SUPPLEMENT DATED SEPTEMBER 19, 1997
TO THE PRINCIPAL MUTUAL FUND PROSPECTUS
DATED MAY 1, 1997
At the Special Meeting of Shareholders held September 16, 1997, the shareholders
of each Fund approved the following actions:
Effective January 1, 1998, the following changes will be made:
1. Each Fund will adopt an Agreement and Plan of Reorganization and
Liquidation under which the existing Funds will become an account of
the Principal Variable Contracts Fund, Inc.
Current Fund Account
------------ -------
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal High Yield Fund, Inc. High Yield Account
Principal Money Market Fund, Inc. Money Market Account
2. Principal Capital Accumulation Fund, Principal Government Securities
Fund and Principal Money Market Fund each will eliminate the
fundamental investment restrictions prohibiting the Fund from
purchasing shares of other investment companies and prohibiting the
Fund from joint participation in any securities trading account.
3. Principal Capital Accumulation Fund will eliminate the fundamental
investment restrictions prohibiting the Fund from purchasing restricted
securities and from investing in repurchase agreements. The Fund will
adopt a non-fundamental investment restriction providing that the Fund
may not "Invest more than 15% of its total assets in securities not
readily marketable and in repurchase agreements maturing in more than
seven days."
4. Principal Government Securities Fund will modify the fundamental
investment restriction prohibiting the Fund from purchasing other than
obligations issued or guaranteed by the United States Government or its
agencies or instrumentalities. The Fund will be permitted to maintain
reasonable amounts in cash or purchase short-term debt securities that
are not issued or guaranteed by the United States Government or its
agencies or instrumentalities.
5. Principal Money Market Fund will amend the fundamental investment
restrictions to allow the Fund to: i) invest more than 5% (but not more
than 25%) of total Fund assets in the securities of a single issuer;
ii) purchase the securities of an issuer if the purchase does not cause
more than 10% of the outstanding voting securities of the issuer to be
held by the Fund (other than securities issued or guaranteed by the
United States Government or its agencies or instrumentalities); and
iii) invest that percentage of its total assets in securities nor
readily marketable as is allowed by federal securities rules or
interpretations.
The Principal(R) Mutual Funds ("Principal Funds") described in this
Prospectus are a family of separately incorporated, diversified, open-end
management investment companies, commonly called mutual funds, which provide the
following range of investment objectives:
Growth-Oriented Funds
PRINCIPAL Balanced Fund, Inc. seeks to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of the investment objective.
PRINCIPAL Capital Accumulation Fund, Inc. seeks to achieve primarily long-term
capital appreciation and secondary growth of investment income through the
purchase primarily of common stocks, but the Fund may invest in other
securities.
PRINCIPAL Emerging Growth Fund, Inc. seeks to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
Income-Oriented Funds
PRINCIPAL Bond Fund, Inc. seeks to provide as high a level of income as is
consistent with preservation of capital and prudent investment risk.
PRINCIPAL High Yield Fund, Inc. seeks high current income. Capital growth is a
secondary objective when consistent with the objective of high current income.
The Fund seeks to achieve its objective primarily through the purchase of high
yielding, lower or non-rated fixed income securities commonly referred to as
"junk bonds." Bonds of this type are considered to be speculative with regard to
payment of interest and return of principal. Purchasers should carefully assess
the risks associated with an investment in this fund.
Money Market Fund
PRINCIPAL Money Market Fund, Inc. seeks as high a level of income available from
short-term securities as is considered consistent with preservation of principal
and maintenance of liquidity by investing all of its assets in a portfolio of
money market instruments.
An investment in any of the funds is neither insured nor guaranteed by the
U.S. Government. There can be no assurance the Money Market Funds will be able
to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Funds that
an investor ought to know before investing. It should be read and retained for
future reference.
Additional information about the Funds has been filed with the Securities
and Exchange Commission, including a document called Statement of Additional
Information, dated May 1, 1997. The Statement of Additional Information is
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Mutual Funds
A Member of
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is May 1, 1997.
TABLE OF CONTENTS
Page
Summary ............................................................... 3
Financial Highlights.................................................... 5
Investment Objectives, Policies and Restrictions........................ 10
Certain Investment Policies and Restrictions............................ 15
Manager and Sub-Advisor ............................................... 16
Duties Performed by the Manager and Sub-Advisor......................... 17
Managers' Comments...................................................... 17
Determination of Net Asset Value of Fund Shares......................... 18
Performance Calculation................................................. 21
Income Dividends, Distributions and Tax Status.......................... 21
Eligible Purchasers and Purchase of Shares.............................. 22
Shareholder Rights ..................................................... 23
Redemption of Shares.................................................... 24
Additional Information.................................................. 25
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, the securities of any of the Funds in any jurisdiction in which
such sale, offer to sell, or solicitation may not be lawfully made. No dealer,
salesperson, or other person has been authorized to give any information or to
make any representations, other than those contained in this Prospectus, in
connection with the offer contained in this Prospectus, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Funds or the Funds' Manager.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Funds are separately incorporated, open-end diversified
management investment companies.
Who may purchase shares of the Funds?
Shares of the Funds are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of each Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Funds offer investors?
Professional Investment Management: Experienced securities analysts provide
each Fund with professional investment management.
Diversification: Each Fund will diversify by investing in securities issued
by a number of issuers doing business in a variety of industries and/or located
in different geographical regions. Diversification reduces investment risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Funds creates administrative efficiencies.
Redeemability: Upon request each Fund will redeem its shares and promptly
pay the investor the current net asset value of the shares redeemed. See
"Redemption of Shares."
What are the Funds' investment objectives?
Growth-Oriented Funds
The investment objective of Principal Balanced Fund, Inc. (sometimes
referred to as the Balanced Fund) is to seek to generate a total return
consisting of current income and capital appreciation while assuming reasonable
risks in furtherance of this objective. The Fund intends to pursue a flexible
investment policy in seeking to achieve this investment objective.
The primary investment objective of Principal Capital Accumulation Fund,
Inc. (sometimes referred to as the Capital Accumulation Fund) is long-term
capital appreciation and its secondary investment objective is growth of
investment income. The Fund seeks to achieve its investment objectives through
the purchase primarily of common stocks, but the Fund may invest in other
securities.
The investment objective of Principal Emerging Growth Fund, Inc. (sometimes
referred to as the Emerging Growth Fund) is to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
Income-Oriented Funds
The investment objective of Principal Bond Fund, Inc. (sometimes referred
to as the Bond Fund) is to provide as high a level of income as is consistent
with preservation of capital and prudent investment risk.
The primary investment objective of Principal High Yield Fund, Inc.
(sometimes referred to as the High Yield Fund) is to seek high current income.
Capital growth is a secondary objective when consistent with the objective of
high current income. The Fund will invest primarily in high yielding, lower or
non-rated fixed income securities.
Money Market Fund
The investment objective of Principal Money Market Fund, Inc. (sometimes
referred to as the Money Market Fund) is to seek as high a level of current
income available from short-term securities as is considered consistent with
preservation of principal and maintenance of liquidity by investing all of its
assets in a portfolio of money market instruments.
There can be no assurance that the investment objectives of any of the
Funds will be realized. See "Investment Objectives, Policies and Restrictions."
Who serves as Manager for the Funds?
Princor Management Corporation, a corporation organized in 1969 by
Principal Mutual Life Insurance Company, is the Manager for each of the Funds.
It is also the dividend disbursing and transfer agent for the Principal Funds.
In order to provide investment advisory services for the Balanced Fund, the
Manager has executed a sub-advisory agreement with Invista Capital Management,
Inc.
("Invista" or "Sub-Advisor"). See "Manager and Sub-Advisor."
What fees and expenses apply to ownership of shares of the Funds?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Funds.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Fund Fee Expenses Expenses
Balanced Fund .60% .03% .63%
Bond Fund .50% .03% .53%
Capital Accumulation Fund .48% .01% .49%
Emerging Growth Fund .64% .02% .66%
High Yield Fund .60% .10% .70%
Money Market Fund .50% .06% .56%
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Period (in years)
_____________________________________________
Fund 1 3 5 10
Balanced Fund $6 $20 $35 $79
Bond Fund $5 $17 $30 $66
Capital Accumulation Fund $5 $16 $27 $62
Emerging Growth Fund $7 $21 $37 $82
High Yield Fund $7 $22 $39 $87
Money Market Fund $6 $18 $31 $70
This Example is based on the Annual Fund Operating expenses for each Fund
described above. Please remember that the Example should not be considered
a representation of past or future expenses and that actual expenses may be
greater or less than shown.
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in the Funds will bear directly or
indirectly. See "Duties Performed by the Manager."
