at by the random ordering. If purchases or sales of the same
debt securities are to be made for two or more of the Funds at the same time,
the securities will be purchased or sold proportionately in accordance with the
amount of such security sought to be purchased or sold at that time for each
fund. If the purchase or sale of securities consistent with the investment
objectives of the funds or one or more of the other clients for which MSAM acts
as investment sub-advisor or advisor is to be made at the same time, the
securities will be purchased or sold proportionately in accordance with the
amount of such security sought to be purchased or sold at that time for each
fund or client.
DETERMINATION OF NET ASSET VALUE OF FUND SHARES
Growth-Oriented and Income-Oriented Funds
The net asset values of the shares of each of the Growth-Oriented and
Income-Oriented Funds are determined daily, Monday through Friday, as of the
close of trading on the New York Stock Exchange, except on days on which changes
in the value of a Fund's portfolio securities will not materially affect the
current net asset value of that 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 Funds treat as customary national business
holidays those days on which the New York Stock Exchange is closed for New
Year's Day (January 1), Washington's Birthday (third Monday in February), Good
Friday (variable date between March 20 and April 23, inclusive), Memorial Day
(last Monday in May), Independence Day (July 4), Labor Day (first Monday in
September), Thanksgiving Day (fourth Thursday in November) and Christmas Day
(December 25). The net asset value per share for each Fund is determined by
dividing the value of securities in the Fund's investment portfolio plus all
other assets, less all liabilities, by the number of Fund shares outstanding.
Securities for which market quotations are readily available, including options
and futures traded on an exchange, are valued at market value, which is
currently determined using the last reported sale price or, if no sales are
reported, as is regularly the case for some securities traded over-the-counter,
the last reported bid price. When reliable market quotations are not considered
to be readily available, which may be the case, for example, with respect to
certain debt securities, preferred stocks, foreign securities and
over-the-counter options, the investments are valued by using market quotations,
prices provided by market makers, which may include dealers with which the Fund
has executed transactions, or estimates of market values obtained from yield
data and other factors relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by the
Board of Directors. Securities with remaining maturities of 60 days or less are
valued at amortized cost. Other assets are valued at fair value as determined in
good faith by the Board of Directors of the Fund.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of the New York Stock Exchange. The
values of such securities used in computing net asset value per share are
usually determined as of such times. Occasionally, events which affect the
values of such securities and foreign currency exchange rates may occur between
the times at which they are generally determined and the close of the New York
Stock Exchange and would therefore not be reflected in the computation of the
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 net asset value of shares of the Money Market Fund is determined at
the same time and on the same days as each of the Growth-Oriented Funds and
Income-Oriented Funds as described above. The net asset value per share for the
Fund is computed by dividing the total value of the Fund's securities and other
assets, less liabilities, by the number of Fund shares outstanding.
All securities held by the Money Market Fund will be valued on an
amortized cost basis. Under this method of valuation, a security is initially
valued at cost; thereafter, the Fund assumes a constant proportionate
amortization in value until maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the security.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price that would be received upon sale of the security.
Use of the amortized cost valuation method by the Money Market Fund
requires the Fund to maintain a dollar weighted average maturity of 90 days or
less and to purchase only obligations that have remaining maturities of 397 days
or less or have a variable or floating rate of interest. In addition, the Fund
can invest only in "Eligible Securities" as that term is defined in Regulations
issued under the Investment Company Act of 1940 (see the Fund's Prospectus for a
more complete description) determined by its Board of Directors to present
minimal credit risks.
The Board of Directors for the Money Market Fund have established
procedures designed to stabilize, to the extent reasonably possible, the Fund's
price per share as computed for the purpose of sales and redemptions at $1.00.
Such procedures include a directive to the Manager to test price the portfolio
or specific securities thereof upon certain changes in the Treasury Bill auction
interest rate for the purpose of identifying possible deviations in the net
asset value per share calculated by using available market quotations or
equivalents from $1.00 per share. If such deviation exceeds 1/2 of 1%, the Board
of Directors will promptly consider what action, if any, will be initiated. In
the event the Board of Directors determines that a deviation exists which may
result in material dilution or other unfair results to shareholders, the Board
will take such corrective action as it regards as appropriate, including: the
sale of portfolio instruments prior to maturity; the withholding of dividends;
redemptions of shares in kind; the establishment of a net asset value per share
based upon available market quotations; or splitting, combining or otherwise
recapitalizing outstanding shares. The Fund may also reduce the number of shares
outstanding by redeeming proportionately from shareholders, without the payment
of any monetary compensation, such value at $1.00 per share.
PERFORMANCE CALCULATION
Each of the Principal Funds may from time to time advertise its
performance in terms of total return. The figures used for total return and
yield are based on the historical performance of a Fund, show the performance of
a hypothetical investment and are not intended to indicate future performance.
Total return and yield will vary from time to time depending upon market
conditions, the composition of a Fund's portfolio and operating expenses. These
factors and possible differences in the methods used in calculating performance
figures should be considered when comparing a Fund's performance to the
performance of some other kind of investment. The calculations of total return
and yield for the Funds do not include the fees and charges of the separate
accounts that invest in the Funds and, therefore, do not reflect the investment
performance of those separate accounts.
Each Fund may also include in its advertisements performance rankings and
other performance-related information published by independent statistical
services or publishers, such as Lipper Analytical Services, Weisenberger
Investment Companies Services, Money Magazine, Forbes, The Wall Street Journal,
Barron's and Changing Times, and comparisons of the performance of a Fund to
that of various market indices, such as the S&P 500 Index, Lehman Brothers GNMA
Index, Dow Jones Industrials Index, and the Salomon Brothers Investment Grade
Bond Index.
Total Return
When advertising total return figures, each of the Growth-Oriented Funds
and Income-Oriented Funds will include its average annual total return for each
of the one, five and ten year periods (or if shorter, the period during which
its registration statement has been in effect) that end on the last day of the
most recent calendar quarter. Average annual total return is computed by
calculating the average annual compounded rate of return over the stated period
that would equate an initial $1,000 investment to the ending redeemable value
assuming the reinvestment of all dividends and capital gains distributions at
net asset value. In its advertising, a Fund may also include average annual
total return for some other period or cumulative total return for a specified
period. Cumulative total return is computed by dividing the ending redeemable
value (assuming the reinvestment of all dividends and capital gains
distributions at net asset value) by the initial investment.
The following table shows as of December 31, 1996 average annual total
return for each of the Funds for the periods indicated:
Fund 1-Year 5-Year 10-Year
- ------------------------ ------- ----------- -------
Aggressive Growth 28.05% 28.05%(4) N/A
Asset Allocation 12.92% 12.95%(4) N/A
Balanced 13.13% 11.57% 12.16%(1)
Bond 2.36% 8.20% 9.55%(1)
Capital Accumulation 23.50% 14.08% 13.08%
Emerging Growth 21.11% 16.64% 17.73%(1)
Government Securities 3.35% 6.68% 8.63%(2)
Growth 12.51% 16.12%(3) N/A
High Yield 13.13% 11.20% 9.89%(1)
World 25.09% 12.83%(3) N/A
(1) Period beginning December 18, 1987 and ending December 31, 1996.
(2) Period beginning March 30, 1987 and ending December 31, 1996.
(3) Period beginning May 1, 1994 and ending December 31, 1996.
(4) Period beginning June 1, 1994 and ending December 31, 1996.
Yield
Money Market Fund
The Money Market Fund may advertise its yield and its effective yield.
Yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of one percent.
As of December 31, 1996, the Money Market Fund's yield was 5.00%. Because
realized capital gains or losses in a Fund's portfolio are not included in the
calculation, the Fund's net investment income per share for yield purposes may
be different from the net investment income per share for dividend purposes,
which includes net short-term realized gains or losses on the Fund's portfolio.
Effective yield is computed by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result. The resulting effective yield figure is carried to at least
the nearest hundredth of one percent. As of December 31, 1996, the Money Market
Fund's effective yield was 5.13%.
The yield quoted at any time for the Money Market Funds represents the
amount that was earned during a specific, recent seven-day period and is a
function of the quality, types and length of maturity of instruments in the
Fund's portfolio and the Fund's operating expenses. The length of maturity for
the portfolio is the average dollar weighted maturity of the portfolio. This
means that the portfolio has an average maturity of a stated number of days for
its issues. The calculation is weighted by the relative value of each
investment.
The yield for the Money Market 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. It should also be emphasized that the Fund is an open-end
investment company and that 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 Money Market 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.
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, each Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which a
Fund so qualifies, it will be exempt from federal income tax upon the amount so
distributed to investors.
For federal income tax purposes, capital gains and losses on futures
contracts or options thereon, index options or options traded on qualified
exchanges are generally treated at 60% long-term and 40% short-term. In
addition, a Fund must recognize any unrealized gains and losses on such
positions held at the end of the fiscal year. A Fund may elect out of such tax
treatment, however, for a futures or options position that is part of an
"identified mixed straddle" such as a put option purchased by the Fund with
respect to a portfolio security. Gains and losses on figures and options
included in an identified mixed straddle will be considered 100% short-term and
unrealized gain or loss on such positions will not be realized at year end. The
straddle provisions of the Code may require the deferral of realized losses to
the extent that the Fund has unrealized gains in certain offsetting positions at
the end of the fiscal year, and may also require recharacterization of all or a
part of losses on certain offsetting positions from short-term to long-term, as
well as adjustment of the holding periods of straddle positions.
One of the requirements the Funds must meet to qualify as a regulated
investment company under federal tax law is that the Fund must derive less than
30% of its gross income from gains on the sale or other disposition of
securities held for less than three months. Accordingly, the Funds will be
restricted in selling securities held or considered under Code rules to have
been held for less than three months and in engaging in certain transactions to
obtain or close positions in options and futures contracts.
The 1986 Tax Reform Act imposes an excise tax on mutual funds which fail
to distribute net investment income and capital gains by the end of the calendar
year in accordance with the provisions of the Act. The Funds intend to comply
with the Act's requirements and to avoid this excise tax.
GENERAL INFORMATION AND HISTORY
The Aggressive Growth Fund was incorporated under the laws of Maryland on
August 20, 1993 as Principal Blue Chip Fund, Inc. The Fund changed its name to
Principal Aggressive Growth Fund on May 1, 1994.
The Asset Allocation Fund was incorporated under the laws of Maryland on
August 20, 1993 as Principal Utilities Fund, Inc. The Fund changed its name to
Principal Asset Allocation Fund on May 1, 1994.
The Balanced Fund was incorporated under the laws of Maryland on November
26, 1986. Effective November 1, 1988 the Fund changed its name from Princor
Managed Investment Fund, Inc. to Principal Managed Fund, Inc. Effective May 1,
1994, the Fund changed its name to Principal Balanced Fund, Inc.
The Bond Fund was incorporated under the laws of Maryland on November 26,
1986. Effective March 20, 1987, its name was changed from Princor Corporate Bond
Fund, Inc. to Princor Bond Investment Fund, Inc. Effective November 1, 1988 the
Fund changed its name to Principal Bond Fund, Inc.
The Capital Accumulation Fund was incorporated under the laws of Maryland
on May 26, 1989 as the successor to the business of a fund with the same name
that had been incorporated in Delaware on February 6, 1969 (the "Predecessor
Fund"). Effective November 1, 1986, the Predecessor Fund changed its name from
BLC Fund, Inc. to Princor Fund, Inc. Effective November 1, 1987, the Predecessor
Fund changed its name to Princor Investment Fund, Inc. Effective November 1,
1988, the Predecessor Fund changed its name to Principal Capital Accumulation
Fund, Inc.
The Emerging Growth Fund was incorporated under the laws of Maryland on
February 20, 1987. Effective November 1, 1988, the Fund changed its name from
Princor Aggressive Growth Investment Fund, Inc. to Principal Aggressive Growth
Fund, Inc. Effective May 1, 1992, the Fund changed its name from Principal
Aggressive Growth Fund, Inc., to Principal Emerging Growth Fund, Inc.
The Government Securities Fund was incorporated under the laws of
Maryland on June 7, 1985 a BLC Federal Government Securities Fund, Inc.
Effective November 1, 1986 the Fund changed its name to Princor Federal
Government Securities Fund, Inc. On November 1, 1987, the Fund changed its name
to Princor Government Securities Investment Fund, Inc. Effective November 1,
1988, the Fund changed its name to Principal Government Securities Fund, Inc.
The High Yield Fund was incorporated under the laws of Maryland on
December 2, 1986. Effective March 20, 1987, its name was changed from Princor
High Yield Bond Investment Fund, Inc. to Princor High Yield Investment Fund,
Inc. Effective November 1, 1988, the Fund changed its name to Principal High
Yield Fund, Inc.
The Money Market Fund was incorporated under the laws of Maryland on June
10, 1982. Effective November 1, 1986, the Fund changed its name from BLC Money
Market Fund, Inc. to Princor Money Market Fund, Inc. Effective November 1, 1987,
the Fund changed its name to Princor Money Market Investment Fund, Inc.
Effective November 1, 1988, the Fund changed its name to Principal Money Market
Fund, Inc.
Effective July 1, 1992, the Bond, Capital Accumulation, Emerging Growth,
Government Securities, High Yield, Managed and Money Market Funds changed their
respective fiscal year-ends from June 30 to December 31.
Reorganization
Following is a description of a Reorganization completed by the Capital
Accumulation Fund on November 1, 1989. "Predecessor Fund" as used below means
the Capital Accumulation Fund, which was incorporated in Delaware on February 6,
1969. "Successor Fund" as used below refers to the Capital Accumulation Fund,
which was incorporated in Maryland on May 26, 1989 for the purpose of completing
the Reorganization.
On October 3, 1989, a majority of the outstanding shares of the
Predecessor Fund approved a proposal to permit the Predecessor Fund to transfer
all of its assets and liabilities to the Successor Fund in accordance with an
Agreement and Plan of Reorganization and Liquidation dated June 16, 1989 (the
"Agreement") between the Successor Fund and Predecessor Fund (the
"Reorganization"). The Agreement was authorized and approved by the Boards of
Directors of the Predecessor Fund and the Successor Fund in accordance with the
laws of Delaware and Maryland, respectively. The net asset values of the shares
were unaffected by the Reorganization.
The primary purpose for the Reorganization was to change the Predecessor
Fund's domicile, thereby eliminating an unnecessary state tax burden for which
the Predecessor Fund was responsible. The state of Delaware imposed a franchise
tax on the Predecessor Fund based upon the assets of the Predecessor Fund.
Payment of this state tax reduced the Predecessor Fund's income otherwise
distributable to the Predecessor Fund's shareholders. Maryland does not impose a
franchise tax but imposes an income tax based upon undistributed net income. The
amount of state income tax for a Maryland mutual fund is low or non-existent
because a mutual fund distributes substantially all of its net income each
fiscal year.
By voting in favor of the Agreement the shareholders authorized the
Predecessor Fund, as the sole shareholder of the Fund prior to the
Reorganization, to: (i) elect as directors of the Successor Fund all of the
Predecessor Fund's Directors at the time of the Reorganization; (ii) ratify the
selection of Ernst & Young LLP as the independent auditors of the Successor
Fund; and (iii) approve as Management Agreement and Investment Service Agreement
for the Successor Fund agreements substantially identical to the Management
Agreement and Investment Service Agreement in effect for the Predecessor Fund at
the time of the Reorganization.
In the Prospectus and Statement of Additional Information, the term
Capital Accumulation Fund is used generally to refer to the Successor Fund and
with respect to matters occurring prior to the reorganization to the Predecessor
Fund.
FINANCIAL STATEMENTS
The financial statements for the Funds for the fiscal period ended
December 31, 1996 appearing in the Annual Report to Shareholders and the report
thereon of Ernst and Young LLP, independent auditors, appearing therein are
incorporated by reference in this Statement of Additional Information. The
Annual Report will be furnished, without charge, to investors who request copies
of the Statement of Additional Information.
<PAGE>
APPENDIX A
Description of Bond Ratings:
Moody's Investors Service, Inc. Bond Ratings
Aaa:
Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa:
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A:
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa:
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba:
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa:
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca:
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C:
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
CONDITIONAL RATING: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and a
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
SHORT-TERM NOTES: The four ratings of Moody's for short-term notes are
MIG 1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality...but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk for having protection...and not
distinctly or predominantly speculative."
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's Corporation's Debt Ratings:
A Standard & Poor's debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default -- capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance with
the terms of the obligation;
II. Nature of and provisions of the obligation;
III.Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.
AAA:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA:
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A:
Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
BBB:
Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
BB, B, CCC, CC:
Debt rated "BB", "B", "CCC" and "CC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "CC" the highest degree
of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
C:
The rating "C" is reserved for income bonds on which no interest is
being paid.
D:
Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of
the project being financed by the bonds being rated and indicates that
payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of
the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise
his own judgment with respect to such likelihood and risk.
NR:
Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does
not rate a particular type of obligation as a matter of policy.
Standard & Poor's, Commercial Paper Ratings
A Standard & Poor's Commercial Paper Rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Ratings are applicable to
both taxable and tax-exempt commercial paper. The four categories are as
follows:
A:
Issues assigned the highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Issues that
possess overwhelming safety characteristics will be given a "+"
designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the highest designations.
B:
Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C:
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D:
This rating indicates that the issue is either in default or is expected
to be in default upon maturity.
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of, such information.
Standard & Poor's rates notes with a maturity of less than three years as
follows:
SP-1 A very strong, or strong, capacity to pay principal and
interest. Issues that possess overwhelming safety
characteristics will be given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement
(1) Part A:
Financial Highlights for each of the four years in
the period ended December 31, 1996, for the period
from July 1, 1992 through December 31, 1992, for
each of the four years in the period ended June 30,
1992 and for the period from December 19, 1987
through June 30, 1988.
(2) Part B:
None
(b) Exhibits
(1a) Articles of Amendment (Filed 4/12/96)
(1b) Articles of Incorporation (Filed 4/12/96)
(2) Bylaws (Filed 4/12/96)
(5a) Management Agreement (Filed 4/12/96)
(5b) Investment Service Agreement (Filed 4/12/96)
(6) Distribution Agreement (Filed 4/12/96)
(8) Custody Agreement (Filed 4/12/96)
(10) Opinion of Counsel (Filed 4/12/96)
(11) Consent of Independent Auditors
(12) Audited Financial Statements as of
December 31, 1996, including the Report of
Ernst & Young LLP, independent auditors for
the Registrant.
(13) Investment Letter (Filed 4/12/96)
(16) Total Return Performance Quotation
(Filed 4/12/96)
(27) Financial Data Schedule
Item 25. Persons Controlled by or Under Common Control with Depositor
Principal Mutual Life Insurance Company (incorporated as a
mutual life insurance company under the laws of Iowa);
Sponsored the organization of the following mutual funds,
some of which it controls by virtue of owning voting
securities:
Principal Asset Allocation Fund, Inc. (a Maryland
Corporation)100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company and its separate accounts on
February 7, 1997.
Principal Aggressive Growth Fund, Inc. (a Maryland Corporation)
100.0% of shares outstanding owned by Principal Mutual Life
Insurance Company and its separate accounts on February 7, 1997.
Princor Balanced Fund, Inc. (a Maryland Corporation) 5.51% of
shares outstanding owned by Principal Mutual Life Insurance
Company on February 7, 1997.
Principal Balanced Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on February 7, 1997.
Princor Blue Chip Fund, Inc. (a Maryland Corporation) 1.76% of
shares outstanding owned by Principal Mutual Life Insurance
Company on February 7, 1997.
Princor Bond Fund, Inc. (a Maryland Corporation) 1.57% of shares
outstanding owned by Principal Mutual Life Insurance Company on
February 7, 1997.
Principal Bond Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on February 7, 1997.
Princor Capital Accumulation Fund, Inc. (a Maryland
Corporation)40.0% of outstanding shares owned by Principal
Mutual Life Insurance Company on February 7, 1997.
Principal Capital Accumulation Fund, Inc. (a Maryland
Corporation)100.0% of outstanding shares owned by Principal
Mutual Life Insurance Company and its Separate Accounts on
February 7, 1997.
Princor Cash Management Fund, Inc. (a Maryland Corporation) 1.07%
of outstanding shares owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on February 7,
1997.
Princor Emerging Growth Fund, Inc. (a Maryland Corporation) 0.58%
of shares outstanding owned by Principal Mutual Life Insurance
Company on February 7, 1997
Principal Emerging Growth Fund, Inc. (a Maryland Corporation)
100.0% of shares outstanding owned by Principal Mutual Life
Insurance Company and its Separate Accounts on February 7, 1997.
Princor Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.39% of shares outstanding owned by Principal
Mutual Life Insurance Company on February 7, 1997.
Principal Government Securities Fund, Inc. (a Maryland
Corporation) 100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company and its Separate Accounts on
February 7, 1997.
Princor Growth Fund, Inc. (a Maryland Corporation) 0.56% of
outstanding shares owned by Principal Mutual Life Insurance
Company on February 7, 1997.
Principal Growth Fund, Inc. (a Maryland Corporation) 100.0% of
outstanding shares are owned by Principal Mutual Life Insurance
Company and its Separate Accounts on February 7, 1997.
Princor High Yield Fund, Inc. (a Maryland Corporation) 27.56% of
shares outstanding owned by Principal Mutual Life Insurance
Company on February 7, 1997.
Principal High Yield Fund, Inc. (a Maryland Corporation) 100.0%
of shares outstanding owned by Principal Mutual Life Insurance
Company and its Separate Accounts on February 7, 1997.
Princor Limited Term Bond Fund, Inc. (a Maryland Corporation)
57.78% of shares outstanding owned by Principal Mutual Life
Insurance Company on February 7, 1997.
Principal Money Market Fund, Inc. (a Maryland Corporation) 100.0%
of shares outstanding owned by Principal Mutual Life Insurance
Company and its Separate Accounts on February 7, 1997.
Principal Special Markets Fund, Inc. (a Maryland Corporation)
60.11% of the shares outstanding of the International Securities
Portfolio and 83.70% of the shares outstanding of the
Mortgage-Backed Securities Portfolio were owned by Principal
Mutual Life Insurance Company on February 7, 1997.
Princor Tax-Exempt Bond Fund, Inc. (a Maryland Corporation) 0.57%
of shares outstanding owned by Principal Mutual Life Insurance
Company on February 7, 1997.
Princor Tax-Exempt Cash Management Fund, Inc. (a Maryland
Corporation) 0.99% of shares outstanding owned by Principal
Mutual Life Insurance Company on February 7, 1997.
Princor Utilities Fund, Inc. (a Maryland Corporation) 1.38% of
shares outstanding owned by Principal Mutual Life Insurance
Company on February 7, 1997.
Princor World Fund, Inc. (a Maryland Corporation) 18.34% of
shares outstanding owned by Principal Mutual Life Insurance
Company on February 7, 1997.
Principal World Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company on February 7, 1997.
Subsidiaries organized and wholly-owned by Principal Mutual Life
Insurance Company:
a. Principal Holding Company (an Iowa Corporation) A holding
company wholly-owned by Principal Mutual Life Insurance
Company.
b. PT Asuransi Jiwa Principal Egalita Indonesia (an Indonesia
Corporation)
Subsidiaries wholly-owned by Principal Holding Company:
a. Petula Associates, Ltd. (an Iowa Corporation) a real
estate development company.
b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.
c. Principal Development Associates, Inc. (a California
Corporation) a real estate development company.
d. Princor Financial Services Corporation (an Iowa
Corporation) a registered broker-dealer.
e. Invista Capital Management, Inc. (an Iowa Corporation) a
registered investment adviser.
f. Principal Marketing Services, Inc. (a Delaware Corporation) a
corporation formed to serve as an interface between marketers
and manufacturers of financial services products.
g. The Principal Financial Group, Inc. (a Delaware corporation)
a general business corporation established in connection with
the new corporate identity. It is not currently active.
h. Delaware Charter Guarantee & Trust Company (a Delaware
Corporation) a nondepository trust company.
i. Principal Securities Holding Corporation (a Delaware
Corporation) a holding company.
j. Principal Health Care, Inc. (an Iowa Corporation) a developer
and administrator of managed care systems.
k. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.
l. Principal Asset Markets, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
m. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.
n. Principal International, Inc. (an Iowa Corporation) a company
formed for the purpose of international business development.
o. Principal Spectrum Associates, Inc. (a California
Corporation) a real estate development company.
p. Principal Commercial Advisors, Inc. (an Iowa Corporation) a
company that purchases, manages and sells commercial real
estate assets.
q. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.
r. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
s. Equity FC, Ltd. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited
liability companies.
Subsidiaries organized and wholly-owned by Princor Financial Services
Corporation:
a. Princor Management Corporation (an Iowa Corporation) a
registered investment advisor.
b. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange
Commission. It is not currently active.
Subsidiary wholly owned by Principal Securities Holding Corporation:
a. Principal Financial Securities, Inc. (a Delaware
Corporation) an investment banking and securities brokerage
firm.
Subsidiaries organized and wholly-owned by Principal Health Care,
Inc.:
a. The Admar Group, Inc. (a Florida Corporation) a national
managed care service organization that developes and manages
preferred provider organizations.
b. Americas Health Plan, Inc. (a Maryland Corporation) a
developer of discount provider networks.
c. Principal Behavioral Health Care, Inc. (an Iowa Corporation)
a mental and nervous/substance abuse preferred provider
organization.
d. Principal Health Care of the Carolinas, Inc. (a North
Carolina Corporation) a health maintenance organization.
e. Principal Health Care of Delaware, Inc. (a Delaware
Corporation) a health maintenance organization.
f. Principal Health Care of Florida, Inc. (a Florida
Corporation) a health maintenance organization.
g. Principal Health Care of Georgia, Inc. (a Georgia
Corporation) a health maintenance organization.
h. Principal Health Care of Illinois, Inc. (an Illinois
Corporation) a health maintenance organization.
i. Principal Health Care of Indiana, Inc. (a Delaware
Corporation) a health maintenance organization.
j. Principal Health Care of Iowa, Inc. (an Iowa Corporation) a
health maintenance organization.
k. Principal Health Care of Kansas City, Inc. (a Missouri
Corporation) a health maintenance organization.
l. Principal Health Care of Louisiana, Inc. (a Louisiana
Corporation) a health maintenance organization.
m. Principal Health Care of the Mid-Atlantic, Inc. (a Virginia
Corporation) a health maintenance organization.
n. Principal Health Care of Nebraska, Inc. (a Nebraska
Corporation) a health maintenance organization.
o. Principal Health Care of Pennsylvania, Inc. (a Pennsylvania
Corporation) a health maintenance organization. It is not
currently active.
p. Principal Health Care of St. Louis, Inc. (a Delaware
Corporation) a health maintenance organization.
q. Principal Health Care of South Carolina, Inc. (A South
Carolina Corporation) a health maintenance organization.
r. Principal Health Care of Tennessee, Inc. (a Tennessee
Corporation) a health maintenance organization.
s. Principal Health Care of Texas, Inc. ( a Texas Corporation)
a health maintenance organization.
t. United Health Care Services of Iowa, Inc. (an Iowa
Corporation) a health maintenance organization.
Subsidiary owned by The Admar Group, Inc.:
a. Admar Corporation (a California Corporation) a managed care
services organization.
b. Admar Insurance Marketing, Inc. (a California Corporation) a
managed care services organization.
c. Benefit Plan Administrators, Inc. (a Colorado Corporation) a
managed care services organization.
d. SelectCare Management Co., Inc. (a California Corporation) a
managed care services organization.
e. Image Financial & Insurance Services, Inc. (a California
Corporation) a managed care services organization.
f. WM. G. Hofgard & Co., Inc. (a California Corporation) a
managed care services organization.
