The Principal Mutual Funds ("Principal Funds") described in this Prospectus
are a family of separately incorporated, diversified, open-end management
investment companies, commonly called mutual funds, which provide the following
range of investment objectives:
Growth-Oriented Funds
PRINCIPAL Aggressive Growth Fund, Inc. seeks to provide long-term capital
appreciation by investing primarily in growth-oriented common stocks of medium
and large capitalization U.S. corporations and, to a limited extent, foreign
corporations.
PRINCIPAL Asset Allocation Fund, Inc. seeks to generate a total investment
return consistent with the preservation of capital.
PRINCIPAL Balanced Fund, Inc. seeks to generate a total return consisting
of current income and capital appreciation while assuming reasonable risks in
furtherance of the investment objective.
PRINCIPAL Capital Accumulation Fund, Inc. seeks to achieve primarily
long-term capital appreciation and secondary growth of investment income through
the purchase primarily of common stocks, but the Fund may invest in other
securities.
PRINCIPAL Emerging Growth Fund, Inc. seeks to achieve capital appreciation
by investing primarily in securities of emerging and other growth-oriented
companies.
PRINCIPAL Growth Fund, Inc. seeks growth of capital through the purchase
primarily of common stocks, but the Fund may invest in other securities.
PRINCIPAL World Fund, Inc. seeks long-term growth of capital by investing
in a portfolio of equity securities of companies domiciled in any of the nations
of the world.
Income-Oriented Funds
PRINCIPAL Bond Fund, Inc. seeks to provide as high a level of income as is
consistent with preservation of capital and prudent investment risk.
PRINCIPAL Government Securities Fund, Inc. seeks a high level of current income,
liquidity and safety of principal. The Fund seeks to achieve its objective
through the purchase of obligations issued or guaranteed by the United States
Government or its agencies, with emphasis on Government National Mortgage
Association Certificates ("GNMA Certificates"). Fund shares are not guaranteed
by the United States Government.
Money Market Fund
PRINCIPAL Money Market Fund, Inc. seeks as high a level of income available from
short-term securities as is considered consistent with preservation of principal
and maintenance of liquidity by investing all of its assets in a portfolio of
money market instruments.
An investment in the Money Market fund is neither insured nor guaranteed by
the U.S. Government. There can be no assurance the Money Market Funds will be
able to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Funds that
an investor ought to know before investing. It should be read and retained for
future reference.
Additional information about the Funds has been filed with the Securities
and Exchange Commission, including a document called Statement of Additional
Information, dated March 31, 1995. The Statement of Additional Information is
incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Mutual Funds
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is March 31, 1995.
<PAGE>
TABLE OF CONTENTS
Page
Summary ................................................................... 3
Financial Highlights ...................................................... 5
Investment Objectives, Policies and Restrictions .......................... 7
Certain Investment Policies and Restrictions .............................. 15
Manager and Sub-Advisors .................................................. 17
Duties Performed by the Manager and Sub-Advisors .......................... 19
Managers' Comments ........................................................ 20
Determination of Net Asset Value of Fund Shares ........................... 26
Performance Calculation ................................................... 26
Income Dividends, Distributions and Tax Status ............................ 27
Eligible Purchasers and Purchase of Shares ................................ 28
Shareholder Rights ........................................................ 29
Redemption of Shares ...................................................... 29
Additional Information .................................................... 30
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, the securities of any of the Funds in any jurisdiction in which
such sale, offer to sell, or solicitation may not be lawfully made. No dealer,
salesperson, or other person has been authorized to give any information or to
make any representations, other than those contained in this Prospectus, in
connection with the offer contained in this Prospectus, and, if given or made,
such other information or representations must not be relied upon as having been
authorized by the Funds or the Funds' Manager.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Funds are separately incorporated, open-end diversified
management investment companies.
Who may purchase shares of the Funds?
Shares of the Funds are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of each Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Funds offer investors?
Professional Investment Management: Experienced securities analysts provide
each Fund with professional investment management.
Diversification: Each Fund will diversify by investing in securities issued
by a number of issuers doing business in a variety of industries and/or located
in different geographical regions. Diversification reduces investment risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Funds creates administrative efficiencies.
Redeemability: Upon request each Fund will redeem its shares and
promptly pay the investor the current net asset value of the shares redeemed.
See "Redemption of Shares."
What are the Funds' investment objectives?
Growth-Oriented Funds
The investment objective of Principal Aggressive Growth Fund, Inc.
(sometimes referred to as the Aggressive Growth Fund) is to provide long-term
capital appreciation by investing primarily in growth-oriented common stocks of
medium and large capitalization U.S. corporations and, to a limited extent,
foreign corporations.
The investment objective of Principal Asset Allocation Fund, Inc.
(sometimes referred to as the Asset Allocation Fund) is to generate a total
investment return consistent with the preservation of capital. The Fund intends
to pursue a flexible investment policy in seeking to achieve this investment
objective.
The investment objective of Principal Balanced Fund, Inc. (sometimes
referred to as the Balanced Fund) is to seek to generate a total return
consisting of current income and capital appreciation while assuming reasonable
risks in furtherance of this objective.
The primary investment objective of Principal Capital Accumulation Fund,
Inc. (sometimes referred to as the Capital Accumulation Fund) is long-term
capital appreciation and its secondary investment objective is growth of
investment income. The Fund seeks to achieve its investment objectives through
the purchase primarily of common stocks, but the Fund may invest in other
securities.
The investment objective of Principal Emerging Growth Fund, Inc. (sometimes
referred to as the Emerging Growth Fund) is to achieve capital appreciation by
investing primarily in securities of emerging and other growth-oriented
companies.
The investment objective of Principal Growth Fund, Inc. (sometimes referred
to as the Growth Fund) is growth of capital. The Fund seeks to achieve its
objective through the purchase primarily of common stocks, but the Fund may
invest in other securities.
The investment objective of Principal World Fund, Inc. (sometimes referred
to as the World Fund) is to seek long-term growth of capital by investing in a
portfolio of equity securities domiciled in any of the nations of the world.
Income-Oriented Funds
The investment objective of Principal Bond Fund, Inc. (sometimes referred
to as the Bond Fund) is to provide as high a level of income as is consistent
with preservation of capital and prudent investment risk.
The investment objective of Principal Government Securities Fund, Inc.
(sometimes referred to as the Government Securities Fund) is to seek a high
level of current income, liquidity and safety of principal. The Fund seeks to
achieve its objective through the purchase of obligations issued or guaranteed
by the United States Government or its agencies, with emphasis on Government
National Mortgage Association Certificates ("GNMA Certificates"). Fund shares
are not guaranteed by the United States Government.
Money Market Fund
The investment objective of Principal Money Market Fund, Inc. (sometimes
referred to as the Money Market Fund) is to seek as high a level of current
income available from short-term securities as is considered consistent with
preservation of principal and maintenance of liquidity by investing all of its
assets in a portfolio of money market instruments.
There can be no assurance that the investment objectives of any of the
Funds will be realized. See "Investment Objectives, Policies and
Restrictions."
Who serves as Manager for the Funds?
Princor Management Corporation, a corporation organized in 1969 by
Principal Mutual Life Insurance Company, is the Manager for each of the Funds.
It is also the dividend disbursing and transfer agent for the Principal Funds.
In order to provide investment advisory service for certain funds the Manager
has executed sub-advisory agreements with Invista Capital Management, Inc.
(Balanced Fund, Growth Fund and World Fund) and Morgan Stanley Asset Management
Inc. (Aggressive Growth Fund and Asset Allocation Fund). Subsequent references
to these corporations may be as "Invista", "MSAM" or "Sub-Advisor". See "Manager
and Sub-Advisors." What fees and expenses apply to ownership of shares of the
Funds?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Funds.
ANNUAL FUND OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Fund Fee Expenses Expenses
Aggressive Growth Fund ................. .80 .23* 1.03*
Asset Allocation Fund .................. .80 .15* .95*
Balanced Fund .......................... .60 .09 .69
Bond Fund .............................. .50 .08 .58
Capital Accumulation Fund .............. .49 .02 .51
Emerging Growth Fund ................... .65 .09 .74
Government Securities Fund ............. .50 .06 .56
Growth Fund ............................ .50 .25* .75*
Money Market Fund ...................... .50 .10 .60
World Fund ............................. .75 .49* 1.24*
*Based on estimated amounts for the current fiscal year.
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Period (in years)
Fund 1 3 5 10
Aggressive Growth Fund $11 $33
Asset Allocation Fund $10 $30
Balanced Fund $7 $22 $38 $86
Bond Fund $6 $19 $32 $73
Capital Accumulation Fund $5 $16 $29 $64
Emerging Growth Fund $8 $24 $41 $92
Government Securities Fund $6 $18 $31 $70
Growth Fund $8 $24
Money Market Fund $6 $19 $33 $75
World Fund $13 $39
This Example is based on the Annual Fund Operating expenses for each Fund
described above. Please remember that the Example should not be considered a
representation of past or future expenses and that actual expenses may be
greater or less than shown.
The purpose of the above table is to assist the investor in understanding the
various expenses that an investor in the Funds will bear directly or indirectly.
See "Duties Performed by the Manager and Sub-Advisors." FINANCIAL HIGHLIGHTS
The following financial highlights for the periods ended December 31, 1994
and prior thereto are derived from financial statements which have been audited
by Ernst & Young LLP, independent auditors. 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.
<PAGE>
Income from Investment Options Less Distributions
------------------------------ ---------------------------
Net Realized Dividends
and Total from Distri-
Net Asset Net Unrealized from Net bution
Value at Invest- Gain Invest- Invest- from Total
Beginning ment (Loss) on ment ment Capital Distri-
of Period Income Investments Operations Income Gains butions
--------- ------ ----------- ---------- ------ ----- -------
Principal
Aggressive
Growth
Fund, Inc.
Period Ended
December 31,
1994(c) $ 9.92 $ .05 $ .24 $ .29 $(.05) $(.05) $(.10)
Principal
Asset
Allocation
Fund, Inc.
Period Ended
December 31,
1994(c) 9.98 .23 (.18) .05 (.23) (.01) (.24)
Principal
Balanced
Fund, Inc.(f)
Year Ended
December 31,
1994 12.77 .37 (.64) (.27) (.37) (.18) (.55)
1993 12.58 .42 .95 1.37 (.42) (.76) (1.18)
Six Months
Ended
December 31,
1992(e) 12.93 .23 .75 .98 (.47) (.86) (1.33)
Year Ended
June 30,
1992 11.33 .47 1.61 2.08 (.48) - (.48)
1991 10.79 .54 .59 1.13 (.57) (.02) (.59)
1990 11.89 .60 (.48) .12 (.63) (.59) (1.22)
1989 11.75 .62 .30 .92 (.55) (.23) (.78)
Period Ended
June 30,
1988(d) 10.00 .27 1.51 1.78 (.03) - (.03)
Principal
Bond Fund, Inc.
Year Ended
December 31,
1994 11.16 .72 (1.04) (.32) (.72) - (.72)
1993 10.77 .88 .38 1.26 (.87) - (.87)
Six Months
Ended
December 31,
1992(e) 11.08 .45 .13 .58 (.89) - (.89)
Year Ended
June 30,
1992 10.64 .91 .46 1.37 (.93) - (.93)
1991 10.72 .94 (.06) .88 (.96) - (.96)
1990 10.92 .95 (.21) .74 (.94) - (.94)
1989 10.68 1.15 .17 1.32 (.96) (.12) (1.08)
Period Ended
June 30,
1988(d) 10.00 .32 .40 .72 (.04) - (.04)
Principal
Capital
Accumulation
Fund, Inc.
Year Ended
December 31,
1994 24.61 .62 (.49) .13 (.61) (.69) (1.30)
1993 25.19 .61 1.32 1.93 (.60) (1.91) (2.51)
Six Months
Ended
December 31,
1992(e) 26.03 .31 1.84 2.15 (.64) (2.35) (2.99)
Year Ended
June 30,
1992 23.35 .65 2.70 3.35 (.67) - (.67)
1991 22.48 .74 1.22 1.96 (.79) (.30) (1.09)
1990 23.63 .79 .14 .93 (.81) (1.27) (2.08)
1989 23.23 .77 1.32 2.09 (.68) (1.01) (1.69)
1988 27.51 .60 (1.50) (.90) (.69) (2.69) (3.38)
1987 25.48 .40 4.46 4.86 (.50) (2.33) (2.83)
1986 21.93 .51 6.65 7.16 (.66) (2.95) (3.61)
1985 20.50 .67 3.73 4.40 (.59) (2.38) (2.97)
<PAGE>
Ratios/Supplemental Data
------------------------------------------------
Ratio of
Net Assets Net
Net Asset at End Ratio of Investment
Value at of Period Expenses Income to Portfolio
End Total (in to Average Average Turnover
of Period Return thousands) Net Assets Net Assets Rate
--------- ------ ---------- ---------- ----------- ---------
Principal
Aggressive
Growth
Fund, Inc.