FINANCIAL HIGHLIGHTS
The following financial highlights for the periods ended December 31, 1996
and prior thereto are derived from financial statements which have been audited
by Ernst & Young LLP, independent auditors, whose report has been incorporated
by reference herein. The financial highlights should be read in conjunction with
the financial statements, related notes, and other financial information
incorporated by reference herein. Audited financial statements may be obtained
by shareholders, without charge, by telephoning 1-800-451-5447.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
___________________________________ ____________________________________________________
Net Realized
and
Net Asset Unrealized Total Dividends Excess
Value at Net Gain from from Net Distributions Distributions
Beginning Investment (Loss) on Investment Investment from from Total
of Period Income Investments Operations Income Capital Gains Capital Gains Distributions
Principal Balanced
Fund, Inc. (a)
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $13.97 $ .40 $ 1.41 $1.81 $(.40) $ (.94) $ -- $(1.34)
1995 11.95 .45 2.44 2.89 (.45) (.42) -- (.87)
1994 12.77 .37 (.64) (.27) (.37) (.18) -- (.55)
1993 12.58 .42 .95 1.37 (.42) (.76) -- (1.18)
Six Months Ended
December 31, 1992(b) 12.93 .23 .75 .98 (.47) (.86) -- (1.33)
Year Ended June 30,
1992 11.33 .47 1.61 2.08 (.48) -- -- (.48)
1991 10.79 .54 .59 1.13 (.57) (.02) -- (.59)
1990 11.89 .60 (.48) .12 (.63) (.59) -- (1.22)
1989 11.75 .62 .30 .92 (.55) (.23) -- (.78)
Period Ended June 30,
1988(e) 10.00 .27 1.51 1.78 (.03) -- -- (.03)
Principal Bond Fund, Inc.
Year Ended December 31,
1996 11.73 .68 (.40) .28 (.68) -- -- (.68)
1995 10.12 .62 1.62 2.24 (.63) -- -- (.63)
1994 11.16 .72 (1.04) (.32) (.72) -- -- (.72)
1993 10.77 .88 .38 1.26 (.87) -- -- (.87)
Six Months Ended
December 31, 1992(b) 11.08 .45 .13 .58 (.89) -- -- (.89)
Year Ended June 30,
1992 10.64 .91 .46 1.37 (.93) -- -- (.93)
1991 10.72 .94 (.06) .88 (.96) -- -- (.96)
1990 10.92 .95 (.21) .74 (.94) -- -- (.94)
1989 10.68 1.15 .17 1.32 (.96) (.12) -- (1.08)
Period Ended June 30,
1988(e) 10.00 .32 .40 .72 (.04) -- -- (.04)
Principal Capital Accumulation
Fund, Inc.
Year Ended December 31,
1996 27.80 .57 5.82 6.39 (.58) (3.77) -- (4.35)
1995 23.44 .60 6.69 7.29 (.60) (2.33) -- (2.93)
1994 24.61 .62 (.49) .13 (.61) (.69) -- (1.30)
1993 25.19 .61 1.32 1.93 (.60) (1.91) -- (2.51)
Six Months Ended
December 31, 1992(b) 26.03 .31 1.84 2.15 (.64) (2.35) -- (2.99)
Year Ended June 30,
1992 23.35 .65 2.70 3.35 (.67) -- -- (.67)
1991 22.48 .74 1.22 1.96 (.79) (.30) -- (1.09)
1990 23.63 .79 .14 .93 (.81) (1.27) -- (2.08)
1989 23.23 .77 1.32 2.09 (.68) (1.01) -- (1.69)
1988 27.51 .60 (1.50) (.90) (.69) (2.69) -- (3.38)
1987 25.48 .40 4.46 4.86 (.50) (2.33) -- (2.83)
Principal Emerging Growth
Fund, Inc. (f)
Year Ended December 31,
1996 25.33 .22 5.07 5.29 (.22) (.66) -- (.88)
1995 19.97 .22 5.57 5.79 (.22) (.21) -- (.43)
1994 20.79 .14 .03 .17 (.14) (.85) -- (.99)
1993 18.91 .17 3.47 3.64 (.17) (1.59) -- (1.76)
Six Months Ended
December 31, 1992(b) 15.97 .10 3.09 3.19 (.21) (.04) -- (.25)
Year Ended June 30,
1992 13.93 .21 2.04 2.25 (.21) -- -- (.21)
1991 14.25 .20 .50 .70 (.23) (.79) -- (1.02)
1990 13.35 .24 .87 1.11 (.20) (.01) -- (.21)
1989 12.85 .16 1.35 1.51 (.11) (.90) -- (1.01)
Period Ended June 30,
1988(e) 10.00 .05 2.83 2.88 (.03) -- -- (.03)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
______________________________________________________
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
Principal Balanced
Fund, Inc. (a)
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $14.44 13.13% $ 93,158 .63% 3.45% 22.6% $.0417
1995 13.97 24.58% 45,403 .66% 4.12% 25.7% N/A
1994 11.95 (2.09)% 25,043 .69% 3.42% 31.5% N/A
1993 12.77 11.06% 21,399 .69% 3.30% 15.8% N/A
Six Months Ended
December 31, 1992(b) 12.58 8.00%(c) 18,842 .73%(d) 3.71%(d) 38.4%(d) N/A
Year Ended June 30,
1992 12.93 18.78% 17,344 .72% 3.80% 26.6% N/A
1991 11.33 11.36% 14,555 .73% 5.27% 27.1% N/A
1990 10.79 .87% 13,016 .74% 5.52% 33.1% N/A
1989 11.89 8.55% 12,751 .74% 5.55% 29.3% N/A
Period Ended June 30,
1988(e) 11.75 17.70%(c) 11,469 .80%(d) 4.96%(d) 41.7%(d) N/A
Principal Bond Fund, Inc.
Year Ended December 31,
1996 11.33 2.36% 63,387 .53% 7.00% 1.7% N/A
1995 11.73 22.17% 35,878 .56% 7.28% 5.9% N/A
1994 10.12 (2.90)% 17,108 .58% 7.86% 18.2% N/A
1993 11.16 11.67% 14,387 .59% 7.57% 14.0% N/A
Six Months Ended
December 31, 1992(b) 10.77 5.33%(c) 12,790 .62%(d) 8.10%(d) 6.7%(d) N/A
Year Ended June 30,
1992 11.08 13.57% 12,024 .62% 8.47% 6.1% N/A
1991 10.64 8.94% 10,552 .63% 9.17% 2.7% N/A
1990 10.72 7.15% 9,658 .64% 9.09% 0.0% N/A
1989 10.92 13.51% 9,007 .64% 9.18% 12.2% N/A
Period Ended June 30,
1988(e) 10.68 6.06%(c) 17,598 .58%(d) 8.11%(d) 68.8%(d) N/A
Principal Capital Accumulation
Fund, Inc.
Year Ended December 31,
1996 29.84 23.50% 205,019 .49% 2.06% 48.5% .0426
1995 27.80 31.91% 135,640 .51% 2.25% 49.2% N/A
1994 23.44 .49% 120,572 .51% 2.36% 44.5% N/A
1993 24.61 7.79% 128,515 .51% 2.49% 25.8% N/A
Six Months Ended
December 31, 1992(b) 25.19 8.81%(c) 105,355 .55%(d) 2.56%(d) 39.7%(d) N/A
Year Ended June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8% N/A
1991 23.35 9.46% 76,537 .53% 3.53% 14.0% N/A
1990 22.48 3.94% 74,008 .56% 3.56% 30.2% N/A
1989 23.63 10.02% 68,132 .57% 3.53% 23.5% N/A
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7% N/A
1987 27.51 22.17% 57,478 .63% 1.99% 16.1% N/A
Principal Emerging Growth
Fund, Inc. (f)
Year Ended December 31,
1996 29.74 21.11% 137,161 .66% 1.07% 8.8% .0379
1995 25.33 29.01% 58,520 .70% 1.23% 13.1% N/A
1994 19.97 .78% 23,912 .74% 1.15% 12.0% N/A
1993 20.79 19.28% 12,188 .78% .89% 22.4% N/A
Six Months Ended
December 31, 1992(b) 18.91 20.12%(c) 9,693 .81%(d) 1.24%(d) 8.6%(d) N/A
Year Ended June 30,
1992 15.97 16.19% 7,829 .82% 1.33% 10.1% N/A
1991 13.93 5.72% 6,579 .89% 1.70% 11.1% N/A
1990 14.25 8.32% 6,067 .88% 1.74% 17.9% N/A
1989 13.35 13.08% 5,509 .90% 1.31% 21.4% N/A
Period Ended June 30,
1988(e) 12.85 28.72%(c) 4,857 .94%(d) .64%(d) 4.6%(d) N/A
</TABLE>
Notes to financial highlights
(a) Effective May 1, 1994, the name of Principal Managed Fund, Inc. was changed
to Principal Balanced Fund, Inc.
(b) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(c) Total return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December
10, 1987 through December 17, 1987 was recognized, all of which was
distributed to the Fund's sole stockholder, Principal Mutual Life Insurance
Company. This represented activity of the fund prior to the initial
offering of shares to eligible purchasers.