Subsidiaries owned by Principal International, Inc.:
a. Principal Insurance Company Limited (a Hong Kong
Corporation).
b. Principal International Argentina, S.A. (an Argentina
servides corporation).
c. Principal International Asia Limited (a Hong Kong
Corporation).
d. Principal International Asia Limited (formerly known as
Goldchin Champ, Limited) (a Hong Kong Corporation).
e. Principal International de Chile, S.A. (a Chile
Corporation).
f. Principal International Espana, S.A. de Seguros de Vida (a
Spain Corporation).
g. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation).
h. Qualitas Medica, S.A. (an Argentina HMO).
i. Zao Principal International (a Russia Corporation) inactive.
Subsidiaries owned by Principal International Argentina, S.A.:
a. Ethika-Jacaranda S.A. Administradora de Fondos de
Jubilaciones y Pensions (an Argentina company)
b. Princor Compania de Seguros de Retiro, S.A. (an Argentina
Corporation).
c. Prinlife Compania de Seguros de Vida, S.A. (an Argentina
Corporation).
Subsidiary owned by Principal International de Chile, S.A.:
a. BanRenta Compania de Seguros de Vida, S.A. (a Chile
Corporation).
Subsidiary owned by Principal International Espana, S.A. de Seguros de
Vida:
a. Princor International Espana Sociedad Anonima de Agencia de
Seguros (a Spain Corporation).
Item 26. Number of Holders of Securities - As of: February 28, 1997
(1) (2)
Title of Class Number of Holders
Principal High Yield Fund, Inc.
Common 2
Item 27. Indemnification
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, the Registrant may
indemnify the corporate representative against judgments, fines, penalties, and
amounts paid in settlement, and against expenses, including attorneys' fees, if
such expenses were actually incurred by the corporate representative in
connection with the proceeding, unless it is established that:
(i) The act or omission of the corporate representative was
material to the matter giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate dishonesty; or
(ii) The corporate representative actually received an improper
personal benefit in money, property, or services; or
(iii) In the case of any criminal proceeding, the corporate
representative had reasonable cause to believe that the act or
omission was unlawful.
If a proceeding is brought by or on behalf of the Registrant, however, the
Registrant may not indemnify a corporate representative who has been adjudged to
be liable to the Registrant. Under the Registrant's Articles of Incorporation
and Bylaws, directors and officers of Registrant are entitled to indemnification
by the Registrant to the fullest extent permitted under Maryland law and the
Investment Company Act of 1940. Reference is made to Article VI, Section 7 of
the Registrant's Articles of Incorporation, Article 12 of Registrant's Bylaws
and Section 2-418 of the Maryland General Corporation Law.
The Registrant has agreed to indemnify, defend and hold the Distributor,
its officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act of 1933, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act of 1933, or under common law or otherwise, arising out of or
based upon any untrue statement of a material fact contained in the Registrant's
registration statement or prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission made in conformity with
information furnished in writing by the Distributor to the Registrant for use in
the Registrant's registration statement or prospectus: provided, however, that
this indemnity agreement, to the extent that it might require indemnity of any
person who is also an officer or director of the Registrant or who controls the
Registrant within the meaning of Section 15 of the Securities Act of 1933, shall
not inure to the benefit of such officer, director or controlling person unless
a court of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent that such result would not be against public
policy as expressed in the Securities Act of 1933, and further provided, that in
no event shall anything contained herein be so construed as to protect the
Distributor against any liability to the Registrant or to its security holders
to which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of its duties,
or by reason of its reckless disregard of its obligations under this Agreement.
The Registrant's agreement to indemnify the Distributor, its officers and
directors and any such controlling person as aforesaid is expressly conditioned
upon the Registrant being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Registrant.
Item 28. Business or Other Connection of Investment Adviser
A complete list of the officers and directors of the investment adviser,
Princor Management Corporation, are set out below. This list includes some of
the same people (designated by an *), who are serving as officers and directors
of the Registrant. For these people the information as set out in the Statement
of Additional Information (See Part B) under the caption "Directors and Officers
of the Fund" is incorporated by reference.
Craig R. Barnes The Principal President and Director
Vice President Financial Group Invista Capital
Des Moines, Iowa Management, Inc.
50392
*Craig L. Bassett See Part B
Treasurer
*Michael J. Beer Same See Part B
Vice President and
Chief Operating Officer
Mary L. Bricker Same Counsel & Assistant
Assistant Corporate Corporate Secretary
Secretary Principal Mutual Life
Insurance Company
Ray S. Crabtree Same Executive Vice President
Director Principal Mutual Life
Insurance Company
David J. Drury Same Chief Executive Officer
Director and Chairman of the Board
Principal Mutual Life
Insurance Company
*Arthur S. Filean Same See Part B
Vice President
Paul N. Germain Same Assistant Vice President-
Assistant Vice President Operations
- Operations Princor Financial Services
Corporation
Michael H. Gersie Same Senior Vice President
Director Principal Mutual Life
Insurance Company
*Ernest H. Gillum Same See Part B
Assistant Vice President
- Registered Products
Thomas J. Graf Same Senior Vice President
Director Principal Mutual Life
Insurance Company
*J. Barry Griswell Same See Part B
Chairman of the Board
and Director
Joyce N. Hoffman Same Vice President and
Vice President and Corporate Secretary
Corporate Secretary Principal Mutual Life
Insurance Company
Theodore M. Hutchison Same Vice Chairman
Director Principal Mutual Life
Insurance Company
*Stephan L. Jones Same See Part B
Director and President
Ronald E. Keller Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Gregg R. Narber Same Senior Vice President &
Director General Counsel
Principal Mutual Life
Insurance Company
Layne A. Rasmussen Same Controller
Controller - Mutual Funds Princor Financial Services
Corporation
Elizabeth R. Ring Same Controller
Controller Princor Financial Services
Corporation
*Michael D. Roughton Same See Part B
Counsel
Charles E. Rohm Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Jean B. Schustek Same Product Compliance Officer
Product Compliance Officer Princor Financial Services
- Registered Products Corporation
Dewain A. Sparrgrove Same Vice President-Securities
Vice President Principal Mutual Life
Insurance Company
Princor Management Corporation serves as investment adviser and dividend
disbursing and transfer agent for, Principal Aggressive Growth Fund, Inc.,
Principal Asset Allocation Fund, Inc., Principal Balanced Fund, Inc., Principal
Bond Fund, Inc., Principal Capital Accumulation Fund, Inc., Principal Emerging
Growth Fund, Inc., Principal Government Securities Fund, Inc., Principal Growth
Fund, Inc., Principal High Yield Fund, Inc., Principal Money Market Fund, Inc.,
Principal Special Markets Fund, Inc., Principal World Fund, Inc., Princor
Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Bond Fund, Inc.,
Princor Capital Accumulation Fund, Inc., Princor Cash Management Fund, Inc.,
Princor Emerging Growth Fund, Inc., Princor Government Securities Income Fund,
Inc., Princor Growth Fund, Inc., Princor High Yield Fund, Inc., Princor Limited
Term Bond Fund, Inc., Princor Tax-Exempt Bond Fund, Inc., Princor Tax-Exempt
Cash Management Fund, Inc., Princor Utilities Fund, Inc. and Princor World Fund,
Inc. - funds sponsored by Principal Mutual Life Insurance Company.
Item 29. Principal Underwriters
(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, Principal Aggressive Growth Fund,
Inc., Principal Asset Allocation Fund, Inc., Principal Balanced Fund, Inc.,
Principal Bond Fund, Inc., Principal Capital Accumulation Fund, Inc., Principal
Emerging Growth Fund, Inc., Principal Government Securities Fund, Inc.,
Principal Growth Fund, Inc., Principal High Yield Fund, Inc., Principal Money
Market Fund, Inc., Principal Special Markets Fund, Inc., Principal World Fund,
Inc., Princor Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Bond
Fund, Inc., Princor Capital Accumulation Fund, Inc., Princor Cash Management
Fund, Inc., Princor Emerging Growth Fund, Inc., Princor Government Securities
Income Fund, Inc., Princor Growth Fund, Inc., Princor High Yield Fund, Inc.,
Princor Limited Term Bond Fund, Inc., Princor Tax-Exempt Bond Fund, Inc.,
Princor Tax-Exempt Cash Management Fund, Inc., Princor Utilities Fund, Inc.,
Princor World Fund, Inc. and for variable annuity contracts participating in
Principal Mutual Life Insurance Company Separate Account B, a registered unit
investment trust for retirement plans adopted by public school systems or
certain tax-exempt organizations pursuant to Section 403(b) of the Internal
Revenue Code, Section 457 retirement plans, Section 401(a) retirement plans,
certain non- qualified deferred compensation plans and Individual Retirement
Annuity Plans adopted pursuant to Section408 of the Internal Revenue Code, and
for variable life insurance contracts issued by Principal Mutual Life Insurance
Company Variable Life Separate Account, a registered unit investment trust.
(b) (1) (2) (3)
Positions
and offices Positions and
Name and principal with principal offices with
business address underwriter registrant
J. Barbara Alvord Marketing Officer None
The Principal
Financial Group
Des Moines, IA 50392
Robert W. Baehr Marketing Services None
The Principal Officer
Financial Group
Des Moines, IA 50392
Craig L. Bassett Treasurer Treasurer
The Principal
Financial Group
Des Moines, IA 50392
Michael J. Beer Vice President and Financial Officer
The Principal Chief Operating Officer
Financial Group
Des Moines, IA 50392
Mary L. Bricker Assistant Corporate None
The Principal Secretary
Financial Group
Des Moines, IA 50392
Ray S. Crabtree Director None
The Principal
Financial Group
Des Moines, IA 50392
David J. Drury Director None
The Principal
Financial Group
Des Moines, IA 50392
Arthur S. Filean Vice President Vice President
The Principal and Secretary
Financial Group
Des Moines, IA 50392
Paul N. Germain Assistant Vice President - None
The Principal Operations
Financial Group
Des Moines, IA 50392
Michael H. Gersie Director None
The Principal
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Assistant Vice President - Assistant
The Principal Registered Products Secretary
Financial Group
Des Moines, IA 50392
Thomas J. Graf Director None
The Principal
Financial Group
Des Moines, IA 50392
J. Barry Griswell Director and Director and
The Principal Chairman of the Chairman of the
Financial Group Board Board
Des Moines, IA 50392
Joyce N. Hoffman Vice President and None
The Principal Corporate Secretary
Financial Group
Des Moines, IA 50392
Theodore M. Hutchison Director None
The Principal
Financial Group
Des Moines, IA 50392
Stephan L. Jones Director and Director and
The Principal President President
Financial Group
Des Moines, IA 50392
Ronald E. Keller Director Director
The Principal
Financial Group
Des Moines, IA 50392
Kevin M. Laraia Operations Officer None
The Principal
Financial Group
Des Moines, IA 50392
John R. Lepley Senior Vice None
The Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392
Gregg R. Narber Director None
The Principal
Financial Group
Des Moines, IA 50392
Mark M. Oswald Compliance Officer None
The Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller - None
The Principal Mutual Funds
Financial Group
Des Moines, IA 50392
Elizabeth R. Ring Controller None
The Principal
Financial Group
Des Moines, IA 50392
Charles E. Rohm Director None
The Principal
Financial Group
Des Moines, IA 50392
Michael D. Roughton Counsel Counsel
The Principal
Financial Group
Des Moines, IA 50392
Jean B. Schustek Product Compliance Officer - None
The Principal Registered Products
Financial Group
Des Moines, IA 50392
Kyle R. Selberg Vice President-Marketing None
The Principal
Financial Group
Des Moines, IA 50392
Roger C. Stroud Assistant Director - None
The Principal Marketing
Financial Group
Des Moines, IA 50392
(c) Inapplicable.
Item 30. Location of Accounts and Records
All accounts, books or other documents of the Registrant are located at the
offices of the Registrant and its Investment Adviser in the Principal Mutual
Life Insurance Company home office building, The Principal Financial Group, Des
Moines, Iowa 50392.
Item 31. Management Services
Inapplicable.
Item 32. Undertakings
Indemnification
Reference is made to Item 27 above, which discusses circumstances under
which directors and officers of the Registrant shall be indemnified by the
Registrant against certain liabilities and expenses incurred by them by reason
of being a director or officer of the Registrant.
Notwithstanding the provisions of Registrant's Articles of Incorporation
and Bylaws, the Registrant hereby makes the following undertaking:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant, in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the Registrant, in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue
Shareholder Communications
Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a director or directors when
requested in writing to do so by the holders of at least 10% of the Registrant's
outstanding shares of common stock and in connection with such meeting to comply
with the provisions of Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications
Delivery of Annual Report to Shareholders
The registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant certifies that it meets all of the
requirments for effectiveness of this Registration Statement and has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Des Moines and State of
Iowa, on the 15th day of April, 1997.
Principal High Yield Fund, Inc.
(Registrant)
By /s/ S. L. Jones
______________________________________
S. L. Jones
President and Director
Attest:
/s/ E. H. Gillum
______________________________________
E. H. Gillum
Assistant Secretary
<PAGE>
Pursuant to the requirement of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
/s/ S. L. Jones
_____________________________ President and Director 4/15/97
S. L. Jones (Principal Executive Officer) __________
/s/ J. B. Griswell
_____________________________ Director and 4/15/97
J. B. Griswell Chairman of the Board __________
/s/ M. J. Beer
_____________________________ Financial Officer (Principal 4/15/97
M. J. Beer Financial and Accounting Officer) __________
(J. D. Davis)*
_____________________________ Director 4/15/97
J. D. Davis __________
(R. W. Erhle)*
_____________________________ Director 4/15/97
R. W. Ehrle __________
(P. A. Ferguson)*
_____________________________ Director 4/15/97
P. A. Ferguson __________
(R. W. Gilbert)*
_____________________________ Director 4/15/97
R. W. Gilbert __________
(R. E. Keller)*
_____________________________ Director 4/15/97
R. E. Keller __________
(B. A. Lukavsky)*
_____________________________ Director 4/15/97
B. A. Lukavsky __________
(R. G. Peebler)*
_____________________________ Director 4/15/97
R. G. Peebler __________
*By /s/ S. L. Jones
_____________________________________
S. L. Jones
President and Director
Pursuant to Powers of Attorney
Previously Filed or Included
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ J. D. Davis
_________________________
J. D. Davis
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ R. W. Ehrle
_________________________
R. W. Ehrle
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ P. A. Ferguson
_________________________
P. A. Ferguson
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ R. W. Gilbert
_________________________
R. W. Gilbert
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ J. B. Griswell
_________________________
J. B. Griswell
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ R. E. Keller
_________________________
R. E. Keller
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ S. L. Jones
_________________________
S. L. Jones
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ B. A. Lukavsky
_________________________
B. A. Lukavsky
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints S. L. Jones, J. B. Griswell, C.
L. Bassett, M. J. Beer and A. S. Filean and each of them (with full power to
each of them to act alone), the undersigned's true and lawful attorney-in-fact
and agent, with full power of substitution to each, for and on behalf and in the
name of the undersigned, to execute and file any documents relating to
registration under the Securities Act of 1933 and the Investment Company Act of
1940 with respect to open end management investment companies currently
organized or to be organized in the future which are sponsored by Principal
Mutual Life Insurance Company, and any and all amendments thereto and reports
thereunder with all exhibits and all instruments necessary or appropriate in
connection therewith, each of said attorneys-in-fact and agents and his or their
substitutes being empowered to act with or without the others or other, and to
have full power and authority to do or cause to be done in the name and on
behalf of the undersigned each and every act and thing necessary or appropriate
to be done in order to effectuate the same, as fully to all intents and purposes
as the undersigned might or could do in person; hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, may do or cause to
be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 15th day
of April, 1997.
/s/ R. G. Peebler
_________________________
R. G. Peebler
Consent of Independent Auditors
The Board of Directors and Shareholders
Principal High Yield Fund, Inc.
We consent to the reference to our firm under the captions "Financial
Highlights" and "Additional Information - Financial Statements" in the
Prospectus in Part A and "Financial Statements" in Part B and to the
incorporation by reference in Part B of our report dated January 17, 1997 on the
financial statements and the financial highlights of Principal Aggressive Growth
Fund, Inc., Principal Asset Allocation Fund, Inc., Principal Balanced Fund,
Inc., Principal Bond Fund, Inc., Principal Capital Accumulation Fund, Inc.,
Principal Emerging Growth Fund, Inc., Principal Government Securities Fund,
Inc., Principal Growth Fund, Inc., Principal High Yield Fund, Inc., Principal
Money Market Fund, Inc., and Principal World Fund, Inc., in this Post Effective
Amendment to Form N-1A Registration Statement under the Securities Act of 1933
(No. 33-14538) and Registration Statement under the Investment Company Act of
1940 (No. 811-5175) of Principal High Yield Fund, Inc.
/s/ Ernst & Young LLP
Des Moines, Iowa
April 11, 1997
A MESSAGE FROM THE PRESIDENT
To Principal Mutual Life Insurance Company Customers
Through year-end, U.S. financial markets turned in positive results. However,
there were some bumps along the way. Mid-year, equity and fixed-income investors
experienced a rather precipitous decline fueled by mixed economic data and
concerns about rising interest rates. These fears were quelled when the Federal
Reserve met December 17 and chose to leave interest rates unchanged. As a
result, both equity and fixed-income markets ended the year well.
Through December 31, 1996, the Dow Jones Industrial Average returned 28.79% and
the Standard & Poor's 500 Index returned 22.96% (the Dow Jones Industrial
Average and the S&P 500 are unmanaged indexes comprised of common stocks. One
cannot invest directly into these or any other index). Markets outside the U.S.
showed mixed results. Included among the regions which posted strongest returns
were Europe, Asia (excluding Japan) and Latin America. Most market experts do
not expect domestic inflation rates to elevate in 1997. Assuming this proves
true, investors should continue to enjoy a relatively stable market environment
though past performance is never a guarantee of future investment results.
The Principal Mutual Funds are used exclusively as underlying investments within
several different Principal Mutual Life Insurance Company variable insurance
products. Please see your contract prospectus for a description of the Funds
specifically available in your contract.
Principal Mutual Life Insurance Company continues to seek to provide our
customers with top-level service and good quality variable annuity and variable
life contracts. We are pleased to have you as a contract owner, and look forward
to a successful 1997.
Sincerely,
/s/ Stephan L. Jones
Stephan L. Jones
President
<PAGE>
CONTENTS
Page
Financial Statements and Financial Highlights
Statements of Assets and Liabilities.......................... 2
Statements of Operations ..................................... 4
Statements of Changes in Net Assets........................... 6
Notes to Financial Statements................................. 10
Schedules of Investments
Principal Aggressive Growth Fund, Inc..................... 18
Principal Asset Allocation Fund, Inc...................... 19
Principal Balanced Fund, Inc.............................. 26
Principal Bond Fund, Inc.................................. 29
Principal Capital Accumulation Fund, Inc.................. 31
Principal Emerging Growth Fund, Inc....................... 33
Principal Government Securities Fund, Inc................. 36
Principal Growth Fund, Inc................................ 36
Principal High Yield Fund, Inc............................ 39
Principal Money Market Fund, Inc.......................... 40
Principal World Fund, Inc................................. 42
Financial Highlights.......................................... 46
Report of Independent Auditors................................ 52
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
STATEMENTS OF ASSETS AND LIABILITIES
Principal Principal
Aggressive Asset Principal Principal
Growth Allocation Balanced Bond
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C> <C>
Investment in securities -- at cost................... $78,439,912 $55,636,193 $84,420,596 $61,453,159
Assets
Investment in securities -- at value (Note 4)......... $86,237,711 $59,227,847 $93,206,906 $62,634,312
Cash ................................................. 4,786,330 4,571,515 10,351 81,407
Receivables:
Dividends and interest........................... 188,774 317,109 751,024 1,223,103
Investment securities sold....................... 179,111 134,816 -- --
Capital Stock sold............................... 384,877 799 214,787 90,272
Total Assets 91,776,803 64,252,086 94,183,068 64,029,094
Liabilities
Accrued expenses...................................... 18,905 18,593 14,885 8,448
Payables:
Dividends and distributions to shareholders...... 1,582,605 2,553,927 1,008,939 633,016
Investment securities purchased.................. 69,744 48,428 -- --
Capital Stock reacquired......................... -- -- 1,575 1,069
Total Liabilities 1,671,254 2,620,948 1,025,399 642,533
Net Assets Applicable to Outstanding Shares ....... $90,105,549 $61,631,138 $93,157,669 $63,386,561
Capital Stock (par value: $.01 a share)
Shares authorized..................................... 100,000,000 100,000,000 100,000,000 100,000,000
Shares issued and outstanding......................... 6,204,681 5,369,370 6,452,156 5,596,601
Net Asset Value Per Share .......................... $14.52 $11.48 $14.44 $11.33
Net Assets Consist of:
Capital Stock......................................... $ 62,047 $ 53,693 $ 64,522 $ 55,966
Additional paid-in capital............................ 79,340,934 56,841,171 84,240,355 62,384,524
Accumulated undistributed net investment income....... 4,793 18,594 23,644 36,471
Accumulated undistributed net realized
gain (loss) from:
Investment transactions ......................... 2,899,976 1,126,026 42,838 (271,553)
Foreign currency transactions.................... -- -- -- --
Net unrealized appreciation of investments............ 7,797,799 3,591,654 8,786,310 1,181,153
Net unrealized appreciation on translation
of assets and liabilities in foreign currencies.. -- -- -- --
Total Net Assets $90,105,549 $61,631,138 $93,157,669 $63,386,561
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
STATEMENTS OF ASSETS AND LIABILITIES
Principal Principal Principal
Capital Emerging Government Principal
Accumulation Growth Securities Growth
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C> <C>
Investment in securities -- at cost................... $174,212,683 $109,056,629 $84,463,498 $86,112,332
Assets
Investment in securities -- at value (Note 4)......... $206,483,512 $136,886,546 $85,325,737 $98,944,796
Cash ................................................. 10,932 16,620 2,332 36,055
Receivables:
Dividends and interest........................... 340,103 99,086 813,492 116,039
Investment securities sold....................... -- -- -- --
Capital Stock sold............................... 484,518 199,597 6,295 543,229
Total Assets 207,319,065 137,201,849 86,147,856 99,640,119
Liabilities
Accrued expenses...................................... 21,554 20,199 11,346 12,189
Payables:
Dividends and distributions to shareholders...... 154,951 20,592 54,266 15,763
Investment securities purchased.................. 2,124,032 -- 981,875 --
Capital Stock reacquired......................... -- 177 511 257
Total Liabilities 2,300,537 40,968 1,047,998 28,209
Net Assets Applicable to Outstanding Shares ....... $205,018,528 $137,160,881 $85,099,858 $99,611,910
Capital Stock (par value: $.01 a share)
Shares authorized..................................... 100,000,000 100,000,000 100,000,000 100,000,000
Shares issued and outstanding......................... 6,869,636 4,611,789 8,255,462 7,222,342
Net Asset Value Per Share .......................... $29.84 $29.74 $10.31 $13.79
Net Assets Consist of:
Capital Stock......................................... $ 68,696$ 46,118 $ 82,555 $ 72,223
Additional paid-in capital............................ 165,254,680 108,816,480 84,726,691 86,696,904
Accumulated undistributed net investment income....... 35,319 13,018 45,745 7,936
Accumulated undistributed net realized
gain (loss) from:
Investment transactions ......................... 7,389,004 455,348 (617,372) 2,383
Foreign currency transactions.................... -- -- -- --
Net unrealized appreciation of investments............ 32,270,829 27,829,917 862,239 12,832,464
Net unrealized appreciation on translation
of assets and liabilities in foreign currencies.. -- -- -- --
Total Net Assets $205,018,528 $137,160,881 $85,099,858 $99,611,910
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
STATEMENT OF NET ASSETS
Principal Principal
High Money Principal
Yield Market World
Fund, Inc. Fund, Inc. Fund, Inc.
<S> <C> <C> <C>
Investment in securities -- at cost................... $12,972,448 $46,091,909 $60,080,919
Assets
Investment in securities -- at value (Note 4)......... $13,432,735 $46,091,909 $71,842,712
Cash ................................................. 19,746 50,823 49,386
Receivables:
Dividends and interest........................... 291,159 135,595 144,486
Investment securities sold....................... -- -- --
Capital Stock sold............................... 243 229,207 57,322
Total Assets 13,743,883 46,507,534 72,093,906
Liabilities
Accrued expenses...................................... 3,540 9,317 33,160
Payables:
Dividends and distributions to shareholders...... -- -- 27,452
Investment securities purchased.................. -- -- 351,045
Capital Stock reacquired......................... -- 253,968 234
Total Liabilities 3,540 263,285 411,891
Net Assets Applicable to Outstanding Shares ....... $13,740,343 $46,244,249 $71,682,015
Capital Stock (par value: $.01 a share)
Shares authorized..................................... 100,000,000 500,000,000 100,000,000
Shares issued and outstanding......................... 1,575,423 46,244,249 5,503,994
Net Asset Value Per Share .......................... $8.72 $1.000 $13.02
Net Assets Consist of:
Capital Stock......................................... $ 15,754 $ 462,443 $ 55,040
Additional paid-in capital............................ 14,248,237 45,781,806 59,603,313
Accumulated undistributed net investment income....... 11,449 -- 24,004
Accumulated undistributed net realized
gain (loss) from:
Investment transactions ......................... (995,384) -- 246,459
Foreign currency transactions.................... -- -- (9,568)
Net unrealized appreciation of investments............ 460,287 -- 11,761,793
Net unrealized appreciation on translation
of assets and liabilities in foreign currencies.. -- -- 974
Total Net Assets $13,740,343 $46,244,249 $71,682,015
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
STATEMENTS OF OPERATIONS
Principal Principal
Aggressive Asset Principal Principal
Growth Allocation Balanced Bond
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
Income:
<S> <C> <C> <C> <C>
Dividends................................ $ 930,715 $ 753,540 $ 934,378 $ --
Less: Withholding tax on foreign dividends -- -- -- --
Interest................................. 237,430 1,547,262 1,923,042 3,923,811
Total Income 1,168,145 2,300,802 2,857,420 3,923,811
Expenses:
Management and investment advisory
fees (Note 3)........................ 491,699 425,427 420,010 260,242
Custodian fees........................... 20,187 29,779 11,314 5,711
Directors' fees.......................... 7,904 7,930 7,927 7,830
Other.................................... 1,331 1,332 1,502 1,327
Total Expenses 521,121 464,468 440,753 275,110
Net Investment Income 647,024 1,836,334 2,416,667 3,648,701
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Net
realized gain (loss) from:
Investment transactions.................. 10,016,661 4,149,766 4,291,386 24,994
Foreign currency transactions............ -- -- -- --
Net increase (decrease) in unrealized
appreciation/depreciation on:
Investments ............................. 5,099,753 715,006 3,030,866 (1,454,206)
Translation of assets and liabilities in
foreign currencies.................. -- -- -- --
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency 15,116,414 4,864,772 7,322,252 (1,429,212)
Net Increase in Net Assets
Resulting from Operations $15,763,438 $6,701,106 $9,738,919 $2,219,489
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
STATEMENTS OF OPERATIONS
Principal Principal Principal
Capital Emerging Government Principal
Accumulation Growth Securities Growth
Fund, Inc. Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
Income:
<S> <C> <C> <C> <C>
Dividends................................ $ 4,025,859 $ 754,816 $ -- $ 971,440
Less: Withholding tax on foreign dividends -- -- -- --
Interest................................. 324,117 879,048 5,055,471 556,688
Total Income 4,349,976 1,633,864 5,055,471 1,528,128
Expenses:
Management and investment advisory
fees (Note 3)........................ 816,437 606,697 360,968 357,833
Custodian fees........................... 6,391 8,735 7,542 4,742
Directors' fees.......................... 7,877 7,905 7,887 7,602
Other.................................... 1,376 1,550 1,351 1,276
Total Expenses 832,081 624,887 377,748 371,453
Net Investment Income 3,517,895 1,008,977 4,677,723 1,156,675
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Net
realized gain (loss) from:
Investment transactions.................. 26,628,772 1,954,051 98,466 242,899
Foreign currency transactions............ -- -- -- --
Net increase (decrease) in unrealized
appreciation/depreciation on:
Investments ............................. 6,846,493 15,461,368 (1,337,219) 7,550,339
Translation of assets and liabilities in
foreign currencies.................. -- -- -- --
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency 33,475,265 17,415,419 (1,238,753) 7,793,238
Net Increase in Net Assets
Resulting from Operations $36,993,160 $18,424,396 $ 3,438,970 $8,949,913
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
STATEMENTS OF OPERATIONS
Principal Principal
High Money Principal
Yield Market World
Fund, Inc. Fund, Inc. Fund, Inc.