Period Ended
December 31,
1994(c) $10.11 2.59%(b) $ 13,770 1.03%(a) 1.06%(a) 105.6%(a)
Principal
Asset
Allocation
Fund, Inc.
Period Ended
December 31,
1994(c) 9.79 .52%(b) 28,041 .95%(a) 4.27%(a) 60.7%(a)
Principal
Balanced
Fund, Inc.(f)
Year Ended
December 31,
1994 11.95 (2.09)% 25,043 .69% 3.42% 31.5%
1993 12.77 11.06% 21,399 .69% 3.30% 15.8%
Six Months
Ended
December 31,
1992(e) 12.58 8.00%(b) 18,842 .73%(a) 3.71%(a) 38.4%(a)
Year Ended
June 30,
1992 12.93 18.78% 17,344 .72% 3.80% 26.6%
1991 11.33 11.36% 14,555 .73% 5.27% 27.1%
1990 10.79 .87% 13,016 .74% 5.52% 33.1%
1989 11.89 8.55% 12,751 .74% 5.55% 29.3%
Period Ended
June 30,
1988(d) 11.75 17.70%(b) 11,469 .80%(a) 4.96%(a) 41.7%(a)
Principal
Bond Fund, Inc.
Year Ended
December 31,
1994 10.12 (2.90)% 17,108 .58% 7.86% 18.2%
1993 11.16 11.67% 14,387 .59% 7.57% 14.0%
Six Months
Ended
December 31,
1992(e) 10.77 5.33%(b) 12,790 .62%(a) 8.10%(a) 6.7%(a)
Year Ended
June 30,
1992 11.08 13.57% 12,024 .62% 8.47% 6.1%
1991 10.64 8.94% 10,552 .63% 9.17% 2.7%
1990 10.72 7.15% 9,658 .64% 9.09% 0.0%
1989 10.92 13.51% 9,007 .64% 9.18% 12.2%
Period Ended
June 30,
1988(d) 10.68 6.06%(b) 17,598 .58%(a) 8.11%(a) 68.8%(a)
Principal
Capital
Accumulation
Fund, Inc.
Year Ended
December 31,
1994 23.44 .49% 120,572 .51% 2.36% 44.5%
1993 24.61 7.79% 128,515 .51% 2.49% 25.8%
Six Months
Ended
December 31,
1992(e) 25.19 8.81%(b) 105,355 .55%(a) 2.56%(a) 39.7%(a)
Year Ended
June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8%
1991 23.35 9.46% 76,537 .53% 3.53% 14.0%
1990 22.48 3.94% 74,008 .56% 3.56% 30.2%
1989 23.63 10.02% 68,132 .57% 3.53% 23.5%
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7%
1987 27.51 22.17% 57,478 .63% 1.99% 16.1%
1986 25.48 38.37% 35,960 .60% 2.63% 37.8%
1985 21.93 25.95% 22,898 .59% 3.33% 42.9%
<PAGE>
(a) Computed on an annualized basis.
(b) Total return amounts have not been annualized.
(c) Period from June 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Aggressive Growth Fund, Inc. and $.01 per share for Principal
Asset Allocation Fund, Inc. for the period from the initial purchase of
shares on May 23, 1994 through May 31, 1994, was recognized, none of which
was distributed to the sole stockholder, Principal Mutual Life Insurance
Company, during the period. Additionally, Principal Aggressive Growth Fund,
Inc. and Principal Asset Allocation Fund, Inc. incurred unrealized losses on
investments of $.09 and $.03 per share, respectively, per share during the
initial interim period. This represented activities of each fund prior to
the initial public offering of fund shares.
(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.
(e) Effective July 1, 1992, the fund changed its fiscal year end from June 30 to
December 31.
(f) Effective May 1, 1994, the name of Principal Managed Fund, Inc. was changed
to Principal Balanced Fund, Inc.
<PAGE>
Income from Investment Options Less Distributions
------------------------------ ---------------------------
Net Realized Dividends
and Total from Distri-
Net Asset Net Unrealized from Net bution
Value at Invest- Gain Invest- Invest- from Total
Beginning ment (Loss) on ment ment Capital Distri-
of Period Income Investments Operations Income Gains butions
--------- ------ ----------- ---------- ------ ----- -------
Principal
Emerging
Growth
Fund, Inc.(f)
Year Ended
December 31,
1994 $20.79 $.14 $ .03 $ .17 $(.14) $ (.85) $ (.99)
1993 18.91 .17 3.47 3.64 (.17) (1.59) (1.76)
Six Months
Ended
December 31,
1992(g) 15.97 .10 3.09 3.19 (.21) (.04) (.25)
Year Ended
June 30,
1992 13.93 .21 2.04 2.25 (.21) - (.21)
1991 14.25 .20 .50 .70 (.23) (.79) (1.02)
1990 13.35 .24 .87 1.11 (.20) (.01) (.21)
1989 12.85 .16 1.35 1.51 (.11) (.90) (1.01)
Period Ended
June 30,
1988(c) 10.00 .05 2.83 2.88 (.03) - (.03)
Principal
Government
Securities
Fund, Inc.
Year Ended
December 31,
1994 10.61 .76 (1.24) (.48) (.75) - (.75)
1993 10.28 .71 .33 1.04 (.71) - (.71)
Six Months
Ended
December 31,
1992(g) 10.93 .40 .04 .44 (.78) (.31) (1.09)
Year Ended
June 30,
1992 10.24 .80 .71 1.51 (.81) (.01) (.82)
1991 10.05 .80 .24 1.04 (.81) (.04) (.85)
1990 10.05 .78 - .78 (.78) - (.78)
1989 9.37 .80 .34 1.14 (.46) - (.46)
1988 9.47 .78 (.09) .69 (.79) - (.79)
Period Ended
June 30,
1987(d) 10.00 .18 (.59) (.41) (.12) - (.12)
Principal
Growth
Fund, Inc.
Period Ended
December 31,
1994(e) 9.60 .07 .51 .58 (.08) - (.08)
Principal
Money Market
Fund, Inc.
Year Ended
December 31,
1994 1.000 .037 - .037 (.037) - (.037)
1993 1.000 .027 - .027 (.027) - (.027)
Six Months
Ended
December 31,
1992(g) 1.000 .016 - .016 (.016) - (.016)
Year Ended
June 30,
1992 1.000 .046 - .046 (.046) - (.046)
1991 1.000 .070 - .070 (.070) - (.070)
1990 1.000 .077 - .077 (.077) - (.077)
1989 1.000 .083 - .083 (.083) - (.083)
1988 1.000 .064 - .064 (.064) - (.064)
1987 1.000 .057 - .057 (.057) - (.057)
1986 1.000 .070 - .070 (.070) - (.070)
1985 1.000 .089 - .089 (.089) - (.089)
Principal
World
Fund, Inc.
Period Ended
December 31,
1994(e) 9.94 .03 (.33) (.30) (.07) (.01) (.08)
<PAGE>
Ratios/Supplemental Data
------------------------------------------------
Ratio of
Net Assets Net
Net Asset at End Ratio of Investment
Value at of Period Expenses Income to Portfolio
End Total (in to Average Average Turnover
of Period Return thousands) Net Assets Net Assets Rate
--------- ------ ---------- ---------- ----------- ---------
Principal
Emerging
Growth
Fund, Inc.(f)
Year Ended
December 31,
1994 $19.97 .78% $23,912 .74% 1.15% 12.0%
1993 20.79 19.28% 12,188 .78% .89% 22.4%
Six Months
Ended
December 31,
1992(g) 18.91 20.12%(b) 9,693 .81%(a) 1.24%(a) 8.6%(a)
Year Ended
June 30,
1992 15.97 16.19% 7,829 .82% 1.33% 10.1%
1991 13.93 5.72% 6,579 .89% 1.70% 11.1%
1990 14.25 8.32% 6,067 .88% 1.74% 17.9%
1989 13.35 13.08% 5,509 .90% 1.31% 21.4%
Period Ended
June 30,
1988(c) 12.85 28.72%(b) 4,857 .94%(a) .64%(a) 4.6%(a)
Principal
Government
Securities
Fund, Inc.
Year Ended
December 31,
1994 9.38 (4.53)% 36,121 .56% 7.05% 23.2%
1993 10.61 10.07% 36,659 .55% 7.07% 20.4%
Six Months
Ended
December 31,
1992(g) 10.28 4.10%(b) 31,760 .59%(a) 7.35%(a) 34.5%(a)
Year Ended
June 30,
1992 10.93 15.34% 33,022 .58% 7.84% 38.9%
1991 10.24 10.94% 26,021 .59% 8.31% 4.2%
1990 10.05 8.16% 21,488 .61% 8.48% 18.7%
1989 10.05 12.61% 15,890 .63% 8.68% 3.7%
1988 9.37 7.69% 12,902 .66% 8.47% 2.7%
Period Ended
June 30,
1987(d) 9.47 (.94)%(b) 10,778 .64%(a) 8.50%(a) .2%
Principal
Growth
Fund, Inc.
Period Ended
December 31,
1994(e) 10.10 5.42%(b) 13,086 .75%(a) 2.39%(a) .9%(a)
Principal
Money Market
Fund, Inc.
Year Ended
December 31,
1994 1.000 3.76% 29,372 .60% 3.81% N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A
Six Months
Ended
December 31,
1992(g) 1.000 1.54%(b) 27,680 .59%(a) 3.10%(a) N/A
Year Ended
June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A
1986 1.000 7.35% 8,896 .69% 7.06% N/A
1985 1.000 9.19% 7,720 .76% 8.80% N/A
Principal
World
Fund, Inc.
Period Ended
December 31,
1994(e) 9.56 (3.37)%(b) 13,746 1.24%(a) 1.31%(a) 14.4%(a)
<PAGE>
(a) Computed on an annualized basis.
(b) Total return amounts have not been annualized.
(c) 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.
(d) Period from April 9, 1987, date shares first offered to the public, through
June 30, 1987. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on October 31, 1987 through
December 17, 1987 was recognized, all of which was distributed to the Fund's
sole stockholder, Principal Mutual Life Insurance Company. This represented
activity of the Fund prior to the initial offering of shares to eligible
purchasers.
(e) Period from May 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share for
Principal Growth Fund, Inc. and $.04 per share for Principal World Fund,
Inc. for the period from the initial purchase of shares on March 23, 1994
through April 30, 1994, was recognized, none of which was distributed to the
sole stockholder, Principal Mutual Life Insurance Company, during the
period. Additionally, Principal Growth Fund, Inc. and Principal World Fund,
Inc. incurred unrealized losses on investments of $.41 and $.10 per share,
respectively, during the initial interim period. This represented activities
of each fund prior to the initial public offering of fund shares.
(f) Effective May 1, 1992, the name of Principal Aggressive Growth Fund, Inc.
was changed to Principal Emerging Growth Fund, Inc.
(g) Effective July 1, 1992 the fund changed its fiscal year end from June 30 to
December 31.
<PAGE>
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Fund are described below.
There can be no assurance that the objectives of the Funds will be realized.
GROWTH-ORIENTED FUNDS
The Principal Funds currently include five Funds which seek capital
appreciation through investments in equity securities (Principal Aggressive
Growth Fund, Principal Capital Accumulation Fund, Principal Emerging Growth
Fund, Principal Growth Fund and Principal World Fund) and two Funds which seek a
total investment return including both capital appreciation and income through
investments in equity and debt securities (Principal Asset Allocation Fund and
Principal Balanced Fund). These seven Funds are collectively referred to as the
Growth-Oriented Funds.
The Growth-Oriented Funds may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and American Depositary Receipts based
on any of the foregoing securities. The Aggressive Growth, Capital Accumulation,
Emerging Growth, Growth and World Funds will seek to be fully invested under
normal conditions in equity securities. When, in the opinion of the Manager or
Sub-Advisor, current market or economic conditions warrant, a Growth-Oriented
Fund may for temporary defensive purposes place all or a portion of its assets
in cash, on which the Fund would earn no income, cash equivalents, bank
certificates of deposit, bankers acceptances, repurchase agreements, commercial
paper, commercial paper master notes which are floating rate debt instruments
without a fixed maturity, United States Government securities, and preferred
stocks and debt securities, whether or not convertible into or carrying rights
for common stock. A Growth-Oriented Fund may also maintain reasonable amounts in
cash or short-term debt securities for daily cash management purposes or pending
selection of particular long-term investments.