(f) Effective May 1, 1992, the name of Principal Aggressive Growth Fund, Inc.
was changed to Principal Emerging Growth Fund, Inc.
<TABLE>
<CAPTION>
Income from
Investment Operations Less Distributions
___________________________________ ____________________________________________________
Net Realized
and
Net Asset Unrealized Total Dividends Excess
Value at Net Gain from from Net Distributions Distributions
Beginning Investment (Loss) on Investment Investment from from Total
of Period Income Investments Operations Income Capital Gains Capital Gains Distributions
Principal High Yield
Fund, Inc.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $ 8.39 $ .80 $ .30 $1.10 $ (.77) $ -- $ -- $ (.77)
1995 7.91 .76 .51 1.27 (.77) (.02) -- (.79)
1994 8.62 .77 (.72) .05 (.76) -- -- (.76)
1993 8.38 .80 .23 1.03 (.79) -- -- (.79)
Six Months Ended
December 31, 1992(a) 8.93 .45 (.10) .35 (.90) -- -- (.90)
Year Ended June 30,
1992 8.28 .92 .66 1.58 (.93) -- -- (.93)
1991 8.96 .99 (.53) .46 (1.14) -- -- (1.14)
1990 10.37 1.21 (1.35) (.14) (1.22) (.05) -- (1.27)
1989 11.01 1.23 (.45) .78 (1.21) (.21) -- (1.42)
Period Ended June 30,
1988(d) 10.00 .67 .49 1.16 (.15) -- -- (.15)
Principal Money Market
Fund, Inc.
Year Ended December 31,
1996 1.000 .049 -- .049 (.049) -- -- (.049)
1995 1.000 .054 -- .054 (.054) -- -- (.054)
1994 1.000 .037 -- .037 (.037) -- -- (.037)
1993 1.000 .027 -- .027 (.027) -- -- (.027)
Six Months Ended
December 31, 1992(a) 1.000 .016 -- .016 (.016) -- -- (.016)
Year Ended June 30,
1992 1.000 .046 -- .046 (.046) -- -- (.046)
1991 1.000 .070 -- .070 (.070) -- -- (.070)
1990 1.000 .077 -- .077 (.077) -- -- (.077)
1989 1.000 .083 -- .083 (.083) -- -- (.083)
1988 1.000 .064 -- .064 (.064) -- -- (.064)
1987 1.000 .057 -- .057 (.057) -- -- (.057)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
______________________________________________________
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
Principal High Yield
Fund, Inc.
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $ 8.72 13.13% $13,740 .70% 9.21% 32.0% N/A
1995 8.39 16.08% 11,830 .73% 9.09% 35.1% N/A
1994 7.91 .62% 9,697 .73% 9.02% 30.6% N/A
1993 8.62 12.31% 9,576 .74% 8.80% 28.7% N/A
Six Months Ended
December 31, 1992(a) 8.38 4.06%(b) 8,924 .77%(c) 10.33%(c) 20.6%(c) N/A
Year Ended June 30,
1992 8.93 20.70% 8,556 .77% 11.00% 31.3% N/A
1991 8.28 6.35% 7,085 .82% 12.58% 6.4% N/A
1990 8.96 (1.46)% 6,643 .83% 13.07% 24.2% N/A
1989 10.37 7.88% 6,741 .95% 11.89% 27.8% N/A
Period Ended June 30,
1988(d) 11.01 11.25%(b) 6,703 .78%(c) 11.71%(c) 58.2%(c) N/A
Principal Money Market
Fund, Inc.
Year Ended December 31,
1996 1.000 5.07% 46,244 .56% 5.00% N/A N/A
1995 1.000 5.59% 32,670 .58% 5.32% N/A N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A N/A
Six Months Ended
December 31, 1992(a) 1.000 1.54%(b) 27,680 .59%(c) 3.10%(c) N/A N/A
Year Ended June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A N/A
</TABLE>
Notes to financial highlights
(a) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December 10,
1987 through December 17, 1987 was recognized, all of which was distributed
to the Fund's sole stockholder, Principal Mutual Life Insurance Company.
This represented activity of the fund prior to the initial offering of
shares to eligible purchasers.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Fund are described below.
There can be no assurance that the objectives of the Funds will be realized.
GROWTH-ORIENTED FUNDS
The Principal Funds currently include two Funds which seek capital
appreciation through investments in equity securities (Principal Capital
Accumulation Fund and Principal Emerging Growth Fund) and one Fund which seeks a
total investment return including both capital appreciation and income through
investments in equity and debt securities (Principal Balanced Fund). These three
Funds are collectively referred to as the Growth-Oriented Funds.
The Growth-Oriented Funds may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and American Depository Receipts based
on any of the foregoing securities. The Capital Accumulation and Emerging Growth
Funds will seek to be fully invested under normal conditions in equity
securities. When in the opinion of the Manager current market or economic
conditions warrant, a Growth-Oriented Fund may for temporary defensive purposes
place all or a portion of its assets in cash, on which the Fund would earn no
income, cash equivalents, bank certificates of deposit, bankers acceptances,
repurchase agreements, commercial paper, commercial paper master notes which are
floating rate debt instruments without a fixed maturity, United States
Government securities, and preferred stocks and debt securities, whether or not
convertible into or carrying rights for common stock. A Growth-Oriented Fund may
also maintain reasonable amounts in cash or short-term debt securities for daily
cash management purposes or pending selection of particular long-term
investments.
Principal Balanced Fund
The investment objective of Principal Balanced Fund is to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of the investment objective. The term
"reasonable risks" refers to investment decisions that in the Manager's judgment
do not present a greater than normal risk of loss in light of current or
anticipated future market and economic conditions, trends in yields and interest
rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Fund invests primarily
in growth and income-oriented common stocks (including securities convertible
into common stocks), corporate bonds and debentures and short-term money market
instruments. The Fund may also invest in other equity securities, and in debt
securities issued or guaranteed by the United States Government and its agencies
or instrumentalities. The Fund seeks to generate real (inflation plus) growth
during favorable investment periods and may emphasize income and capital
preservation strategies during uncertain investment periods. The Manager will
seek to minimize declines in the net asset value per share. However, there is no
guarantee that the Manager will be successful in achieving this goal.
The portions of the Fund's total assets invested in equity securities, debt
securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Fund's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Manager as to general market and economic conditions, trends in investment
yields and interest rates and changes in fiscal or monetary policies.
The Fund may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Fund may invest in both
exchange-listed and over-the-counter securities, in small or large companies,
and in well-established or unseasoned companies. Also, the Fund's investments in
corporate bonds and debentures and money market instruments are not restricted
by credit ratings or other objective investment criteria, except with respect to
bank certificates of deposit as set forth below. Some of the fixed income
securities in which the Fund may invest may be considered to include speculative
characteristics and the Fund may purchase such securities that are in default
but does not currently intend to invest more than 5% of its assets in securities
rated below BBB by Standard & Poor's or Baa by Moody's. See the discussion of
the Principal High Yield Fund for information concerning risks associated with
below-investment grade bonds. The Fund will not concentrate its investments in
any industry.
In selecting common stocks, the Manager seeks companies which the Manager
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Manager determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Manager may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Fund may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Fund may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The short-term money market investments in which the Fund may invest
include the following: U.S. Treasury bills, bank certificates of deposit,
bankers' acceptances, repurchase agreements, commercial paper and commercial
paper master notes which are floating rate debt instruments without a fixed
maturity. The Fund will only invest in domestic bank certificates of deposit
issued by banks which are members of the Federal Reserve System that have total
deposits in excess of one billion dollars.
The United States government securities in which the Fund may invest
include U.S. Treasury obligations and obligations of certain agencies, such as
the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Principal Capital Accumulation Fund
The primary objective of Principal Capital Accumulation Fund is long-term
capital appreciation. A secondary objective is growth of investment income.
The Fund will invest primarily in common stocks, but it may invest in other
securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. In pursuit of the
Fund's investment objectives, investments will be made in securities which as a
group appear to offer long-term prospects for capital and income growth.
Securities chosen for investment may include those of companies which the
Manager believes can reasonably be expected to share in the growth of the
nation's economy over the long term.
Principal Emerging Growth Fund
The objective of Principal Emerging Growth Fund is to achieve capital
appreciation. The strategy of this Fund is to invest primarily in the common
stocks and securities (both debt and preferred stock) convertible into common
stocks of emerging and other growth-oriented companies that, in the judgment of
the Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the Emerging Growth Fund may invest, for any period of
time, in any industry, in any kind of growth-oriented company, whether new and
unseasoned or well known and established.
There can be, of course, no assurance that the Fund will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Fund invests, the Fund believes that its shares are
suitable only for persons who are prepared to experience above-average
fluctuations in net asset value, to assume above-average investment risk in
search of above-average return, and to consider the Fund as a long-term
investment and not as a vehicle for seeking short-term profits. Moreover, since
the Fund will not be seeking current income, investors should not view a
purchase of Fund shares as a complete investment program.