Net Investment Income
Income:
<S> <C> <C> <C>
Dividends................................ $ -- $ -- $ 1,385,001
Less: Withholding tax on foreign dividends -- -- (169,435)
Interest................................. 1,241,012 2,321,335 381,561
Total Income 1,241,012 2,321,335 1,597,127
Expenses:
Management and investment advisory
fees (Note 3)........................ 75,111 208,822 376,123
Custodian fees........................... 3,517 13,843 65,966
Directors' fees.......................... 7,851 8,091 7,915
Other.................................... 1,332 1,490 1,357
Total Expenses 87,811 232,246 451,361
Net Investment Income 1,153,201 2,089,089 1,145,766
Net Realized and Unrealized Gain (Loss) on
Investments and Foreign Currency Net
realized gain (loss) from:
Investment transactions.................. 210,672 -- 875,641
Foreign currency transactions............ -- -- (9,568)
Net increase (decrease) in unrealized
appreciation/depreciation on:
Investments ............................. 218,620 -- 9,714,799
Translation of assets and liabilities in
foreign currencies.................. -- -- 495
Net Realized and Unrealized Gain (Loss)
on Investments and Foreign Currency 429,292 -- 10,581,367
Net Increase in Net Assets
Resulting from Operations $1,582,493 $2,089,089 $11,727,133
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal
Aggressive Growth Asset Allocation
Fund, Inc. Fund, Inc.
1996 1995 1996 1995
Operations
<S> <C> <C> <C> <C>
Net investment income....................... $ 647,024 $ 302,552 $ 1,836,334 $ 1,387,625
Net realized gain (loss) from
investment transactions 10,016,661 4,905,174 4,149,766 1,628,048
Net increase (decrease) in unrealized appreciation/
depreciation on investments and translation of
assets and liabilities in foreign currencies 5,099,753 2,660,711 715,006 3,340,632
Net Increase in Net Assets
Resulting from Operations 15,763,438 7,868,437 6,701,106 6,356,305
Dividends and Distributions to Shareholders
From net investment income.................. (642,821) (305,795) (1,837,566) (1,398,405)
From net realized gain on investments and foreign
currency transactions................. (8,672,973) (3,377,897) (3,447,188) (1,026,374)
(9,315,794) (3,683,692) (5,284,754) (2,424,779)
Capital Share Transactions (Note 5)
Shares sold................................. 54,678,368 14,807,229 20,370,526 7,552,421
Shares issued in reinvestment of dividends
and distributions...................... 7,733,190 3,683,692 2,730,827 2,424,779
Shares redeemed............................. (12,396,594) (2,803,211) (3,960,605) (875,745)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 50,014,964 15,687,710 19,140,748 9,101,455
Total Increase 56,462,608 19,872,455 20,557,100 13,032,981
Net Assets
Beginning of period......................... 33,642,941 13,770,486 41,074,038 28,041,057
End of period (including undistributed net
investment income as set forth below).. $90,105,549 $33,642,941 $61,631,138 $41,074,038
Undistributed Net Investment Income......... $ 4,793 $ 3,483 $ 18,594 $ 19,826
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal
Balanced Bond
Fund, Inc. Fund, Inc.
1996 1995 1996 1995
Operations
<S> <C> <C> <C> <C>
Net investment income....................... $ 2,416,667 $ 1,419,736 $ 3,648,701 $ 1,790,567
Net realized gain (loss) from
investment transactions 4,291,386 1,509,204 24,994 (178,683)
Net increase (decrease) in unrealized appreciation/
depreciation on investments and translation of
assets and liabilities in foreign currencies 3,030,866 4,627,533 (1,454,206) 3,151,543
Net Increase in Net Assets
Resulting from Operations 9,738,919 7,556,473 2,219,489 4,763,427
Dividends and Distributions to Shareholders
From net investment income.................. (2,404,163) (1,419,914) (3,612,230) (1,807,251)
From net realized gain on investments and foreign
currency transactions................. (5,078,241) (1,126,793) -- --
(7,482,404) (2,546,707) (3,612,230) (1,807,251)
Capital Share Transactions (Note 5)
Shares sold................................. 51,227,505 18,469,155 38,212,107 15,942,301
Shares issued in reinvestment of dividends
and distributions...................... 6,103,434 1,530,787 2,979,214 1,815,744
Shares redeemed............................. (11,833,111) (4,649,589) (12,289,678) (1,944,884)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 45,497,828 15,350,353 28,901,643 15,813,161
Total Increase 47,754,343 20,360,119 27,508,902 18,769,337
Net Assets
Beginning of period......................... 45,403,326 25,043,207 35,877,659 17,108,322
End of period (including undistributed net
investment income as set forth below).. $ 93,157,669 $45,403,326 $ 63,386,561 $35,877,659
Undistributed Net Investment Income......... $ 23,644 $ 11,765 $ 36,471 $ --
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal
Capital Accumulation
Fund, Inc.
1996 1995
Operations
<S> <C> <C>
Net investment income....................... $ 3,517,895 $ 2,706,864
Net realized gain (loss) from
investment transactions 26,628,772 11,294,865
Net increase (decrease) in unrealized appreciation/
depreciation on investments and translation of
assets and liabilities in foreign currencies 6,846,493 19,225,574
Net Increase in Net Assets
Resulting from Operations 36,993,160 33,227,303
Dividends and Distributions to Shareholders
From net investment income.................. (3,541,996) (2,707,756)
From net realized gain on investments and foreign
currency transactions................. (22,300,640) (10,552,706)
(25,842,636) (13,260,462)
Capital Share Transactions (Note 5)
Shares sold................................. 81,833,141 38,113,651
Shares issued in reinvestment of dividends
and distributions...................... 25,659,931 13,137,194
Shares redeemed............................. (49,264,748) (56,149,805)
Net Increase (Decrease) in Net Assets from
Capital Share Transactions 58,228,324 (4,898,960)
Total Increase 69,378,848 15,067,881
Net Assets
Beginning of period......................... 135,639,680 120,571,799
End of period (including undistributed net
investment income as set forth below).. $205,018,528 $135,639,680
Undistributed Net Investment Income......... $ 35,319 $ 59,420
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal
Emerging Growth Government Securities
Fund, Inc. Fund, Inc.
1996 1995 1996 1995
Operations
<S> <C> <C> <C> <C>
Net investment income........................................ $ 1,008,977 $ 502,095 $ 4,677,723 $ 2,727,198
Net realized gain (loss) from investment transactions........ 1,954,051 1,202,668 98,466 (41,117)
Net realized (loss) from foreign currency transactions....... -- -- -- --
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and
liabilities in foreign currencies....................... 15,461,368 8,417,614 (1,337,219) 4,199,844
Net Increase in Net Assets Resulting from Operations 18,424,396 10,122,377 3,438,970 6,885,925
Dividends and Distributions to Shareholders
From net investment income................................... (1,000,544) (496,559) (4,644,240) (2,764,369)
Excess distribution of net investment income (Note 1)........ -- -- -- --
From net realized gain on investments
and foreign currency transactions (2,245,806) (473,643) -- --
(3,246,350) (970,202) (4,644,240) (2,764,369)
Capital Share Transactions (Note 5)
Shares sold.................................................. 78,710,392 33,010,562 47,002,706 24,755,653
Shares issued in reinvestment of dividends
and distributions....................................... 3,177,572 825,122 4,589,974 2,708,209
Shares redeemed.............................................. (18,425,569) (8,379,384) (15,367,021) (17,627,312)
Net Increase in Net Assets from
Capital Shares Transactions 63,462,395 25,456,300 36,225,659 9,836,550
Total Increase 78,640,441 34,608,475 35,020,389 13,958,106
Net Assets
Beginning of period.......................................... 58,520,440 23,911,965 50,079,469 36,121,363
End of period (including undistributed (overdistributed) net
investment income as set forth below)................... $137,160,881 $58,520,440 $ 85,099,858 $50,079,469
Undistributed (Overdistributed) Net Investment Income........ $ 13,018 $ 6,354 $ 45,745 $ 16,895
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal
Growth High Yield
Fund, Inc. Fund, Inc.
1996 1995 1996 1995
Operations
<S> <C> <C> <C> <C>
Net investment income........................................ $ 1,156,675 $ 572,297 $ 1,153,201 $ 976,414
Net realized gain (loss) from investment transactions........ 242,899 298,608 210,672 (49,300)
Net realized (loss) from foreign currency transactions....... -- -- -- --
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and
liabilities in foreign currencies....................... 7,550,339 5,280,826 218,620 664,483
Net Increase in Net Assets Resulting from Operations 8,949,913 6,151,731 1,582,493 1,591,597
Dividends and Distributions to Shareholders
From net investment income................................... (1,148,740) (566,536) (1,116,648) (991,915)
Excess distribution of net investment income (Note 1)........ -- -- -- (25,104)
From net realized gain on investments
and foreign currency transactions (240,516) (294,742) -- --
(1,389,256) (861,278) (1,116,648) (1,017,019)
Capital Share Transactions (Note 5)
Shares sold.................................................. 55,634,083 29,355,706 437,560 673,188
Shares issued in reinvestment of dividends
and distributions....................................... 1,373,493 753,669 1,116,648 1,017,019
Shares redeemed.............................................. (7,663,844) (5,778,425) (109,643) (131,664)
Net Increase in Net Assets from
Capital Shares Transactions 49,343,732 24,330,950 1,444,565 1,558,543
Total Increase 56,904,389 29,621,403 1,910,410 2,133,121
Net Assets
Beginning of period.......................................... 42,707,521 13,086,118 11,829,933 9,696,812
End of period (including undistributed (overdistributed) net
investment income as set forth below)................... $99,611,910 $42,707,521 $13,740,343 $11,829,933
Undistributed (Overdistributed) Net Investment Income........ $ 7,936 $ 5,761 $ 11,449 $ (25,104)
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
STATEMENTS OF CHANGES IN NET ASSETS
Principal Principal
Money Market World
Fund, Inc. Fund, Inc.
1996 1995 1996 1995
Operations
<S> <C> <C> <C> <C>
Net investment income........................................ $ 2,089,089 $ 1,502,142 $ 1,145,766 $ 519,182
Net realized gain (loss) from investment transactions........ -- -- 875,641 174,169
Net realized (loss) from foreign currency transactions....... -- -- (9,568) (5,526)
Net increase (decrease) in unrealized appreciation/depreciation
on investments and translation of assets and
liabilities in foreign currencies....................... -- -- 9,715,294 2,574,265
Net Increase in Net Assets Resulting from Operations 2,089,089 1,502,142 11,727,133 3,262,090
Dividends and Distributions to Shareholders
From net investment income................................... (2,089,089) (1,502,142) (1,149,902) (506,808)
Excess distribution of net investment income (Note 1)........ -- -- -- --
From net realized gain on investments
and foreign currency transactions -- -- (750,235) (23,834)
(2,089,089) (1,502,142) (1,900,137) (530,642)
Capital Share Transactions (Note 5)
Shares sold.................................................. 119,544,896 94,151,329 38,889,383 15,630,379
Shares issued in reinvestment of dividends
and distributions....................................... 1,914,643 1,130,170 1,849,921 530,642
Shares redeemed.............................................. (107,885,209) (91,983,464) (9,449,905) (2,072,943)
Net Increase in Net Assets from
Capital Shares Transactions 13,574,330 3,298,035 31,289,399 14,088,078
Total Increase 13,574,330 3,298,035 41,116,395 16,819,526
Net Assets
Beginning of period.......................................... 32,669,919 29,371,884 30,565,620 13,746,094
End of period (including undistributed (overdistributed) net
investment income as set forth below)................... $ 46,244,249 $32,669,919 $71,682,015 $30,565,620
Undistributed (Overdistributed) Net Investment Income........ $ -- $ -- $ 24,004 $ 12,505
<FN>
See accompanying notes.
</FN>
</TABLE>
<PAGE>
December 31, 1996
NOTES TO FINANCIAL STATEMENTS
Principal Aggressive Growth Fund, Inc.
Principal Asset Allocation Fund, Inc.
Principal Balanced Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Accumulation Fund, Inc.
Principal Emerging Growth Fund, Inc.
Principal Government Securities Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal Money Market Fund, Inc.
Principal World Fund, Inc.
Note 1 -- Significant Accounting Policies
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund, Inc.,
Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal High
Yield Fund, Inc., Principal Money Market Fund, Inc. and Principal World Fund,
Inc. (the "Funds") are registered under the Investment Company Act of 1940, as
amended, as open-end diversified management investment companies and operate in
the mutual fund industry.
Principal Money Market Fund, Inc. values its securities at amortized cost, which
approximates market. Under the amortized cost method, a security is valued by
applying a constant amortization to maturity of the difference between the
principal amount due at maturity and the cost of the security to the fund.
The other funds value securities for which market quotations are readily
available at market value, which is determined using the last reported sale
price or, if no sales are reported, as is regularly the case for some securities
traded over-the-counter, the last reported bid price. When reliable market
quotations are not considered to be readily available, which may be the case,
for example, with respect to certain debt securities and preferred stocks, the
investments are valued by using market quotations, prices provided by market
makers or estimates of market values obtained from yield data and other factors
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by each fund's Board of Directors.
Securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market.
With respect to Principal World Fund, Inc., the value of foreign securities in
foreign currency amounts is expressed in U.S. dollars at the closing daily rate
of exchange. The identified cost of the portfolio holdings is translated at
approximate rates prevailing when acquired. Income and expense amounts are
translated at approximate rates prevailing when received or paid, with daily
accruals of such amounts reported at approximate rates prevailing at the date of
valuation.
Since the carrying amount of the foreign securities in the Principal World Fund,
Inc. is determined based on the exchange rate and market values at the close of
the period, it is not practicable to isolate that portion of the results of
operations arising as a result of changes in the foreign exchange rates from the
fluctuations arising from changes in the market prices of securities during the
period.
The Funds record investment transactions generally one day after the trade date.
The identified cost basis has been used in determining the net realized gain or
loss from investment transactions and unrealized appreciation or depreciation of
investments. The Funds record dividend income on the ex-dividend date, except
dividend income from foreign securities whereby the ex-dividend date has passed;
such dividends are recorded as soon as the Funds are informed of the ex-dividend
date. Interest income is recognized on an accrual basis.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and the difference between the
amount of dividends and foreign withholding taxes recorded on the fund's books
and the U.S. dollar equivalent of the amounts actually received or paid. Net
unrealized foreign exchange gains and losses arise from changes in the value of
assets and liabilities other than investments in securities at fiscal year end,
resulting from changes in the exchange rate.
With respect to Principal Money Market Fund, Inc., all net investment income and
any realized gains and losses from investment transactions are declared as
dividends daily to shareholders of record as of that day. Dividends and
distributions to shareholders of the other funds are recorded on the ex-dividend
date.
Dividends and distributions to shareholders from net investment income and net
realized gain from investment and foreign currency transactions are determined
in accordance with federal income tax regulations, which may differ from
generally accepted accounting principles. To the extent these "book/tax"
differences are permanent in nature (i.e. that they result from other than
timing of recognition - "temporary"), such amounts are reclassified within the
capital accounts based on their federal tax-basis treatment; temporary
differences do not require reclassification. Reclassifications made for the
years ended December 31, 1996 and 1995 were not material.
Due to the timing of dividend distributions and the differences in accounting
for income and realized gains (losses) for financial statement and federal
income tax purposes, the fiscal year in which amounts are distributed may differ
from the year in which the income and realized gains (losses) are recorded for
financial statement purposes by the fund. The differences between the income and
gains distributed on a book versus tax basis are shown as excess distributions
of net investment income and net realized gain on investments in the
accompanying Statements of Changes in Net Assets.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2 -- Federal Income Taxes
No provision for federal income taxes is considered necessary because each fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year, substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments is
approximately the same for both federal income tax and financial reporting
purposes.
At December 31, 1996, Principal Bond Fund, Inc. had a net capital loss
carryforward of approximately $272,000 expiring in 2002 and 2003. Principal
Government Securities Fund, Inc. had a net capital loss carryforward of
approximately $617,000 expiring in 2002 and 2003. Principal High Yield Fund,
Inc. had a net capital loss carryforward of approximately $995,000 expiring in
1999 through 2003.
Note 3 -- Management Agreement and Transactions With Affiliates
The Funds have agreed to pay investment advisory and management fees to Princor
Management Corporation (wholly owned by Princor Financial Services Corporation,
a subsidiary of Principal Mutual Life Insurance Company) (the "Manager"),
computed at an annual percentage rate of each fund's average daily net assets.
The annual rate used in this calculation for Principal Bond Fund, Inc.,
Principal Capital Accumulation Fund, Inc., Principal Government Securities Fund,
Inc., Principal Growth Fund, Inc. and Principal Money Market Fund, Inc. is .50%
of the first $100 million of the fund's average daily net assets, .45% of the
next $100 million of the fund's average daily net assets and .40% of the next
$100 million of the fund's average daily net assets. The annual rate used in
this calculation for Principal Asset Allocation Fund, Inc. and Principal
Aggressive Growth Fund, Inc. is .80% of the first $100 million of the fund's
average daily net assets. With respect to Principal Balanced Fund, Inc. and
Principal High Yield Fund, Inc., the annual rate used is .60% of the first $100
million of the fund's average daily net assets. With respect to Principal
Emerging Growth Fund, Inc. the annual rate used is .65% of the first $100
million of the fund's average daily net assets and .60% of the next $100 million
of the fund's average daily net assets. With respect to Principal World Fund,
Inc., the annual rate used is .75%, of the first $100 million of the fund's
average daily net assets.
Brokerage commissions were paid to affiliates by certain of the funds, as
follows:
Year Ended Year Ended
December 31, December 31,
1996 1995
Principal Balanced Fund, Inc. $ 1,300 $ 219
Principal Capital Accumulation
Fund, Inc. 10,262 3,885
Principal Emerging Growth
Fund, Inc. -- 910
Principal Growth Fund, Inc. 438 4,252
Principal World Fund, Inc. 3,176 2,207
All of the shares of the Funds are owned by Principal Mutual Life Insurance
Company and/or one or more Separate Accounts sponsored by Principal Mutual Life
Insurance Company.
Note 4 -- Investment Transactions
For the year ended December 31, 1996, the cost of investment securities
purchased and proceeds from investment securities sold (not including short-term
investments and U.S. government securities) by the Funds were as follows:
Purchases Sales
Principal Aggressive Growth Fund, Inc. $133,717,949 $93,952,732
Principal Asset Allocation Fund, Inc. 65,579,307 48,240,538
Principal Balanced Fund, Inc. 37,879,789 13,472,831
Principal Bond Fund, Inc. 29,553,087 573,288
Principal Capital Accumulation Fund, Inc. 115,353,668 79,662,349
Principal Emerging Growth Fund, Inc. 61,139,785 7,036,586
Principal Government Securities Fund, Inc. 22,704,172 3,422,418
Principal Growth Fund, Inc. 45,840,119 1,232,775
Principal High Yield Fund, Inc. 4,387,611 3,785,289
Principal World Fund, Inc. 35,669,393 5,508,800
At December 31, 1996, net unrealized appreciation of investments held by the
Funds was composed of the following:
<TABLE>
<CAPTION>
Gross Unrealized Net Unrealized
------------------------------------ Appreciation
Appreciation (Depreciation) of Investments
<S> <C> <C> <C>
Principal Aggressive Growth Fund, Inc. $ 9,867,696 $ (2,069,897) $ 7,797,799
Principal Asset Allocation Fund, Inc. 5,545,004 (1,953,350) 3,591,654
Principal Balanced Fund, Inc. 10,173,472 (1,387,162) 8,786,310
Principal Bond Fund, Inc. 1,802,455 (621,302) 1,181,153
Principal Capital Accumulation Fund, Inc. 36,534,795 (4,263,966) 32,270,829
Principal Emerging Growth Fund, Inc. 32,122,187 (4,292,270) 27,829,917
Principal Government Securities Fund, Inc. 1,617,334 (755,095) 862,239
Principal Growth Fund, Inc. 17,905,917 (5,073,453) 12,832,464
Principal High Yield Fund, Inc. 518,776 (58,489) 460,287
Principal World Fund, Inc. 13,790,582 (2,028,789) 11,761,793
</TABLE>
Principal Government Securities Fund, Inc. may trade portfolio securities on a
"to-be-announced" (TBA) basis. In a TBA transaction, the fund commits to
purchase or sell securities for which all specific information is not known at
the time of the trade. Securities purchased on a TBA basis are not settled until
they are delivered to the fund, normally 15 to 30 days later. These transactions
are subject to market fluctuations and their current value is determined in the
same manner as for other portfolio securities. As of December 31, 1996, TBA
purchase commitments involved securities with a face amount of $1,000,000, cost
of $981,875 and market value of $978,180. Principal Government Securities Fund,
Inc. has set aside investment securities and other assets in excess of the
commitments to serve as collateral.
At December 31, 1996, Principal Asset Allocation Fund, Inc., Principal Balanced
Fund, Inc., Principal Emerging Growth Fund, Inc., Principal High Yield Fund,
Inc. and Principal World Fund, Inc. held the following securities which may
require registration under the Securities Act of 1933 or an exemption therefrom
in order to effect a sale in the ordinary course of business.
<TABLE>
<CAPTION>
Value at Value as a
Date of Dec. 31, Percentage of
Fund Security Description Acquisition Cost 1996 Net Assets
<S> <C> <C> <C> <C> <C>
Principal Asset Alps 96 1 PT; Pass Through 5/22/96 $ 74,973 $ 77,754 .13%
Allocation Fund, Inc. Certificates
Brooks Fiber Properties; Step-Up
Senior Discount Notes 11/1/96 39,393 44,625 .08%
CIA Brasilia De Distribuicao; 5/30/96 48,825 55,192 .09%
GDR 5/31/96 49,987 57,418 .10%
7/17/96 42,550 40,949 .07%
Centrais Electricas De
Santa Catarin ADR 10/4/96 18,296 19,215 .03%
Cole National Group, Inc.; 11/13/96 29,775 30,900 .05%
Senior Subordinated Notes 11/14/96 24,969 25,750 .04%
First Nationwide 9/13/96 25,000 27,000 .05%
Fomento Economico Mexicano 5/30/96 100,040 111,664 .19%
5/31/96 90,900 102,132 .17%
Globo Communicacoes Part.
Notes 12/10/96 39,776 40,150 .07%
Grupo Financiero Bancomer 5/30/96 99,375 84,832 .14%
SA, ADR 5/31/96 93,125 80,030 .14%
International Home Foods;
Senior Subordinated Notes 10/29/96 30,000 31,200 .05%
Israel Electric Corp.; Senior
Notes 12/11/96 249,525 249,615 .42%
Maxxam Group Holdings, Inc.;
Senior Notes 12/18/96 40,000 40,500 .07%
Netsat Servicos LTDA; Senior 7/26/96 40,000 41,950 .07%
Notes 12/2/96 10,525 10,487 .02%
Paging Network, Inc.; Senior
Subordinated Notes 10/10/96 60,000 60,525 .10%
Parker Drilling Company; Senior 11/5/96 10,038 10,525 .02%
Notes 11/5/96 19,843 21,050 .04%
PTTEP International, Ltd.;
Yankee Dollar Notes 11/8/96 259,810 256,425 .43%
Tevecap SA; Senior Notes 11/21/96 50,000 51,125 .09%
U.S. Can Corp; Senior
Subordinated Notes 10/10/96 15,000 15,750 .03%
12/02/96 15,788 15,750 .03%
1,602,513 2.72%
<CAPTION>
Value at Value as a
Date of Dec. 31, Percentage of
Fund Security Description Acquisition Cost 1996 Net Assets
Principal Balanced Federal-Mogul Corp.; Series D
<S> <C> <C> <C> <C>
Fund, Inc. Convertible 10/15/92 $248,325 $ 260,150 .28%
Principal Emerging Ciba-Geigy Corp.; Exchangeable
Growth Fund, Inc. Subordinated Debentures 3/20/91 150,000 150,000 .11%
Sierra On Line; Convertible
Subordinated Debentures 8/17/94 100,375 345,125 .25%
495,125 .36%
Principal High Yield Cole National Group, Inc.;
Fund, Inc. Senior Subordinated Notes 11/13/96 198,500 206,000 1.50%
Euramax International PLC;
Senior Subordinated Notes 9/18/96 50,000 51,625 .38%
Motors & Gears, Inc.; Series A
Senior Notes 11/1/96 200,000 207,000 1.51%
Parker Drilling Co.; Senior Notes 11/5/96 99,215 105,250 .77%
956,125 4.16%
Principal World Alfa SA; Convertible 9/25/95 398,000 438,000 .61%
Fund, Inc. Subordinated Debentures 11/20/96 329,254 328,500 .46%
Fokus Bank 6/25/96 645,965 818,135 1.14%
Hyundai Motor Co. Ltd. GDR 9/3/96 307,688 173,750 .24%
Kemira OY 12/9/96 314,077 327,185 .46%
12/10/96 131,955 133,391 .19%
12/11/96 241,385 244,131 .34%
Royal Plastics Group 6/25/96 272,357 334,757 .47%
7/2/96 91,512 110,969 .15%
Voest-Alpine Stahl 10/30/95 280,007 326,936 .46%
3/27/96 146,558 159,915 .22%
6/25/96 256,094 273,632 .38%
6/27/96 145,930 152,807 .21%
3,822,108 5.33%
</TABLE>
The Fund's investments are with various issuers in various industries. The
Schedules of Investments contained herein summarize concentrations of credit
risk by industry.
Note 5 -- Capital Share Transactions
Transactions in Capital Stock by fund were as follows:
<TABLE>
<CAPTION>
Principal Aggressive Principal Asset Principal Balanced
Growth Fund, Inc. Allocation Fund, Inc. Fund, Inc.