Principal Aggressive Growth Fund
The Aggressive Growth Fund's investment objective is to provide long-term
capital appreciation by investing primarily in growth-oriented common stocks of
medium and large capitalization U.S. corporations and, to a limited extent,
foreign corporations. Common stocks for this purpose include common stocks and
equivalents, such as securities convertible into common stocks and securities
having common stock characteristics, such as rights and warrants to purchase
common stocks. Under normal circumstances, the Fund will invest at least 65% of
the value of its total assets in common stocks.
The Fund employs a flexible and eclectic investment process in pursuit of
its investment objective. In selecting stocks for the Fund, the Sub-Advisor,
MSAM, concentrates on a universe of rapidly growing, high quality companies and
lower but accelerating earnings growth situations. The Sub-Advisor's universe of
potential investments generally comprises companies with market capitalizations
of $750 million or more and is not restricted to specific market sectors. The
Sub-Advisor uses its research capabilities, analytical resources and judgment to
assess economic, industry and market trends, as well as individual company
developments, to select promising growth investments for the Fund. The
Sub-Advisor concentrates on companies with strong, communicative managements and
clearly defined strategies for growth. In addition, the Sub-Advisor rigorously
assesses company developments, including changes in strategic direction,
management focus and current and likely future earnings results. Valuation is
important to the Sub-Advisor but is viewed in the context of prospects for
sustainable earnings growth and the potential for positive earnings surprises
vis-a-vis consensus expectations. The Fund is free to invest in any common stock
which in the Sub-Advisor's judgment provides above average potential for capital
appreciation.
In selecting investments for the Fund, the Sub-Advisor emphasizes
individual security selection. The Fund's investments will generally be
diversified by industry but concentrated sector positions may result from the
investment process. The Fund has a long-term investment perspective; however,
the Sub-Advisor may take advantage of short-term opportunities that are
consistent with its objective by selling recently purchased securities which
have increased in value.
The Fund may invest in common stock and convertible securities of domestic
and foreign corporations. However, the Fund does not expect to invest more than
25% of its total assets at the time of purchase in securities of foreign
companies. The Fund may invest in securities of foreign issuers directly or in
the form of Depositary Receipts. The Fund may enter into forward foreign
currency exchange contracts which provide for the purchase or sale of foreign
currencies in connection with the settlement of foreign securities transactions
or to hedge the underlying currency exposure related to foreign investments. The
Fund will not enter into these commitments for speculative purposes. Investors
should recognize that investing in foreign companies involves certain special
considerations which are not typically associated with investing in U.S.
companies. See "Foreign Securities" and "Currency Contracts."
The Fund may invest in convertible securities of domestic and, subject to
the above restrictions, foreign issuers on occasions when, due to market
conditions, it is more advantageous to purchase such securities than common
stock. Convertible securities entitle the holder to exchange the securities for
a specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time and to receive interest or
dividends until the holder elects to exercise the conversion privilege. Since
the Fund invests in both common stocks and convertible securities, the risks of
investing in the general equity markets may be tempered to a degree by the
Fund's investments in convertible securities which are often not as volatile as
equity securities.
Principal Asset Allocation Fund
The Asset Allocation Fund seeks to generate a total investment return
consistent with preservation of capital. In seeking to achieve its objective,
the Fund intends to pursue a flexible investment policy by investing primarily
in the common stock and other securities having common stock characteristics of
large and small domestic or foreign companies that appear to be undervalued
relative to their earnings results or potential, or whose earnings growth
prospects appear to be more attractive than the economy as a whole, and domestic
or foreign fixed-income securities, including high yield securities when, in the
judgement of the Sub-Advisor, MSAM, it is appropriate to do so.
The securities in which the Fund invests will be identified as belonging to
an "asset class." Asset classes may include, but are not limited to, small
capitalization (companies whose market value is less than $1 billion) value
stocks, large capitalization (companies with a market value in excess of $1
billion) value stocks, small capitalization growth stocks, large capitalization
growth stocks, common stocks of foreign corporations, domestic fixed-income
securities, domestic high yield fixed-income securities, foreign fixed-income
securities, and money market instruments (debt securities maturing in one year
or less). "Value" stocks are generally defined as companies with distinctly
below average stock price to earnings ratios and stock price to book value
ratios, and higher than average dividend yields. "Growth" stocks are generally
defined as those companies whose earnings are expected to grow more rapidly than
the economy as a whole.
The allocation among asset classes is designed to lessen overall investment
risk through participation in a variety of types of investments in several
markets. Reallocation among asset classes, or the elimination of an asset class
for a period of time, will occur when in the Sub-Advisor's judgement such shift
offers the investor better prospects of achieving the overall investment
objective of the Fund. Under normal conditions, abrupt shifts among asset
classes will not occur and it is not the policy of the Sub-Advisor to attempt
market timing. The Sub-Advisor does not undertake to maintain a specific portion
of the Fund in any asset class, but expects that over time the investment mix
will be within the following ranges: 25% to 75% in equities, 20% to 60% in
fixed-income securities and 0% to 40% in money market instruments. Factors
involved with this decision will depend upon the judgement of the Sub-Advisor as
to general market and economic conditions, trends and investment yields and
interest rates and changes in fiscal or monetary policies. The Sub-Advisor will
seek to minimize declines in the net asset value per share; however, there is no
guarantee this goal can be achieved.
The Fund may invest in all types of common stocks and other equities and
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Fund may invest in both
exchange listed and over-the-counter securities, including American Depositary
Receipts ("ADRs") and closed end mutual funds. The Fund's investments in
corporate bonds and debentures and money market instruments are not restricted
by credit ratings or other objective investment criteria, except with respect to
bank certificates of deposit as set forth below. See "Below-Investment Grade
Bonds" for a discussion of the risks associated with these securities. Normally,
investments in below investment grade bonds are not expected to exceed 20% of
Fund assets. Securities purchases may be either U.S. dollar or Non-U.S. dollar
denominated.
To achieve its investment objective, the Fund may at times emphasize the
generation of interest income by investing in short, medium or long-term
fixed-income securities. Investment in those securities may also be made with a
view to realizing capital appreciation when the Sub-Advisor believes that
declining interest rates may increase market values.
Money market instruments in which the Fund may invest may include U.S.
Treasury bills, bank certificates of deposit, bankers acceptances, repurchase
agreements, commercial paper and commercial paper master notes which are
floating rate debt instruments without a fixed maturity, and non-U.S. dollar
denominated money market instruments. The Fund will only invest in domestic bank
certificates of deposit issued by banks which are members of the Federal Reserve
System that have total deposits in excess of $1 billion.
The Fund may invest in U.S. government securities including U.S. Treasury
obligations and obligations of certain agencies such as the Government National
Mortgage Association which are supported by the full faith and credit of the
United States, as well as obligations of certain other federal agencies or
instrumentalities which are backed only by the right of the issuer to borrow
limited funds from the U.S. Treasury, by the discretionary authority of the U.S.
government to purchase such obligations or by the credit of the agency or
instrumentality itself.
Principal Balanced Fund
The investment objective of Principal Balanced Fund is to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of the investment objective. The term
"reasonable risks" refers to investment decisions that in the judgment of the
Sub-Advisor, Invista, do not present a greater than normal risk of loss in light
of current or anticipated future market and economic conditions, trends in
yields and interest rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Fund invests primarily
in growth and income-oriented common stocks (including securities convertible
into common stocks), corporate bonds and debentures and short-term money market
instruments. The Fund may also invest in other equity securities, and in debt
securities issued or guaranteed by the United States Government and its agencies
or instrumentalities. The Fund seeks to generate real (inflation plus) growth
during favorable investment periods and may emphasize income and capital
preservation strategies during uncertain investment periods. The Sub-Advisor
will seek to minimize declines in the net asset value per share. However, there
is no guarantee that the Sub-Advisor will be successful in achieving this goal.
The portions of the Fund's total assets invested in equity securities, debt
securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Fund's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Sub-Advisor as to general market and economic conditions, trends in investment
yields and interest rates and changes in fiscal or monetary policies.
The Fund may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Fund may invest in both
exchange-listed and over-the-counter securities, in small or large companies,
and in well-established or unseasoned companies. Also, the Fund's investments in
corporate bonds and debentures and money market instruments are not restricted
by credit ratings or other objective investment criteria, except with respect to
bank certificates of deposit as set forth below. Some of the fixed income
securities in which the Fund may invest may be considered to include speculative
characteristics and the Fund may purchase such securities that are in default
but does not currently intend to invest more than 5% of its assets in securities
rated below BBB by Standard & Poor's or Baa by Moody's. See "Below
Investment-Grade Bonds" for a discussion of the risks associated with these
securities. The rating services' descriptions of BBB or Baa securities are as
follows: Moody's Investors Service, Inc. Bond Ratings -- Baa: Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories. The Fund will not concentrate its
investments in any industry.
In selecting common stocks, the Sub-Advisor seeks companies which it
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Sub-Advisor determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Sub-Advisor may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Fund may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Fund may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The short-term money market investments in which the Fund may invest
include the following: U.S. Treasury bills, bank certificates of deposit,
bankers' acceptances, repurchase agreements, commercial paper and commercial
paper master notes which are floating rate debt instruments without a fixed
maturity. The Fund will only invest in domestic bank certificates of deposit
issued by banks which are members of the Federal Reserve System that have total
deposits in excess of $1 billion.
The United States government securities in which the Fund may invest
include U.S. Treasury obligations and obligations of certain agencies, such as
the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Principal Capital Accumulation Fund
The primary objective of Principal Capital Accumulation Fund is long-term
capital appreciation. A secondary objective is growth of investment income.
The Fund will invest primarily in common stocks, but it may invest in other
securities. In making selections for the Fund's investment portfolio, the
Manager will use an approach described broadly as that of fundamental analysis,
which is discussed in the Statement of Additional Information. In pursuit of the
Fund's investment objectives, investments will be made in securities which as a
group appear to offer long-term prospects for capital and income growth.
Securities chosen for investment may include those of companies which the
Manager believes can reasonably be expected to share in the growth of the
nation's economy over the long term.
Principal Emerging Growth Fund
The objective of Principal Emerging Growth Fund is to achieve capital
appreciation. The strategy of this Fund is to invest primarily in the common
stocks and securities (both debt and preferred stock) convertible into common
stocks of emerging and other growth-oriented companies that, in the judgment of
the Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the Emerging Growth Fund may invest, for any period of
time, in any industry, in any kind of growth-oriented company, whether new and
unseasoned or well known and established.
There can be, of course, no assurance that the Fund will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Fund invests, the Fund believes that its shares are
suitable only for persons who are prepared to experience above-average
fluctuations in net asset value, to assume above-average investment risk in
search of above-average return, and to consider the Fund as a long-term
investment and not as a vehicle for seeking short-term profits. Moreover, since
the Fund will not be seeking current income, investors should not view a
purchase of Fund shares as a complete investment program.
Principal Growth Fund
The objective of Principal Growth Fund is growth of capital. Realization of
current income will be incidental to the objective of growth of capital.
The Fund will invest primarily in common stocks, but it may invest in other
equity securities. In making selections for the Fund's investment portfolio, the
Sub-Advisor, Invista, will use an approach described broadly as that of
fundamental analysis, which is discussed in the Statement of Additional
Information. In pursuit of the Fund's investment objective, investments will be
made in securities which as a group appear to possess potential for appreciation
in market value. Common stocks chosen for investment may include those of
companies which have a record of sales and earnings growth that exceeds the
growth rate of corporate profits of the S&P 500 or which offer new products or
new services. The policy of investing in securities which have a high potential
for growth of capital can mean that the assets of the Fund may be subject to
greater risk than securities which do not have such potential.
Principal World Fund
The investment objective of Principal World Fund is to seek long-term
growth of capital through investment in a portfolio of equity securities of
companies domiciled in any of the nations of the world. In choosing investments
in equity securities of foreign and United States corporations, the Sub-Advisor,
Invista, intends to pay particular attention to long-term earnings prospects and
the relationship of then-current prices to such prospects. Short-term trading is
not generally intended, but occasional investments may be made for the purpose
of seeking short-term or medium-term gain. The Fund expects its investment
objective to be met over long periods which may include several market cycles.
For a description of certain investment risks associated with foreign
securities, see "Foreign Securities."