INCOME-ORIENTED FUNDS
The Principal Funds currently include two Funds which seek a high level of
income through investments in fixed-income securities (Principal Bond Fund and
Principal High Yield Fund) collectively referred to as the "Income-Oriented
Funds." An investment in any of the Income-Oriented Funds involves market risks
associated with movements in interest rates. The market value of the Funds'
investments will fluctuate in response to changes in interest rates and other
factors. During periods of falling interest rates, the values of outstanding
long-term fixed-income securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. Changes
by recognized rating agencies in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities will affect the Funds' net asset values but will not affect cash
income derived from the securities unless a change results from a failure of an
issuer to pay interest or principal when due. Each Fund's rating limitations
apply at the time of acquisition of a security, and any subsequent change in a
rating by a rating service will not require elimination of a security from the
Fund's portfolio. The Statement of Additional Information contains descriptions
of ratings of Moody's Investors Service, Inc. ("Moody's") and Standard and
Poor's Corporation ("S&P").
Principal Bond Fund
The investment objective of Principal Bond Fund is to provide as high a
level of income as is consistent with preservation of capital and prudent
investment risk.
In seeking to achieve the investment objective, the Fund will predominantly
invest in marketable fixed-income securities. Investments will be made generally
on a long-term basis, but the Fund may make short-term investments from time to
time as deemed prudent by the Manager. Longer maturities typically provide
better yields but will subject the Fund to a greater possibility of substantial
changes in the values of its portfolio securities as interest rates change.
Under normal circumstances, the Fund will invest at least 65% of its
assets, exclusive of cash items, in one or more of the following kinds of
securities: (i) corporate debt securities and taxable municipal obligations,
which at the time of purchase have an investment grade rating within the four
highest grades used by Standard & Poor's Corporation (AAA, AA, A or BBB) or by
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa) or which, if lower-rated or
nonrated, are comparable in quality in the opinion of the Fund's Manager; (ii)
similar Canadian corporate, Provincial and Federal Government securities payable
in U.S. funds; and (iii) securities issued or guaranteed by the United States
Government or its agencies or instrumentalities. The balance of the Fund's
assets may be invested in other fixed income securities, including domestic and
foreign corporate debt securities or preferred stocks, in common stocks that
provide returns that compare favorably with the yields on fixed income
investments, and in common stocks acquired upon conversion of debt securities or
preferred stocks or upon exercise of warrants acquired with debt securities or
otherwise and foreign government securities. The debt securities and preferred
stocks in which the Fund invests may be convertible or nonconvertible. The Fund
does not intend to purchase debt securities rated lower than Ba3 by Moody's or
BB - by S & P (bonds which are judged to have speculative elements; their future
cannot be considered as well-assured). See the discussion of the Principal High
Yield Fund for information concerning risks associated with below investment
grade bonds.
During the year ended December 31, 1996, the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Aaa .18%
Aa .81%
A 24.05%
Baa 68.04%
Ba 6.92%
* The above percentages for A rated securities include .57% unrated
securities which have been determined by the Manager to be of comparable
quality.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by Standard & Poor's or P-1 or P-2 by Moody's,
unrated commercial paper issued by corporations with outstanding debt securities
rated in the four highest grades by Standard & Poor's and Moody's and bank
certificates of deposit and bankers' acceptances issued or guaranteed by
national or state banks and repurchase agreements considered by the Fund to have
investment quality. Under unusual market or economic conditions, the Fund may
for temporary defense purposes invest up to 100% of its assets in cash or cash
equivalents.
Principal High Yield Fund
Principal High Yield Fund's primary investment objective is high current
income. Capital growth is a secondary objective when consistent with the
objective of high current income. This Fund is designed for investors willing to
assume additional risk in return for above average income.
In seeking to attain the Fund's objective of high current income, the Fund
invests primarily in high yielding, lower or non-rated (high risk) fixed-income
securities, commonly known as "junk bonds," constituting a diversified portfolio
which the Fund Manager believes does not involve undue risk to income or
principal. Normally, at least 80% of the Fund's assets will be invested in debt
securities, convertible securities (both debt and preferred stock) or preferred
stocks that are consistent with its primary investment objective of high current
income. The Fund's remaining assets may be held in cash or cash equivalents, or
invested in common stocks and other equity securities when these types of
investments are consistent with the objective of high current income.
The Fund seeks to invest its assets in securities rated Ba1 or lower by
Moody's Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("S&P") or in unrated securities which the Fund's Manager believes
are of comparable quality. These securities are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and to repay principal in accordance with the terms of the obligation. The Fund
will not invest in securities rated Caa or lower by Moody's and CCC or lower by
S&P.
The rating services' descriptions of securities rating categories in which
the Fund may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the high end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB, B, CCC, CC: Debt rated
"BB", "B", "CCC" and "CC" is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
The higher-yielding, lower-rated securities in which the High Yield Fund
invests present special risks to investors. The market value of lower-rated
securities may be more volatile than that of higher-rated securities and
generally tends to reflect the market's perception of the creditworthiness of
the issuer and short-term market developments to a greater extent than more
highly rated securities, which reflect primarily fluctuations in general levels
of interest rates. Periods of economic uncertainty and change can be expected to
result in increased volatility in the market value of lower-rated securities.
Further, such securities may be subject to greater risks of loss of income and
principal, particularly in the event of adverse economic changes or increased
interest rates, because their issuers generally are not as financially secure or
as creditworthy as issuers of higher-rated securities. Additionally, to the
extent that there is not a national market system for secondary trading of
lower-rated securities, there may be a low volume of trading in such securities
which may make it more difficult to value or sell those securities than
higher-rated securities. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market.
Investors should recognize that the market for higher yielding, lower-rated
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the High Yield Fund and the ability
of the issuers of the securities held by it to pay principal and interest. A
default by an issuer may result in the Fund incurring additional expenses to
seek recovery of the amounts due it.
Some of the securities in which the Fund invests contain call provisions.
If the issuer of such a security exercises a call provision in a declining
interest rate market, the Fund would have to replace the security with a
lower-yielding security, resulting in a decreased return for investors. Further,
a higher-yielding security's value will decrease in a rising interest rate
market, which will be reflected in the Fund's net asset value per share.
Congress recently enacted legislation requiring federally-insured savings
and loan associations to divest themselves of investments in high yield
securities. This legislation might increase the supply of securities available
for purchase in the secondary market and, potentially, lower the value of the
securities held by the Fund.
Investors should carefully consider their ability to assume the risks of
investing in lower-rated securities before making an investment in the High
Yield Fund and should be prepared to maintain their investment during periods of
adverse market conditions.
Investors should not rely on the Fund for their short-term financial needs.
The Fund seeks to minimize the risks of investing in lower-rated securities
through diversification, investment analysis and attention to current
developments in interest rates and economic conditions. Because the Fund invests
primarily in securities in the lower rating categories, the achievement of the
Fund's goals is more dependent on the Manager's ability than would be the case
if the Fund were investing in securities in the higher rating categories.
Although the Fund's Manager considers security ratings when making investment
decisions, it performs its own investment analysis and does not rely principally
on the ratings assigned by the rating services. There are risks in applying
credit ratings as a method for evaluating high yield securities. For example,
credit ratings evaluate the safety of principal and interest payments, not the
market value risk of high yield securities, and credit rating agencies may fail
to make timely changes in credit ratings to reflect subsequent events. The
Manager's analysis includes traditional security analysis considerations such as
the issuer's experience and managerial strength, changing financial condition,
borrowing requirements or debt maturity schedules, and its responsiveness to
changes in business conditions and interest rates. It also considers relative
values based on anticipated cash flow, interest or dividend coverage, asset
coverage and earnings prospects. In addition, the Manager analyzes general
business conditions and other factors such as anticipated changes in economic
activity and interest rates, the availability of new investment opportunities,
and the economic outlook for specific industries. The Manager continuously
monitors the issuers of portfolio securities to determine if the issuers will
have sufficient cash flow and profits to meet required principal and interest
payments and to assure the securities' liquidity so the Fund can meet redemption
requests. During the year ended December 31, 1996 the percentage of the Fund's
portfolio securities invested in the various ratings established by Moody's,
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Baa 2.63%
Ba 38.86%
B 56.47%
C 2.04%
The above percentages for B and Ba rated securities include 2.72% and
- -1.13%, respectively, unrated securities which have been determined by the
Manager to be of comparable quality.
There may be times when, in the Manager's judgment, unusual market or
economic conditions make pursuing the Fund's basic investment strategy
inconsistent with the best interests of its shareholders. At such times the
Manager may employ alternative strategies, primarily seeking to reduce
fluctuations in the value of the Fund's assets. In implementing these
"defensive" strategies, the Fund may temporarily invest in money-market
instruments of all types, higher-rated fixed-income securities or any other
fixed-income securities that the Fund considers consistent with such strategy.