Year Ended December 31, 1996:
<S> <C> <C> <C>
Shares sold................................... 3,918,263 1,770,239 3,602,550
Shares issued in reinvestment of
dividends and distributions.................. 547,658 239,060 424,022
Shares redeemed............................... (860,656) (337,801) (825,489)
Net Increase 3,605,265 1,671,498 3,201,083
Year Ended December 31, 1995:
Shares sold................................... 1,161,931 692,541 1,392,999
Shares issued in reinvestment of
dividends and distributions.................. 287,452 219,390 115,881
Shares redeemed............................... (211,535) (78,261) (354,061)
Net Increase 1,237,848 833,670 1,154,819
<CAPTION>
Principal Principal Capital Principal Emerging
Bond Fund, Inc. Accumulation Fund, Inc. Growth Fund, Inc.
Year Ended December 31, 1996:
<S> <C> <C> <C>
Shares sold................................... 3,340,011 2,763,121 2,884,710
Shares issued in reinvestment of
dividends and distributions.................. 262,934 868,606 110,728
Shares redeemed............................... (1,065,373) (1,641,040) (693,851)
Net Increase 2,537,572 1,990,687 2,301,587
Year Ended December 31, 1995:
Shares sold................................... 1,388,036 1,462,128 1,443,488
Shares issued in reinvestment of
dividends and distributions.................. 155,537 493,432 32,984
Shares redeemed............................... (174,815) (2,220,452) (363,945)
Net Increase (Decrease) 1,368,758 (264,892) 1,112,527
<CAPTION>
Principal Government Principal Growth Principal High
Securities Fund, Inc. Fund, Inc. Yield Fund, Inc.
Year Ended December 31, 1996:
<S> <C> <C> <C>
Shares sold................................... 4,520,032 4,289,963 50,390
Shares issued in reinvestment of
dividends and distributions.................. 445,172 99,697 128,056
Shares redeemed............................... (1,457,956) (604,413) (12,523)
Net Increase 3,507,248 3,785,247 165,923
Year Ended December 31, 1995:
Shares sold................................... 2,389,165 2,597,297 77,400
Shares issued in reinvestment of
dividends and distributions.................. 258,394 61,037 121,455
Shares redeemed............................... (1,752,028) (517,157) (15,228)
Net Increase 895,531 2,141,177 183,627
<CAPTION>
Principal Money Principal World
Market Fund, Inc. Fund, Inc.
Year Ended December 31, 1996:
<S> <C> <C>
Shares sold................................... 119,544,896 3,308,501
Shares issued in reinvestment of
dividends and distributions.................. 1,914,643 144,196
Shares redeemed............................... (107,885,209) (800,955)
Net Increase 13,574,330 2,651,742
Year Ended December 31, 1995:
Shares sold................................... 94,151,329 1,566,265
Shares issued in reinvestment of
dividends and distributions.................. 1,130,170 49,808
Shares redeemed............................... (91,983,464) (202,182)
Net Increase 3,298,035 1,413,891
</TABLE>
Note 6 -- Line of Credit
The Funds have an unsecured line of credit with a bank which allows each fund to
borrow up to $500,000. Borrowings are made solely to facilitate the handling of
unusual and/or unanticipated short-term cash requirements. Interest is charged
to each fund, based on its borrowings, at a rate equal to the bank's Fed Funds
Unsecured Rate plus 100 basis points. Additionally, a commitment fee is charged
at the annual rate of .25% on the line of credit. At December 31, 1996, the
Funds had no outstanding borrowings under the line of credit.
SCHEDULES OF INVESTMENTS
PRINCIPAL AGGRESSIVE GROWTH FUND, INC.
Shares
Held Value
Common Stocks (95.71%)
Advertising (0.15%)
Catalina Marketing Corp. 2,500(a) $ 137,812
Air Transportation, Scheduled (0.67%)
AMR Corp. 6,800(a) 599,250
Aircraft & Parts (7.33%)
Allied Signal, Inc. 14,100 944,700
Boeing Co. 7,957 846,426
General Dynamics Corp. 7,400 521,700
Gulfstream Aerospace Corp. 7,000(a) 169,750
McDonnell Douglas Corp. 12,300 787,200
Rockwell International Corp. 8,800 535,700
Sunstrand Corp. 2,400 102,000
United Technologies Corp. 40,900 2,699,400
6,606,876
Bakery Products (1.09%)
Einstein/Noah Bagel Corp. 11,900(a) 354,025
Interstate Bakeries 12,700 623,888
977,913
Beverages (0.40%)
Coca-Cola Enterprises 7,500 363,750
Cigars (0.92%)
Consolidated Cigar Holdings, Inc. 33,600(a) 831,600
Congeneration -
Small Power Producer (0.49%)
AES Corp. 9,500(a) 441,750
Commercial Banks (3.91%)
Chase Manhattan Corp. 7,812 697,221
Citicorp 2,100 216,300
Wells Fargo & Co. 9,683 2,611,989
3,525,510
Communications Equipment (1.44%)
Larscom, Inc. 16,000(a) 182,000
U.S. Industries, Inc. 21,000(a) 721,875
U.S. Robotics Corp. 5,500(a) 396,000
1,299,875
Computer & Data Processing
Services (6.56%)
Adobe Systems, Inc. 9,800 366,275
First Data Corp. 13,500 492,750
GTECH Holdings Corp. 85,600(a) 2,739,200
Microsoft Corp. 12,200(a) 1,008,025
Netscape Communications 6,300(a) 358,313
Oracle Systems Corp. 11,100(a) 463,425
Sterling Commerce, Inc. 13,600(a) 479,400
5,907,388
Computer & Office Equipment (4.35%)
Cisco Systems 10,400(a) 661,700
International Business
Machines Corp. 6,300 951,300
International Game Technology 126,400 2,306,800
3,919,800
Consumer Products (13.28%)
Philip Morris Cos., Inc. 42,600 $4,797,825
RJR Nabisco 210,900 7,170,600
11,968,425
Cutlery, Handtools, & Hardware (0.98%)
Gillette Co. 11,300 878,575
Drug Stores & Proprietary Stores (0.43%)
CVS Corp. 9,300 384,787
Drugs (1.26%)
American Home Products Corp. 7,900 463,138
Pfizer, Inc. 5,800 480,675
Schering-Plough Corp. 3,000 194,250
1,138,063
Eating & Drinking Places (3.07%)
Boston Chicken, Inc. 32,600(a) 1,169,525
Brinker International, Inc. 25,200(a) 403,200
Cracker Barrel Old Country
Store, Inc. 43,600 1,106,350
Foodmaker Inc. 9,800(a) 86,975
2,766,050
Electrical Industrial Apparatus (0.47%)
Emerson Electric Co. 4,400 425,700
Electronic Components &
Accessories (1.69%)
Intel Corp. 11,600 1,518,875
Federal & Federally Sponsored
Credit (1.02%)
Student Loan Marketing Association 9,900 921,937
Fire, Marine, & Casualty
Insurance (5.95%)
Aetna, Inc. 15,300 1,224,000
Berkshire Hathaway, Inc. 44(a) 1,500,400
Cigna Corp. 2,650 362,056
Loews Corp. 24,100 2,271,425
5,357,881
Grain Mill Products (0.23%)
Ralston-Ralston Purina Group 2,800 205,450
Grocery Stores (1.68%)
Dominicks Supermarkets, Inc. 20,700(a) 450,225
Food Lion, Inc. 104,600 1,059,075
1,509,300
Hospitals (0.62%)
Columbia/HCA Healthcare Corp. 13,700 558,275
Hotels & Motels (0.71%)
Hilton Hotels Corp. 24,600 642,675
Industrial Inorganic Chemicals (1.32%)
Monsanto Co. 14,300 555,913
Olin Corp. 16,900 635,862
1,191,775
Insurance Agents, Brokers, &
Services (0.52%)
Exel Ltd. 12,300 465,862
Lumber & Other Building
Materials (0.79%)
Home Depot, Inc. 14,200 711,775
Medical Instruments &
Supplies (1.47%)
Acuson Corp. 8,900(a) 216,938
Becton, Dickinson & Co. 19,000 824,125
U.S. Surgical Corp. 7,300 287,437
1,328,500
Miscellaneous Amusement,
Recreation Service (0.44%)
Family Golf Centers, Inc. 13,100(a) 394,637
Miscellaneous Apparel &
Accessories (0.33%)
Designer Holdings, Ltd. 18,200(a) 293,475
Miscellaneous Business
Services (0.74%)
CUC International, Inc. 19,775(a) 469,656
Viad Corp. 12,100 199,650
669,306
Miscellaneous Electrical
Equipment & Supplies (0.27%)
Motorola, Inc. 4,000 245,500
Miscellaneous Food
& Kindred Products (3.87%)
Campbell Soup Co. 41,600 3,338,400
McCormick & Co. 6,200 146,088
3,484,488
Miscellaneous Investing (6.74%)
HFS, Inc. 101,600(a) 6,070,600
Miscellaneous Manufacturers (0.59%)
WMS Industries, Inc. 26,400(a) 528,000
Motion Picture Production &
Services (1.00%)
Film Roman, Inc. 11,400(a) 86,925
Viacom, Inc. 8,100(a) 282,488
Walt Disney Company 7,600 529,150
898,563
Motion Picture Theaters (0.02%)
AMC Entertainment 1,400(a) 20,125
Motor Vehicles & Equipment (0.47%)
Ford Motor Co. 13,300 423,937
Newspapers (1.00%)
Gannett Co. 5,600 419,300
Hollinger International, Inc. 17,100 196,650
New York Times Co. 7,500 285,000
900,950
Periodicals (2.75%)
K III Communications 230,100(a) 2,473,575
Personal Credit Institutions (2.07%)
American Express Co. 23,500 1,327,750
Dean Witter, Discover & Co. 8,200 543,250
1,871,000
Photographic Equipment &
Supplies (0.90%)
Eastman Kodak Co. 10,050 806,513
Plastic Materials & Synthetics (0.39%)
Hercules, Inc. 8,100 350,325
Radio & Television
Broadcasting (3.16%)
Clear Channel Communications 60,100(a) 2,171,113
Heftel Broadcasting Co. 8,200(a) 258,300
Infinity Broadcasting 12,500(a) 417,187
2,846,600
Real Estate Operators &
Lessors (0.28%)
Insignia Financial Group 11,100 249,750
Refrigeration & Service
Machinery (0.01%)
American Standard Inc. 100(a) 3,825
Retail Stores, NEC (0.95%)
PETsMART, Inc. 39,300(a) 859,687
Sanitary Services (0.50%)
WMX Technologies, Inc. 13,800 450,225
Search & Navigation
Equipment (0.58%)
Loral Space Communications 28,600(a) 525,525
Security & Commodity
Services (1.62%)
Franklin Resources, Inc. 21,400 1,463,225
Special Industry Macinery (0.27%)
Applied Materials, Inc. 6,800(a) 244,375
Surety Insurance (2.46%)
Ace Ltd. 21,500 1,292,688
The PMI Group, Inc. 16,800 930,300
2,222,988
Telephone Communication (0.80%)
Airtouch Communications, Inc. 11,300(a) 285,325
Worldcom, Inc. 16,800(a) 437,850
723,175
Tires & Inner Tubes (0.70%)
Goodyear Tire & Rubber Co. 12,300 631,913
Total Portfolio Investments (95.71%) 86,237,711
Cash and receivables, net of
liabilities (4.29%) 3,867,838
Total Net Assets (100.00%) $90,105,549
(a) Non-income producing security - No dividend paid during the past twelve
months.
PRINCIPAL ASSET ALLOCATION FUND, INC.
Shares
Held Value
Common Stocks (68.92%)
Advertising (0.03%)
Catalina Marketing Corp. 300 $ 16,537
Air Transportation, Scheduled (0.90%)
AMR Corp. 1,600(a) 141,000
British Airways PLC ADR 1,400 143,850
Cathay Pacific Airways ADR 8,500 67,033
KLM Royal Dutch Airlines 7,380 205,717
557,600
Aircraft & Parts (2.07%)
Allied Signal, Inc. 1,600 107,200
Boeing Co. 942 100,205
General Dynamics Corp. 800 56,400
Gulfstream Aerospace Corp. 2,200(a) 53,350
McDonnell Douglas Corp. 2,200 140,800
Rockwell International Corp. 2,500 152,188
Sunstrand Corp. 200 8,500
United Technologies Corp. 10,000 660,000
1,278,643
Automotive Rentals, No
Drivers (0.10%)
Ryder Systems, Inc. 2,100 59,063
Bakery Products (0.23%)
Einstein/Noah Bagel Corp. 2,200(a) 65,450
Interstate Bakeries 1,500 73,688
139,138
Beverages (1.34%)
Bass PLC ADR 5,000 138,750
CIA Cervecerias Unidas ADR 4,080 65,790
CIA Cervejaria Brahma ADR 7,750 84,728
Coca-Cola Enterprises 600 29,100
Coca-Cola Femsa S.A. ADR 2,350 67,856
Fomento Economico Mexicano 62,800(c) 213,796
Kirin Brewery 2,300 226,550
826,570
Blast Furnace & Basic Steel
Products (0.37%)
Australian National Industries 8,960 35,582
British Steel PLC ADS 3,500 96,250
Tubos De Acero De Mexico ADR 6,200(a) 98,425
230,257
Books (0.07%)
McGraw-Hill Companies, Inc. 1,000 46,125
Cable & Other Pay TV Services (0.14%)
Multicanal Participacoes ADR 6,800(a) 87,125
Chemicals & Allied Products (1.41%)
Asahi Chemical Industry Co. ADR 4,100(a) 231,722
Bayer AG Sponsored ADR 10,735 437,449
Mitsubishi Chemical Corp. 6,100 197,079
866,250
Cigars (0.30%)
Consolidated Cigar Holdings, Inc. 7,400(a) 183,150
Clay, Ceramic &
Refractory Minerals (0.08%)
English China Clays ADR 5,300 52,338
Congeneration - Small
Power Producer (0.13%)
AES Corp. 1,700(a) 79,050
Combination Utility Services (0.26%)
CIA Energetica De Minas
Cemig ADR 1,880 $ 64,048
NIPSCO Industries, Inc. 2,450 97,081
161,129
Commercial Banks (4.52%)
ABN-AMRO Holdings NV ADR 7,385 479,884
Allied Irish Banks ADR 2,900 113,825
Banco Central ADR 6,500 84,500
Bank of Boston Corp. 1,100 70,675
BankAmerica Corp. 550 54,862
Banker's Trust 950 81,937
Barclays PLC ADS 5,571 383,006
Brierly Investments Ltd. ADR 5,550 102,737
Chase Manhattan 1,940 173,145
Citicorp 600 61,800
Commerzbank AG ADR 3,600 91,337
First of America Bank Corp. 1,700 102,213
HSBC Holdings ADR 600 128,378
Mellon Bank Corp. 1,100 78,100
National Westminster ADR 1,900 132,050
PNC Financial Corp. 2,000 75,250
Wells Fargo & Co. 1,600 431,600
Westpac Banking ADR 4,900 139,650
2,784,949
Commercial Printing (0.31%)
DAI Nippon Printing Co. 1,100 192,384
Communications Equipment (0.84%)
Alcatel Alsthom ADR 4,700 75,200
Hanson PLC ADR 2,950 19,912
Harris Corp. 1,350 92,644
Larscom, Inc. 1,800(a) 20,475
Matsushita Electrical ADR 800 130,600
U.S. Industries, Inc. 3,800(a) 130,625
U.S. Robotics Corp. 700 50,400
519,856
Computer & Data Processing
Services (1.51%)
Adobe Systems, Inc. 1,200 44,850
First Data Corp. 1,600 58,400
GTECH Holdings Corp. 17,800(a) 569,600
Microsoft Corp. 1,400 115,675
Netscape Communications 700 39,812
Oracle Systems Corp. 1,250 52,188
Sterling Commerce, Inc. 1,500(a) 52,875
933,400
Computer & Office Equipment (1.61%)
Apple Computer Inc. 1,400(a) 29,225
Cisco Systems 1,200 76,350
Hitachi Ltd. ADR 2,900 268,250
International Business
Machines Corp. 1,300 196,300
International Game Technology 23,100 421,575
991,700
Concrete, Gypsum & Plaster
Products (0.30%)
Cementos De Mexico SA ADR 16,000 114,837
Italcementi Fabriche S P A ADR 13,000 72,673
187,510
Concrete Work (0.12%)
Pioneer International Ltd. ADR 25,000 74,460
Construction & Related
Machinery (0.63%)
Kajima Corp. ADR 2,900 206,875
Komatsu Ltd. ADR 1,100 180,064
386,939
Consumer Products (4.66%)
American Brands, Inc. 900 44,663
Philip Morris Cos., Inc. 9,850 1,109,356
RJR Nabisco 50,500 1,717,000
2,871,019
Crude Petroleum &
Natural Gas (0.38%)
Broken Hill Proprietary Ltd. ADR 2,200 62,150
Petrofina SA ADR 2,900 92,210
Societe Generale ADR 3,600 77,695
232,055
Cutlery, Handtools &
Hardware (0.16%)
Gillette Co. 1,300 101,075
Department Stores (0.28%)
Marui Corp. ADR 2,800 100,836
Penney (J.C.) Co. 1,500 73,125
173,961
Drug Store & Proprietary Stores (0.07%)
CVS Corp. 1,000 41,375
Drugs (1.03%)
American Home Products Corp. 800 46,900
Hafslund ADR 13,172 90,096
Novo Nordisk ADR 3,200 149,600
Nycomed 13,172 197,580
Pfizer, Inc. 700 58,013
Schering-Plough Corp. 300 19,425
Smithkline Beecham PLC ADR 1,100 74,800
636,414
Drugs, Proprietaries &
Sundries (0.26%)
Amway Japan Ltd. ADS 6,833 113,599
Grupo Casa Autrey ADR 2,500 48,750
162,349
Eating & Drinking Places (1.08%)
Boston Chicken, Inc. 5,900(a) 211,662
Brinker International, Inc. 4,200(a) 67,200
Cracker Barrel Old Country Store, Inc. 7,500 190,313
Foodmaker Inc. 1,100(a) 9,763
Host Marriott Corp. 11,600 185,600
664,538
Electric Services (1.71%)
Centrais Electricas Brasileiras S/A -
Electrobras ADR 4,300 79,867
Centrais Electricas De Santa
Catarin ADR 210(a)(c) 19,215
Centrais Electricas Brasileiras
ADR 16,800 300,723
Empresa Nacional De
Electricidad SA ADR 1,400 98,000
EVN Energie-Vansorgung Nied ADR 3,600 108,270
GPU, Inc. 2,600 87,425
National Power ADR 3,300 111,788
Northeast Utilities, Inc. 1,400 18,550
Pinnacle West Capital Corp. 2,400 76,200
Shangdong Huaneng Power
Development Ltd. ADS 8,000 $ 78,000
Texas Utilities Co. 1,800 73,350
1,051,388
Electrical Industrial Apparatus (0.08%)
Emerson Electric Co. 500 48,375
Electronic Components &
Accessories (0.91%)
Intel Corp. 2,200 288,063
Kyocera Corp. ADR 1,500 183,000
Texas Instruments 1,374 87,592
558,655
Electronic Distribution
Equipment (0.45%)
Phillips NV ADR 6,969 278,760
Family Clothing Stores (0.01%)
Stage Stores, Inc. 500(a) 9,125
Farm & Garden Machinery (0.12%)
Deere & Co. 1,800 73,125
Federal & Federally Sponsored
Credit (0.45%)
Student Loan Marketing Association
(Non-Voting) 3,000 279,375
Ferroalloy Ores, Exept Vanadium (0.27%)
Novartis A G Sponsored ADR 2,879(a) 164,405
Finance Services (0.75%)
Grupo Financiero Bancomer SA ADR 20,600(a)(c) 164,862
Nomura Sec. Co. Ltd. ADR 2,000 299,819
464,681
Fire Marine & Casualty
Insurance (2.30%)
Aetna, Inc. 2,900 232,000
Berkshire Hathaway, Inc. 10,000(a) 341,000
CIGNA Corp. 350 47,819
Loews Corp. 5,400 508,950
St. Paul Cos., Inc. 1,300 76,212
Tokio Marine & Fire Insurance ADR 4,600 214,475
1,420,456
Footwear, Except Rubber (0.23%)
Ollivetti Inc. Cos. 396,825(a) 139,603
General Industrial Machinery (0.66%)
Amer Group Ltd. ADR 5,500 56,682
S K F AB ADR 15,370 359,274
415,956
Grain Mill Products (0.35%)
Grupo Indl Maseca Sade CV ADR 9,636 184,289
Ralston-Ralston Purina Group 400 29,350
213,639
Groceries & Related Products (0.16%)
Fleming Cos., Inc. 5,550 95,738
Grocery Stores (0.71%)
Dominicks Supermarkets, Inc. 2,400(a) 52,200
Food Lion, Inc., Class B 16,900 171,113
Koninklijke Bijenkorf
Beheer NV ADR 2,400 86,371
Santa Isabella SA ADR 5,635 127,492
437,176
Holding Offices (0.59%)
Jardine Strategic Holdings Ltd.
ADR 10,000 $ 72,400
Trizec Hahn Corp. 13,134 288,948
361,348
Hospitals (0.10%)
Columbia/HCA Healthcare Corp. 1,500 61,125
Hotels & Motels (1.31%)
Bristol Hotel Co. 2,300(a) 73,025
Hilton Hotels Corp. 4,300 112,338
John Q. Hammons Hotels, Inc. 17,400(a) 147,900
Ladbroke Group ADR 37,000 146,265
Servico, Inc. 11,500(a) 185,437
Suburban Lodges of America 8,900(a) 142,400
807,365
Household Audio & Video
Equipment (0.27%)
Sony Corp. ADR 2,500 164,063
Individual & Family Services (0.01%)
Assisted Living Concepts, Inc. 600(a) 9,150
Industrial Inorganic Chemicals (0.86%)
AKZO ADR 4,283 289,103
Eastman Chemical Co. 1,050 58,012
Monsanto Co. 1,600 62,200
Olin Corp. 3,200 120,400
529,715
Industrial Organic Chemicals (0.10%)
Nova Corp. ADR 6,700 58,625
Insurance Agents, Brokers &
Services (0.09%)
EXEL Ltd. 1,400 53,025
Investment Offices (0.48%)
American General Hospitality Corp. 12,400 294,500
Iron & Steel Foundries (0.61%)
Kawasaki Steel Corp. ADR 7,900 226,647
Kubota Ltds. ADR 850 81,600
Siderar S.A.I.C. Sponsored
ADR-144A 3,000 69,132
377,379
Life Insurance (0.23%)
American General Corp. 1,700 69,487
Lincoln National 1,400 73,500
142,987
Lumber & Other Building
Materials (0.13%)
Home Depot, Inc. 1,600 80,200
Management & Public
Relations (0.13%)
Ogden Corp. 4,300 80,625
Meat Products (0.49%)
Groupe Danone 10,764 299,394
Medical Instruments &
Supplies (0.31%)
Acuson Corp. 1,000(a) $ 24,375
Baxter International, Inc. 1,500 61,500
Becton, Dickinson & Co. 1,700 73,738
U.S. Surgical Corp. 800 31,500
191,113
Metalworking Machinery (0.30%)
Makita Corp. ADR 13,000 182,000
Miscellaneous Amusement, Recreation
Service (0.11%)
Family Golf Centers, Inc. 2,200(a) 66,275
Miscellaneous Apparel &
Accessories (0.06%)
Designer Holdings, Ltd. 2,200(a) 35,475
Miscellaneous Business
Services (0.12%)
CUC International, Inc. 2,250 53,437
Viad Corp. 1,400 23,100
76,537
Miscellaneous Chemical
Products (0.01%)
Millenium Chemicals, Inc. 196(a) 3,479
Miscellaneous Converted Paper
Products (0.04%)
P. T. Inti Indorayon Utama ADR 10,000 24,531
Miscellaneous Electrical Equipment &
Supplies (0.34%)
Motorola, Inc. 400 24,550
TDK Corp. ADS 2,800 184,100
208,650
Miscellaneous Food & Kindred
Products (1.35%)
Campbell Soup Co. 8,800 706,200
McCormick & Co. 700 16,494
Nestle Reg. ADR 2,000 107,021
829,715
Miscellaneous Investing (8.83%)
Avalon Properties 3,400 97,750
Bedford Property Investors 9,800 171,500
Brandywine Realty Trust 18,000 351,000
Burnham Pacific Properties 19,400 291,000
Capstar Hotel Co. 2,400(a) 47,100
Chateau Properties 6,200 164,300
Duke Realty Investments, Inc. 4,500 173,250
East Group Properties 6,700 183,413
Essex Property Trust 7,500 220,313
Evans Withycombe Residential 1,400 29,400
Healthcare Realty Trust, Inc. 300 7,950
HFS, Inc. 21,300 1,272,675
Irvine Apartment Community 9,800 245,000
Koger Equity, Inc. 1,800(a) 33,750
LTC Properties, Inc. 3,100 57,350
Meridian Industrial Trust 13,500 283,500
Merry Land & Investment Co. 5,100 109,650
Oasis Residential, Inc. 8,400 191,100
Omega Healthcare Investors 5,600 186,200
Paragon Group, Inc. 10,800 191,700
Prentiss Property Trust 10,700 $ 267,500
ROC Communities 9,200 255,300
Shurgard Storage Center 6,300 186,637
South West Property Trust 7,300 123,187
Taubman Centers 2,300 29,612
Urban Shopping Centers 9,300 269,700
5,439,837
Miscellaneous Manufacturers (0.15%)
WMS Industries, Inc. 4,700(a) 94,000
Miscellaneous Non-Durable
Goods (0.46%)
DESC ADR 2,500 55,000
Mitsubishi Corp. ADR 11,000 227,448
282,448
Miscellaneous Special Trade
Contractors (0.17%)
Hang Lung Development Co. ADR 9,400 103,297
Motion Picture Production &
Services (0.16%)
Film Roman, Inc. 1,300(a) 9,913
Viacom, Inc.; Class B 900 31,387
Walt Disney Company 800 55,700
97,000
Motion Picture Theaters (0.01%)
AMC Entertainment 200(a) 2,875
Motor Vehicles & Equipment (1.52%)
Chrysler Corp. 2,100 69,300
Fiat SPA ADR 4,700 71,675
Ford Motor Co. 1,500 47,813
General Motors Corp. 1,400 78,050
Siderurgica Venezuelana Saica ADR 16,000 60,134
Toyota Motor Corp. ADR 8,600 494,500
Volkswagen AG ADR 1,400 116,280
937,752
Newspapers (0.16%)
Gannett Co. 600 44,925
Hollinger International, Inc. 1,800 20,700
New York Times Co. 900 34,200
99,825
Non-Classifiable
Establishments (0.11%)
Keppel Corp. Ltd. ADR 4,300 67,013
Nonresidential Building
Construction (0.03%)
Emprasas ICA Sociedad
Controladora SA ADR 1,170(a) 17,111
Ophthalmic Goods (0.14%)
Bausch & Lomb 2,450 85,750
Paper Mills (0.12%)
Willamette Ind., Inc. 1,100 76,587
Periodicals (0.86%)
K III Communications 49,200(a) 528,900
Personal Credit Institutions (0.41%)
American Express Co. 3,400 192,100
Dean Witter, Discover & Co. 900 59,625
251,725
Petroleum Refining (1.54%)
Ashland, Inc. 4,400 $ 193,050
Atlantic Richfield Co. 1,600 212,000
Exxon Corp. 2,400 235,200
Mobil Corp. 1,600 195,600
Total SA IE Francaise ADR 2,800 112,700
948,550
Photographic Equipment &
Supplies (0.93%)
Eastman Kodak Co. 1,650 132,412
Fuji Photo Film 8,800 290,400
OCE Van Der Grinten NV ADR 1,400 151,200
574,012
Plastic Materials & Synthetics (0.18%)
Hercules, Inc. 800 34,600
Shanghai Petrochemical Co. Ltd. ADR 2,600 76,375
110,975
Primary Nonferrous Metals (0.11%)
Phelps Dodge Corp. 1,050 70,875
Radio & Television
Broadcasting (1.09%)
Clear Channel Communications 11,200 404,600
Grupo Radio Centro SA ADR 1,970(a) 13,544
Grupo Televisa SA GDR 6,200(a) 158,875
Heftel Broadcasting Co. 1,600(a) 50,400
Infinity Broadcasting 1,400 46,725
674,144
Railroads (0.18%)
Nagoya Railroad Co. Ltd. 2,900 111,183
Real Estate Agents & Managers (0.11%)
Atlantic Gulf Communities Co. 15,900(a) 68,569
Real Estate Operators &
Lessors (2.36%)
Alexander Haagen Properties 11,200 165,200
Arden Realty Group, Inc. 9,400 260,850
Catellus Dev. Corp. 9,000(a) 102,375
FAC Realty, Inc. 4,200 27,825
Insignia Financial Group 1,200 27,000
IRT Property Co. 800 9,200
Nationwide Health Properties 10,700 259,475
Pacific Gulf Properties 10,400 202,800
Parkway Properties, Inc. 6,300 163,800
Sekisui House Ltd. ADR 2,300 233,824
1,452,349
Refrigeration & Service
Machinery (0.01%)
American Standard, Inc. 100(a) 3,825
Retail Stores, NEC (0.48%)
CIA Brasileira De Distribuicao GDR 8,625(a)(c) 153,559
PETsMART, Inc. 6,600 144,375
297,934
Sanitary Services (0.08%)
WMX Technologies, Inc. 1,600 52,200
Sawmills & Planning Mills (0.14%)
Louisiana Pacific Corp. 4,000 84,500
Search & Navigation
Equipment (0.18%)
Loral Space Communications 6,200 113,925
Security & Commodity
Services (0.50%)
Franklin Resources, Inc. 4,500 $ 307,687
Soap, Cleaners & Toilet Goods (0.62%)
KAO Corp. ADR 2,200 255,880
Shiseido Co. Ltd. ADR 11,000 126,992
382,872
Special Industry Machinery (0.05%)
Applied Materials, Inc. 800(a) 28,750
Subdividers & Developers (0.10%)
Singapore Land ADR 11,600 64,267
Sugar & Confectionary
Products (0.13%)
Perlis Plantations ADR 25,000 77,705
Surety Insurance (0.69%)
ACE Ltd. 4,200 252,525
The PMI Group, Inc. 3,100 171,662
424,187
Telephone Communication (3.17%)
Airtouch Communications, Inc. 1,300(a) 32,825
AT&T Corp. 2,000 87,000
BCE, Inc. 8,590 410,173
Compania Anonima Telefonos
De Venezuela ADR 5,740(a) 161,438
Sprint Corp. 1,600 63,800
Telebras GDR 18 1,377
Telecommunicacoes
Brasileiras SA ADR 5,080 388,620
Telefonica de Argentina ADR 13,050 337,669
Telefonica de Espana SA ADS 2,500 173,125
Telefonica Del Peru ADR 10,330 194,978
U.S. West Communications Group 1,700 54,825
Worldcom, Inc. 1,900 49,518
1,955,348
Tires & Inner Tubes (0.45%)
Bridgestone ADR 1,100 208,495
Goodyear Tire & Rubber Co. 1,400 71,925
280,420
Variety Stores (0.12%)
Woolworth Corp. 3,350(a) 73,281
Water Transportation of Freight,
NEC (0.18%)
Penninsular & Oriental
Steamships ADR 5,400 109,044
Total Common Stocks 42,475,414
Preferred Stock (0.39%)
Cable & Other Pay TV Services (0.09%)
TCI Pacific 580 52,998
Medical Instruments & Supplies (0.06%)
Fresenius Medical Care Cap 35(a) 35,612
Periodicals (0.24%)
Time Warner; Series M 140(a) $ 151,900
Total Preferred Stocks 240,510
Principal
Amount Value
Bonds (10.36%)
Airports, Flying Fields &
Services (0.13%)
Alps 96 1 PT
Pass Through Certificates;
12.75%; 6/15/06 $ 74,943(c) $ 77,754
Blast Furnace & Basic Steel
Products (0.03%)
Ivaco Senior Notes;
11.50%; 9/15/05 20,000 19,850
Business Credit Institutions (0.53%)
AT&T Capital Corp. Medium-Term
Notes; 5.85%; 1/5/99 330,000 329,472
Cable & Other Pay TV
Services (0.80%)
Cablevision Systems Corp.