For temporary defensive purposes, the World Fund may invest in the same
kinds of securities as the other Growth-Oriented Funds whether issued by
domestic or foreign corporations, governments, or governmental agencies,
instrumentalities or political subdivisions and whether denominated in United
States dollars or some other currency.
The Fund intends that its investments normally will be allocated among
various countries. Although there is no limitation on the percentage of assets
that may be invested in any one country or denominated in any one currency, the
Fund intends under normal market conditions to have at least 65% of its assets
invested in securities issued by corporations of at least five countries, one of
which may be the United States. Investments may be made anywhere in the world,
but it is expected that primary consideration will be given to investing in the
securities issued by corporations of Western Europe, North America and
Australasia (Australia, Japan and Far East Asia) that have developed economies.
Changes in investments may be made as prospects change for particular countries,
industries or companies.
The Fund may invest in the securities of other investment companies but may
not invest more than 10% of its assets in securities of other investment
companies, invest more than 5% of its total assets in the securities of any one
investment company, or acquire more than 3% of the outstanding voting securities
of any one investment company except in connection with a merger, consolidation
or plan of reorganization. The Fund's Manager will waive its management fee on
the Fund's assets invested in securities of other open-end investment companies.
The Fund will generally invest only in those investment companies that have
investment policies requiring investment in securities comparable in quality to
those in which the Fund invests.
INCOME-ORIENTED FUNDS
The Principal Funds currently include two Funds which seek a high level of
income through investments in fixed-income securities (Principal Bond Fund and
Principal Government Securities Fund) collectively referred to as the
"Income-Oriented Funds." An investment in either of the Income-Oriented Funds
involves market risks associated with movements in interest rates. The market
value of the Funds' investments will fluctuate in response to changes in
interest rates and other factors. During periods of falling interest rates, the
values of outstanding long-term fixed-income securities generally rise.
Conversely, during periods of rising interest rates, the values of such
securities generally decline. Changes by recognized rating agencies in their
ratings of any fixed-income security and in the ability of an issuer to make
payments of interest and principal may also affect the value of these
investments. Changes in the value of portfolio securities will affect the Funds'
net asset values but will not affect cash income derived from the securities
unless a change results from a failure of an issuer to pay interest or principal
when due. Each Fund's rating limitations apply at the time of acquisition of a
security, and any subsequent change in a rating by a rating service will not
require elimination of a security from the Fund's portfolio. The Statement of
Additional Information contains descriptions of ratings of Moody's Investors
Service, Inc. ("Moody's") and Standard and Poor's Corporation ("S&P").
Principal Bond Fund
The investment objective of Principal Bond Fund is to provide as high a
level of income as is consistent with preservation of capital and prudent
investment risk.
In seeking to achieve the investment objective, the Fund will predominantly
invest in marketable fixed-income securities. Investments will be made generally
on a long-term basis, but the Fund may make short-term investments from time to
time as deemed prudent by the Manager. Longer maturities typically provide
better yields but will subject the Fund to a greater possibility of substantial
changes in the values of its portfolio securities as interest rates change.
Under normal circumstances, the Fund will invest at least 65% of its
assets, exclusive of cash items, in one or more of the following kinds of
securities: (i) corporate debt securities and taxable municipal obligations,
which at the time of purchase have an investment grade rating within the four
highest grades used by Standard & Poor's Corporation (AAA, AA, A or BBB) or by
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa) or which, if lower-rated or
nonrated, are comparable in quality in the opinion of the Fund's Manager; (ii)
similar Canadian corporate, Provincial and Federal Government securities payable
in U.S. funds; and (iii) securities issued or guaranteed by the United States
Government or its agencies or instrumentalities. The balance of the Fund's
assets may be invested in other fixed income securities, including domestic and
foreign corporate debt securities or preferred stocks, in common stocks that
provide returns that compare favorably with the yields on fixed income
investments, and in common stocks acquired upon conversion of debt securities or
preferred stocks or upon exercise of warrants acquired with debt securities or
otherwise and foreign government securities. The debt securities and preferred
stocks in which the Fund invests may be convertible or nonconvertible. The Fund
does not intend to purchase debt securities rated lower than Ba3 by Moody's or
BB - by S & P (bonds which are judged to have speculative elements; their future
cannot be considered as well-assured). See "Below Investment-Grade Bonds" for a
discussion of the risks associated with these securities. The rating services'
descriptions of BBB or Baa securities are as follows: Moody's Investors Service,
Inc. Bond Ratings -- Baa: Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well. Standard &
Poor's Corporation Bond Ratings -- BBB: Debt rated "BBB" is regarded as having
an adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than for debt in higher-rated
categories.
During the year ended December 31, 1994, 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 0.18%
Aa 1.45%
A 15.84%
Baa 61.37%
Ba 18.23%
B 0.33%
* The above percentages for A, B, and C rated securities include 1.98%,
.23% and .39% respectively, unrated securities which have
been determined by the Manager to be of comparable quality.
Cash equivalents in which the Fund invests include corporate commercial
paper rated A-1+, A-1 or A-2 by Standard & Poor's or P-1 or P-2 by Moody's,
unrated commercial paper issued by corporations with outstanding debt securities
rated in the four highest grades by Standard & Poor's and Moody's and bank
certificates of deposit and bankers' acceptances issued or guaranteed by
national or state banks and repurchase agreements considered by the Fund to have
investment quality. Under unusual market or economic conditions, the Fund may
for temporary defense purposes invest up to 100% of its assets in cash or cash
equivalents.
Principal Government Securities Fund
The objective of Principal Government Securities Fund is a high level of
current income, liquidity and safety of principal.
The Fund will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities include
Government National Mortgage Association ("GNMA") Certificates of the modified
pass-through type, Federal National Mortgage Association ("FNMA") Obligations,
Federal Home Loan Mortgage Corporation ("FHLMC") Certificates and Student Loan
Marketing Association ("SLMA") Certificates and other U.S. Government
Securities. GNMA is a wholly-owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned
corporation, FHLMC, a federal corporation, and SLMA, a government sponsored
stockholder-owned organization, are instrumentalities of the United States. The
securities and guarantees of FNMA, FHLMC and SLMA are not backed, directly or
indirectly, by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Fund may maintain reasonable
amounts of cash or short-term debt securities for daily cash management purposes
or pending selection of particular long-term investments.
Depending on market conditions, up to 55% of the assets may be invested in
GNMA Certificates. GNMA is a United States Government corporation within the
Department of Housing and Urban Development. GNMA Certificates are
mortgage-backed securities representing an interest in a pool of mortgage loans.
Such loans are made by lenders such as mortgage bankers, insurance companies,
commercial banks and savings and loan associations. Then, they are either
insured by the Federal Housing Administration (FHA) or they are guaranteed by
the Veterans Administration (VA) or Farmers Home Administration (FmHA). The
lender or other prospective issuer creates a specific pool of such mortgages,
which it submits to GNMA for approval. After approval, a GNMA Certificate is
typically offered by the issuer to investors through securities dealers.
GNMA Certificates differ from bonds in that the principal is scheduled to
be paid back by the borrower on a monthly basis over the life of the loan rather
than returned in a lump sum at maturity. Modified pass-through GNMA
certificates, which are the only kind in which the Fund intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of whether or not the mortgagor has made such payment.
The timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government.
Although the payment of interest and principal is guaranteed, the guarantee
does not extend to the value of a GNMA Certificate or the value of the shares of
the Fund. The market value of a GNMA Certificate typically will fluctuate to
reflect changes in prevailing interest rates. It falls when rates increase (as
does the market value of other debt securities) and it rises when rates decline
(but it may not rise on a comparable basis with other debt securities because of
its prepayment feature), and, therefore, may be more or less than the face
amount of the GNMA Certificate, which reflects the aggregate principal amount of
the underlying mortgages. As a result, the net asset value of Fund shares will
fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Fund at prevailing
interest rates which may be less than the rate on the GNMA Certificate.
Prepayments are likely to increase as the interest rate for new mortgages moves
lower than the rate on the GNMA Certificate. Moreover, if the GNMA Certificate
had been purchased at a premium above principal because its rate exceeded
prevailing rates, the premium is not guaranteed and a decline in value to par
may result in a loss of the premium especially in the event of prepayment.
To the extent deemed appropriate by the Fund's Manager, the Fund intends to
purchase GNMA Certificates directly from Principal Mutual Life Insurance Company
and other issuers as well as from securities dealers. The Fund will purchase
directly from issuers only if it can obtain a price advantage by not paying the
commission or mark-up that would be required if the Certificates were purchased
from a securities dealer. The Securities and Exchange Commission has issued an
order under the Investment Company Act of 1940 that permits the Fund to purchase
GNMA Certificates directly from Principal Mutual Life Insurance Company subject
to certain conditions.
The FNMA and FHLMC securities in which the Fund invests are very similar to
GNMA certificates as described above but are not guaranteed by the full faith
and credit of the United States but rather by the agency itself. FNMA and FHLMC
securities are rated Aaa by Moody's and AAA by Standard & Poor's. These ratings
reflect the status of FNMA and FHLMC as federal agencies as well as the
important role each plays in financing purchases of homes in the U.S.
Student Loan Marketing Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Fund
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by the agency and is traded regularly in denominations similar to
those in which government obligations are traded.
The Fund will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the Fund's
investment objective. Accordingly, the Fund may sell portfolio securities in
anticipation of a rise in interest rates and purchase securities for inclusion
in its portfolio in anticipation of a decline in interest rates.
As a hedge against changes in interest rates, the Fund may enter into
contracts with dealers in GNMA Certificates whereby the Fund agrees to purchase
or sell an agreed-upon principal amount of GNMA Certificates at a specified
price on a certain date. The Fund may enter into similar purchase agreements
with issuers of GNMA Certificates other than Principal Mutual Life Insurance
Company. The Fund may also purchase optional delivery standby commitments which
give the Fund the right to sell particular GNMA Certificates at a specified
price on a specified date. Failure of the other party to such a contract or
commitment to abide by the terms thereof could result in a loss to the Fund. To
the extent the Fund engages in delayed delivery transactions it will do so for
the purpose of acquiring portfolio securities consistent with its investment
objective and policies and not for the purpose of investment leverage or to
speculate on interest rate changes. Liability accrues to the Fund at the time it
becomes obligated to purchase such securities, although delivery and payment
occur at a later date. From the time the Fund becomes obligated to purchase
securities on a delayed delivery basis the Fund has all the rights and risks
attendant to the ownership of a security. At the time the Fund enters into a
binding obligation to purchase such securities, Fund assets of a dollar amount
sufficient to make payment for the securities to be purchased will be
segregated. The availability of liquid assets for this purpose and the effect of
asset segregation on the Fund's ability to meet its current obligations, to
honor requests for redemption and to have its investment portfolio managed
properly will limit the extent to which the Fund may engage in forward
commitment agreements. Except as may be imposed by these factors, there is no
limit on the percent of the Fund's total assets that may be committed to
transactions in such agreements.
MONEY MARKET FUND
The Principal Funds also include a Fund which invests primarily in
short-term securities, Principal Money Market Fund. Securities in which the
Money Market Fund will invest may not yield as high a level of current income as
securities of low quality and longer maturities which generally have less
liquidity, greater market risk and more fluctuation.
The Money Market Fund will limit its portfolio investments to United States
dollar denominated instruments that its board of directors determines present
minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in respect to
a class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security at the time of issuance was a long-term security that has a
remaining maturity of 397 calendar days or less, and whose issuer has
received from a nationally recognized statistical rating organization a
rating, with respect to a class of short-term debt obligations (or any
security within that class) that is now comparable in priority and
security with the security, in one of the two highest rating categories
for short-term debt obligations; or
(3) An unrated security that is of comparable quality to a security
meeting the requirements of (1) or (2) above, as determined
by the board of directors.
The Fund will not invest more than 5% of its total assets in the following
securities:
(1) Securities which, when acquired by the Fund (either initially or upon
any subsequent rollover), are rated below the highest rating category
for short-term debt obligations;
(2) Securities which, at the time of issuance were long-term securities but
when acquired by the Fund have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Fund's board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Fund will
maintain a dollar-weighted average portfolio maturity of 90 days or
less.