The yield to maturity on these securities would generally be lower than the
yield to maturity on lower-rated fixed-income securities. It is impossible to
predict when, or for how long, such alternative strategies will be utilized.
The Fund's Manager buys and sells securities for the Fund principally in
response to its evaluation of an issuer's continuing ability to meet its
obligations, the availability of better investment opportunities, and its
assessment of changes in business conditions and interest rates. From time to
time, consistent with its investment objectives, the Fund may sell securities
that have appreciated in value because of declines in interest rates. It may
also trade securities for the purpose of seeking short-term profits. Securities
may be sold in anticipation of a market decline or bought in anticipation of a
market rise. They may also be traded for securities of comparable quality and
maturity to take advantage of perceived short-term disparities in market values
or yields.
MONEY MARKET FUND
The Principal Funds also include a Fund which invests primarily in
short-term securities, Principal Money Market Fund. Securities in which the
Money Market Fund will invest may not yield as high a level of current income as
securities of low quality and longer maturities which generally have less
liquidity, greater market risk and more fluctuation.
The Money Market Fund will limit its portfolio investments to United States
dollar denominated instruments that its board of directors determines present
minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in respect to
a class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security at the time of issuance was a long-term security that has a
remaining maturity of 397 calendar days or less, and whose issuer has
received from a nationally recognized statistical rating organization a
rating, with respect to a class of short-term debt obligations (or any
security within that class) that is now comparable in priority and
security with the security, in one of the two highest rating categories
for short-term debt obligations; or
(3) An unrated security that is of comparable quality to a security
meeting the requirements of (1) or (2) above, as determined by the
board of directors.
The Fund will not invest more than 5% of its total assets in the following
securities:
(1) Securities which, when acquired by the Fund (either initially or upon
any subsequent rollover), are rated below the highest rating category
for short-term debt obligations;
(2) Securities which, at the time of issuance were long-term securities but
when acquired by the Fund have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Fund's board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Fund will
maintain a dollar-weighted average portfolio maturity of 90 days or
less.
The objective of Principal Money Market Fund is to seek as high a level of
current income available from short-term securities as is considered consistent
with preservation of principal and maintenance of liquidity by investing its
assets in a portfolio of money market instruments. These money market
instruments are U.S. Government Securities, U.S. Government Agency Securities,
Bank Obligations, Commercial Paper, Short-term Corporate Debt and Repurchase
Agreements, which are described briefly below and in more detail in the
Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
The Fund intends to hold its investments until maturity, but may on
occasion trade securities to take advantage of market variations. Also, revised
valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at times when such sales might otherwise not be
desirable. The Fund's right to borrow to facilitate redemptions may reduce the
need for such sales. It is the Fund's policy to be as fully invested as
reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the Fund expects
to usually transact purchases and sales of portfolio securities with issuers or
dealers on a net basis, it is not anticipated that the Fund will pay any
significant brokerage commissions. The Fund is free to dispose of portfolio
securities at any time, when changes in circumstances or conditions make such a
move desirable in light of the investment objective.
A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Fund invests. The
rate of return and the net asset value will be affected by such other factors as
sales of portfolio securities prior to maturity and the Fund's operating
expenses.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Funds
may use in an effort to achieve their respective investment objectives.
Diversification
Each Fund is subject to the diversification requirements of Section 817(h)
of the Internal Revenue Code (the "Code") which must be met at the end of each
quarter of the year (or within 30 days thereafter). Regulations issued by the
Secretary of the Treasury have the effect of requiring each Fund to invest no
more than 55% of its total assets in securities of any one issuer, no more than
70% in the securities of any two issuers, no more than 80% in the securities of
any three issuers, and no more than 90% in the securities of any four issuers.
For this purpose, the United States Treasury and each U.S. Government agency and
instrumentality is considered to be a separate issuer. Thus, the Government
Securities Fund intends to invest in U.S. Treasury securities and in securities
issued by at least four U.S. Government agencies or instrumentalities in the
amounts necessary to meet those diversification requirements at the end of each
quarter of the year (or within thirty days thereafter).
In the event any of the Funds do not meet the diversification requirements
of Section 817(h) of the Code, the contracts funded by shares of the Funds will
not be treated as annuities or life insurance for Federal income tax purposes
and the owners of the Funds will be subject to taxation on their share of the
dividends and distributions paid by the Funds.
Foreign Securities
Each of the following Principal Funds has adopted investment restrictions that
limit its investments in foreign securities to the indicated percentage of its
assets: Bond, Capital Accumulation and High Yield - 20%; Balanced Fund and
Emerging Growth - 10%. Debt securities issued in the United States pursuant to a
registration statement filed with the Securities and Exchange Commission are not
considered "foreign securities" for purposes of this investment limitation.
Investment in foreign securities presents certain risks including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. A Fund's investment in foreign securities may also result
in higher custodial costs and the costs associated with currency conversions.
Repurchase Agreements
Each of the Funds, except the Capital Accumulation, may enter into
repurchase agreements with, and each of the Funds, except the Capital
Accumulation and Money Market Funds, may lend its portfolio securities to,
unaffiliated broker-dealers and other unaffiliated qualified financial
institutions. These transactions must be fully collateralized at all times, but
involve some credit risk to the Fund if the other party should default on its
obligations, and the Fund is delayed or prevented from recovering on the
collateral. See the Funds' Statement of Additional Information for further
information regarding the credit risks associated with repurchase agreements and
the standards adopted by each Fund's Board of Directors to deal with those
risks. None of the Funds intend either (i) to enter into repurchase agreements
that mature in more than seven days if any such investment, together with any
other illiquid securities held by the Fund, would amount to more than 10% of its
total assets or (ii) to loan securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Funds may enter into forward commitment
agreements which call for the Fund to purchase or sell a security on a future
date and at a price fixed at the time the Fund enters into the agreement. Each
of these Funds may also acquire rights to sell its investments to other parties,
either on demand or at specific intervals.
Warrants
Each of the Funds, except the Money Market Fund, may invest in warrants up
to 5% of its assets, of which not more than 2% may be invested in warrants that
are not listed on the New York or American Stock Exchange.
Borrowing
As a matter of fundamental policy, each Fund may borrow money only for
temporary or emergency purposes. The Balanced Fund, Bond Fund, Capital
Accumulation Fund, High Yield Fund and Money Market Fund may borrow only from
banks. Further, each may borrow only in an amount not exceeding 5% of its
assets, except the Capital Accumulation Fund which may borrow only in an amount
not exceeding the lesser of (i) 5% of the value of its assets less liabilities
other than such borrowings, or (ii) 10% of its assets taken at cost at the time
the borrowing is made, and the Money Market Fund which may borrow only in an
amount not exceeding the lesser of (i) 5% of the value of its assets, or (ii)
10% of the value of its net assets taken at cost at the time the borrowing is
made.
Options
The Balanced Fund, Bond Fund, Emerging Growth Fund and High Yield Fund may
purchase covered spread options, which would give the Fund the right to sell a
security that it owns at a fixed dollar spread or yield spread in relationship
to another security that the Fund does not own, but which is used as a
benchmark. These same Funds may also purchase and sell financial futures
contracts, options on financial futures contracts and options on securities and
securities indices, but will not invest more than 5% of their assets in the
purchase of options on securities, securities indices and financial futures
contracts or in initial margin and premiums on financial futures contracts and
options thereon. The Funds may write options on securities and securities
indices to generate additional revenue and for hedging purposes and may enter
into transactions in financial futures contracts and options on those contracts
for hedging purposes.
The Statement of Additional Information includes further information
concerning the Funds' investment policies and applicable investment
restrictions. Each Fund's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for a Fund are not fundamental and
may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISOR
The Manager for the Funds is Princor Management Corporation (the
"Manager"), an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the State of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969,
and since that time has managed various mutual funds sponsored by Principal
Mutual Life Insurance Company. As of December 31, 1996, the Manager served as
investment advisor for 26 such funds with assets totaling approximately $4.0
billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced Fund. The
Manager will reimburse Invista for the cost of providing these services.
Invista, an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance company and an affiliate of the Manager, was founded in 1985 and
manages investments for institutional investors, including Principal Mutual
Life. Assets under management at December 31, 1996 were approximately $19.6
billion. Invista's address is 1500 Hub Tower, 699 Walnut, Des Moines, Iowa
50309.
The Manager or Invista has assigned certain individuals the primary
responsibility for the day-to-day management of each Fund's portfolio. The
persons primarily responsible for the day-to-day management of each Fund are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Fund Responsible Since Person Primarily Responsible
- -------------------- ----------------- -----------------------------------------------------------------------------
<S> <C> <C>
Balanced April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President,
Invista Capital Management, Inc.
Bond November, 1996 Scott A. Bennett, CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company.
Capital Accumulation November, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice President,
(Fund's inception) Invista Capital Management, Inc.; Co-Manager since November, 1996: Catherine A.