Senior Subordinated Notes;
9.25%; 11/1/05 35,000 34,650
9.88%; 5/15/06 105,000 107,756
Comcast Corp. Senior Subordinated
Notes; 9.13%; 10/15/06 20,000 20,450
Marcus Cable Company Step-Up
Senior Discount Notes; 12/15/05 150,000(b)* 107,625
Netsat Servicos LTDA Senior Notes;
12.75%; 8/5/04 50,000(c) 52,437
Rogers Cable Systems Ltd.
Senior Notes; 10.00%; 3/15/05 100,000 106,750
TCI Communications Inc. Debentures;
7.88%; 2/15/26 75,000 64,875
494,543
Chemicals & Allied Products (0.10%)
ISP Holdings Senior Notes;
9.00%; 10/15/03 60,000 60,900
Commercial Banks (0.49%)
First Nationwide Holdings I;
9.13%; 1/15/03 35,000 35,350
First Nationwide; 10.63%; 10/1/03 25,000(c) 27,000
Nationsbank Corp. Senior Notes;
5.70%; 2/9/01 250,000 241,725
304,075
Communications Equipment (0.19%)
Globo Communicacoes Part Note;
10.50%; 12/20/06 40,000(c) 40,150
Rogers Communications, Inc.
Senior Note; 9.13%; 1/15/06 25,000 24,750
Tevecap SA Senior Notes;
12.63%; 11/26/04 50,000(c) 51,125
116,025
Communications Services, NEC (0.49%)
Dial Call Communications, Inc.
Senior Discount Notes, Series B;
12/12/05 $375,000(b) $ 249,375
IXC Communications, Inc. Note;
12/50%; 10/1/05 50,000 55,000
304,375
Computer & Office Equipment (0.03%)
Quest Diagnostic Senior
Subordinated Notes;
10.75%; 12/15/06 20,000 21,000
Crude Petroleum & Natural
Gas (0.21%)
Flores & Rucks Senior Subordinate
Notes; 9.75%; 10/1/06 50,000 52,875
Nuevo Energy Co. Senior
Subordinated Notes;
9.50%; 4/15/06 70,000 74,200
127,075
Electric Services (0.12%)
Midland Cogeneration Debentures;
10.33%; 7/23/02 7,204 7,673
Midland Cogent Debentures;
10.33%; 7/23/02 42,670 45,444
Midland Funding II Notes;
11.75%; 7/23/05 20,000 22,400
75,517
Electronic Components &
Accessories (0.17%)
Advanced Micro Devices, Inc.
Senior Secured Notes;
11.00%; 8/1/03 70,000 75,950
Digital Equipment Debenture Notes;
8.63%; 11/1/12 30,000 29,330
105,280
Electronic Distribution
Equipment (0.41%)
Israel Electric Corp. Senior
Notes; 7.25%; 12/15/06 250,000(c) 249,615
Finance Services (0.93%)
Lehman Brothers, Inc. Senior
Subordinated Notes;
7.25%; 4/15/03 500,000 503,028
TLC Beatrice International
Finance Senior Notes;
11.50%; 10/01/05 65,000 69,063
572,091
Fire, Marine & Casualty
Insurance (0.03%)
Home Holdings Inc. Senior Notes;
8.63%; 12/15/03 80,000 17,600
Gas Production & Distribution (0.15%)
Cleveland Electric Illum Co.;
9.50%; 5/15/05 85,000 91,375
General Government, NEC (0.55%)
Republic of Columbia
8.70%; 2/15/16 95,000 94,461
Republic of Colombia Yankee
Dollar Bond Note;
7.25%; 2/23/04 250,000 241,629
336,090
Glass & Glassware, Pressed or
Blown (0.17%)
Owens-Ill. Inc. Debentures;
11.00%; 12/01/03 $ 95,000 $ 105,925
Hotels & Motels (0.39%)
Boyd Gaming Corp. Senior Notes;
9.25%; 10/1/03 50,000 48,750
Courtyard by Marriott Senior
Notes; 10.75%; 2/1/08 90,000 94,950
Host Marriott Travel Plaza
Senior Notes; 9.50%; 5/15/05 95,000 99,156
242,856
Metal Cans & Shipping
Containers (0.05%)
U.S. Can Corp. Senior Subordinated
Notes; 10.13%; 10/15/06 30,000(c) 31,500
Metal Mining Services (0.42%)
PTTEP International, Ltd. Yankee
Dollar Notes; 7.63%; 10/1/06 250,000(c) 256,425
Miscellaneous Amusement, Recreation
Service (0.19%)
Grand Casinos Inc. First Mortgage;
10.13%; 12/1/03 95,000 95,950
Station Casinos, Inc. Senior
Subordinated Notes;
9.63%; 6/1/03 20,000 19,800
115,750
Miscellaneous Converted Paper
Products (0.12%)
SD Warren Co. Senior Subordinated
Notes; 12.00%; 12/15/04 70,000 75,600
Miscellaneous Food &
Kindred Products (0.05%)
International Home Foods Senior
Subordinated Notes;
10.38%; 11/1/06 30,000(c) 31,200
Miscellaneous Investing (0.17%)
HMC Acquisition Properties Senior
Notes; 9.00%; 12/15/07 65,000 65,975
Maxxam Group Holdings, Inc.
Senior Notes; 12.00%; 8/1/03 40,000(c) 40,500
106,475
Miscellaneous Publishing (0.02%)
Marvel Parent Holding; 4/15/98 100,000(b) 14,000
Miscellaneous Shopping Goods
Stores (0.16%)
Southland Corp. Senior
Subordinated Debentures;
5.00%; 12/15/03 119,000 98,472
Mortgage Bankers & Brokers (0.04%)
Homeside, Inc. Senior Notes;
11.25%; 5/15/03 20,000 22,300
Oil & Gas Field Services (0.05%)
Parker Drilling Company Senior
Notes; 9.75%; 11/15/06 30,000(c) 31,575
Paperboard Mills (0.30%)
Gaylord Container Senior Notes;
11.50%; 5/15/01 $120,000 $ 127,650
Gaylord Container Senior
Subordinated Debentures;
12.75%; 5/15/05 20,000 22,050
Stone Container Financial Co.;
11.50%; 8/15/06 35,000 35,962
185,662
Personal Credit Institutions (0.40%)
GMAC Medium-Term Notes;
6.10%; 12/06/00 250,000 245,925
Radio & Television
Broadcasting (0.55%)
Echostar Satellite Broadcasting
Step-Up Senior Discount
Notes; 3/15/04 190,000(b)* 145,350
Viacom Subordinated Debentures;
8.00%; 7/7/06 200,000 191,365
336,715
Retail Stores, NEC (0.09%)
Cole National Group, Inc. Senior
Subordinated Notes;
9.88%; 12/31/06 55,000(c) 56,650
Sanitary Services (0.18%)
Norcal Waste Systems Inc. Step-Up
Senior Notes; 11/15/05 100,000* 111,000
Soap, Cleaners & Toilet Goods (0.15%)
Revlon Worldwide Corp. Senior
Discount Notes; 3/15/98 105,000(b) 91,087
Surety Insurance (0.06%)
Teleport Communications Step-Up
Bond; 7/1/07 55,000(b) 37,675
Telephone Communication (1.24%)
Brooks Fiber Properties Step-Up
Senior Discount Notes; 11/1/06 70,000(c)(b) 44,625
Comcast Cellular Notes:
3/5/00 100,000(b) 72,000
3/5/00 40,000(b) 28,750
Comcast Corp. Senior Subordinated
Debentures; 9.38%; 5/15/05 115,000 119,313
Lenfest Communications
Senior Notes;
8.38%; 11/1/05 90,000 86,962
MFS Communications Inc. Step-Up
Senior Discount Notes; 1/15/06 190,000(b) 139,888
Occidente Y Carbide Cellular
Step-Up; 3/15/01 130,000(b)* 76,375
Occidente T Carbide Warrants; 520(b)* 0
Paging Network, Inc. Senior
Subordinated Notes;
10.00%; 10/15/08 60,000(c) 60,525
10.13%; 8/1/07 20,000 20,475
Philippine Long Distance Telephone
Co. Notes;
9.25%; 6/30/06 10,000 10,650
9.25%; 6/30/06 25,000 26,625
Telewest PLC Step-Up Debentures;
10/01/07 $110,000(b) $ 76,450
762,638
Variety Stores (0.20%)
DR Structured Finance
Pass thru Certificates;
7.60%; 8/15/07 134,430 120,514
Total Bonds 6,382,581
U.S. Government Treasury Notes (14.88%)
8.00%; 1/15/97 500,000 500,156
6.38%; 5/15/99 2,000,000 2,017,500
6.25%; 5/31/00 3,000,000 3,013,125
6.25%; 4/30/01 2,000,000 2,004,376
7.88%; 11/15/04 1,500,000 1,636,875
Total U.S. Government Treasury Notes 9,172,032
Government National Mortgage Association (GNMA)
Certificates (1.55%)
Description of Issue Principal
Type Rate Maturity Amount Value
GNMA I 6.00% 6/15/11 $991,302 $ 957,310
Total Portfolio Investments (96.10%) 59,227,847
Cash and receivables, net of
liabilities (3.90%) $2,403,291
Total Net Assets (100.00%) $61,631,138
(a) Non-income producing security - No dividend paid during the past twelve
months.
(b) Non-income producing security - zero-and zero-step coupon bonds.
(c) Restricted Security - See Note 4 to the financial statements.
* Variable Rate
PRINCIPAL BALANCED FUND, INC.
Shares
Held Value
Common Stocks (56.09%)
Advertising (0.26%)
Interpublic Group of Cos., Inc. 5,100 $ 242,250
Bakery Products (0.87%)
Sara Lee Corp. 21,700 808,325
Beverages (0.79%)
Pepsico, Inc. 20,100 587,925
Universal Foods Corp. 4,300 151,575
739,500
Combination Utility Services (0.55%)
Cinergy Corp. 15,400 513,975
Commercial Banks (6.13%)
Banc One Corp. 22,013 $ 946,559
Bank of Boston Corp. 13,900 893,075
Corestates Financial Corp. 22,500 1,167,188
First of America Bank Corp. 7,600 456,950
Fleet Financial Group, Inc. 11,600 578,550
KeyCorp. 16,800 848,400
Marshall & Ilsley Corp. 6,000 207,750
Nationsbank Corp. 6,200 606,050
5,704,522
Commercial Printing (0.63%)
R. R. Donnelley & Sons Co. 18,700 586,712
Communications Equipment (1.00%)
Allen Group, Inc. 4,200 93,450
DSC Communications Corp. 15,000(a) 268,125
General Instrument Corp. 26,100(a) 564,413
925,988
Computer & Office Equipment (1.79%)
Hewlett-Packard Co. 9,700 487,425
International Business
Machines Corp. 7,800 1,177,800
1,665,225
Consumer Products (0.36%)
Philip Morris Cos., Inc. 3,000 337,875
Crude Petroleum & Natural
Gas (1.18%)
Texaco, Inc. 11,200 1,099,000
Dairy Products (0.31%)
Dean Foods Co. 9,000 290,250
Drug Stores & Proprietary
Stores (0.61%)
Rite Aid Corp. 14,200 564,450
Drugs (6.22%)
Abbott Labs 17,000 862,750
American Home Products Corp. 11,500 674,188
Bristol-Myers Squibb Co. 5,000 543,750
Merck & Co., Inc. 12,400 982,700
Pharamacia & Upjohn, Inc. 27,000 1,069,875
Schering-Plough Corp. 14,300 925,925
Warner-Lambert Co. 9,800 735,000
5,794,188
Electric Services (2.40%)
Dominion Resources, Inc. 13,600 523,600
FPL Group, Inc. 9,300 427,800
Houston Industries, Inc. 38,100 862,012
Potomac Electric Power Co. 16,400 422,300
2,235,712
Electrical Industrial Apparatus (0.57%)
Emerson Electric Co. 5,500 532,125
Electronic Distribution
Equipment (1.03%)
General Electric Co. 9,700 959,088
Fats & Oils (1.24%)
Archer Daniels Midland Co. 52,695 1,159,290
General Industrial Machinery (0.61%)
BW/IP Holdings, Inc.; Class A 6,400 $ 105,600
Pall Corp. 18,200 464,100
569,700
Grain Mill Products (0.66%)
Ralston-Ralston Purina Group 8,300 609,012
Greeting Cards (0.67%)
American Greetings Corp. 22,100 627,088
Grocery Stores (2.52%)
Albertson's, Inc. 16,800 598,500
American Stores Co. 16,000 654,000
Sysco Corp. 33,500 1,092,937
2,345,437
Household Furniture (1.59%)
Masco Corp. 41,100 1,479,600
Industrial Inorganic Chemicals (0.66%)
Dow Chemical Co. 5,300 415,388
Eastman Chemical Co. 3,550 196,137
611,525
Jewelry, Silverware & Plated
Ware (0.22%)
Jostens, Inc. 9,700 204,913
Management & Public
Relations (1.39%)
ACNielson Corp. 6,966(a) 105,361
Cognizant Corp. 20,900 689,700
Dun & Bradstreet Corp. 20,900 496,375
1,291,436
Meat Products (1.28%)
ConAgra, Inc. 4,141 206,015
Tyson Foods, Inc. 28,900 989,825
1,195,840
Medical Instruments &
Supplies (0.67%)
St. Jude Medical, Inc. 14,750(a) 628,718
Medical Service & Health
Insurance (1.18%)
AON Corp. 8,750 543,593
Foundation Health Corp. 15,800(a) 501,650
Physicians Corp. of America 5,000(a) 50,000
1,095,243
Metal Forgings & Stampings (0.60%)
Newell Co. 17,600 554,400
Metalworking Machinery (0.06%)
Giddings & Lewis 4,600 59,225
Miscellaneous Business
Services (0.24%)
Safety-Kleen Corp. 13,600 222,700
Miscellaneous Converted Paper
Products (1.10%)
Minnesota Mining & Mfg. Co. 12,400 1,027,650
Miscellaneous Electrical Equipment
& Supplies (0.78%)
Motorola, Inc. 11,800 724,225
Miscellaneous Fabricated Metal
Products (0.18%)
Keystone International, Inc. 8,500 $ 171,063
Miscellaneous Plastics Products,
NEC (0.20%)
Rubbermaid, Inc. 8,300 188,825
Miscellaneous Shopping Goods
Stores (1.27%)
Toys 'R' Us, Inc. 39,400(a) 1,182,000
Motor Vehicles, Parts &
Supplies (0.98%)
Grainger (W. W.), Inc. 11,400 914,850
Paper Mills (1.08%)
Kimberly Clark Corp. 10,600 1,009,650
Petroleum Refining (2.87%)
Atlantic Richfield Co. 10,900 1,444,250
Exxon Corp. 12,500 1,225,000
2,669,250
Plastic Materials & Synthetics (0.10%)
Wellman, Inc. 5,600 95,900
Sanitary Services (2.50%)
Browning-Ferris Industries, Inc. 43,600 1,144,500
WMX Technologies, Inc. 36,400 1,187,550
2,332,050
Security Brokers & Dealers (0.34%)
Edwards (A.G.), Inc. 9,500 319,437
Soap, Cleaners & Toilet Goods (2.04%)
Avon Products 19,900 1,136,787
Colgate-Palmolive Co. 8,300 765,675
1,902,462
Telephone Communication (2.50%)
AT&T Corp. 23,400 1,017,900
MCI Communications Corp. 40,100 1,310,769
2,328,669
Variety Stores (1.86%)
Dayton-Hudson Corp. 25,500 1,000,875
Wal-Mart Stores, Inc. 31,800 727,425
1,728,300
Total Common Stocks 52,247,643
Preferred Stocks (1.39%)
Motor Vehicles & Equipment (1.39%)
Federal-Mogul Corp.
Series D Convertible 4,300(b) 260,150
Ford Motor Co.
Series A Convertible 10,000 1,037,500
Total Preferred Stocks 1,297,650
Bonds (1.64%)
Blast Furnace & Basic Steel
Products (0.22%)
Quanex Corp. Convertible
Subordinated Debentures;
6.88%; 6/30/07 $200,000 $ 204,000
Electric Lighting & Wiring
Equipment (0.24%)
Cooper Industries, Inc.
Convertible Subordinated
Debentures; 7.05%; 1/1/15 208,000 222,560
Electric Industrial Apparatus (0.31%)
Liebert Co. Convertible Subordinated
Debentures; 8.00%; 11/15/10 80,000 289,100
Engines & Turbines (0.21%)
Outboard Marine Corp. Convertible
Subordinated Debentures;
7.00%; 7/1/02 200,000 195,250
Lumber & Other Building
Materials (0.16%)
Hechinger Co. Convertible
Subordinated Debentures;
5.50%; 4/1/12 425,000 148,219
Petroleum Refining (0.33%)
Pennzoil Co. Senior Exchangeable
Debentures; 6.50%; 1/15/03 200,000 308,500
Trucking & Courier Services, Ex.,
Air (0.17%)
Builders Transport, Inc.
Convertible Subordinated
Debentures; 6.50%; 5/1/11 306,000 162,945
Total Bonds 1,530,574
U.S. Government Treasury Notes & Bonds (37.02%)
5.13%; 2/28/98 2,500,000 2,476,563
5.13%; 11/30/98 3,000,000 2,957,814
6.38%; 1/15/00 1,900,000 1,916,625
5.50%; 4/15/00 3,500,000 3,440,937
6.13%; 9/30/00 3,500,000 3,497,813
6.25%; 4/30/01 3,000,000 3,006,564
6.38%; 8/15/02 2,000,000 2,013,126
6.25%; 2/15/03 3,000,000 2,997,189
5.75%; 8/15/03 4,800,000 4,656,000
7.25%; 8/15/04 1,500,000 1,579,219
7.50%; 2/15/05 800,000 855,750
5.63%; 2/15/06 2,000,000 1,892,500
7.25%; 5/15/16 1,000,000 1,055,938
7.50%; 11/15/16 1,000,000 1,082,188
7.25%; 8/15/22 1,000,000 1,057,813
Total U. S. Government Treasury
Notes & Bonds 34,486,039
Commercial Paper (3.91%)
Business Credit Institutions (2.94%)
General Electric Capital Corp.;
6.65%; 1/2/97 $2,740,000 $2,740,000
Personal Credit Institutions (0.97%)
Ford Motor Credit Co. ;
5.91%; 1/2/97 905,000 905,000
Total Commercial Paper 3,645,000
Total Portfolio Investments (100.05%) 93,206,906
Liabilities, net of cash and receivables (-0.05%) (49,237)
Total Net Assets (100.00%) $93,157,669
(a) Non-income producing security - No dividend paid during the past twelve
months.
(b) Restricted Security - See Note 4 to the financial statements.
PRINCIPAL BOND FUND, INC.
Principal
Amount Value
Bonds (95.83%)
Air Transportation, Scheduled (1.59%)
Federal Express Corp.,
Pass-Through Cert.;
7.96%; 3/28/17 $500,000 $ 514,735
7.58%; 7/2/19 500,000 491,800
1,006,535
Aircraft & Parts (0.52%)
Textron, Inc. Medium-Term Notes,
Series C; 9.55%; 3/19/01 300,000 331,469
Auto & Home Supply Stores (0.94%)
Pep Boys-Manny, Moe & Jack Notes;
7.00%; 6/1/05 600,000 597,691
Bakery Products (1.47%)
Nabisco, Inc. Notes;
7.05%; 7/15/07 950,000 930,984
Beverages (2.71%)
Joseph E. Seagram & Sons
Guaranteed Debentures;
8.88%; 9/15/11 1,500,000 1,714,734
Broadwoven Fabric Mills,
Cotton (2.32%)
Burlington Industries, Inc. Notes;
7.25%; 9/15/05 1,500,000 1,472,342
Cable & Other Pay TV
Services (1.55%)
TCI Communications, Inc. Senior
Notes; 8.00%; 8/1/05 1,000,000 982,799
Combination Utility Services (0.43%)
Public Service Electric & Gas
Medium-Term Notes;
8.16%; 5/26/09 $250,000 $ 270,577
Consumer Products (1.25%)
Philip Morris Cos. Notes;
6.80%; 12/1/03 500,000 492,748
RJR Nabisco Capital Corp. Senior
Notes; 8.75%; 4/15/04 300,000 302,625
795,373
Copper Ores (0.48%)
Asarco, Inc. Notes; 7.38%; 2/1/03 300,000 306,900
Crude Petroleum & Natural
Gas (1.26%)
Occidental Petroleum Corp.
Medium-Term Notes;
9.73%; 6/15/01 250,000 278,929
Union Oil of California
Medium-Term Notes;
7.77%; 4/19/05 500,000 522,791
801,720
Deep Sea Foreign Transportation of
Freight (1.54%)
American President Cos., Ltd.
Senior Notes; 7.13%; 11/15/03 1,000,000 978,094
Department Stores (4.07%)
Dillard Investment Co. Notes;
9.25%; 5/1/97 200,000 202,202
Harcourt General, Inc. Subordinated
Notes; 9.50%; 3/15/00 350,000 376,948
J. C. Penney Co., Inc. Medium-
Term Notes, Series A;
6.88%; 10/15/15 1,500,000 1,414,743
Sears Roebuck Co. Medium-Term
Notes; 9.05%; 2/6/12 500,000 586,503
2,580,396
Drug Stores & Proprietary
Stores (2.17%)
Rite Aid Corp. Senior Debentures;
6.88%; 8/15/13 1,500,000 1,373,653
Eating & Drinking Places (2.44%)
Marriott International, Inc.
Notes; 6.75%; 12/15/03 200,000 196,846
Senior Notes; 7.88%; 4/15/05 1,300,000 1,350,384
1,547,230
Electric Services (2.16%)
Cleveland Electric Illuminating Co.
First Mortgage Bonds;
8.75%; 11/15/05 400,000 409,000
Southern California Edison Co.