The objective of Principal Money Market Fund is to seek as high a level of
current income available from short-term securities as is considered consistent
with preservation of principal and maintenance of liquidity by investing its
assets in a portfolio of money market instruments. These money market
instruments are U.S. Government Securities, U.S. Government Agency Securities,
Bank Obligations, Commercial Paper, Short-term Corporate Debt and Repurchase
Agreements, which are described briefly below and in more detail in the
Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
The Fund intends to hold its investments until maturity, but may on
occasion trade securities to take advantage of market variations. Also, revised
valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at times when such sales might otherwise not be
desirable. The Fund's right to borrow to facilitate redemptions may reduce the
need for such sales. It is the Fund's policy to be as fully invested as
reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the Fund expects
to usually transact purchases and sales of portfolio securities with issuers or
dealers on a net basis, it is not anticipated that the Fund will pay any
significant brokerage commissions. The Fund is free to dispose of portfolio
securities at any time, when changes in circumstances or conditions make such a
move desirable in light of the investment objective.
A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Fund invests. The
rate of return and the net asset value will be affected by such other factors as
sales of portfolio securities prior to maturity and the Fund's operating
expenses.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Funds
may use in an effort to achieve their respective investment objectives.
Diversification
Each Fund is subject to the diversification requirements of Section 817(h)
of the Internal Revenue Code (the "Code") which must be met at the end of each
quarter of the year (or within 30 days thereafter). Regulations issued by the
Secretary of the Treasury have the effect of requiring each Fund to invest no
more than 55% of its total assets in securities of any one issuer, no more than
70% in the securities of any two issuers, no more than 80% in the securities of
any three issuers, and no more than 90% in the securities of any four issuers.
For this purpose, the United States Treasury and each U.S. Government agency and
instrumentality is considered to be a separate issuer. Thus, the Government
Securities Fund intends to invest in U.S. Treasury securities and in securities
issued by at least four U.S. Government agencies or instrumentalities in the
amounts necessary to meet those diversification requirements at the end of each
quarter of the year (or within thirty days thereafter).
In the event any of the Funds do not meet the diversification requirements
of Section 817(h) of the Code, the contracts funded by shares of the Funds will
not be treated as annuities or life insurance for Federal income tax purposes
and the owners of the Funds will be subject to taxation on their share of the
dividends and distributions paid by the Funds.
Foreign Securities
Each of the following Principal Funds has adopted investment restrictions
that limit its investments in foreign securities to the indicated percentage of
its assets: Asset Allocation and World Funds - 100%; Aggressive Growth Fund -
25%; Bond, Capital Accumulation - 20%; Balanced, Emerging Growth and Growth
Funds - 10%. Investment in foreign securities presents certain risks including
those resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. A Fund's investment in foreign securities may also result
in higher custodial costs and the costs associated with currency conversions.
Currency Contracts
The Aggressive Growth, Asset Allocation and World Funds may each enter into
forward currency contracts, currency futures contracts and options thereon and
options on currencies for hedging and other non-speculative purposes. A forward
currency contract involves a privately negotiated obligation to purchase or sell
a specific currency at a future date at a price set at the time of the contract.
The Funds will not enter into a transaction to hedge currency exposure to an
extent greater in effect than the aggregate market value of the securities held
or to be purchased by the Fund that are denominated or generally quoted in or
currently convertible into the currency. When the Fund enters into a contract to
buy or sell a foreign currency, it generally will hold an amount of that
currency, liquid securities denominated in that currency or a forward contract
for such securities equal to the Fund's obligation, or it will segregate liquid
high grade debt obligations equal to the amount of the Fund's obligations. The
use of currency contracts involves many of the same risks as transactions in
futures contracts and options as well as the risk of government action through
exchange controls or otherwise that would restrict the ability of the Fund to
deliver or receive currency.
Repurchase Agreements and Securities Loans
Each of the Funds, except the Capital Accumulation Fund, may enter into
repurchase agreements with, and each of the Funds, except the Capital
Accumulation and Money Market Funds, may lend its portfolio securities to,
unaffiliated broker-dealers and other unaffiliated qualified financial
institutions. These transactions must be fully collateralized at all times, but
involve some credit risk to the Fund if the other party should default on its
obligations, and the Fund is delayed or prevented from recovering on the
collateral. See the Funds' Statement of Additional Information for further
information regarding the credit risks associated with repurchase agreements and
the standards adopted by each Fund's Board of Directors to deal with those
risks. None of the Funds intend either (i) to enter into repurchase agreements
that mature in more than seven days if any such investment, together with any
other illiquid securities held by the Fund, would amount to more than 10% of its
total assets or (ii) to loan securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Funds may enter into forward commitment
agreements which call for the Fund to purchase or sell a security on a future
date and at a price fixed at the time the Fund enters into the agreement. Each
of the Funds may also acquire rights to sell its investments to other parties,
either on demand or at specific intervals.
Warrants
Each of the Funds, except the Money Market and Government Securities Funds,
may invest in warrants up to 5% of its assets, of which not more than 2% may be
invested in warrants that are not listed on the New York or American Stock
Exchange. For the World Fund, the 2% limitation also does not apply to warrants
listed on the Toronto Stock Exchange or the Chicago Board Options Exchange.
Borrowing
As a matter of fundamental policy, each Fund may borrow money only for
temporary or emergency purposes. The Balanced Fund, Bond Fund, Capital
Accumulation Fund and Money Market Fund may borrow only from banks. Further,
each may borrow only in an amount not exceeding 5% of its assets, except the
Capital Accumulation Fund which may borrow only in an amount not exceeding the
lesser of (i) 5% of the value of its assets less liabilities other than such
borrowings, or (ii) 10% of its assets taken at cost at the time the borrowing is
made, and the Money Market Fund which may borrow only in an amount not exceeding
the lesser of (i) 5% of the value of its assets, or (ii) 10% of the value of its
net assets taken at cost at the time the borrowing is made.
Options
The Aggressive Growth Fund, Asset Allocation Fund, Balanced Fund, Bond
Fund, Emerging Growth Fund, Government Securities Fund, Growth Fund and World
Fund may purchase covered spread options, which would give the Fund the right to
sell a security that it owns at a fixed dollar spread or yield spread in
relationship to another security that the Fund does not own, but which is used
as a benchmark. These same Funds may also purchase and sell financial futures
contracts, options on financial futures contracts and options on securities and
securities indices, but will not invest more than 5% of their assets in the
purchase of options on securities, securities indices and financial futures
contracts or in initial margin and premiums on financial futures contracts and
options thereon. The Funds may write options on securities and securities
indices to generate additional revenue and for hedging purposes and may enter
into transactions in financial futures contracts and options on those contracts
for hedging purposes.
Below Investment Grade Bonds
Below investment-grade bonds are securities rated Ba1 or lower by Moody's
Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("S&P") or unrated securities which the Fund's Manager or
Sub-Advisor believes are of comparable quality. These securities are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and to repay principal in accordance with the terms of the
obligation. The Funds, except the Asset Allocation Fund, do not intend to invest
in securities rated lower than Ba3 by Moody's or BB by S&P. The Asset Allocation
Fund does not intend to invest in securities rated below Caa by Moody's and
below CCC by S&P. The Asset Allocation Fund normally will not invest more than
20% of its assets in below investment grade securities. The Bond Fund may not
invest more than 35% of its assets in such securities. The Balanced Fund does
not intend to invest more than 5% of its assets in such securities.
The rating services' descriptions of below investment grade securities
rating categories in which the Funds may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small. Caa:
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the high end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB, B, CCC, CC: Debt rated
"BB", "B", "CCC" and "CC" is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The "BB" rating may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
Below investment-grade securities present special risks to investors. The
market value of lower-rated securities may be more volatile than that of
higher-rated securities and generally tends to reflect the market's perception
of the creditworthiness of the issuer and short-term market developments to a
greater extent than more highly rated securities, which reflect primarily
fluctuations in general levels of interest rates. Periods of economic
uncertainty and change can be expected to result in increased volatility in the
market value of lower-rated securities. Further, such securities may be subject
to greater risks of loss of income and principal, particularly in the event of
adverse economic changes or increased interest rates, because their issuers
generally are not as financially secure or as creditworthy as issuers of
higher-rated securities. Additionally, to the extent that there is not a
national market system for secondary trading of lower-rated securities, there
may be a low volume of trading in such securities which may make it more
difficult to value or sell those securities than higher-rated securities.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield securities,
especially in a thinly traded market.
Investors should recognize that the market for below investment-grade
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the Funds and the ability of the
issuers of the securities held by the Funds to pay principal and interest. A
default by an issuer may result in a Fund incurring additional expenses to seek
recovery of the amounts due it.
Some of the securities in which the Funds invest may contain call
provisions. If the issuer of such a security exercises a call provision in a
declining interest rate market, the Fund would have to replace the security with
a lower-yielding security, resulting in a decreased return for investors.
Further, a higher-yielding security's value will decrease in a rising interest
rate market, which will be reflected in the Fund's net asset value per share.
Congress recently enacted legislation requiring federally-insured savings
and loan associations to divest themselves of investments in high yield
securities. This legislation might increase the supply of securities available
for purchase in the secondary market and, potentially, lower the value of the
securities held by the Funds.
The Statement of Additional Information includes further information
concerning the Funds' investment policies and applicable investment
restrictions. Each Fund's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for a Fund are not fundamental and
may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISORS
The Manager for the Funds is Princor Management Corporation (the
"Manager"), an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the State of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969,
and since that time has managed various mutual funds sponsored by Principal
Mutual Life Insurance Company. As of December 31, 1994, the Manager served as
investment advisor for 25 such funds with assets totaling approximately $2.0
billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced Fund, Growth
Fund and World Fund. The Manager will reimburse Invista for the cost of
providing these services. Invista, an indirectly wholly-owned subsidiary of
Principal Mutual Life Insurance company and an affiliate of the Manager, was
founded in 1985 and manages investments for institutional investors, including
Principal Mutual Life. Assets under management at December 31, 1994 were
approximately $11.2 billion. Invista's address is 1500 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
The Manager has also executed an agreement with Morgan Stanley Asset
Management Inc. ("MSAM") under which MSAM has agreed to assume the obligations
of the Manager to provide investment advisory services for the Aggressive Growth
Fund and Asset Allocation Fund. The Manager pays MSAM a fee for such investment
advisory services. MSAM, with principal offices at 1221 Avenue of the Americas,
New York, NY 10020, provides a broad range of portfolio management services to
customers in the United States and abroad. At December 31, 1994, MSAM managed
investments totaling approximately $48.7 billion, including approximately $35.6
billion under active management and $13.1 billion as Named Fiduciary or
Fiduciary Adviser.
The Manager, Invista, or MSAM has assigned certain individuals the primary
responsibility for the day-to-day management of each Fund's portfolio. The
persons primarily responsible for the day-to-day management of each Fund are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Fund Responsible Since Person Primarily Responsible
<S> <C> <C>
Aggressive Growth May, 1994 Kurt Feuerman (MBA degree, Columbia University; M.A. degree, Syracuse
(Fund's inception) University). Managing Director, Morgan Stanley Asset Management Inc.
since 1990. Prior thereto, Managing Director, Drexel Burnham Lambert.
Asset Allocation May, 1994 Michael A. Crowe (MBA degree, Western Michigan University). Managing
(Fund's inception) Director, Morgan Stanley Asset Management Inc. and Chief Operating
Officer, MSAM/Chicago.
Balanced April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President, Invista
Capital Management, Inc. since 1987.
Bond December, 1987 Donald D. Brattebo (BBA degree, Upper Iowa University). Second Vice
(Fund's inception) President, Principal Mutual Life Insurance Company since 1990; Prior
thereto, Director, Investment Securities.
Capital Accumulation November, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice
(Fund's inception) President, Invista Capital Management, Inc. since 1984.
Emerging Growth December, 1987 Michael R. Hamilton, (BMBA degree, Bellarmine College). Vice President,
and Growth (Fund's inception) Invista Capital Management, Inc. since 1987.
and May, 1994 (Fund's
inception), respectively
Government Securities April, 1987 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
Income (Fund's inception) Capital Management Company since 1992. Director - Securities Trading,
Principal Mutual Life Insurance Company 1992; Prior thereto, Associate
Director.
World April, 1994 Scott D. Opsal, CFA (MBA degree, University of Minnesota). Vice President,
Invista Capital Management, Inc. since 1987.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISORS
Under Maryland law, the business and affairs of each of the Funds are
managed under the direction of its Board of Directors. The investment services
and certain other services referred to under the heading "Cost of Manager's
Services" in the Statement of Additional Information are furnished to the Funds
under the terms of a Management Agreement between each of the Funds and the
Manager and, for some of the Funds, a Sub-Advisory Agreement between the Manager
and Invista or the Manager and MSAM. The Manager, Invista, or MSAM, advises the
Funds on investment policies and on the composition of the Funds' portfolios. In
this connection, the Manager, or Sub-Advisor, furnishes to the Board of
Directors of each Fund a recommended investment program consistent with that
Fund's investment objective and policies. The Manager, or Sub-Advisor, is
authorized, within the scope of the approved investment program, to determine
which securities are to be bought or sold, and in what amounts.