Green, CFA, (MBA degree, Drake University). Vice President, Invista Capital
Management, Inc.
Emerging Growth December, 1987 Michael R. Hamilton, (BMBA degree, Bellarmine College). Vice President, Invista
(Fund's inception) Capital Management, Inc.
High Yield December, 1987 James K. Hovey, CFA (MBA degree University of Iowa). Director - Investment
(Fund's inception) Securities, Principal Mutual Life Insurance Company.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISOR
Under Maryland law, the business and affairs of each of the Funds are
managed under the direction of its Board of Directors. The investment services
and certain other services referred to under the heading "Cost of Manager's
Services" in the Statement of Additional Information are furnished to the Funds
under the terms of a Management Agreement between each of the Funds and the
Manager, and for the Balanced Fund, a Sub-Advisory Agreement between the Manager
and Invista. The Manager, or Invista, advises the Funds on investment policies
and on the composition of the Funds' portfolios. In this connection, the
Manager, or Invista, furnishes to the Board of Directors of each Fund a
recommended investment program consistent with that Fund's investment objective
and policies. The Manager, or Invista, is authorized, within the scope of the
approved investment program, to determine which securities are to be bought or
sold, and in what amounts.
The compensation paid by each Fund to the Manager for the fiscal year ended
December 31, 1996 was, on an annual basis, equal to the following percentage of
average net assets:
Total
Manager's Annualized
Fund Fee Expenses
Balanced Fund .60% .63%
Bond Fund .50% .53%
Capital Accumulation Fund .48% .49%
Emerging Growth Fund .64% .66%
High Yield Fund .60% .70%
Money Market Fund .50% .56%
The Manager, or Invista, may purchase at its own expense statistical and
other information or services from outside sources, including Principal Mutual
Life Insurance Company. An Investment Service Agreement between each Fund, the
Manager and Principal Mutual Life Insurance Company provides that Principal
Mutual Life Insurance Company will furnish certain personnel, services and
facilities required by the Manager in connection with its performance of the
Management Agreements, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard. The Investment Service
Agreements for the Capital Accumulation and Emerging Growth also include as a
party Invista Capital Management, Inc., an indirectly wholly-owned subsidiary of
Principal Mutual Life Insurance Company, and also provide that the subsidiaries
of Principal Mutual Life Insurance Company will furnish the same items and be
reimbursed by the Manager for their costs incurred in this regard.
The Funds may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc., a broker-dealer that is an affiliate of the Distributor and
Manager for each of the Funds.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company.
MANAGERS' COMMENTS
Princor Management Corporation and Invista are staffed with investment
professionals who manage each individual fund. Comments by these individuals in
the following paragraphs summarize in capsule form the general strategy and
recent results of each fund over the past year. The accompanying charts display
results for the past 10 years or the life of the fund, whichever is shorter.
Average Annual Total Return figures provided for each fund in the graphs below
reflect all expenses of the fund and assume all distributions are reinvested at
net asset value. The figures do not reflect expenses of the variable life
insurance contracts or variable annuity contracts that purchase fund shares;
performance figures for the divisions of the contracts would be lower than
performance figures for the funds due to the additional contract expenses. Past
performance is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
The various indices included in the graphs below are unmanaged and do not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.
Growth-Oriented Funds
Principal Balanced Fund
(Judith A. Vogel)
This balanced portfolio combines stocks, bonds and cash in a relatively
conservative mix which seeks to provide both capital appreciation and income to
the shareholder without taking on undue risk. The asset allocation of the Fund
generally approximates 60% stocks and 40% bonds. In the year ended December 31,
1996 the stock market produced exceptional results. Aided by a healthy economy,
continued corporate profit growth, and a good dose of investor enthusiasm, the
S&P 500 Stock Index advanced nearly 23%. Conditions in the bond market were less
supportive over the year. Long-term interest rates rose 0.70% in 1996, with a
lot of volatility along the way, causing the bond returns to hover between zero
and 3% for the year. Demonstrating its balanced nature, the Fund produced a 13%
annual return, about midway between stock and bond market results and very near
the Lipper Balanced Fund Average. The bond portion of the Fund's portfolio is
comprised of U.S. Government notes and bonds with an emphasis on safety of
principal. The stock portion of the portfolio is concentrated in companies with
stable or growing earnings that are not terribly sensitive to economic activity.
After six years of economic expansion resulting in high rates of resource
utilization, corporate profit growth is likely to come down, causing a scarcity
of earnings growth. Companies that can continue to grow earnings will be
afforded premium valuations. There is no independent market index against which
to measure returns of balanced portfolios, however, we show the S&P 500 Stock
Index for your information.
Total Returns *
As of December 31, 1996
---------------------------------------------------
Since Inception
1 Year 5 Year Date 12/18/87
13.13% 11.57% 12.16%
Comparison of Change in Value of $10,000 Investment in the
Balanced Fund, S&P 500 and Lipper Balanced Fund Average
----------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Mid Cap
December 31, Return Index Index
10,000 10,000 10,000
1988 11,637 11,661 11,229
1989 12,982 15,356 13,429
1990 12,147 14,877 13,355
1991 16,321 19,412 16,930
1992 18,410 20,891 18,122
1993 20,447 22,992 20,066
1994 20,019 23,294 19,561
1995 24,941 32,037 24,482
1996 28,215 39,388 27,851
Note: Past performance is not predictive of future performance.
Principal Capital Accumulation Fund
(David L. White)
The strategy with this portfolio is to hold common stocks of companies
based on a valuation that is attractive when compared to the market. The
analytical staff looks at companies' current valuations compared to the market,
then at historical information to compare valuations to historical averages. The
focus is on the fundamentals of an industry and the company to determine the
current and future outlook as these potential investments. From there the
portfolio is constructed to provide a diversified set of investments.
The Fund outperformed the S&P 500 Index and Lipper Growth and Income Fund
Average for 1996. The strength of the market was in much fewer stocks than in
the past. The volatility between industries was much greater than the overall
results. The Fund benefited from several areas of exposure. Banks and health
care were the strongest areas for the Fund during the year. The focus has been
away from the more cyclical areas of the economy which also helped during the
year. As the economic cycle progresses, the market places more emphasis on
companies with consistent earnings growth, and we have tended to overweight
these areas of the market. As the market performance continues to narrow,
however, it becomes increasingly difficult to select the correct areas of
overperformance.
Total Returns *
As of December 31, 1996
----------------------------------------
1 Year 5 Year 10 Year
23.50% 14.08% 13.08%
Comparison of Change in Value of $10,000 Investment in the
Capital Accumulation Fund, S&P 500 and Lipper Growth and Income Fund Average
----------------------------------------------------------------------------
Fund S&P 500 Lipper
Year Ended Total Stock Growth & Income
December 31, Return Index Fund Average
10,000 10,000 10,000
1987 10,647 10,526 10,184
1988 12,183 12,274 11,814
1989 14,155 16,163 14,596
1990 12,759 15,659 13,946
1991 17,693 20,433 18,002
1992 19,377 21,990 19,618
1993 20,888 24,201 21,884
1994 20,990 24,519 21,678
1995 27,688 33,722 28,360
1996 34,193 41,460 34,253
Note: Past performance is not predictive of future performance.
Principal Emerging Growth Fund
(Michael R. Hamilton)
The equity market was strong in 1996, but within the market there were two
different trends. Large-cap stocks performed much better than small-cap stocks.
The Emerging Growth Fund returned 19.13% compared with the Lipper Mid Cap
Average of 17.9%. The Fund and the Lipper Average trailed the S&P 500 Index
because of their emphasis on small cap stocks. While both trailed the S&P 500,
this was a good year for the fund.
The financial market continues to grapple with the paradox of strong
economic growth with no apparent inflation. Productivity will be key in 1997 if
inflation is to remain benign. The Fund's portfolio continues to be focused on
companies that should enhance productivity of both labor and capital. Several of
the technology, service and cyclical areas support this emphasis. The portfolio
is also overweighted in the financial sector as bank consolidation continues.
Continued profit growth will be important in 1997 as well. Companies with
more predictable and visible earnings growth are preferred. This continues to be
those that are low cost producers and have competitive barriers to entry.
Selectivity in all sectors will be crucial to outperformance.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
21.11% 16.64% 17.73%
Comparison of Change in Value of $10,000 Investment
in the Emerging Growth Fund, S&P 500 and
Lipper Mid Cap Fund Average
-----------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 MID CAP
December 31, Return Index Index
10,000 10,000 10,000
1988 12,369 11,661 11,476
1989 15,070 15,356 14,586
1990 13,186 14,877 14,067
1991 20,240 19,412 21,275
1992 23,264 20,891 23,213
1993 27,750 22,992 26,625
1994 27,967 23,294 26,079
1995 36,080 32,037 34,469
1996 43,697 39,388 40,646
Note: Past performance is not predictive of future performance.