Notes; 6.38%; 1/15/06 1,000,000 957,500
1,366,500
Engines & Turbines (1.53%)
Brunswick Corp. Debentures;
7.38%; 9/1/23 1,000,000 972,673
Fabricated Rubber Products,
NEC (0.44%)
M. A. Hanna Co. Senior Notes;
9.38%; 9/15/03 250,000 279,712
Farm & Garden Machinery (2.26%)
Case Corp. Notes; 7.25%; 1/15/16 $1,500,000 $1,431,972
Gas Production & Distribution (2.52%)
Enron Corp. Notes;
7.13%; 5/15/07 750,000 754,409
Tennessee Gas Pipeline Co. Notes;
9.00%; 1/15/97 400,000 400,319
Transco Energy Co. Notes;
9.38%; 8/15/01 400,000 440,197
1,594,925
General Government, NEC (1.67%)
Ontario Hydro Debentures;
7.45%; 3/31/13 500,000 516,525
Province of Saskatchewan, Canada
Global Notes; 8.00%; 2/1/13 500,000 538,930
1,055,455
Gold & Silver Ores (1.17%)
Placer Dome, Inc. Notes;
7.13%; 6/15/07 750,000 741,332
Grain Mill Products (1.60%)
Ralston Purina Co. Debentures;
7.75%; 10/1/15 1,000,000 1,012,928
Groceries & Related Products (2.27%)
Supervalu, Inc. Medium-Term Notes,
Series B; 6.49%; 12/12/05 1,500,000 1,436,113
Highway & Street
Construction (2.91%)
Foster Wheeler Corp. Notes;
6.75%; 11/15/05 1,900,000 1,842,021
Hospitals (0.88%)
Columbia/HCA Healthcare Corp.
Medium-Term Notes;
8.70%; 2/10/10 500,000 559,390
Hotels & Motels (2.43%)
Hilton Hotels Corp. Notes;
7.70%; 7/15/02 1,500,000 1,539,246
Household Appliances (0.88%)
Maytag Corp. Medium-Term Notes;
8.62%; 11/15/07 500,000 556,271
Household Furniture (0.77%)
Masco Corp. Debentures;
7.13%; 8/15/13 500,000 486,540
Industrial Inorganic Chemicals (3.57%)
FMC Corp. Senior Notes;
6.38%; 9/1/03 200,000 191,316
7.75%; 7/1/11 1,500,000 1,541,657
Grace (W.R.) & Co. Guaranteed
Notes; 8.00%; 8/15/04 500,000 527,870
2,260,843
Lumber & Construction
Materials (2.61%)
Crane Co. Notes; 8.50%; 3/15/04 1,524,000 1,655,833
Machinery, Equipment &
Supplies (1.15%)
AAR Corp. Notes; 7.25%; 10/15/03 $750,000 $ 729,422
Metalworking Machinery (0.31%)
Black & Decker Corp. Notes;
7.00%; 2/1/06 200,000 198,156
Millwork, Plywood & Structural
Members (1.75%)
Georgia-Pacific Corp.
Debentures; 9.50%; 12/1/11 100,000 118,281
Senior Debentures; 7.70%; 6/15/15 1,000,000 990,371
1,108,652
Miscellaneous Chemical
Products (0.63%)
Ferro Corp. Senior Debentures;
7.63%; 5/1/13 400,000 399,922
Miscellaneous Investing (2.76%)
Washington Real Estate Investment
Trust Senior Notes;
7.25%; 8/13/06 1,000,000 985,787
Weingarten Realty Investors
Medium-Term Notes;
7.29%; 5/23/05 750,000 762,774
1,748,561
Miscellaneous Metal Ores (1.84%)
Amax, Inc. Notes; 9.88%; 6/13/01 100,000 111,490
Cyprus Amax Minerals Notes;
7.38%; 5/15/07 650,000 655,273
Cyprus Minerals Co. Notes;
10.13%; 4/1/02 350,000 397,742
1,164,505
Motion Picture Production &
Services (0.57%)
Columbia Pictures Entertainment, Inc.
Senior Subordinated Notes;
9.88%; 2/1/98 350,000 363,499
Motor Vehicles & Equipment (1.31%)
TRW, Inc. Medium-Term Notes;
9.25%; 12/30/11 700,000 827,859
Newpapers (2.54%)
News America Holdings, Inc.
Guaranteed Senior Notes;
8.50%; 2/15/05 1,500,000 1,609,261
Operative Builders (2.44%)
Pulte Corp. Senior Notes;
8.38%; 8/15/04 1,000,000 1,054,329
7.30%; 10/24/05 500,000 492,016
1,546,345
Paper Mills (5.30%)
Bowater, Inc. Debentures;
9.38%; 12/15/21 200,000 238,208
Champion International Corp. Notes;
9.88%; 6/1/00 250,000 274,675
7.10%; 9/1/05 875,000 872,241
Chesapeake Corp. Notes;
7.20%; 3/15/05 1,400,000 1,403,112
Potlatch Corp. Medium-Term Notes;
8.75%; 1/14/22 $500,000 $ 572,901
3,361,137
Personal Credit Institutions (1.62%)
General Motors Acceptance Corp.
Medium-Term Notes;
8.25%; 2/24/04 500,000 539,421
Notes; 6.63%; 10/15/05 500,000 485,609
1,025,030
Petroleum Refining (4.43%)
Ashland Oil, Inc. Medium-Term Notes;
7.71%; 5/11/07 500,000 523,198
7.73%; 7/15/13 250,000 257,824
Series F; 8.54%; 1/13/05 250,000 274,043
Pennzoil Co. Debentures;
10.13%; 11/15/09 325,000 380,621
Phillips Petroleum Co. Notes;
9.38%; 2/15/11 500,000 601,111
Sun Co., Inc.
Debentures; 9.00%; 11/1/24 500,000 573,617
Notes; 7.13%; 3/15/04 200,000 199,148
2,809,562
Plastic Materials & Synthetics (3.06%)
Geon Company Notes;
6.88%; 12/15/05 2,000,000 1,939,110
Primary Nonferrous Metals (1.06%)
Reynolds Metals Co.
Medium-Term Notes;
8.34%; 5/22/07 500,000 544,565
7.65%; 2/4/08 125,000 129,958
674,523
Pulp Mills (0.35%)
International Paper Co. Medium-Term
Notes; 9.70%; 8/15/00 200,000 220,139
Railroads (1.51%)
Union Pacific Corp. Notes;
6.40%; 2/1/06 1,000,000 954,162
Refrigeration & Service
Machinery (0.55%)
Westinghouse Electric Corp.
Debentures; 8.63%; 8/1/12 350,000 351,264
Rental of Railroad Cars (1.73%)
Gatx Capital Corp. Medium-Term
Notes, Series C; 6.86%; 10/13/05 1,000,000 984,838
Signal Capital Corp. Equipment Trust
Cert.; 9.95%; 2/1/06 109,000 114,360
1,099,198
Sanitary Services (1.72%)
Laidlaw, Inc. Senior Notes;
7.88%; 4/15/05 1,045,000 1,092,578
Sawmills & Planning Mills (1.26%)
MacMillan Bloedel Delaware
Guaranteed Notes; 8.50%; 1/15/04 750,000 798,000
Telephone Communication (2.38%)
Sprint Corp. Notes; 8.13%; 7/15/02 500,000 531,471
U.S. West Capital Funding, Inc.
Medium-Term Notes;
6.83%; 11/15/07 1,000,000 978,829
1,510,300
Variety Stores (1.15%)
Dayton-Hudson Corp. Debentures;
9.63%; 2/1/08 $150,000 $ 176,937
Dayton-Hudson Corp. Sinking Fund
Debentures; 9.50%; 10/15/16 55,000 57,476
Shopko Stores, Inc. Senior Notes;
9.00%; 11/15/04 500,000 496,463
730,876
Total Bonds 60,744,312
Commercial Paper (2.98%)
Business Credit Institutions (2.98%)
General Electric Capital;
6.65%; 1/2/97 1,890,000 1,890,000
Total Portfolio Investments (98.84%) 62,634,312
Cash and receivables, net of liabilities (1.19%) 752,249
Total Net Assets (100.00%) $63,386,561
PRINCIPAL CAPITAL ACCUMULATION
FUND, INC.
Shares
Held Value
Common Stocks (98.79%)
Beverages (2.95%)
Anheuser Busch Cos., Inc. 100,000 $ 4,000,000
Pepsico, Inc. 49,000 1,433,250
Universal Foods Corp. 17,200 606,300
6,039,550
Combination Utility Services (1.73%)
Cinergy Corp. 58,200 1,942,425
Montana Power Co. 75,000 1,603,125
3,545,550
Commercial Banks (10.69%)
Banc One Corp. 123,940 5,329,420
Bank of Boston Corp. 38,300 2,460,775
Corestates Financial Corp. 104,000 5,395,000
First of America Bank Corp. 28,700 1,725,588
KeyCorp 103,000 5,201,500
Nationsbank Corp. 18,400 1,798,600
21,910,883
Commercial Printing (2.56%)
R. R. Donnelley & Sons Co. 167,000 5,239,625
Communications Equipment (1.61%)
Allen Group, Inc. 16,000(a) 356,000
DSC Communications Corp. 52,800(a) 943,800
General Instrument Corp. 92,800(a) 2,006,800
3,306,600
Computer & Office Equipment (2.37%)
Hewlett-Packard Co. 33,400 1,678,350
International Business
Machines Corp. 21,000 3,171,000
4,849,350
Crude Petroleum & Natural
Gas (1.89%)
Texaco, Inc. 39,400 $ 3,866,125
Dairy Products (0.67%)
Dean Foods Co. 42,500 1,370,625
Drug Stores & Proprietary Stores (1.12%)
Rite Aid Corp. 58,000 2,305,500
Drugs (9.02%)
Abbott Labs 66,000 3,349,500
American Home Products Corp. 45,000 2,638,125
Bristol-Myers Squibb Co. 18,000 1,957,500
Merck & Co., Inc. 37,000 2,932,250
Pharmacia & Upjohn, Inc. 137,000 5,428,625
Warner-Lambert Co. 29,200 2,190,000
18,496,000
Electric Services (4.81%)
Dominion Resources, Inc. 44,400 1,709,400
FPL Group, Inc. 38,500 1,771,000
Houston Industries, Inc. 231,000 5,226,375
Potomac Electric Power Co. 45,000 1,158,750
9,865,525
Electrical Industrial Apparatus (1.28%)
Emerson Electric Co. 27,090 2,620,958
Electronic Distribution
Equipment (1.40%)
General Electric Co. 29,000 2,867,375
Farm & Garden Machinery (2.24%)
Tenneco, Inc. 101,600 4,584,700
Fats & Oils (1.99%)
Archer Daniels Midland Co. 185,010 4,070,220
Gas Production & Distribution (0.23%)
El Paso Natural Gas 9,448 477,124
General Industrial Machinery (0.56%)
BW/IP Holdings, Inc., Class A 23,000 379,500
Pall Corp. 30,100 767,550
1,147,050
Grain Mill Products (1.02%)
Ralston-Ralston Purina Group 28,600 2,098,525
Greeting Cards (2.48%)
American Greetings Corp. 179,000 5,079,125
Grocery Stores (3.23%)
Albertson's, Inc. 40,600 1,446,375
American Stores Co. 60,000 2,452,500
Sysco Corp. 83,400 2,720,925
6,619,800
Household Furniture (2.60%)
Masco Corp. 148,200 5,335,200
Industrial Inorganic
Chemicals (1.24%)
Dow Chemical Co. 22,000 $ 1,724,250
Eastman Chemical Co. 14,900 823,225
2,547,475
Industrial Organic Chemicals (0.70%)
Ethyl Corp. 150,000 1,443,750
Jewelry, Silverware & Plated
Ware (0.33%)
Jostens, Inc. 31,700 669,662
Life Insurance (2.55%)
American General Corp. 128,000 5,232,000
Management & Public
Relations (1.35%)
ACNielson Corp. 14,966(a) 226,361
Cognizant Corp. 44,900 1,481,700
Dun & Bradstreet Corp. 44,900 1,066,375
2,774,436
Meat Products (1.47%)
Tyson Foods, Inc. 88,000 3,014,000
Medical Instruments &
Supplies (1.10%)
St. Jude Medical, Inc. 53,100(a) 2,263,388
Medical Service & Health
Insurance (1.63%)
AON Corp. 31,050 1,928,981
Foundation Health Corp. 37,400(a) 1,187,450
Physicians Corp. of America 22,900(a) 229,000
3,345,431
Metal Forgings & Stampings (0.98%)
Newell Co. 64,000 2,016,000
Metalworking Machinery (0.14%)
Giddings & Lewis 23,000 296,125
Miscellaneous Business
Services (0.35%)
Safety-Kleen Corp. 43,500 712,312
Miscellaneous Converted Paper
Products (1.27%)
Minnesota Mining & Mfg. Co. 31,400 2,602,275
Miscellaneous Electrical Equipment &
Supplies (0.94%)
Motorola, Inc. 31,400 1,927,175
Miscellaneous Fabricated Metal
Products (0.27%)
Keystone International, Inc. 27,300 549,413
Miscellaneous Shopping Goods
Stores (1.59%)
Toys 'R' Us, Inc. 108,700(a) 3,261,000
Motor Vehicles, Parts &
Supplies (1.42%)
Grainger (W. W.), Inc. 36,400 2,921,100
Newspapers (2.48%)
Dow Jones & Co., Inc. 150,000 $ 5,081,250
Paper Mills (1.72%)
Kimberly Clark Corp. 37,000 3,524,250
Petroleum Refining (4.35%)
Atlantic Richfield Co. 40,000 5,300,000
Exxon Corp. 37,000 3,626,000
8,926,000
Plastic Materials & Synthetics (0.19%)
Wellman, Inc. 23,000 393,875
Sanitary Services (4.37%)
Browning-Ferris Industries, Inc. 203,900 5,352,375
WMX Technologies, Inc. 110,600 3,608,325
8,960,700
Security Brokers & Dealers (0.59%)
Edwards (A.G.), Inc. 36,015 1,211,004
Ship & Boats Building &
Repairing (0.15%)
Newport News Shipbuilding, Inc. 20,320(a) 304,800
Soap, Cleaners, & Toilet Goods (2.99%)
Avon Products 63,600 3,633,150
Colgate-Palmolive Co. 27,000 2,490,750
6,123,900
Telephone Communication (5.21%)
AT&T Corp. 52,000 2,262,000
MCI Communications Corp. 101,500 3,317,781
US West Communications Group 158,000 5,095,500
10,675,281
Variety Stores (2.96%)
Dayton-Hudson Corp. 81,000 3,179,250
Wal-Mart Stores, Inc. 126,000 2,882,250
6,061,500
Total Common Stocks 202,533,512
Principal
Amount Value
Commercial Paper (1.92%)
Business Credit Institutions (0.83%)
General Electric Capital;
6.65%; 1/2/97 $1,710,000 $ 1,710,000
Personal Credit Institutions (1.09%)
Ford Motor Credit Co.;
5.91%; 1/2/97 2,240,000 2,240,000
Total Commercial Paper 3,950,000
Total Portfolio Investments (100.71%) 206,483,512
Liabilities, net of cash and receivables (-0.71%) (1,464,984)
Total Net Assets (100.00%) $205,018,528
(a) Non-income producing security - No dividend paid during the past twelve
months.
PRINCIPAL EMERGING GROWTH FUND, INC.
Shares
Held Value
Common Stocks (85.53%)
Blast Furnace & Basic Steel
Products (0.99%)
Lukens, Inc. 67,300 $ 1,354,413
Carpets & Rugs (0.85%)
Shaw Industries, Inc. 99,300 1,166,775
Chemicals & Allied Products (0.46%)
Sigma-Aldrich Corp. 10,000 624,375
Commercial Banks (6.55%)
Boatmen's Bancshares, Inc. 6,100 393,450
First Commerce Corp. 15,600 606,450
First Federal Capital Corp. 40,665 955,627
Independent Bank Corp. Michigan 26,460 893,025
Mercantile Bancorp., Inc. 20,960 1,076,820
Merchants Bancorp., Inc. 21,500 666,500
National City Corp. 20,100 901,988
North Fork Bancorp., Inc. 33,700 1,200,562
Peoples Heritage Financial
Group, Inc. 33,300 932,400
Princeton National Bancorp., Inc. 36,000 666,000
Summit Bancorp. 15,900 695,625
8,988,447
Commercial Printing (0.37%)
Merrill Corp. 22,300 512,900
Computer & Data Processing
Services (7.71%)
American Management Systems, Inc. 84,500(a) 2,070,250
Bitstream 102,000(a) 663,000
Cerner Corp. 116,200(a) 1,801,100
HBO & Co. 31,500 1,870,312
Microsoft Corp. 29,600(a) 2,445,700
National Processing, Inc. 21,300(a) 340,800
Sunquest Information Systems, Inc. 97,300(a) 1,386,525
10,577,687
Computer & Office Equipment (3.09%)
EMC Corp. 81,700(a) 2,706,312
Optika Imaging Systems 75,000(a) 376,172
Seagate Technology 4,000(a) 158,000
Systemsoft Corporation 67,000(a) 996,625
4,237,109
Construction & Related
Machinery (2.26%)
Energy Ventures, Inc. 61,000(a) 3,103,375
Crude Petroleum & Natural
Gas (1.52%)
Devon Energy Corp. 60,000 2,085,000
Dairy Products (0.39%)
Dreyer's Grand Ice Cream, Inc. 18,200 527,800
Drugs (2.36%)
Alliance Pharmaceutical Corp. 30,000(a) $ 408,750
Forest Laboratories, Inc. 17,400(a) 569,850
Genzyme Corp. - General Division 7,182 156,208
Genzyme Corp. - Tissue Repair 255(a) 1,817
Merck & Co., Inc. 10,000 792,500
Pharmacia & Upjohn, Inc. 32,400 1,283,850
Seragen, Inc. 20,000(a) 20,000
3,232,975
Electronic Components &
Accessories (7.18%)
Intel Corp. 37,900 4,962,531
Linear Technology Corp. 46,800 2,053,350
Solectron Corp. 53,100(a) 2,834,213
9,850,094
Engineering & Architectural
Services (1.14%)
Paychex, Inc. 30,400 1,563,700
Finance Services (1.31%)
First Financial Corp. 73,250 1,794,625
Fire, Marine, & Casualty
Insurance (2.19%)
Avemco Corp. 35,000 546,875
Berkley W.R. Corp. 48,500 2,461,375
3,008,250
Footwear, Except Rubber (0.78%)
Nine West Group, Inc. 22,900(a) 1,061,988
General Industrial Machinery (5.00%)
Flow International Corp. 101,500(a) 926,187
Kaydon Corp. 45,600 2,148,900
Pentair, Inc. 54,600 1,760,850
Roper Industries, Inc. 51,500 2,014,938
6,850,875
Grocery Stores (0.88%)
Casey's General Stores, Inc. 64,500 1,209,375
Hardware Stores (0.91%)
Central Tractor Farm & Country, Inc. 90,500(a) 1,244,375
Holding Offices (0.46%)
ISB Financial Corp. 35,400 637,200
Hose, Belting, Gaskets &
Packing (0.97%)
Mark IV Industries 58,875 1,332,047
Hospitals (1.91%)
Humana, Inc. 62,300(a) 1,191,488
Universal Health Services, Inc.;
Class B 50,000(a) 1,431,250
2,622,738
Insurance Agents, Brokers &
Services (1.33%)
Equifax, Inc. 59,400 1,819,125
Investment Offices (1.21%)
Invesco PLC ADS 31,300 $ 1,388,938
Invesco FDG LLC Sponsored ADR 6,260 272,310
1,661,248
Iron & Steel Foundries (0.39%)
Atchison Casting Corp. 30,000(a) 540,000
Laundry, Cleaning & Garment
Services (1.02%)
G & K Services, Inc.; Class A 37,225 1,405,244
Management & Public Relations (0.68%)
Complete Management, Inc. 72,000 927,000
Measuring & Controlling
Devices (1.68%)
ISCO, Inc. 22,513 202,612
Millipore Corp. 37,100 1,535,013
Photon Dynamics 73,600(a) 561,200
2,298,825
Meat Products (0.88%)
Michael Foods, Inc. 95,200 1,213,800
Medical Instruments &
Supplies (4.65%)
Boston Scientific Corp. 35,200(a) 2,112,000
Nellcor Puritan Bennett 84,000(a) 1,837,500
Steris Corp. 55,700(a) 2,422,950
6,372,450
Medical Service & Health
Insurance (4.65%)
Alternative Living Services 93,700(a) 1,358,650
Foundation Health Corp. 40,500(a) 1,285,875
Health System International, Inc. 52,200(a) 1,291,950
Orthofix International NV 77,600(a) 640,200
Patient Info Systems 59,000(a) 545,750
United Healthcare Corp. 27,900 1,255,500
6,377,925
Metal Services, NEC (1.88%)
BMC Industries, Inc. 81,900 2,579,850
Miscellaneous Chemical
Products (3.67%)
Cytec Industries 48,200(a) 1,958,125
H. B. Fuller Co. 20,000 940,000
Loctite Corp. 35,100 2,136,712
5,034,837
Office Furniture (1.28%)
Chromcraft Revington, Inc. 36,200(a) 1,004,550
Kimball International, Inc.; Class B 18,200 753,025
1,757,575
Office & Clinics of Medical
Doctors (0.09%)
FHP International Corp. 3,400(a) 126,225
Oil & Gas Field Services (1.40%)
Diamond Offshore Drilling 33,700(a) 1,920,900
Operative Builders (1.32%)
D. R. Horton, Inc. 131,200 1,426,800
Pulte Corp. 12,621 388,096
1,814,896
Paints & Allied Products (0.89%)
RPM, Inc. 71,700 1,218,900
Plastic Materials & Synthetics (0.91%)
A. Schulman, Inc. 51,000 $ 1,249,500
Plumbing, Heating,
Air-Conditioning (1.71%)
Apogee Enterprises, Inc. 57,000 2,265,750
Metalclad Corp. 45,600(a) 82,650
2,348,400
Refrigeration & Service
Machinery (0.60%)
Tecumseh Products Co.; Class A 14,400 826,200
Sanitary Services (1.03%)
Browning-Ferris Industries, Inc. 46,600 1,223,250
USA Waste Services, Inc. 5,847(a) 186,373
1,409,623
Savings Institutions (1.08%)
North Side Savings Bank 15,000 817,500
Sterling Financial Corp. 46,900(a) 662,463
1,479,963
Screw Machine Products, Bolts,
Etc. (1.00%)
TriMas Corp. 57,500 1,372,812
Security Brokers & Dealers (0.66%)
Jefferies Group, Inc. 22,400 904,400
Telephone Communication (0.83%)
McLeod, Inc. 44,500(a) 1,134,750
Toys & Sporting Goods (1.05%)
Mattel, Inc. 51,700 1,434,675
Trucking & Courier Services, Ex.
Air (0.36%)
J. B. Hunt Transport Services, Inc. 35,500 497,000
Total Common Stocks 117,312,246
Preferred Stock (0.44%)
Offices & Clinics of Medical
Doctors (0.44%)
FHP International Corp.
Series A Convertible 20,000(a) 610,000
Principal
Amount Value
Bonds (1.55%)
Computer & Data Processing
Services (0.25%)
Sierra On Line Convertible
Subordinated Debentures;
6.50%; 4/1/01 $110,000(b) $ 345,125
Industrial Inorganic Chemicals (0.35%)
Ciba-Geigy Corp. Exchangeable
Subordinated Debentures;
6.25%; 3/15/16 150,000(b) 150,000
ICN Pharmaceuticals, Inc. Convertible
Subordinated Debentures;
8.50%; 11/15/99 $300,000 $ 325,500
475,500
Management & Public
Relations (0.73%)
Complete Management, Inc. Convertible
Debentures; 8.00%; 12/15/03 1,000,000 1,005,000
Nursing & Personal Care
Facilities (0.14%)
Greenery Rehabilitation Group, Inc.
Convertible Senior Subordinated
Notes; 8.75%; 4/1/15 250,000 192,187
Sanitary Services (0.08%)
Enclean, Inc. Convertible Subordinated
Debentures; 7.50%; 8/1/01 100,000 102,339
Total Bonds 2,120,151
Commercial Paper (12.28%)
Business Credit Institutions (4.27%)
American Express Credit Corp.;
5.50%; 1/10/97 2,850,000 2,846,517
General Electric Capital Corp.;
5.78%; 1/7/97 3,015,000 3,012,579
5,859,096
Personal Credit Institutions (2.97%)
Beneficial Corp;
5.80%; 1/8/97 1,460,000 1,458,589
Household Finance Corp.;
5.62%; 1/6/97 2,610,000 2,608,370
4,066,959
Security Brokers & Dealers (5.04%)
Merrill Lynch & Co.;
5.85%; 1/3/97 2,830,000 2,829,540
5.95%; 1/9/97 1,250,000 1,248,554
Smith Barney, Inc.;
5.60%; 1/2/97 2,840,000 2,840,000
6,918,094
Total Commercial Paper 16,844,149
Total Portfolio Investments (99.80%) 136,886,546
Cash and Receivables, net of liabilities (0.20%) 274,335
Total Net Assets (100.00%) $137,160,881
(a) Non-income producing security - No dividend paid during the past twelve
months.
(b) Restricted Security - See Note 4 to the financial statements.
PRINCIPAL GOVERNMENT SECURITIES
FUND, INC.
Description of Issue Principal
Type Rate Maturity Amount Value
Government National Mortgage Association (GNMA)
Certificates (32.28%)
GNMA I 6.50% 5/15/26 $1,000,000 $ 955,380
GNMA I 7.00 1/15/24 844,300 830,107
GNMA I 8.00 10/15/16-6/15/17 1,916,985 1,985,086
GNMA I 8.50 2/15/17-5/15/21 1,862,038 1,962,849
GNMA II 6.00 6/20/24-9/20/26 19,468,917 17,972,068
GNMA II 6.50 12/20/25-2/20/26 3,958,038 3,770,587
Total GNMA Certificates 27,476,077
Federal National Mortgage Association (FNMA)
Certificates (18.45%)
FNMA 5.50 5/1/24 1,177,323 1,051,491
FNMA 6.00 11/1/23-3/1/26 4,062,985 3,779,118
FNMA 6.50 11/1/23-6/1/26 6,613,120 6,323,071
FNMA 7.00 TBA* 1,000,000 978,180
FNMA 7.00 8/1/23 786,901 772,926
FNMA 7.50 4/1/22 1,051,299 1,058,395
FNMA 8.00 6/1/17-11/1/21 793,649 816,254
FNMA GL 6.50 8/15/25 963,731 920,642
Total FNMA Certificates 15,700,077
Federal Home Loan Mortgage Corporation (FHLMC) Certificates (16.69%)
FHLMC 5.50 2/1/24-3/1/24 1,511,637 1,378,673
FHLMC 6.00 12/1/23-1/1/26 2,819,464 2,627,584
FHLMC 6.50 4/1/24-5/1/26 5,298,220 5,078,155
FHLMC 7.00 9/1/23-1/1/24 2,565,534 2,530,318
FHLMC 7.50 2/1/22-6/1/24 1,499,723 1,509,795
FHLMC 8.00 11/1/21 752,170 772,531
FHLMC GL 7.50 3/1/23 301,178 302,910
Total FHLMC Certificates 14,199,966
Principal
Amount Value
Student Loan Marketing Association (SLMA)
Certificates (16.19%)
Student Loan Marketing Association
Debentures;
7.30%; 8/1/12 $10,000,000 $10,316,899
8.47%; 12/1/08 1,000,000 1,136,995
9.15%; 12/1/04 1,200,000 1,381,893
Notes; 6.13%; 12/1/05 560,000 537,816
Notes; 9.25%; 6/1/04 350,000 403,353
Total SLMA Certificates 13,776,956
Private Export Funding Corporation (PEFCO)
Certificates (15.60%)
Private Export Funding Corp.