The compensation paid by each Fund to the Manager for the fiscal year ended
December 31, 1994 was, on an annual basis, equal to the following percentage of
average net assets:
Total
Manager's Annualized
Fund Fee Expenses
---- --- --------
Aggressive Growth Fund ........................ .80% 1.03%
Asset Allocation Fund ......................... .80% .95%
Balanced Fund ................................. .60% .69%
Bond Fund ..................................... .50% .58%
Capital Accumulation Fund ..................... .49% .51%
Emerging Growth Fund .......................... .65% .74%
Government Securities Fund .................... .50% .56%
Growth Fund ................................... .50% .75%
Money Market Fund ............................. .50% .60%
World Fund .................................... .75% 1.24%
The compensation being paid by the Aggressive Growth Fund, Asset Allocation
Fund and World Fund for investment management services is higher than that paid
by most funds to their advisor, but it is not higher than the fees paid by many
funds with similar investment objectives and policies.
The Manager and Sub-Advisors may purchase at their own expense statistical
and other information or services from outside sources, including Principal
Mutual Life Insurance Company. An Investment Service Agreement between the
Manager, Principal Mutual Life Insurance Company and each Fund, except the
Aggressive Growth Fund and Asset Allocation Fund, provides that Principal Mutual
Life Insurance Company will furnish certain personnel, services and facilities
required by the Manager in connection with its performance of the Management
Agreements, and that the Manager will reimburse Principal Mutual Life Insurance
Company for its costs incurred in this regard. The Investment Service Agreements
for the Capital Accumulation, Emerging Growth and Government Securities Funds
also include as a party Invista Capital Management, Inc., an indirectly
wholly-owned subsidiary of Principal Mutual Life Insurance Company, and also
provide that the subsidiaries of Principal Mutual Life Insurance Company will
furnish the same items and be reimbursed by the Manager for their costs incurred
in this regard.
The Funds may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc., a broker-dealer that is an affiliate of the Distributor and
Manager for each of the Funds. The Fund may also execute transactions for
portfolio securities through Morgan Stanley & Co. Incorporated, an affiliate of
Morgan Stanley Asset Management Inc.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company.
MANAGERS' COMMENTS
Princor Management Corporation, Invista and MSAM are staffed with
investment professionals who manage each individual fund. Comments by these
individuals in the following paragraphs summarize in capsule form the general
strategy and recent results of each fund during the year ended December 31,
1994.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 value fluctuate. Shares are redeemable at
current net asset value, which may be more or less than original cost.
The various indicates included in the following graphs are unmanaged and do
not reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index.
Growth-Oriented Funds
Principal Aggressive Growth Fund
(Kurt Feuerman)
Since the SEC effective date of June 1, 1994, the Principal Aggressive
Growth Fund has returned 2.6% versus 2.3% for the S&P 500 and 0.6% for the
Lipper Growth Fund average.
1994 was a difficult year for investors, in part due to the dramatic shift in
sectors favored by investors over the course of the year. Cyclicals, for
instance, were strong in the first quarter, then weak for the rest of the year.
Consumer staples were weak early in the year then strong in the second half.
Technology stocks plummeted in the first half, then soared in the second. Our
response to the difficult market environment was to hold a little more cash than
usual (about 11% at year end) and to try to take advantage of market volatility.
For example, we took advantage of the carnage in the technology area and bought
a basket of tech stocks in July and August. This paid off handsomely.
Our defense/aerospace exposure was large throughout 1994, and this was one of
our biggest successes. We continue to overweight this sector, as industry
downsizing and restructuring are leading to significant EPS growth and positive
shareholder actions. Some of our consumer non-durables bets also paid off during
1994. We also did well with HMOs (Humana returned 15%) and selected higher beta
growth names. But it was a humbling year in many respects as well. Our biggest
mistakes were to hold too much in the financial and consumer cyclical sectors.
Looking to 1995, we are neutral but hopeful. The big positive is that we have
now had nearly 18 months of the broad stock indices moving sideways, enhancing
the valuation of the market. There is no complacency in the investment
community, and corporate stock buybacks and insider buying activity are other
positive signals. Areas of emphasis continue to be financials, cyclical growth,
consumer non-durables, defense and selected high growth/high beta issues.
Graph Description:
Comparison of Change in Value of $10,000 Investment in the Aggressive Growth
Fund, S&P 500, and Lipper Growth Fund Average
Aggressive
Growth Lipper
Total S&P 500 Growth
Return Index Fund Average
Beginning Value 10,000 10,000 10,000
Year Ended December 31,
1994 10,259 10,230 10,055
Total Returns *
As of December 31, 1994
Since Inception 6/1/94 5 Year 10 Year
2.59% -- --
Principal Asset Allocation Fund
(Michael A. Crowe)
1994 was a difficult year for investors in financial assets worldwide; global
equity and bond markets retreated and neither geographic nor asset class
diversification protected investors from negative returns. Of the 21 asset
categories we monitor, only commodities and Japanese stocks had double-digit
returns. Eight asset classes posted losses including domestic (U.S.) fixed
income which endured one of the worst years on record after the Federal Reserve
raised interest rates six times. In sum, there were few places to hide.
Within this environment, we maintained our diversified investment policy. At
year end 1994, the target weightings for the portfolio were 40% U.S. equities,
20% international equities and 40% fixed income. This policy served us well.
Since the SEC effective date of June 1, 1994, the Fund has returned 0.52% versus
a half-point decline for the Lipper Flexible Portfolio Fund average.
The Fund benefited from overweighted (greater than 50% of equity) commitments to
large cap growth and small cap stocks. Beginning in July, growth stocks
experienced a significant rally based on perceptions of a slowing economy and
attractive valuations. While this occurred, value stocks languished. In both
value and growth sectors, the small-cap names were relatively stronger than the
large cap group and performed well through year end.
In anticipation of a Fed rate hike and the continuation of the global economic
expansion, we redeployed cash to U.S. fixed income and international equities
early in the fourth quarter. Within the international sector, we raised the
emerging markets exposure to almost 20%. Unfortunately, our implementation was
early given the surprise devaluation of the peso. We view this as a temporary
disruption and, over the longer term, remain bullish on emerging market
equities. The move to increase fixed income was more timely. Our outlook for
U.S. Treasuries grew more bullish as rates increased and the yield curve
flattened. Accordingly, we lengthened our duration which proved to be a
favorable decision.
For 1995, we are cautiously optimistic. We start the year with a diversified
portfolio structure and a flexible, opportunistic mind-set.
Graph Description:
Comparison of Change in Value of $10,000 Investment in the Asset Allocation
Fund, S&P 500, and Lipper Flexible Portfolio Fund Average
Asset
Allocation Lipper
Total S&P 500 Flexible Portfolio
Return Index Fund Average
Beginning Value 10,000 10,000 10,000
Year Ended December 31,
1994 10,052 10,230 10,008
Total Returns *
As of December 31, 1994
Since Inception 6/1/94 5 Year 10 Year
0.52% -- --
Principal Balanced Fund
(Judith A. Vogel)
This portfolio is designed to hold a combination of both stocks and bonds,
generally a 60/40 split, and, as a result, is influenced by forces which impact
on each of these asset classes. The bond side of the portfolio, primarily
influenced by action on the part of the Federal Reserve to hold down inflation
by increasing short-term interest rates, contributed virtually nothing to the
net total return of the portfolio this past fiscal year. Income from these
holdings was largely offset by reduced prices caused by the general increase in
interest rates. The common stock holdings in the portfolio fared much better
through the positive impact of economic growth on corporate earnings. Investment
results for the total portfolio were somewhat below the S&P 500 Index. No
independent market index is available as a good comparison to a portfolio with a
blend of stock and bond holdings. However, the Lipper Balanced Fund average
provides a good reference. As is shown, we slightly outperformed that average in
1994.
Graph Description:
Comparison of Change in Value of $10,000 Investment in the Balanced Fund,
S&P 500 Index and Lipper Balanced Fund Average
Balanced Lipper
Total S&P 500 Balanced
Return Index Fund Average
Beginning Value 10,000 10,000 10,000
Year Ended December 31,
1988 11,637 11,662 11,229
1989 12,982 15,357 13,429
1990 12,147 14,877 13,355
1991 16,321 19,412 16,930
1992 18,410 20,893 18,122
1993 20,447 22,995 20,066
1994 20,019 23,297 19,561
Total Returns *
As of December 31, 1994
1 Year 5 Year Since Inception 12/18/87
- -2.09% 9.05% 10.37%
Principal Capital Accumulation Fund
(David L. White)
Our strategy with this portfolio is to hold common stocks of a wide number of
established companies and to vary the emphasis among various types of companies
based on our view of the economy and the value of companies based on estimates
of future free cash flows. While it is impossible to ignore short-term
influences, we tend to take the longer view. Our approach might also be
described as "top down". We look at the big picture, then move to industries,
geography, markets, etc., and from there to selection of specific investments.
As we have moved through the current economic recovery, we have had a
significant portion of the portfolio in stocks of companies sensitive to the
economy. We have continued to sort through these holdings and have been keeping
those with good exposure to foreign markets, and de-emphasizing domestic
companies to capture the oncoming recovery we expect in Europe and elsewhere. We
are also increasing our exposure to companies which we feel have good prospects
for future growth. This overall strategy placed us slightly below the S&P 500
Index and slightly above Lipper's Growth and Income Funds in performance for
this fiscal year.
Graph Description:
Comparison of Change in Value of $10,000 Investment in the Capital Accumulation
Fund, S&P 500 and Lipper Growth & Income Fund Average
Capital
Accumulation S&P 500 Lipper
Total Stock Growth & Income
Return Index Fund Average
Beginning Value 10,000 10,000 10,000
Year Ended December 31,
1985 12,750 13,175 12,796
1986 14,814 15,636 14,880
1987 15,773 16,457 15,154
1988 18,048 19,192 17,580
1989 20,969 25,271 21,719
1990 18,901 24,485 20,752
1991 26,210 31,947 26,787
1992 28,705 34,382 29,193
1993 30,942 37,844 32,564
1994 31,094 38,339 32,258
Total Returns *
As of December 31, 1994
1 Year 5 Year 10 Year
0.49% 8.20% 12.01%
Principal Emerging Growth Fund
(Michael R. Hamilton)
The stock market did not show much positive activity until the third quarter of
the fiscal year, at which time a fairly significant comeback took place.
However, most if not all of these gains were reversed by a downturn in the
fourth quarter. We have a sizeable portion of our portfolio in the healthcare,
technology and industrial cyclical areas. These have done well from a
performance standpoint this year and on an overall basis helped us move ahead of
the Lipper Mid Cap Average. However, we lagged slightly the S&P 500 index for
the period ended December 31. During the year the Lipper organization came out
with their Mid Cap (middle capitalization sized companies) Average and funds of
this type are categorized within that universe. As a result, although we are
showing the Lipper Capital Appreciation Average again this year, we will be
discontinuing its use as a comparative index because this Fund is more
comparable to the mid cap universe. Our focus continues to be on individual
companies with sustainable growth which can be purchased at reasonable
valuations.
Graph Description:
Comparison of Change in Value of $10,000 Investment in the Emerging Growth Fund,
S&P 500 Index, Lipper Mid Cap Fund Average and Lipper Capital Appreciation Fund
Average
Emerging
Growth Lipper Lipper
Total S&P 500 Mid Cap Capital Apprec.
Return Index Fund Average Fund Average
Beginning Value 10,000 10,000 10,000 10,000
Year Ended December 31,
1988 12,369 11,662 11,476 11,371
1989 15,070 15,357 14,586 14,412
1990 13,186 14,877 14,067 13,296
1991 20,240 19,412 21,275 18,710
1992 23,264 20,893 23,213 20,288
1993 27,750 22,995 26,625 23,363
1994 27,967 23,297 26,079 22,574
Total Returns *
As of December 31, 1994
1 Year 5 Year Since Inception 12/18/87
0.78% 9.05% 10.37%
Principal Growth Fund
(Michael R. Hamilton)
This fund started in the Spring of 1994 and as a result has an abbreviated
period of experience. Even though for most of our fiscal year the stock market
operated in a fairly narrow range with some upside activity in the third
quarter, the last quarter saw a downturn. According to the S&P 500 index, we
tended to be ahead of the market for most of the year and closed well ahead of
both the S&P 500 and the Lipper Growth Fund index. Much of our performance came
from several concentrations in the portfolio (healthcare, technology, consumer
durables, industrial cyclicals) that did well in the market this year. Going
forward, we will continue to emphasize U.S. companies we believe will benefit
from productivity of plan, equipment and labor. Many of these will be positioned
to react favorably not only to continued U.S. economic expansion but to
recovering economics abroad, as well.