Important Notes of the Growth-Oriented Funds:
Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average currently contains 272 mutual funds.
Lipper Growth & Income Fund Average: this average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one year average currently contains 522 funds.
Lipper Mid Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average currently contains 154 funds.
Income-Oriented Funds
Principal Bond Fund
(Scott A. Bennett)
The Principal Bond Fund's performance in 1996 lagged when compared to 1995.
1995 was a banner year, mainly because of dramatically declining interest rates.
During 1996 interest rates increased throughout most of the year based on fears
of increasing inflation. This hurt the Fund's relative performance as the
duration target of 7 years (actual duration at 12/31/96 was 6.98 years) is
longer than the average BBB rated bond fund and the BAA Lehman Corporate Index.
Relative performance was also negatively impacted by the lack of a significant
amount of less than investment grade bonds in the portfolio. High yield (less
than investment grade) debt performed extremely well during 1996, with many of
the top performing funds in the Lipper BAA universe having significant exposures
to this asset class.
Over the long-term, the Fund continues to outperform the average BBB fund.
This is attributed to remaining fully invested and not trying to guess interest
rates. The BBB corporate bond class continued to be an attractive asset class in
1996, outperforming all other taxable investment grade classes. Spreads
continued to narrow during the year with defaults low and a large amount of
funds chasing the available bonds.
Total Returns *
As of December 31, 1996
- --------------------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
2.36% 8.20% 9.55%
Comparison of Change in Value of $10,000 Investment in the Bond Fund, Lehman
Brothers BAA Corporate Index and Lipper Corporate Debt BBB Rated Fund Average
-----------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total BAA BBB
December 31, Return Index Avg
10,000 10,000 10,000
1988 10,991 11,129 10,900
1989 12,514 12,699 12,060
1990 13,167 13,595 12,751
1991 15,369 16,113 15,020
1992 16,810 17,512 16,258
1993 18,771 19,665 18,261
1994 18,227 18,707 17,447
1995 22,268 22,959 20,948
1996 22,794 23,882 21,616
Note: Past performance is not predictive of future performance.
Principal High Yield Fund
(James K. Hovey)
While most bond investments had very low returns for 1996, high yield bonds
in general and the Principal High Yield Fund included had a good year. The
Fund's total return for 1996 was 13.13% which compares to 11.35% for the Lehman
Brothers High Yield Index and 13.67% for the Lipper High Current Yield Fund
Average. For comparison, 10 year U.S. Treasury bonds had a total return for 1996
of 0.04%. This low return was caused by increasing interest rates causing the
value of Treasury bonds to fall.
High yield bonds are somewhat insulated from interest rate movements due to
their characteristic of a large risk premium or spread that can offset general
interest rate movements for assets with less credit risk. In 1996, the risk
premium for high yield bonds declined enough to not only offset the risk free
interest rate increase, but also to allow price increases of many high yield
bonds. While the annual total return performance was similar to both Lipper and
Lehman, the Fund underperformed both during the first two quarters and
outperformed during the third and fourth quarters of the year. Our Fund has a B+
average credit rating and has approximately the same amount of BB exposure as B
exposure. This more closely resembles the Lehman index while high yield mutual
funds, as reflected by the Lipper average, typically have a riskier credit
profile than our Fund. This risk profile was an advantage to the Lipper average
over the first two quarters as risk premium tightening was more pronounced in
riskier bonds. Our Fund significantly outperformed in the fourth quarter due to
excellent performance by individual securities that were upgraded or for which
tender offers had been received at attractive levels. Our Fund also benefited
over the course of the year by not having any credit defaults. The return
performance of the Fund during 1996 is a good indicator of how high yield is a
worthwhile asset class that can enhance diversification. The decline of risk
premiums will make outperformance of other types of income oriented funds more
difficult going forward, but also makes our conservative risk position even more
appropriate.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
13.13% 11.20% 9.89%
Comparison of Change in Value of $10,000 Investment in the High Yield Fund,
Lehman Brothers High Yield Index and Lipper High Current Yield Fund Average
Fund Lehman Lipper
Year Ended Total High Yield Narrow
December 31, Return Index Index
10,000 10,000 10,000
1988 11,492 11,524 11,298
1989 11,735 11,620 11,239
1990 10,831 10,506 10,059
1991 13,788 15,346 13,876
1992 15,798 17,764 16,352
1993 17,743 20,803 19,500
1994 17,854 20,593 18,753
1995 20,725 24,549 21,844
1996 23,446 27,335 24,830
Note: Past performance is not predictive of future performance.
Important Notes of the Income-Oriented Funds:
Lehman Brothers, BAA Corporate Index: an unmanaged index of all publicly issued
fixed rate nonconvertible, dollar-denominated, SEC-registered corporate debt
rated Baa or BBB by Moody's or S&P.
Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average
currently contains 102 mutual funds.
Lehman Brothers High Yield Index: an unmanaged index of all publicly issued
fixed, dollar-denominated, SEC-registered corporate debt rated Ba1 or lower with
at least $100 million outstanding and one-year or more to maturity.
Lipper High Current Yield Fund Average: this average consists of mutual funds
investing in high (relative) current yield fixed income securities with no
quality or maturity restrictions. The mutual funds tend to invest in lower grade
debt issues. The one year average currently contains 148 mutual funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE OF FUND SHARES
The net asset value of each Fund's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange,
except on days on which changes in the value of the Fund's portfolio securities
will not materially affect the current net asset value of the Fund's redeemable
securities, on days during which a Fund receives no order for the purchase or
sale of its redeemable securities and no tender of such a security for
redemption, and on customary national business holidays. The net asset value per
share of each Fund is determined by dividing the value of the Fund's securities
plus all other assets, less all liabilities, by the number of Fund shares
outstanding.
Growth-Oriented and Income-Oriented Funds
The following valuation information applies to the Growth-Oriented and
Income-Oriented Funds. Securities for which market quotations are readily
available are valued using those quotations. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.
As previously described, some of the Funds may purchase foreign securities
whose trading is substantially completed each day at various times prior to the
close of the New York Stock Exchange. The values of such securities used in
computing net asset value per share are usually determined as of such times.
Occasionally, events which affect the values of such securities and foreign
currency exchange rates may occur between the times at which they are generally
determined and the close of the New York Stock Exchange and would therefore not
be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
by the Manager under procedures established and regularly reviewed by the Board
of Directors. To the extent the Fund invests in foreign securities listed on
foreign exchanges which trade on days on which the Fund does not determine its
net asset value, for example Saturdays and other customary national U.S.
Holidays, the Fund's net asset value could be significantly affected on days
when shareholders have no access to the Fund.
Money Market Fund
The Money Market Fund values its securities at amortized cost. For a
description of this calculation procedure see the Funds' Statement of Additional
Information.
PERFORMANCE CALCULATION
From time to time, the Funds may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Funds. The Funds' yield and total return
figures described below will vary depending upon market conditions, the
composition of the Funds' portfolios and operating expenses. These factors and
possible differences in the methods used in calculating yield and total return
should be considered when comparing the Funds' performance figures to
performance figures published for other investment vehicles. The Funds may also
quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices. Any performance data quoted for the Funds represents only
historical performance and is not intended to indicate future performance of the
Funds. The calculation of average annual total return and yield for the Funds
does not include fees and charges of the separate accounts that invest in the
Funds and, therefore, does not reflect the investment performance of those
separate accounts. For further information on how the Funds calculate yield and
total return figures, see the Statement of Additional Information.
Average Annual Total Return
Each Fund may advertise its respective average annual total return. Average
annual total return for each Fund is computed by calculating the average annual
compounded rate of return over the stated period that would equate an initial
$1,000 investment to the ending redeemable value assuming the reinvestment of
all dividends and capital gains distributions at net asset value. The same
assumptions are made when computing cumulative total return by dividing the
ending redeemable value by the initial investment. The Funds may also quote
rankings, yields or returns as published by independent statistical services or
publishers, and information regarding the performance of certain market indices.
Yield and Effective Yield
From time to time the Money Market Fund may advertise its respective yield
and effective yield. The yield of the Fund refers to the income generated by an
investment in the Fund over a seven-day period. This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
The yield for the Money Market Fund will fluctuate daily as the income
earned on the investments of the Fund fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Fund is an open-end investment company and there is no
guarantee that the net asset value or any stated rate of return will remain
constant. A shareholder's investment in the Fund is not insured. Investors
comparing results of the Fund with investment results and yields from other
sources such as banks or savings and loan associations should understand these
distinctions. Historical and comparative yield information may, from time to
time, be presented by the Fund.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
It is the policy of each Fund to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Funds intend to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which a
Fund so qualifies it will be exempt from federal income tax upon the amounts so
distributed to investors.
Any dividends from the net investment income of the Funds (except the Money
Market Fund) will normally be payable to the shareholders annually, and any net
realized gains will be distributed annually. All dividends and capital gains
distributions are applied to purchase additional Fund shares at net asset value
as of the payment date without the imposition of any sales charge.