Secured Notes;
6.62%; 10/1/05 $2,000,000 $1,985,080
9.45%; 12/31/99 4,500,000 4,894,200
Series SS, Senior Secured Notes;
5.50%; 3/15/01 3,325,000 3,225,849
5.80%; 2/1/04 2,200,000 2,140,292
7.03%; 10/31/03 1,000,000 1,027,240
Total PEFCO Certificates 13,272,661
Federal Agency Short-Term Obligations (1.06%)
Federal Home Loan Mortgage Corp.;
1/2/97 900,000 900,000
Total Portfolio Investments (100.27%) 85,325,737
Liabilities, net of cash and receivables (-0.27%) (225,879)
Total Net Assets (100.00%) $85,099,858
* Securities purchased on a to-be-announced basis.
PRINCIPAL GROWTH FUND, INC.
Shares
Held Value
Common Stocks (91.96%)
Advertising (1.20%)
Interpublic Group of Cos., Inc. 25,300 $1,201,750
Beverages (1.70%)
Coca-Cola Co. 8,800 463,100
Pepsico, Inc. 42,100 1,231,425
1,694,525
Blast Furnace & Basic Steel
Products (0.68%)
Lukens, Inc. 33,600 676,200
Carpets & Rugs (0.64%)
Shaw Industries, Inc. 54,800 643,900
Cash Grains (1.92%)
Pioneer Hi-Bred International 27,400 1,918,000
Commercial Banks (6.21%)
Banc One Corp. 16,500 709,500
Bank of Boston Corp. 11,000 706,750
Barnett Banks Inc. 10,000 411,250
Boatmen's Bancshares, Inc. 18,700 1,206,150
CoreStates Financial Corp. 12,300 638,063
First of America Bank Corp. 11,700 703,462
Firstar Corp. 15,000 787,500
Firstmerit Corp. 14,600 518,300
Princeton National Bancorp., Inc. 27,300 505,050
6,186,025
Communications Equipment (3.99%)
General Instrument Corp. 75,800(a) $1,639,175
Northern Telecom Ltd. 18,700 1,157,063
Octel Communications Corp. 67,200(a) 1,176,000
3,972,238
Computer & Data Processing
Services (3.01%)
GTECH Holdings Corp. 47,800(a) 1,529,600
Microsoft Corp. 17,800(a) 1,470,725
3,000,325
Computer & Office Equipment (6.12%)
Automatic Data Processing, Inc. 20,000 857,500
Bay Networks 45,600(a) 951,900
Ceridian Corp. 37,400(a) 1,514,700
Digital Equipment Corp. 30,800(a) 1,120,350
Hewlett-Packard Co. 27,500 1,381,875
Pitney Bowes, Inc. 5,000 272,500
6,098,825
Department Stores (0.60%)
May Department Stores 12,800 598,400
Drugs (7.52%)
Alliance Pharmaceutical Corp. 10,000(a) 136,250
Bristol-Myers Squibb Co. 10,000 1,087,500
Genzyme Corp. - General Division 9,500(a) 206,625
Johnson & Johnson 20,000 995,000
Lilly (Eli) & Co. 20,000 1,460,000
Merck & Co., Inc. 14,600 1,157,050
Pharmacia & Upjohn, Inc. 27,500 1,089,687
Smithkline Beecham PLC ADR 20,000 1,360,000
7,492,112
Eating & Drinking Places (0.32%)
McDonald's Corp. 7,000 316,750
Electrical Goods (0.73%)
Avnet, Inc. 12,500 728,125
Electronic Components &
Accessories (3.94%)
Intel Corp. 17,300 2,265,219
Linear Technology Corp. 37,800 1,658,475
3,923,694
Electronic Distribution
Equipment (0.50%)
General Electric Co. 5,000 494,375
Federal & Federally Sponsored
Credit (0.41%)
Federal National Mortgage Association11,000 409,750
Footwear, Except Rubber (1.70%)
Stride Rite Corp. 169,300 1,693,000
General Industrial Machinery (2.85%)
Flow International Corp. 42,100(a) 384,163
Ingersoll-Rand Co. 20,400 907,800
Tyco International Ltd. 29,200 1,543,950
2,835,913
Grain Mill Products (1.39%)
Ralcorp Holdings, Inc. 15,000(a) 316,875
Ralston-Ralston Purina Group 14,600 1,071,275
1,388,150
Grocery Stores (0.40%)
Casey's General Stores, Inc. 21,200 $ 397,500
Hose, Belting, Gaskets &
Packing (1.33%)
Mark IV Industries 58,500 1,323,562
Hospitals (2.75%)
Columbia/HCA Healthcare Corp. 24,900 1,014,675
Humana, Inc. 45,500(a) 870,188
Universal Health Services, Inc.;
Class B 30,000(a) 858,750
2,743,613
Household Furniture (1.26%)
Masco Corp. 34,900 1,256,400
Investment Offices (1.12%)
Invesco FDG LLC Sponsored ADR 4,200(a) 182,700
Invesco PLC ADS 21,000 931,875
1,114,575
Knitting Mills (0.30%)
Russell Corp. 10,000 297,500
Lumber & Other Building
Materials (1.38%)
Home Depot, Inc. 27,400 1,373,425
Management & Public
Relations (2.37%)
ACNielson Corp. 1,666(a) 25,198
Cognizant Corp. 5,000 165,000
Dun & Bradstreet Corp. 5,000 118,750
Medaphis Corp. 183,000(a) 2,047,313
2,356,261
Medical Instruments &
Supplies (4.89%)
Becton, Dickinson & Co. 20,000 867,500
Boston Scientific Corp. 41,100(a) 2,466,000
Nellcor Puritan Bennett 70,200(a) 1,535,625
4,869,125
Medical Service & Health
Insurance (3.43%)
AON Corp. 11,700 726,862
Foundation Health Corp. 31,600(a) 1,003,300
Health System International, Inc. 21,000(a) 519,750
United Healthcare Corp. 15,000 675,000
Value Health, Inc. 25,000(a) 487,500
3,412,412
Millwork, Plywood & Structural
Members (1.01%)
Georgia-Pacific Corp. 14,000 1,008,000
Miscellaneous Chemical
Products (0.61%)
Loctite Corp. 10,000 608,750
Miscellaneous Converted Paper
Products (0.54%)
Minnesota Mining & Mfg. Co. 6,500 538,687
Miscellaneous Electrical Equipment &
Supplies (1.68%)
Motorola, Inc. 27,300 1,675,537
Miscellaneous Fabricated
Metal Products (0.95%)
Parker-Hannifin Corp. 24,300 $ 941,625
Miscellaneous Plastics Products,
NEC (0.23%)
Rubbermaid, Inc. 10,000 227,500
Miscellaneous Shopping Goods
Stores (0.45%)
Toys 'R' Us, Inc. 15,000(a) 450,000
Motor Vehicles & Equipment (3.35%)
Chrysler Corp. 60,200 1,986,600
Dana Corp. 41,300 1,347,413
3,334,013
Offices & Clinics of Medical
Doctors (0.98%)
FHP International Corp. 26,200(a) 972,675
Office Furniture (0.42%)
Chromcraft Revington, Inc. 15,100(a) 419,025
Operative Builders (0.60%)
Pulte Corp. 19,300 593,475
Paints & Allied Products (0.43%)
RPM, Inc. 25,000 425,000
Petroleum Refining (2.23%)
Atlantic Richfield Co. 5,800 768,500
Exxon Corp. 14,800 1,450,400
2,218,900
Photographic Equipment &
Supplies (0.01%)
Imation Corp. 380(a) 10,688
Plastic Materials & Synthetics (0.83%)
A. Schulman, Inc. 33,600 823,200
Preserved Fruits & Vegetables (0.86%)
CPC International, Inc. 11,100 860,250
Radio, Television & Computer
Stores (0.22%)
Tandy Corp. 5,000 220,000
Radio & Television
Broadcasting (0.91%)
Sinclair Broadcasting Group 35,000(a) 910,000
Refrigeration & Service
Machinery (0.97%)
Tecumseh Products Co.; Class A 16,800 963,900
Rubber & Plastics Footwear (1.20%)
Nike, Inc. 20,000 1,195,000
Sanitary Services (1.26%)
Browning-Ferris Industries, Inc. 29,300 769,125
WMX Technologies, Inc. 15,000 489,375
1,258,500
Security Brokers & Dealers (0.97%)
Salomon, Inc. 20,400 $ 961,350
Shoe Stores (0.06%)
Payless Shoesource Inc. 1,600(a) 60,000
Soap, Cleaners & Toilet Goods (3.11%)
Colgate-Palmolive Co. 11,700 1,079,325
Ecolab, Inc. 46,400 1,745,800
International Flavors & Fragrances, Inc. 6,000 270,000
3,095,125
Toys & Sporting Goods (1.00%)
Mattel, Inc. 35,950 997,612
Variety Stores (0.34%)
Wal-Mart Stores, Inc. 15,000 343,125
Women's & Children's
Undergarments (2.08%)
Warnaco Group; Class A 69,800 2,067,825
Total Common Stock 91,596,192
Preferred Stock (0.37%)
Offices & Clinics of Medical
Doctors (0.37%)
FHP International Corp.;
Series A Convertible 12,182 371,551
Principal
Amount Value
Commercial Paper (7.00%)
Business Credit Institutions (1.90%)
American Express Credit Corp.;
5.80%; 1/7/97 $1,900,000 $1,898,469
Personal Credit Institutions (3.34%)
Beneficial Corp.;
5.95%; 1/3/97 1,255,000 1,254,793
Ford Motor Credit Co.;
5.91%; 1/2/97 2,070,000 2,070,000
3,324,793
Security Brokers & Dealers (1.76%)
Merrill Lynch & Co., Inc.
6.20%; 1/6/97 1,755,000 1,753,791
Total Commercial Paper 6,977,053
Total Portfolio Investments (99.33%) 98,944,796
Cash and receivables, net of liabilities (0.67%) 667,114
Total Net Assets (100.00%) $99,611,910
(a) Non-income producing security - No dividend paid during the past twelve
months.
PRINCIPAL HIGH YIELD FUND, INC.
Principal
Amount Value
Bonds (90.48%)
Aircraft & Parts (2.03%)
Rohr Industries, Inc. Subordinated
Debentures; 9.25%; 3/1/17 $300,000 $ 279,000
Blast Furnace & Basic Steel
Products (3.24%)
Ivaco Senior Notes;
11.50%; 9/15/05 150,000 148,875
Weirton Steel Corp. Senior Notes;
10.75%; 6/1/05 300,000 297,000
445,875
Broadwoven Fabric Mills,
Cotton (2.21%)
J.P. Stevens & Co. Inc.
Sinking Fund Debentures;
9.00%; 3/1/17 300,000 303,750
Cable & Other Pay TV
Services (3.72%)
Jones Intercable, Inc. Senior Notes;
9.63%; 3/15/02 300,000 315,000
TCI Communications, Inc. Debentures;
8.75%; 8/1/15 200,000 196,656
511,656
Cogeneration - Small Power
Producer (3.50%)
AES Corp. Senior Subordinated
Notes; 10.25%; 7/15/06 300,000 322,500
California Energy Co., Inc.
Ltd. Resource Senior Secured
Notes; 9.88%; 6/30/03 150,000 158,250
480,750
Computer & Data Processing
Services (2.41%)
Tenet Healthcare Corp.
Senior Subordinated Notes;
10.13%; 3/1/05 300,000 331,500
Consumer Products (2.92%)
RJR Nabisco, Inc. Senior Notes;
8.75%; 8/15/05 400,000 401,641
Crude Petroleum & Natural
Gas (4.22%)
Chesapeake Energy Corp.
Senior Notes; 9.13%; 4/15/06 150,000 155,625
Nuevo Energy Co.
Senior Subordinated Notes;
9.50%; 4/15/06 400,000 424,000
579,625
Electric Services (1.15%)
El Paso Electric Co.
First Mortgage Bonds, Series D;
8.90%; 2/1/06 150,000 158,250
Electrical Industrial Apparatus (1.51%)
Motors & Gears, Inc.,
Series A Senior Notes;
10.75%; 11/15/06 200,000(a) 207,000
Electronic Components &
Accessories (2.37%)
Advanced Micro Devices, Inc.;
11.00%; 8/1/03 $300,000 $ 325,500
Engines & Turbines (2.03%)
Outboard Marine Corp. Debentures;
9.13%; 4/15/17 300,000 279,000
Footwear, Except Rubber (0.73%)
Brown Group, Inc. Senior Notes;
9.50%; 10/15/06 100,000 100,750
Forest Products (2.04%)
Doman Industries, Ltd. Senior Notes;
8.75%; 3/15/04 300,000 279,750
Fuel Dealers (2.23%)
Petroleum Heat & Power Co., Inc.
Subordinated Notes;
10.13%; 4/1/03 300,000 306,000
General Government, NEC (1.04%)
Republic of Argentina Global Bonds;
8.38%; 12/20/03 150,000 142,500
Groceries & Related Products (2.07%)
Rykoff-Sexton, Inc. Senior
Subordinated Notes;
8.88%; 11/1/03 300,000 285,000
Grocery Stores (3.51%)
Dominick's Finer Foods, Inc.
Senior Subordinated Notes;
10.88%; 5/1/05 150,000 166,500
Ralph's Grocery Co.
Senior Subordinated Notes;
11.00%; 6/15/05 300,000 315,750
482,250
Hotels & Motels (2.17%)
John Q. Hammons Hotels, L.P. &
Finance Corp. First Mortgage
Notes; 8.88%; 2/15/04 300,000 297,750
Industrial Inorganic Chemicals (1.51%)
PT Tri Polyta Indonesia TBK;
11.38%; 12/1/03 200,000 208,000
Knitting Mills (2.36%)
Tultex Corp. Senior Notes;
10.63%; 3/15/05 300,000 324,750
Miscellaneous Amusement, Recreation
Service (1.15%)
Rio Hotel & Casino, Inc.
Senior Subordinated Notes;
10.63%; 7/15/05 150,000 157,500
Miscellaneous Plastics Products,
NEC (2.17%)
Congoleum Corp. Senior Notes;
9.00%; 2/1/01 300,000 298,500
Motor Vehicles & Equipment (2.58%)
Blue Bird Body Company Senior
Subordinated Notes;
10.75%; 11/15/06 $50,000 $ 52,500
Lear Seating Corp. Subordinated
Notes; 8.25%; 2/1/02 300,000 302,250
354,750
Nonferrous Foundries
(Casting) (1.19%)
Howmet Corp. Senior Subordinated
Notes; 10.00%; 12/1/03 150,000 163,500
Nursing & Personal Care
Facilities (2.14%)
Mariner Health Group, Inc. Senior
Subordinated Notes; 9.50%; 4/1/06 300,000 294,000
Oil & Gas Field Services (0.77%)
Parker Drilling Company Senior Notes;
9.75%; 11/15/06 100,000(a) 105,250
Petroleum Refining (2.23%)
Crown Central Petroleum Corp.
Senior Notes; 10.88%; 2/1/05 300,000 306,750
Primary Nonferrous Metals (0.38%)
Euramax International PLC Senior
Subordinated Notes;
11.25%; 10/1/06 50,000(a) 51,625
Pulp Mills (2.64%)
Magnetek, Inc. Senior Subordinated
Debentures; 10.75%; 11/15/98 350,000 363,125
Radio, Television & Computer
Stores (2.24%)
Compusa, Inc. Senior Subordinated
Notes; 9.50%; 6/15/00 300,000 307,500
Radio & Television
Broadcasting (3.24%)
American Radio Systems
Senior Subordinated Notes;
9.00%; 2/1/06 300,000 295,500
Sullivan Broadcasting Inc.
Senior Subordinated Notes;
10.25%; 12/15/05 150,000 150,375
445,875
Retail Stores, NEC (1.50%)
Cole National Group, Inc. Senior
Subordinated Notes;
9.88%; 12/31/06 200,000(a) 206,000
School Buses (1.51%)
Lamar Advertising Company Senior
Subordinated Notes;
9.63%; 12/1/06 200,000 207,000
Soap, Cleaners & Toilet Goods (2.32%)
Coty, Inc. Senior Subordinated
Notes; 10.25%; 5/1/05 300,000 318,750
Telephone Communication (10.79%)
360 Communications Co.
Senior Notes; 7.50%; 3/1/06 $150,000 $ 148,813
Paging Network, Inc. Senior
Debentures; 8.88%; 2/1/06 300,000 286,125
Rogers Cablesystems Ltd. Senior
Secured Second Priority Notes;
9.63%; 8/1/02 250,000 261,250
Rogers Cantel Inc. Senior Secured
Debentures; 9.75%; 6/1/16 300,000 315,000
Telecom Argentina Stet-France
Telecom SA Senior Notes;
12.00%; 11/15/02 150,000 168,375
Vanguard Cellular Systems, Inc.
Senior Debentures; 9.38%; 4/15/06 300,000 303,000
1,482,563
Textile Finishing, Except Wool (2.23%)
Dominion Textile (USA) Inc.
Guaranteed Senior Notes;
9.25%; 4/1/06 300,000 306,000
Water Supply (2.43%)
California Energy Casecnan Water &
Energy Co., Inc. Senior Secured
Bonds Series B; 11.95%; 11/15/10 300,000 333,750
Total Bonds 12,432,735
Commercial Paper (7.28%)
Federal & Federally Sponsored
Credit (7.28%)
FHLMC Commercial Paper;
5.40%; 1/2/97 1,000,000 1,000,000
Total Portfolio Investments (97.76%) 13,432,735
Cash and receivables, net of liabilities (2.24%) 307,608
Total Net Assets (100.00%) $13,740,343
(a) Restricted Security - See Note 4 to the financial statements.
PRINCIPAL MONEY MARKET FUND, INC.
Principal
Amount Value
Commercial Paper (84.65%)
Asset Backed Securities (8.89%)
Corporate Asset Funding Co.;
5.55%; 1/28/97 $500,000 $ 497,996
5.55%; 1/29/97 275,000 273,855
Retailer Funding Corp. Notes;
5.65%; 1/23/97 500,000 498,352
5.60%; 1/30/97 750,000 746,733
Ciesco L.P.;
5.50%; 1/16/97 850,000 848,182
5.65%; 1/22/97 500,000 498,431
5.60%; 1/31/97 750,000 746,617
4,110,116
Business Credit Institutions (7.74%)
AON Corp.;
5.31%; 1/17/97 $750,000 $ 748,340
5.30%; 2/7/97 600,000 596,820
CIT Group Holdings, Inc.;
5.31%; 2/28/97 400,000 396,637
5.28%; 6/2/97 750,000 733,390
General Electric Capital Corp.;
5.29%; 1/24/97 500,000 498,384
International Lease Finance Corp.;
5.55%; 1/17/97 605,000 603,601
3,577,172
Computer & Office Equipment (3.83%)
Xerox Credit Corp.;
5.38%; 1/24/97 180,000 179,409
5.65%; 1/22/97 475,000 473,509
5.32%; 2/4/97 125,000 124,390
5.50%; 2/5/97 1,000,000 994,806
1,772,114
Department Stores (1.49%)
Sears Roebuck Acceptance Corp.;
5.31%; 3/11/97 350,000 346,489
5.39%; 5/19/97 350,000 342,821
689,310
Drugs (0.79%)
Abbott Laboratories;
5.95%; 1/9/97 365,000 364,578
Electric Services (5.75%)
AES Shady Point, Inc.;
5.42%; 1/10/97 500,000 499,398
5.42%; 1/13/97 150,000 149,751
Commed Fuel Co., Inc.;
LOC Canadian Imperial Bank of
Commerce;
5.31%; 2/26/97 125,000 123,986
5.32%; 2/25/97 400,000 396,749
5.31%; 2/25/97 400,000 396,814
LOC Credit Suisse; 5/37%; 2/11/97 750,000 745,525
Florida Power Corp.;
5.55%; 1/28/97 350,000 348,597
2,660,820
Finance Services (4.62%)
Mitsubishi International Corp.;
5.34%; 1/27/97 700,000 697,404
5.40%; 2/10/97 500,000 497,075
5.32%; 3/3/97 325,000 322,118
5.35%; 3/3/97 375,000 371,656
5.43%; 3/17/97 250,000 247,210
2,135,463
Foregin Banks, Branches &
Agencies (2.97%)
Barclays U.S. Funding;
5.73%; 1/3/97 625,000 624,901
5.50%; 1/21/97 750,000 747,823
1,372,724
Forest Products (2.15%)
Weyerhaeuser Co.;
5.50%; 2/6/97 1,000,000 994,653
Gas Production & Distribution (0.99%)
Washingtron Gas Light Co.;
5.65%; 2/7/97 460,000 457,401
Investment Offices (3.99%)
Morgan Stanley Group, Inc.;
5.43%; 1/7/97 $500,000 $ 499,623
5.43%; 1/15/97 600,000 598,824
5.37%; 2/12/97 750,000 745,413
1,843,860
Miscellaneous Investing (1.62%)
MLTC Funding, Inc.;
LOC Citibank, N.A.;
5.32%; 1/21/97 400,000 398,877
5.33%; 1/24/97 350,000 348,860
747,737
Mortgage Bankers & Brokers (0.56%)
Countrywide Home Loan, Inc.;
5.46%; 1/15/97 260,000 259,487
Motor Vehicles & Equipment (4.73%)
Echlin, Inc.;
5.40%; 1/6/97 250,000 249,850
5.34%; 1/16/97 350,000 349,273
5.38%; 1/16/97 300,000 299,372
5.42%; 1/29/97 400,000 398,374
5.36%; 3/14/97 500,000 494,715
5.41%; 3/18/97 400,000 395,492
2,187,076
Personal Credit Institutions (7.77%)
Comoloco Inc.;
5.40%; 2/10/97 500,000 497,075
5.32%; 2/27/97 500,000 495,862
5.50%; 5/23/97 250,000 244,615
5.38%; 7/24/97 500,000 484,831
Ford Motor Credit Co.;
5.34%; 1/30/97 250,000 248,962
General Motors Acceptance Corp.;
5.35%; 1/17/97 150,000 149,666
5.45%; 1/24/97 150,000 149,501
5.60%; 3/3/97 125,000 123,833
5.67%; 3/7/97 400,000 395,968
5.70%; 3/10/97 200,000 197,878
5.68%; 3/14/97 250,000 247,199
Norwest Financial, Inc.;
5.30%; 2/18/97 360,000 357,509
3,592,899
Real Estate Operators &
Lessors (3.02%)
Towson Town Center, Inc.; LOC
Bank of Tokyo-Mitsubishi, Ltd.;
5.60%; 1/16/97 400,000 399,128
5.40%; 1/17/97 200,000 199,550
5.40%; 1/17/97 300,000 299,325
5.55%; 2/19/97 500,000 496,300
1,394,303
Security Brokers & Dealers (14.42%)
Bear Stearns Cos.;
5.50%; 1/31/97 700,000 696,899
Goldman Sachs Group, L.P.;
5.45%; 1/8/97 575,000 574,478
5.35%; 2/14/97 825,000 819,728
5.37%; 2/14/97 400,000 397,434
5.32%; 3/21/97 375,000 370,677
Security Brokers & Dealers (Con't)
Merrill Lynch & Co., Inc.;
5.45%; 1/9/97 $500,000 $ 499,470
5.34%; 1/13/97 150,000 149,755
5.33%; 1/22/97 225,000 224,334
5.33%; 1/23/97 500,000 498,445
5.33%; 1/23/97 200,000 199,378
5.35%; 2/13/97 575,000 571,411
Smith Barney Inc.;
5.42%; 1/2/97 700,000 700,000
5.40%; 1/3/97 500,000 499,925
5.45%; 1/3/97 300,000 299,955
5.55%; 1/3/97 170,000 169,974
6,671,863
Soap, Cleaners & Toilet Goods (0.49%)
Procter & Gamble Co.;
5.55%; 1/7/97 225,000 224,827
Subdividers & Developers (4.41%)
Hartz 667 Commercial Paper Corp.;
LOC Bank of Tokyo-Mitsubishi, Ltd.;
5.42%; 1/14/97 1,000,000 998,193
5.67%; 2/3/97 750,000 746,220
5.40%; 2/3/97 300,000 298,560
2,042,973
Tires & Inner Tubes (4.42%)
Bridgestone/Firestone;
LOC Sumitomo Bank Ltd.;
5.55%; 1/6/97 750,000 749,538
5.50%; 1/8/97 400,000 399,633
6.00%; 1/9/97 400,000 399,533
5.37%; 1/13/97 500,000 499,180
2,047,884
Total Commercial Paper 39,147,310
Bank Notes (4.00%)
Commercial Banks (4.00%)
LaSalle National Bank;
5.56%; 3/6/97 300,000 300,000
5.47%; 3/15/97 300,000 300,000
5.77%; 4/25/97 350,000 350,000
5.72%; 4/30/97 400,000 400,000
6.20%; 8/21/97 500,000 500,000
Total Bank Notes 1,850,000
Bonds (9.61%)
Business Credit Institutions (2.16%)
John Deere Capital Corp.
Medium-Term Notes, Series C;
5.95%; 6/30/97 1,000,000 999,444
Electric Services (1.09%)
Southern California Edison Co. Ref.
Mortgage; 6.13%; 7/15/97 500,000 501,335
Personal Credit Institutions (6.36%)
American General Finance Corp.;
7.70%; 11/15/97 $500,000 $ 508,455
Associates Corp. of North America
Senior Notes;
8.63%; 6/15/97 1,000,000 1,012,035
6.75%; 7/15/97 500,000 502,280
Ford Motor Credit Co.;
5.63%; 3/3/97 415,000 415,074
Household Finance Corp. Notes;
6.25%; 10/15/97 500,000 501,899
2,939,743
Total Bonds 4,440,522
U.S. Government Treasury Bill (1.41%)
Treasury Bill (1.41%)
U.S. Government Treasury Bill;
5.09%; 3/6/97 660,000 654,077
Total Portfolio Investments (99.67%) 46,091,909
Cash and receivables, net of liabilities (0.33%) 152,340
Total Net Assets (100.00%) $46,244,249
PRINCIPAL WORLD FUND, INC.