Graph Description:
Comparison of Change in Value of $10,000 Investment in the Growth Fund,
S&P 500, and Lipper Growth Fund Average
Growth Lipper
Total S&P 500 Growth
Return Index Fund Average
Beginning Value 10,000 10,000 10,000
Year Ended December 31,
1994 10,542 10,395 10,090
Total Returns *
As of December 31, 1994
Since Inception 5/1/94 5 Year 10 Year
5.42% -- --
Principal World Fund (Scott D. Opsal)
This fund started in the Spring of 1994 and as a result has an abbreviated
period of experience. Foreign equities markets throughout most of the fiscal
year have been flat to negative, with some gains in the past several months. Our
performance has paralleled those funds which have not concentrated a major
portion of their portfolios in Japanese issues. We avoided that market for the
most part (we have less than 1% of the portfolio in Japan) because we feel, and
have for some time, that the Japanese market is clearly overvalued. Our
philosophy is that over time, undervalued assets should outperform overvalued
assets. As a result of our Japanese underweighting, those mutual funds and
market indexes that have a much heavier weighting in Japan, such as the Morgan
Stanley International EAFE index, will show more positive comparable results. A
factor which added positive performance to our portfolio is the weakness of the
U.S. dollar. This results in a positive foreign exchange effect for a
U.S.-dollar-based investor. For the next several months the level of worldwide
interest rates, which have been rising, will be a major factor in international
equities markets.
Graph Description:
Comparison of Change in Value of $10,000 Investment in the World Fund,
EAFE, and Lipper International Fund Average
World Lipper
Total EAFE International
Return Index Fund Average
Beginning Value 10,000 10,000 10,000
Year Ended December 31,
1994 9,663 9,991 9,758
Total Returns *
As of December 31, 1994
Since Inception 5/1/94 5 Year 10 Year
-3.37% -- --
Important Notes of the Growth-Oriented Funds:
Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Growth Fund Average: This average consists of funds which normally invest
in companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices. The one-year average currently contains 481 funds.
Lipper Flexible Portfolio Fund Average: This average consists of funds which
allocate their investments across various asset classes, including domestic
common stocks, bonds and money market instruments, with a focus on total return.
The one-year average currently contains 107 funds.
Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average currently contains 153 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 348 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 75 funds.
Lipper Capital Appreciation Fund Average: this average consists of mutual funds
which attempt to obtain maximum capital appreciation, frequently by means of
100% or more portfolio turnover, leveraging, purchasing unregistered securities,
purchasing options, etc. These funds may take large cash positions. The one year
average currently contains 141 mutual funds.
Morgan Stanley Capital International EAFE (Europe, Australia and Far East)
Index: This average reflects an arithmetic, market value weighted average of
performance of more than 900 listed securities which are listed on the stock
exchanges of the following countries: Australia, Austria, Belgium, Denmark,
Netherlands, New Zealand, Norway, Singapore/Malaysia, Spain, Sweden,
Switzerland, and the United Kingdom.
Lipper International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average currently contains 157 funds.
Income-Oriented Funds
Principal Bond Fund
(Donald D. Brattebo)
As with nearly all mutual funds with portfolios holding fixed-income
investments, the big news this past fiscal year has been the general rise in
interest rates prompted by the Federal Reserve's actions to increase short-term
rates. This followed an extended period of falling rates which generally
benefited holders of fixed-income investments on a total return basis but was
discomforting to investors dependent upon interest and dividends for ongoing
living expenses. Bond values move in the opposite direction of interest rates,
and it is this relationship which caused the net asset value of this fund, and
most other fixed-income funds as well, to be flat to negative for the past year.
The total return of any investment is the absolute change in its value (assuming
the reinvestment of income) over the stated period of time, taking into
consideration both changes in market value and the generation of income and
other distributions. In 1994 the downward push of bond values exceeded the
positive contribution of interest income. However, a prudent investor normally
looks at the longer view of the investment and anticipates fluctuations in the
short run. We are making no change in our approach to selecting bonds for the
Fund's portfolio. We will continue to focus on diversification, credit quality
and call protection while selecting bonds to arrive at an average portfolio
maturity in the ten- to twelve-year range.
Graph Description:
Comparison of Change in Value of $10,000 Investment in the Bond Fund,
Lehman Brothers BAA Corporate Bond Index and Lipper Corporate Debt BBB Rated
Fund Average
Lehman
Brothers
Bond Corporate Lipper
Total Debt BBB Corporate Debt BBB Rated
Return Index Fund Average
Beginning Value 10,000 10,000 10,000
Year Ended December 31,
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
Total Returns *
As of December 31, 1994
1 Year 5 Year Since Inception 12/18/87
- -2.90% 7.81% 8.91%
Principal Government Securities Fund
(Martin J. Schafer)
Our policy is to avoid the various types of derivative securities available in
this marketplace and, as a result, we averted the significant decrease in value
(and the resulting publicity) these issues caused investors in government and
other fixed-income securities. Nevertheless, we were unable to escape the
decreases in market value which inevitably accompany a broad and sharp increase
in the general level of interest rates, such as what was triggered from the
action of the Federal Reserve in raising short-term rates in recent months. Our
policy of running a fairly straightforward portfolio priced at or below par was
instrumental in maintaining our competitive position in the past, but did act to
push our prices to levels lower than other funds investing in similar
mortgage-backed securities. Their portfolios were structured more toward a
premium over par position. The worst may be behind us from a total return
standpoint, unless the Fed is behind in trying to contain potential inflation.
If they are, then a series of rate increases will be needed in an effort to
lessen the possibility of future inflation. Although our values and those of
other fixed-income funds have fallen in 1994, the good news, if any, is that
dividend flows to investors should increase.
Graph Description:
Comparison of Change in Value of $10,000 Investment in the Government Securities
Fund, Lehman Brothers U.S. Mortgage Index and Lipper U.S. Mortgage Fund Average
Government Lehman
Securities Brothers Lipper
Total Mortgage U.S. Mortgage
Return Index Fund Average
Beginning Value 10,000 10,000 10,000
Year Ended December 31,
1987 10,099 10,204 10,104
1988 10,939 11,094 10,858
1989 12,645 12,808 12,224
1990 13,852 14,183 13,370
1991 16,200 16,410 15,348
1992 17,308 17,551 16,285
1993 19,051 18,751 17,499
1994 18,188 18,450 16,769
Total Returns *
As of December 31, 1994
1 Year 5 Year Since Inception 4/9/87
- -4.53% 7.54% 8.05%
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 69 mutual funds.
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgages/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average currently contains 55 mutual funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE OF FUND SHARES
The net asset value of each Fund's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange,
except on days on which changes in the value of the Fund's portfolio securities
will not materially affect the current net asset value of the Fund's redeemable
securities, on days during which a Fund receives no order for the purchase or
sale of its redeemable securities and no tender of such a security for
redemption, and on customary national business holidays. The net asset value per
share of each Fund is determined by dividing the value of the Fund's securities
plus all other assets, less all liabilities, by the number of Fund shares
outstanding.
Growth-Oriented and Income-Oriented Funds
The following valuation information applies to the Growth-Oriented and
Income-Oriented Funds. Securities for which market quotations are readily
available are valued using those quotations. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.
As previously described, some of the Funds may purchase foreign securities
whose trading is substantially completed each day at various times prior to the
close of the New York Stock Exchange. The values of such securities used in
computing net asset value per share are usually determined as of such times.
Occasionally, events which affect the values of such securities and foreign
currency exchange rates may occur between the times at which they are generally
determined and the close of the New York Stock Exchange and would therefore not
be reflected in the computation of the Fund's net asset value. If events
materially affecting the value of such securities occur during such period, then
these securities will be valued at their fair value as determined in good faith
by the Manager or Sub-Advisor under procedures established and regularly
reviewed by the Board of Directors. To the extent the Fund invests in foreign
securities listed on foreign exchanges which trade on days on which the Fund
does not determine its net asset value, for example Saturdays and other
customary national U.S. Holidays, the Fund's net asset value could be
significantly affected on days when shareholders have no access to the Fund.
Money Market Fund
The Money Market Fund values its securities at amortized cost. For a
description of this calculation procedure see the Funds' Statement of Additional
Information.
PERFORMANCE CALCULATION
From time to time, the Funds may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Funds. The Funds' yield and total return
figures described below will vary depending upon market conditions, the
composition of the Funds' portfolios and operating expenses. These factors and
possible differences in the methods used in calculating yield and total return
should be considered when comparing the Funds' performance figures to
performance figures published for other investment vehicles. The Funds may also
quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices. Any performance data quoted for the Funds represents only
historical performance and is not intended to indicate future performance of the
Funds. The calculation of average annual total return and yield for the Funds
does not include fees and charges of the separate accounts that invest in the
Funds and, therefore, does not reflect the investment performance of those
separate accounts. For further information on how the Funds calculate yield and
total return figures, see the Statement of Additional Information.
Average Annual Total Return
Each Fund may advertise its respective average annual total return. Average
annual total return for each Fund is computed by calculating the average annual
compounded rate of return over the stated period that would equate an initial
$1,000 investment to the ending redeemable value assuming the reinvestment of
all dividends and capital gains distributions at net asset value. The same
assumptions are made when computing cumulative total return by dividing the
ending redeemable value by the initial investment. The Funds may also quote
rankings, yields or returns as published by independent statistical services or
publishers, and information regarding the performance of certain market indices.
Yield and Effective Yield
From time to time the Money Market Fund may advertise its respective yield
and effective yield. The yield of the Fund refers to the income generated by an
investment in the Fund over a seven-day period. This income is then annualized.
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The effective yield is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
The yield for the Money Market Fund will fluctuate daily as the income
earned on the investments of the Fund fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Fund is an open-end investment company and there is no
guarantee that the net asset value or any stated rate of return will remain
constant. A shareholder's investment in the Fund is not insured. Investors
comparing results of the Fund with investment results and yields from other
sources such as banks or savings and loan associations should understand these
distinctions. Historical and comparative yield information may, from time to
time, be presented by the Fund.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
It is the policy of each Fund to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Funds intend to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which a
Fund so qualifies it will be exempt from federal income tax upon the amounts so
distributed to investors.
Any dividends from the net investment income of the Funds (except the Money
Market Fund) will normally be payable to the shareholders annually, and any net
realized gains will be distributed annually. All dividends and capital gains
distributions are applied to purchase additional Fund shares at net asset value
as of the payment date without the imposition of any sales charge.
Each Fund will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Funds to consult with tax advisors on the federal and
state tax aspects of their investments and redemptions.
Money Market Fund
The Money Market Fund declares dividends of all its daily net investment
income on each day the Fund's net asset value per share is determined. Dividends
are payable daily and are automatically reinvested in full and fractional shares
of the Fund at the then current net asset value unless a shareholder requests
payment in cash.
Net investment income, for dividend purposes, consists of (1) accrued
interest income plus or minus accrued discount or amortized premium; plus or
minus (2) all net short-term realized gains and losses; minus (3) all accrued
expenses of the Fund. Expenses of the Fund are accrued each day. Net income will
be calculated immediately prior to the determination of net asset value per
share of the Fund.
Since the Fund's policy is, under normal circumstances, to hold portfolio
securities to maturity and to value portfolio securities at amortized cost, it
does not expect any capital gains or losses. If the Fund does experience gains,
however, it could result in an increase in dividends. Capital losses could
result in a decrease in dividends. If for some extraordinary reason the Fund
realizes net long-term capital gains, it will distribute them once every 12
months.
Since the net income of the Fund (including realized gains and losses on
the portfolio securities) is declared as a dividend each time the net income of
the Fund is determined, the net asset value per share of the Fund normally
remains at $1.00 immediately after each determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Fund,
representing reinvestment of dividend income, is reflected by an increase in the
number of shares of the Fund in the account.