Each Fund will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Funds to consult with tax advisors on the federal and
state tax aspects of their investments and redemptions.
Money Market Fund
The Money Market Fund declares dividends of all its daily net investment
income on each day the Fund's net asset value per share is determined. Dividends
are payable daily and are automatically reinvested in full and fractional shares
of the Fund at the then current net asset value unless a shareholder requests
payment in cash.
Net investment income, for dividend purposes, consists of (1) accrued
interest income plus or minus accrued discount or amortized premium; plus or
minus (2) all net short-term realized gains and losses; minus (3) all accrued
expenses of the Fund. Expenses of the Fund are accrued each day. Net income will
be calculated immediately prior to the determination of net asset value per
share of the Fund.
Since the Fund's policy is, under normal circumstances, to hold portfolio
securities to maturity and to value portfolio securities at amortized cost, it
does not expect any capital gains or losses. If the Fund does experience gains,
however, it could result in an increase in dividends. Capital losses could
result in a decrease in dividends. If for some extraordinary reason the Fund
realizes net long-term capital gains, it will distribute them once every 12
months.
Since the net income of the Fund (including realized gains and losses on
the portfolio securities) is declared as a dividend each time the net income of
the Fund is determined, the net asset value per share of the Fund normally
remains at $1.00 immediately after each determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Fund,
representing reinvestment of dividend income, is reflected by an increase in the
number of shares of the Fund in the account.
Normally the Fund will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Fund determined
at any time is a negative amount, the net asset value per share will be reduced
below $1.00. If this happens, the Fund may endeavor to restore the net asset
value per share to $1.00 by reducing the number of outstanding shares by
redeeming proportionately from shareholders without the payment of any monetary
consideration, such number of full and fractional shares as is necessary to
maintain a net asset value per share of $1.00. Each shareholder will be deemed
to have agreed to such a redemption in these circumstances by investing in the
Fund. The Fund may seek to achieve the same objective of restoring the net asset
value per share to $1.00 by not declaring dividends from net income on
subsequent days until restoration, with the result that the net asset value per
share would increase to the extent of positive net income which is not declared
as a dividend, or any other method approved by the Board of Directors.
The Board of Directors may revise the above dividend policy, or postpone
the payment of dividends, if the Fund should have or anticipate any large
presently unexpected expense, loss or fluctuation in net assets which in the
opinion of the Board might have a significant adverse affect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Funds. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Fund shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of each
Fund reserves the right to broaden or limit the designation of Eligible
Purchasers.
Principal Balanced, Principal Bond, Principal Capital Accumulation Fund,
Principal Emerging Growth and Principal Money Market Fund each serve as an
underlying investment medium for variable annuity contracts and variable life
insurance policies that are funded in separate accounts established by Principal
Mutual Life Insurance Company. It is conceivable that in the future it may be
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the Funds simultaneously. Although
neither Principal Mutual Life Insurance Company nor the Funds currently foresee
any such disadvantages either to variable life insurance policy owners or to
variable annuity contract owners, each Fund's Board of Directors intends to
monitor events in order to identify any material conflicts between such policy
owners and contract owners and to determine what action, if any, should be taken
in response thereto. Such action could include the sale of Fund shares by one or
more of the separate accounts, which could have adverse consequences. Material
conflicts could result from, for example, (1) changes in state insurance laws,
(2) changes in Federal income tax law, (3) changes in the investment management
of the Fund, or (4) differences in voting instructions between those given by
policy owners and those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Funds. There are no sales charges on the Funds'
shares. There are no restrictions on amounts to be invested in the Funds'
shares.
Shareholder accounts for each Fund will be maintained under an open account
system. Under this system, an account is automatically opened and maintained for
each new investor. Each investment is confirmed by sending the investor a
statement of account showing the current purchase and the total number of shares
then owned. The statement of account is treated by each Fund as evidence of
ownership of Fund shares in lieu of stock certificates, and unless written
request is made to the Fund, stock certificates will not be issued or delivered
to investors. Certificates, which can be stolen or lost, are unnecessary except
for special purposes such as collateral for a loan. Fractional interests in the
Funds' shares are reflected to three decimal places in the statement of account,
but any stock certificates will be issued only for full shares owned.
If an offer to purchase shares is received by any of the Funds before the
close of trading on the New York Stock Exchange, the shares will be issued at
the offering price (net asset value of Fund shares) computed on that day. If an
offer is received after the close of trading or on a day which is not a trading
day, the shares will be issued at the offering price computed on the first
succeeding day on which a price is determined. Dividends on the Money Market
Fund shares will be paid on the next day following the effective date of a
purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each of the Principal Funds.
Each Fund share is entitled to one vote either in person or by proxy at all
shareholder meetings for that Fund. This includes the right to vote on the
election of directors, selection of independent accountants and other matters
submitted to meetings of shareholders. Each share has equal rights with every
other share as to dividends, earnings, voting, assets and redemption. Shares are
fully paid and non-assessable, and have no preemptive or conversion rights.
Shares may be issued as full or fractional shares, and each fractional share has
proportionately the same rights, including voting, as are provided for a full
share. Shareholders of each of these Funds may remove any director with or
without cause by the vote of a majority of the votes entitled to be cast at a
meeting of shareholders.
The bylaws of each Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of each Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Funds intend to hold shareholder meetings only when required by
law and at such other times as may be deemed appropriate by their respective
Boards of Directors.
Shareholder inquiries should be directed to the applicable Fund at The
Principal Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Funds' shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of a Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Fund's shares allocated
to each of its separate accounts registered under the Investment Company Act of
1940 and attributable to variable annuity contracts or variable life insurance
policies participating therein in accordance with instructions received from
contract or policy holders, participants and annuitants. Other shares of each
Fund held by each registered separate account, including those for which no
timely instructions are received, are voted in proportion to the instructions
that are received with respect to contracts or policies participating in that
separate account. Shares of each of the Funds held in the general account of
Principal Mutual Life Insurance Company or in its unregistered separate accounts
are voted in proportion to the instructions that are received with respect to
contracts and policies participating in its registered and unregistered separate
accounts. If Principal Mutual determines pursuant to applicable law that a
Fund's shares held in one or more separate accounts or in its general account
need not be voted pursuant to instructions received with respect to
participating contracts or policies, it then may vote those Fund shares in its
own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Fund will redeem its shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Fund requesting redemption of any part or all of the
shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, the Fund will not require a signature guarantee as a part of a
proper endorsement; otherwise the shareholder's signature must be guaranteed by
either a commercial bank, trust company, credit union, savings and loan
association, national securities exchange member, or by a brokerage firm. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Fund in proper and complete form. The amount received for shares
upon redemption may be more or less than the cost of such shares depending upon
the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Fund may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Fund of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Fund
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Fund. A Fund will
redeem only those shares for which it has good payment. To avoid the
inconvenience of such a delay, shares may be purchased with a certified check,
bank cashier's check or money order. During the period prior to the time a
redemption from the Money Market Fund is effective, dividends on such shares
will accrue and be payable and the shareholder will be entitled to exercise all
other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Funds may be transferred to an
Eligible Purchaser. However, whenever any of the Funds is requested to transfer
shares to other than an Eligible Purchaser, the Fund has the right at its
election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Fund must notify the transferee or transferees of such shares
in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Funds. The
custodian performs no managerial or policymaking functions for the Funds.
Organization and Share Ownership: The Funds were incorporated in the state
of Maryland on the following dates: Balanced Fund - November 26, 1986; Bond Fund
- - November 26, 1986; Capital Accumulation Fund - May 26, 1989 (effective
November 1, 1989 succeeded to the business of a predecessor Fund that had been
incorporated in Delaware on February 6, 1969); Emerging Growth Fund - February
20, 1987; High Yield Fund - December 2, 1986; and Money Market Fund - June 10,
1982. Principal Mutual Life Insurance Company owns 100% of each Fund's
outstanding shares.
Capitalization: The authorized capital stock of each Fund consists of
100,000,000 shares of common stock (500,000,000 for Principal Money Market Fund,
Inc.), $.01 par value.
Financial Statements: Copies of the financial statements of each Fund will
be mailed to each shareholder of that Fund semi-annually. At the close of each
fiscal year, each Fund's financial statements will be audited by a firm of
independent auditors. The firm of Ernst & Young LLP has been appointed to audit
the financial statements of each Fund for their respective present fiscal years.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the
Funds have filed with the Securities and Exchange Commission. The Funds'
Statement of Additional Information is hereby incorporated by reference into
this Prospectus. A copy of the Funds' Statement of Additional Information can be
obtained upon request, free of charge, by writing or telephoning the Fund. You
may obtain a copy of Part C of the Registration Statements filed with the
Securities and Exchange Commission, Washington, D.C., from the Commission upon
payment of the prescribed fees.
Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for each of the Principal Funds.