Shares
Held Value
Common Stocks (94.61%)
Aircraft & Parts (0.03%)
Cemex SA 6,936 $ 24,891
Beverages (1.21%)
Lion Nathan 362,000 867,047
Blast Furnace & Basic Steel
Products (1.27%)
Voest-Alpine Stahl 25,700(b) 913,290
Cement, Hydraulic (0.06%)
Apasco SA 6,320 43,354
Central Reserve Depositories (5.23%)
Banco Totta & Acores 23,000 433,185
Barclays PLC 83,048 1,421,911
Ergo Bank 3,800 192,611
Union Bank of Norway 12,800 400,916
Wing Hang Bank 286,000 1,297,816
3,746,439
Combination Utility Services (2.51%)
ABB AG 905 1,122,218
Iberdrola 1 SA 47,600 673,334
1,795,552
Commercial Banks (7.62%)
ABN-AMRO Holdings NV 12,235 795,042
Bank of Ireland 116,449 1,063,155
Fokus Bank 119,000(b) $ 818,135
Grupo Financiero Bancomer;
Series B 235,000(a) 94,036
National Australia Bank Ltd. 89,885 1,056,606
Siam City Bank 555,000 519,500
Svenska Handelsbanken AB Free 40,500 1,115,110
5,461,584
Communications Services,
NEC (1.03%)
KPN Royal PTT Nederland 19,389 738,688
Computer & Office Equipment (0.12%)
Canon, Inc. 4,000 88,222
Concrete, Gypsum & Plaster
Products (0.02%)
Cementos de Mexico SA 3,200 12,439
Construction & Related
Machinery (0.78%)
Powerscreen International PLC 58,100 561,760
Consumer Products (1.90%)
Imasco Ltd. 55,700 1,365,422
Crude Petroleum & Natural
Gas (0.62%)
Hardy Oil & Gas 86,200 443,280
Deap Sea Foreign Transportation
of Freight (0.50%)
Van Ommeren NV 7,900 356,239
Department Stores (0.75%)
Vendex International 12,500 534,041
Drugs (4.05%)
Elan Corp. PLC ADR 23,400(a) 778,050
Galenica Holdings AG 480 170,877
Roussel-Uclaf 2,970 872,364
Teva Pharmaceutical ADR 21,500 1,080,375
2,901,666
Electric Light & Wiring
Equipment (0.33%)
Clipsal Industries Holdings 25,000 91,000
Otra NV 8,300 142,513
233,513
Electric Services (1.12%)
Korea Electric Power Corp. 8,100 235,671
Korea Mobil Telecommunications
Corp. 290 156,404
Northern Ireland Electric 63,400 413,372
805,447
Electronic Components &
Accessories (2.71%)
Amtek Engineering 391,250 777,567
Elec & Eltek International 268,000 1,018,400
Murata Mfg. 1,000 33,170
Varitronix 63,000 114,027
1,943,164
Electronic Distribution
Equipment (3.42%)
Amper SA 38,000 869,114
Phillips Electronics 28,900 $1,169,542
Techtronic Industries Co. 2,800 416,290
2,454,946
Engines & Turbines (2.38%)
Mabuchi Motor 1,400 70,320
PT United Tractors 372,000 779,428
Scapa Group PLC 204,000 855,308
1,705,056
Farm & Garden Machinery (1.31%)
New Holland NV 45,000(a) 939,375
Finance Services (1.34%)
MBF Capital Berhad 592,000 961,075
Foreign Banks, Branches &
Agencies (0.05%)
Shinhan Bank 2,740(a) 37,268
Forest Products (0.17%)
Metsa-Serla 16,000 119,765
Functions Closely Related to
Banking (0.87%)
Liechtenstein Global Trust AG 1,225 625,856
Gas Production & Distribution (1.62%)
Hafslund ASA 5,467 37,415
OMV AG 9,950 1,120,800
1,158,215
Highway & Street
Construction (0.38%)
BAU Holdings AG 3,030 151,227
Edrasis Psallidas 14,664 124,820
276,047
Holding Offices (1.21%)
First Pacific Co. Ltd. 666,382 865,824
Household Appliances (1.00%)
Fisher & Paykel 182,086 714,012
Household Audio & Video
Equipment (0.88%)
SKF 'B' Free 26,800 633,888
Industrial Inorganic Chemicals (2.12%)
Bayer AG 20,100 814,507
Kemira OY 56,000(a)(b) 704,707
1,519,214
Investment Offices (1.41%)
Invesco Funding 37,800(a) 167,863
Invesco PLC 189,000 839,316
1,007,179
Meat Products (7.06%)
AFFCO Holdings 1,147,265 502,562
Danisco AS 22,000 1,335,163
Davomas Abadi 780,000 701,587
Orkla B Ordinary Shares 21,300 1,350,977
Unilever NV 6,630 1,171,350
5,061,639
Medical Instruments &
Supplies (0.12%)
Nycomed 5,467 83,905
Miscellaneous Chemical
Products (3.43%)
Hoechst AG 22,500 $1,040,971
Novartis AG 1,238 1,414,204
2,455,175
Miscellaneous Durable Goods (1.02%)
Hagemeyer NV 9,175 732,520
Miscellaneous Equipment Rental &
Leasing (1.36%)
Insituto Mobiliane Italian 114,000 974,679
Miscellaneous Food & Kindred
Products (0.57%)
Burns, Philp & Co., Ltd. 230,631 410,322
Miscellaneous Furniture &
Fixtures (0.08%)
Pt Surya Toto 29,000 57,693
Miscellaneous Manufacturers (0.57%)
Carter Holt Harvey Ltd. 181,000 410,504
Miscellaneous Non-Durable
Goods (1.97%)
Grand Metropolitan PLC 179,500 1,409,949
Miscellaneous Plastics Products,
NEC (0.62%)
Royal Plastics Group 24,100(b) 445,725
Miscellaneous Textile Goods (0.72%)
Espirit Asia 1,158,000 512,754
Miscellaneous Transportation
Equipment (0.54%)
Autoliv AB 8,900 389,732
Miscellaneous Transportation
Services (0.23%)
Koninklijke Pakhoed NV 5,281 164,865
Miscellaneous Wood Products (0.25%)
Enso OY 22,300 179,019
Motor Vehicles & Equipment (1.74%)
E.C.I.A. Equipment & Composants 4,600 709,634
Hyundai Motor Co. Ltd. GDR 25,000(b) 173,750
Volvo AB 16,450 362,583
1,245,967
Motor Vehicles, Parts &
Supplies (1.06%)
Dahl International AB 36,000(a) 756,588
Newspapers (1.57%)
Marcoiberica Distribucion de
Edicioues 58,500 618,393
Publishing & Broadcasting Ltd. 104,000 505,527
1,123,920
Oil & Gas Field Services (1.55%)
Repsol Petroleo SA 28,960 1,108,751
Personal Credit Institutions (0.28%)
Manhattan Card Co. 402,000 $ 203,988
Plastic Materials & Synthetics (1.21%)
Astra AB 18,000 867,308
Primary Nonferrous Metals (0.46%)
British Steel PLC 121,300 333,167
Pulp Mills (1.65%)
Lassila & Tikanoja Ltd. OY 10,700 677,890
UPM-Kymmene OY 24,140 505,425
1,183,315
Railroad Equipment (0.23%)
Vae AG 1,470 166,670
Security Brokers & Dealers (1.27%)
Peregrine Investment Holdings 526,000 901,035
Peregrine Investment - Warrants 38,800(a) 12,415
913,450
Security & Commodity
Services (1.62%)
Corporacion Bancaria de Espania SA 26,000 1,161,330
Ship & Boat Building &
Repairing (0.21%)
Unitor Ships Service 11,930 153,203
Soap, Cleaners, & Toilet Goods (1.29%)
Reckitt & Colman PLC 74,350 921,183
Special Industry Machinery (1.21%)
Bobst SA 205 276,342
IHC Caland NV 7,700 439,367
Sulzer AG 290 154,641
870,350
Sugar & Confectionary
Products (3.23%)
Nestle 1,125 1,203,992
Tate & Lyle 137,000 1,111,284
2,315,276
Telephone Communication (6.69%)
Cable & Wireless PLC 64,000 531,735
Investec Consultadoria
Internacional 8,600(a) 265,894
Nokia Corp.; Class A ADR 23,800 1,371,475
Tele Danmark B 8,500 468,307
Telecom Italia-DI 448,200 872,523
Telefonica de Espana SA 49,700 1,151,993
Telefonos de Mexico SA ADR 4,050 133,650
4,795,577
Water Supply (0.26%)
Wessex Water PLC 28,596 184,005
Water Transportation of Freight,
NEC (0.52%)
ICB Shipping AB 'B' Free 32,000 374,925
Total Common Stocks 67,821,212
Bonds (1.07%)
Fire, Marine & Casualty
Insurance (1.07%)
Alfa SA Convertible Subordinated
Debentures; 8.00%; 9/15/00 $700,000(b) $ 766,500
Commercial Paper (4.54%)
Business Credit Institutions (2.93%)
General Electric Capital Corp.;
6.65%; 1/2/97 2,100,000 2,100,000
Personal Credit Institutions (1.61%)
Ford Motor Credit Co.;
5.91%; 1/2/97 1,155,000 1,155,000
Total Commercial Paper 3,255,000
Total Portfolio Investments (100.22%) 71,842,712
Liabilities, net of cash and receivables (-0.22%) (160,697)
Total Net Assets (100.00%) $71,682,015
(a) Non-Income producing security - No dividend paid during the period.
(b) Restricted security - See Note 4 to the financial statements.
Principal World Fund, Inc. Investments by Country
Total Market Percentage of Total
Country Value Market Value
Australia $ 1,972,456 2.75%
Austria 2,351,987 3.27
Canada 1,811,148 2.52
Denmark 1,803,470 2.51
Finland 3,558,281 4.95
France 1,581,998 2.20
Germany 1,855,478 2.58
Greece 317,431 0.45
Hong Kong 4,324,148 6.02
Indonesia 1,538,708 2.14
Israel 1,080,375 1.50
Italy 1,847,203 2.57
Japan 191,712 0.27
Korea 603,094 0.84
Malaysia 961,075 1.34
Mexico 1,074,869 1.50
Netherlands 7,183,542 10.00
New Zealand 2,494,126 3.47
Norway 2,844,551 3.96
Portugal 699,079 0.97
Singapore 1,886,967 2.63
Spain 5,582,915 7.77
Sweden 4,500,134 6.26
Switzerland 4,968,129 6.92
Thailand 519,500 0.72
United Kingdom 11,035,336 15.36
United States 3,255,000 4.53
Total Market Value $71,842,712 100.00%
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
Income from
Investment Operations Less Distributions
---------------------------------------- ---------------------------------
Net Realized
and
Net Asset Net Unrealized Total Dividends
Value at Invest- Gain from from Net Distributions
Beginning ment (Loss) on Investment Investment from
of Period Income Investments Operations Income Capital Gains
PRINCIPAL AGGRESSIVE GROWTH FUND INC.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
1996 $12.94 $.11 $3.38 $3.49 $(.11) $(1.80)
1995 10.11 .13 4.31 4.44 (.13) (1.48)
Period Ended December 31, 1994(d) 9.92 .05 .24 .29 (.05) (.05)
PRINCIPAL ASSET ALLOCATION FUND, INC.
Year Ended December 31,
1996 11.11 .36 1.06 1.42 (.36) (.69)
1995 9.79 .40 1.62 2.02 (.40) (.30)
Period Ended December 31, 1994(d) 9.98 .23 (.18) .05 (.23) --
PRINCIPAL BALANCED FUND, INC.
Year Ended December 31,
1996 13.97 .40 1.41 1.81 (.40) (.94)
1995 11.95 .45 2.44 2.89 (.45) (.42)
1994 12.77 .37 (.64) (.27) (.37) (.18)
1993 12.58 .42 .95 1.37 (.42) (.76)
Six Months Ended December 31, 1992(a) 12.93 .23 .75 .98 (.47) (.86)
Year Ended June 30, 1992 11.33 .47 1.61 2.08 (.48) --
PRINCIPAL BOND FUND, INC.
Year Ended December 31,
1996 11.73 .68 (.40) .28 (.68) --
1995 10.12 .62 1.62 2.24 (.63) --
1994 11.16 .72 (1.04) (.32) (.72) --
1993 10.77 .88 .38 1.26 (.87) --
Six Months Ended December 31, 1992(a) 11.08 .45 .13 .58 (.89) --
Year Ended June 30, 1992 10.64 .91 .46 1.37 (.93) --
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
Year Ended December 31,
1996 27.80 .57 5.82 6.39 (.58) (3.77)
1995 23.44 .60 6.69 7.29 (.60) (2.33)
1994 24.61 .62 (.49) .13 (.61) (.69)
1993 25.19 .61 1.32 1.93 (.60) (1.91)
Six Months Ended December 31, 1992(a) 26.03 .31 1.84 2.15 (.64) (2.35)
Year Ended June 30, 1992 23.35 .65 2.70 3.35 (.67) --
PRINCIPAL EMERGING GROWTH FUND, INC.
Year Ended December 31,
1996 25.33 .22 5.07 5.29 (.22) (.66)
1995 19.97 .22 5.57 5.79 (.22) (.21)
1994 20.79 .14 .03 .17 (.14) (.85)
1993 18.91 .17 3.47 3.64 (.17) (1.59)
Six Months Ended December 31, 1992(a) 15.97 .10 3.09 3.19 (.21) (.04)
Year Ended June 30, 1992 13.93 .21 2.04 2.25 (.21) --
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
Ratios/Supplemental Data
---------------------------- -------------------------------
Excess Net Asset Ratio of
Distributions Value at Net Assets at Expenses to
from Total End of Total End of Period Average
Capital Gains Distributions Period Return (in thousands) Net Assets
PRINCIPAL AGGRESSIVE GROWTH FUND INC.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
1996 $ -- $(1.91) $14.52 28.05% $90,106 .85%
1995 -- (1.61) 12.94 44.19% 33,643 .90%
Period Ended December 31, 1994(d) -- (.10) 10.11 2.59%(c) 13,770 1.03%(b)
PRINCIPAL ASSET ALLOCATION FUND, INC.
Year Ended December 31,
1996 -- (1.05) 11.48 12.92% 61,631 .87%
1995 -- (.70) 11.11 20.66% 41,074 .89%
Period Ended December 31, 1994(d) (.01) (.24) 9.79 .52%(c) 28,041 .95%(b)
PRINCIPAL BALANCED FUND, INC.
Year Ended December 31,
1996 -- (1.34) 14.44 13.13% 93,158 .63%
1995 -- (.87) 13.97 24.58% 45,403 .66%
1994 -- (.55) 11.95 (2.09)% 25,043 .69%
1993 -- (1.18) 12.77 11.06% 21,399 .69%
Six Months Ended December 31, 1992(a) -- (1.33) 12.58 8.00%(c) 18,842 .73%(b)
Year Ended June 30, 1992 -- (.48) 12.93 18.78% 17,344 .72%
PRINCIPAL BOND FUND, INC.
Year Ended December 31,
1996 -- (.68) 11.33 2.36% 63,387 .53%
1995 -- (.63) 11.73 22.17% 35,878 .56%
1994 -- (.72) 10.12 (2.90)% 17,108 .58%
1993 -- (.87) 11.16 11.67% 14,387 .59%
Six Months Ended December 31, 1992(a) -- (.89) 10.77 5.33%(c) 12,790 .62%(b)
Year Ended June 30, 1992 -- (.93) 11.08 13.57% 12,024 .62%
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
Year Ended December 31,
1996 -- (4.35) 29.84 23.50% 205,019 .49%
1995 -- (2.93) 27.80 31.91% 135,640 .51%
1994 -- (1.30) 23.44 .49% 120,572 .51%
1993 -- (2.51) 24.61 7.79% 128,515 .51%
Six Months Ended December 31, 1992(a) -- (2.99) 25.19 8.81%(c) 105,355 .55%(b)
Year Ended June 30, 1992 -- (.67) 26.03 14.53% 94,596 .54%
PRINCIPAL EMERGING GROWTH FUND, INC.
Year Ended December 31,
1996 -- (.88) 29.74 21.11% 137,161 .66%
1995 -- (.43) 25.33 29.01% 58,520 .70%
1994 -- (.99) 19.97 .78% 23,912 .74%
1993 -- (1.76) 20.79 19.28% 12,188 .78%
Six Months Ended December 31, 1992(a) -- (.25) 18.91 20.12%(c) 9,693 .81%(b)
Year Ended June 30, 1992 -- (.21) 15.97 16.19% 7,829 .82%
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
-------------------------------
Ratio of Net
Investment
Income to Portfolio Average
Average Turnover Commission
Net Assets Rate Rate
PRINCIPAL AGGRESSIVE GROWTH FUND INC.
Year Ended December 31,
<S> <C> <C> <C>
1996 1.05% 166.9% $.0541
1995 1.34% 172.9% N/A
Period Ended December 31, 1994(d) 1.06%(b) 105.6%(b) N/A
PRINCIPAL ASSET ALLOCATION FUND, INC.
Year Ended December 31,
1996 3.45% 108.2% .0497
1995 4.07% 47.1% N/A
Period Ended December 31, 1994(d) 4.27%(b) 60.7%(b) N/A
PRINCIPAL BALANCED FUND, INC.
Year Ended December 31,
1996 3.45% 22.6% .0417
1995 4.12% 25.7% N/A
1994 3.42% 31.5% N/A
1993 3.30% 15.8% N/A
Six Months Ended December 31, 1992(a) 3.71%(b) 38.4%(b) N/A
Year Ended June 30, 1992 3.80% 26.6% N/A
PRINCIPAL BOND FUND, INC.
Year Ended December 31,
1996 7.00% 1.7% N/A
1995 7.28% 5.9% N/A
1994 7.86% 18.2% N/A
1993 7.57% 14.0% N/A
Six Months Ended December 31, 1992(a) 8.10%(b) 6.7%(b) N/A
Year Ended June 30, 1992 8.47% 6.1% N/A
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
Year Ended December 31,
1996 2.06% 48.5% .0426
1995 2.25% 49.2% N/A
1994 2.36% 44.5% N/A
1993 2.49% 25.8% N/A
Six Months Ended December 31, 1992(a) 2.56%(b) 39.7%(b) N/A
Year Ended June 30, 1992 2.65% 34.8% N/A
PRINCIPAL EMERGING GROWTH FUND, INC.
Year Ended December 31,
1996 1.07% 8.8% .0379
1995 1.23% 13.1% N/A
1994 1.15% 12.0% N/A
1993 .89% 22.4% N/A
Six Months Ended December 31, 1992(a) 1.24%(b) 8.6%(b) N/A
Year Ended June 30, 1992 1.33% 10.1% N/A
<FN>
See accompanying notes.
</FN>
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (Continued)
Selected data for a share of Capital Stock outstanding throughout each period:
Income from
Investment Operations Less Distributions
--------------------------------------- -------------------------------
Net Realized
and
Net Asset Net Unrealized Total Dividends
Value at Invest- Gain from from Net Distributions
Beginning ment (Loss) on Investment Investment from
of Period Income Investments Operations Income Capital Gains
PRINCIPAL GOVERNMENT SECURITIES FUND, INC.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
1996 $10.55 $.59 $ (.24) $ .35 $(.59) $ --
1995 9.38 .60 1.18 1.78 (.61) --
1994 10.61 .76 (1.24) (.48) (.75) --
1993 10.28 .71 .33 1.04 (.71) --
Six Months Ended December 31, 1992(a) 10.93 .40 .04 .44 (.78) --
Year Ended June 30, 1992 10.24 .80 .71 1.51 (.81) --
PRINCIPAL GROWTH FUND, INC.
Year Ended December 31,
1996 12.43 .16 1.39 1.55 (.16) (.03)
1995 10.10 .17 2.42 2.59 (.17) --
Period Ended December 31, 1994(e) 9.60 .07 .51 .58 (.08) --
PRINCIPAL HIGH YIELD FUND, INC.
Year Ended December 31,
1996 8.39 .80 .30 1.10 (.77) --
1995 7.91 .76 .51 1.27 (.77) (.02)
1994 8.62 .77 (.72) .05 (.76) --
1993 8.38 .80 .23 1.03 (.79) --
Six Months Ended December 31, 1992(a) 8.93 .45 (.10) .35 (.90) --
Year Ended June 30, 1992 8.28 .92 .66 1.58 (.93) --
PRINCIPAL MONEY MARKET FUND, INC.
Year Ended December 31,
1996 1.000 .049 -- .049 (.049) --
1995 1.000 .054 -- .054 (.054) --
1994 1.000 .037 -- .037 (.037) --
1993 1.000 .027 -- .027 (.027) --
Six Months Ended December 31, 1992(a) 1.000 .016 -- .016 (.016) --
Year Ended June 30, 1992 1.000 .046 -- .046 (.046) --
PRINCIPAL WORLD FUND, INC.
Year Ended December 31,
1996 10.72 .22 2.46 2.68 (.22) (.16)
1995 9.56 .19 1.16 1.35 (.18) --
Period Ended December 31, 1994(e) 9.94 .03 (.33) (.30) (.05) (.02)
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
---------------------------------
Excess Net Asset
Distributions Value at
from Total End of Total
Capital Gains Distributions Period Return
PRINCIPAL GOVERNMENT SECURITIES FUND, INC.
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $ -- $ (.59) $10.31 3.35%
1995 -- (.61) 10.55 19.07%
1994 -- (.75) 9.38 (4.53)%
1993 -- (.71) 10.61 10.07%
Six Months Ended December 31, 1992(a) (.31) (1.09) 10.28 4.10%(c)
Year Ended June 30, 1992 (.01) (.82) 10.93 15.34%
PRINCIPAL GROWTH FUND, INC.
Year Ended December 31,
1996 -- (.19) 13.79 12.51%
1995 (.09) (.26) 12.43 25.62%
Period Ended December 31, 1994(e) -- (.08) 10.10 5.42%(c)
PRINCIPAL HIGH YIELD FUND, INC.
Year Ended December 31,
1996 -- (.77) 8.72 13.13%
1995 -- (.79) 8.39 16.08%
1994 -- (.76) 7.91 .62%
1993 -- (.79) 8.62 12.31%
Six Months Ended December 31, 1992(a) -- (.90) 8.38 4.06%(c)
Year Ended June 30, 1992 -- (.93) 8.93 20.70%
PRINCIPAL MONEY MARKET FUND, INC.
Year Ended December 31,
1996 -- (.049) 1.000 5.07%
1995 -- (.054) 1.000 5.59%
1994 -- (.037) 1.000 3.76%
1993 -- (.027) 1.000 2.69%
Six Months Ended December 31, 1992(a) -- (.016) 1.000 1.54%(c)
Year Ended June 30, 1992 -- (.046) 1.000 4.64%
PRINCIPAL WORLD FUND, INC.
Year Ended December 31,
1996 -- (.38) 13.02 25.09%
1995 (.01) (.19) 10.72 14.17%
Period Ended December 31, 1994(e) (.01) (.08) 9.56 (3.37)%(c)
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
Selected data for a share of Capital Stock outstanding throughout each period:
Ratios/Supplemental Data
--------------------------------------------------------------
Ratio of Net
Ratio of Investment
Net Assets at Expenses to Income to Portfolio Average
End of Period Average Average Turnover Commission
(in thousands) Net Assets Net Assets Rate Rate
PRINCIPAL GOVERNMENT SECURITIES FUND, INC.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C>
1996 $85,100 .52% 6.46% 8.4% N/A
1995 50,079 .55% 6.73% 9.8% N/A
1994 36,121 .56% 7.05% 23.2% N/A
1993 36,659 .55% 7.07% 20.4% N/A
Six Months Ended December 31, 1992(a) 31,760 .59%(b) 7.35%(b) 34.5%(b) N/A
Year Ended June 30, 1992 33,022 .58% 7.84% 38.9% N/A
PRINCIPAL GROWTH FUND, INC.
Year Ended December 31,
1996 99,612 .52% 1.61% 2.0% $.0401
1995 42,708 .58% 2.08% 6.9% N/A
Period Ended December 31, 1994(e) 13,086 .75%(b) 2.39%(b) 0.9%(b) N/A
PRINCIPAL HIGH YIELD FUND, INC.
Year Ended December 31,
1996 13,740 .70% 9.21% 32.0% N/A
1995 11,830 .73% 9.09% 35.1% N/A
1994 9,697 .73% 9.02% 30.6% N/A
1993 9,576 .74% 8.80% 28.7% N/A
Six Months Ended December 31, 1992(a) 8,924 .77%(b) 10.33%(b) 20.6%(b) N/A
Year Ended June 30, 1992 8,556 .77% 11.00% 31.3% N/A
PRINCIPAL MONEY MARKET FUND, INC.
Year Ended December 31,
1996 46,244 .56% 5.00% N/A N/A
1995 32,670 .58% 5.32% N/A N/A
1994 29,372 .60% 3.81% N/A N/A
1993 22,753 .60% 2.64% N/A N/A
Six Months Ended December 31, 1992(a) 27,680 .59%(b) 3.10%(b) N/A N/A
Year Ended June 30, 1992 25,194 .57% 4.54% N/A N/A
PRINCIPAL WORLD FUND, INC.
Year Ended December 31,
1996 71,682 .90% 2.28% 12.5% .0120
1995 30,566 .95% 2.26% 15.6% N/A
Period Ended December 31, 1994(e) 13,746 1.24%(b) 1.31%(b) 14.4%(b) N/A
<FN>
See accompanying notes.
</FN>
</TABLE>
Notes to Financial Highlights
(a) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(b) Computed on an annualized basis.
(c) Total return amounts have not been annualized.
(d) Period from June 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Aggressive Growth Fund, Inc. and $.01 per share for Principal
Asset Allocation Fund, Inc. for the period from the initial purchase of
shares on May 23, 1994 through May 31, 1994, was recognized, none of which
was distributed to the sole stockholder, Principal Mutual Life Insurance
Company, during the period. Additionally, Principal Aggressive Growth Fund,
Inc. and Principal Asset Allocation Fund, Inc. incurred unrealized losses
on investments of $.09 and $.03 per share, respectively, during the initial
interim period. This represented activities of each fund prior to the
initial public offering of fund shares.
(e) Period from May 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Growth Fund, Inc. and $.04 per share for Principal World Fund,
Inc. for the period from the initial purchase of shares on March 23, 1994
through April 30, 1994, was recognized, none of which was distributed to
the sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, Principal Growth Fund, Inc. and Principal World Fund,
Inc. incurred unrealized losses on investments of $.41 and $.10 per share,
respectively, during the initial interim period. This represented
activities of each fund prior to the initial public offering of fund
shares.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors and Shareholders
Principal Aggressive Growth Fund, Inc.
Principal Asset Allocation Fund, Inc.
Principal Balanced Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Accumulation Fund, Inc.
Principal Emerging Growth Fund, Inc.
Principal Government Securities Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal Money Market Fund, Inc.
Principal World Fund, Inc.
We have audited the accompanying statements of assets and liabilities of
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund, Inc.,
Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal High
Yield Fund, Inc., Principal Money Market Fund, Inc., and Principal World Fund,
Inc., including the schedules of investments, as of December 31, 1996, and the
related statements of operations for the year then ended, the statements of
changes in net assets for the period of two years then ended and the financial
highlights for each of the periods indicated therein. These financial statements
and financial highlights are the responsibility of the Funds' management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund, Inc.,
Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal High
Yield Fund, Inc., Principal Money Market Fund, Inc., and Principal World Fund,
Inc. at December 31, 1996, and the results of their operations for the year then
ended, the changes in their net assets for the period of two years then ended
and the financial highlights for each of the periods indicated therein, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Des Moines, Iowa
January 17, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 12972448
<INVESTMENTS-AT-VALUE> 13432735
<RECEIVABLES> 291402
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 19746
<TOTAL-ASSETS> 13743883
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3540
<TOTAL-LIABILITIES> 3540
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 14263991
<SHARES-COMMON-STOCK> 1575423
<SHARES-COMMON-PRIOR> 1409500
<ACCUMULATED-NII-CURRENT> 11449
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (995384)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 460287
<NET-ASSETS> 13740343
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1241012
<OTHER-INCOME> 0
<EXPENSES-NET> (87811)
<NET-INVESTMENT-INCOME> 1153201
<REALIZED-GAINS-CURRENT> 210672
<APPREC-INCREASE-CURRENT> 218620
<NET-CHANGE-FROM-OPS> 1582493
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1116648)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 50390
<NUMBER-OF-SHARES-REDEEMED> (12523)
<SHARES-REINVESTED> 128056
<NET-CHANGE-IN-ASSETS> 1910410
<ACCUMULATED-NII-PRIOR> (25104)
<ACCUMULATED-GAINS-PRIOR> (1206056)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 75111
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 87811
<AVERAGE-NET-ASSETS> 12523890
<PER-SHARE-NAV-BEGIN> 8.39
<PER-SHARE-NII> .80
<PER-SHARE-GAIN-APPREC> .30
<PER-SHARE-DIVIDEND> (.77)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.72
<EXPENSE-RATIO> .70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