Normally the Fund will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Fund determined
at any time is a negative amount, the net asset value per share will be reduced
below $1.00. If this happens, the Fund may endeavor to restore the net asset
value per share to $1.00 by reducing the number of outstanding shares by
redeeming proportionately from shareholders without the payment of any monetary
consideration, such number of full and fractional shares as is necessary to
maintain a net asset value per share of $1.00. Each shareholder will be deemed
to have agreed to such a redemption in these circumstances by investing in the
Fund. The Fund may seek to achieve the same objective of restoring the net asset
value per share to $1.00 by not declaring dividends from net income on
subsequent days until restoration, with the result that the net asset value per
share would increase to the extent of positive net income which is not declared
as a dividend, or any other method approved by the Board of Directors.
The Board of Directors may revise the above dividend policy, or postpone
the payment of dividends, if the Fund should have or anticipate any large
presently unexpected expense, loss or fluctuation in net assets which in the
opinion of the Board might have a significant adverse affect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Funds. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Fund shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of each
Fund reserves the right to broaden or limit the designation of Eligible
Purchasers.
Principal Balanced, Principal Bond, Principal Capital Accumulation,
Principal Emerging Growth and Principal Money Market Funds each serve as an
underlying investment medium for variable annuity contracts and variable life
insurance policies that are funded in separate accounts established by Principal
Mutual Life Insurance Company. It is conceivable that in the future it may be
disadvantageous for variable life insurance separate accounts and variable
annuity separate accounts to invest in the Funds simultaneously. Although
neither Principal Mutual Life Insurance Company nor the Funds currently foresee
any such disadvantages either to variable life insurance policy owners or to
variable annuity contract owners, each Fund's Board of Directors intends to
monitor events in order to identify any material conflicts between such policy
owners and contract owners and to determine what action, if any, should be taken
in response thereto. Such action could include the sale of Fund shares by one or
more of the separate accounts, which could have adverse consequences. Material
conflicts could result from, for example, (1) changes in state insurance laws,
(2) changes in Federal income tax law, (3) changes in the investment management
of the Fund, or (4) differences in voting instructions between those given by
policy owners and those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Funds. There are no sales charges on the Funds'
shares. There are no restrictions on amounts to be invested in the Funds'
shares.
Shareholder accounts for each Fund will be maintained under an open account
system. Under this system, an account is automatically opened and maintained for
each new investor. Each investment is confirmed by sending the investor a
statement of account showing the current purchase and the total number of shares
then owned. The statement of account is treated by each Fund as evidence of
ownership of Fund shares in lieu of stock certificates, and unless written
request is made to the Fund, stock certificates will not be issued or delivered
to investors. Certificates, which can be stolen or lost, are unnecessary except
for special purposes such as collateral for a loan. Fractional interests in the
Funds' shares are reflected to three decimal places in the statement of account,
but any stock certificates will be issued only for full shares owned.
If an offer to purchase shares is received by any of the Funds before the
close of trading on the New York Stock Exchange, the shares will be issued at
the offering price (net asset value of Fund shares) computed on that day. If an
offer is received after the close of trading or on a day which is not a trading
day, the shares will be issued at the offering price computed on the first
succeeding day on which a price is determined. Dividends on the Money Market
Fund shares will be paid on the next day following the effective date of a
purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each of the Principal Funds.
Each Fund share is entitled to one vote either in person or by proxy at all
shareholder meetings for that Fund. This includes the right to vote on the
election of directors, selection of independent accountants and other matters
submitted to meetings of shareholders. Each share has equal rights with every
other share as to dividends, earnings, voting, assets and redemption. Shares are
fully paid and non-assessable, and have no preemptive or conversion rights.
Shares may be issued as full or fractional shares, and each fractional share has
proportionately the same rights, including voting, as are provided for a full
share. Shareholders of each of these Funds may remove any director with or
without cause by the vote of a majority of the votes entitled to be cast at a
meeting of shareholders.
The bylaws of each Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of each Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Funds intend to hold shareholder meetings only when required by
law and at such other times as may be deemed appropriate by their respective
Boards of Directors.
Shareholder inquiries should be directed to the applicable Fund at The
Principal Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Funds' shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of a Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Fund's shares allocated
to each of its separate accounts registered under the Investment Company Act of
1940 and attributable to variable annuity contracts or variable life insurance
policies participating therein in accordance with instructions received from
contract or policy holders, participants and annuitants. Other shares of each
Fund held by each registered separate account, including those for which no
timely instructions are received, are voted in proportion to the instructions
that are received with respect to contracts or policies participating in that
separate account. Shares of each of the Funds held in the general account of
Principal Mutual Life Insurance Company or in its unregistered separate accounts
are voted in proportion to the instructions that are received with respect to
contracts and policies participating in its registered and unregistered separate
accounts. If Principal Mutual determines pursuant to applicable law that a
Fund's shares held in one or more separate accounts or in its general account
need not be voted pursuant to instructions received with respect to
participating contracts or policies, it then may vote those Fund shares in its
own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Fund will redeem its shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Fund requesting redemption of any part or all of the
shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, the Fund will not require a signature guarantee as a part of a
proper endorsement; otherwise the shareholder's signature must be guaranteed by
either a commercial bank, trust company, credit union, savings and loan
association, national securities exchange member, or by a brokerage firm. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Fund in proper and complete form. The amount received for shares
upon redemption may be more or less than the cost of such shares depending upon
the net asset value at the time of redemption.
Redemption proceeds will be sent within seven 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. If a Fund is requested to
redeem shares for which good payment has not yet been received, the Fund may
delay transmittal of redemption proceeds until such time as good payment has
been collected for the purchase of such shares (which may take up to 15 days or
more). 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 America National Trust and Savings Association, 2 Rector
Street, New York, New York 10006, is custodian of the portfolio securities and
cash assets of each of the Funds except the World Fund. The custodian for the
World Fund is Chase Manhattan Bank, Global Securities Services, Chase Metro Tech
Center, Brooklyn, New York 11245. The custodians perform no managerial or
policymaking functions for the Funds.
Organization and Share Ownership: The Funds were incorporated in the state
of Maryland on the following dates: Aggressive Growth Fund - August 20, 1993;
Asset Allocation Fund - August 20, 1993; Balanced Fund - November 26, 1986; Bond
Fund - November 26, 1986; Capital Accumulation Fund - May 26, 1989 (effective
November 1, 1989 succeeded to the business of a predecessor Fund that had been
incorporated in Delaware on February 6, 1969); Emerging Growth Fund - February
20, 1987; Government Securities Fund - June 7, 1985; Growth Fund - August 20,
1993; Money Market Fund - June 10, 1982; and World Fund - August 20, 1993.
Principal Mutual Life Insurance Company owns 100% of each Fund's outstanding
shares.
Capitalization: The authorized capital stock of each Fund
consists of 100,000,000 shares of common stock (500,000,000 for Principal Money
Market Fund,Inc.), $.01 par value.
Financial Statements: Copies of the financial statements of each Fund will
be mailed to each shareholder of that Fund semi-annually. At the close of each
fiscal year, each Fund's financial statements will be audited by a firm of
independent auditors. The firm of Ernst & Young LLP has been appointed to audit
the financial statements of each Fund for their respective present fiscal years.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the
Funds have filed with the Securities and Exchange Commission. The Funds'
Statement of Additional Information is hereby incorporated by reference into
this Prospectus. A copy of the Funds' Statement of Additional Information can be
obtained upon request, free of charge, by writing or telephoning the Fund. You
may obtain a copy of Part C of the Registration Statements filed with the
Securities and Exchange Commission, Washington, D.C., from the Commission upon
payment of the prescribed fees.
Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is
the principal underwriter for each of the Principal Funds.
PART B
PRINCIPAL AGGRESSIVE GROWTH FUND, INC.
PRINCIPAL ASSET ALLOCATION FUND, INC.
PRINCIPAL BALANCED FUND, INC.
PRINCIPAL BOND FUND, INC.
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
PRINCIPAL EMERGING GROWTH FUND, INC.
PRINCIPAL GOVERNMENT SECURITIES FUND, INC.
PRINCIPAL GROWTH FUND, INC.
PRINCIPAL HIGH YIELD FUND, INC.
PRINCIPAL MONEY MARKET FUND, INC.
PRINCIPAL WORLD FUND, INC.
Statement of Additional Information
dated March 31, 1995
This Statement of Additional Information provides information about each
of the above Funds in addition to the information that is contained in the
Funds' Prospectus, dated March 31, 1995.
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Funds' Prospectus, a copy of which can be
obtained free of charge by writing or telephoning:
Principal Funds
The Principal Financial Group
Des Moines, Iowa 50392-0200
Telephone: 1-800-247-4123
- 1 -
<PAGE>
TABLE OF CONTENTS
Investment Policies and Restrictions of the Fund .......................... 2
Growth-Oriented Funds .............................................. 2
Income-Oriented Funds .............................................. 7
Money Market Fund .................................................. 10
Fund Investments .......................................................... 12
Directors and Officers of the Fund ........................................ 23
Manager and Sub-Advisors .................................................. 24
Cost of Manager's Services ................................................ 25
Brokerage on Purchases and Sales of Securities ............................ 27
Determination of Net Asset Value of Fund Shares ........................... 29
Performance Calculation ................................................... 30
Tax Status ................................................................ 32
General Information and History ........................................... 33
Financial Statements ...................................................... 35
Appendix A ................................................................ 36
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS OF THE FUNDS
The following information about the Principal Funds, a family of
separately incorporated, diversified, open-end management investment companies,
commonly called mutual funds, supplements the information provided in the
Prospectus under the caption "Investment Objectives, Policies and Restrictions."
There are three categories of Principal Funds: Growth-Oriented Funds,
which include five Funds which seek primarily capital appreciation through
investments in equity securities (Aggressive Growth Fund, Capital Accumulation
Fund, Emerging Growth Fund, Growth Fund and World Fund) and two Funds which seek
a total investment return including both capital appreciation and income through
investments in equity and debt securities (Asset Allocation Fund and Balanced
Fund); Income-Oriented Funds, which include three funds which seek primarily a
high level of income through investments in debt securities (Bond Fund,
Government Securities Fund and High Yield Fund) and a Money Market Fund, which
seeks primarily a high level of income through investments in short-term debt
securities.
In seeking to achieve its investment objective, each Fund has adopted as
matters of fundamental policy certain investment restrictions which cannot be
changed without approval by the holders of the lesser of: (i) 67% of the Fund's
shares present or represented at a shareholders' meeting at which the holders of
more than 50% of such shares are present or represented by proxy; or (ii) more
than 50% of the outstanding shares of the Fund. Similar shareholder approval is
required to change the investment objective of each of the Funds. The following
discussion provides for each Fund a statement of its investment objective, a
description of its investment restrictions that are matters of fundamental
policy and a description of any investment restrictions it may have adopted that
are not matters of fundamental policy and may be changed without shareholder
approval. For purposes of the investment restrictions, all percentage and rating
limitations apply at the time of acquisition of a security, and any subsequent
change in any applicable percentage resulting from market fluctuations or in a
rating by a rating service will not require elimination of any security from the
portfolio. Unless specifically identified as a matter of fundamental policy,
each investment policy discussed in the Prospectus or the Statement of
Additional Information is not fundamental and may be changed by the respective
Fund's Board of Directors.
GROWTH-ORIENTED FUNDS
Investment Objectives
Principal Aggressive Growth Fund, Inc. ("Aggressive Growth Fund") seeks to
provide long-term capital appreciation by investing primarily in growth-oriented
common stocks of medium and large capitalization U.S. corporations and, to a
limited extent, foreign corporations. Principal Asset Allocation Fund, Inc.
("Asset Allocation Fund") seeks to generate a total investment return consistent
with the preservation of capital.
Principal Balanced Fund, Inc. ("Balanced Fund") seeks to generate a total
investment return consisting of current income and capital appreciation while
assuming reasonable risks in furtherance of the investment objective.
Principal Capital Accumulation Fund, Inc. ("Capital Accumulation Fund")
seeks to achieve primarily long-term capital appreciation and secondarily growth
of investment income through the purchase primarily of common stocks, but the
Fund may invest in other securities.
Principal Emerging Growth Fund, Inc. ("Emerging Growth Fund") seeks to
achieve capital appreciation by investing primarily in securities of emerging
and other growth-oriented companies.
Principal Growth Fund, Inc. ("Growth Fund") seeks growth of capital through
the purchase primarily of common stocks, but the Fund may invest in other
securities.
Principal World Fund, Inc. ("World Fund") seeks long-term growth of capital
by investing in a portfolio of equity securities of companies domiciled in any
of the nations of the world.
Investment Restrictions
Aggressive Growth Fund, Asset Allocation Fund, Balanced Fund, Emerging
Growth Fund, Growth Fund and World Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Aggressive
Growth Fund, Asset Allocation Fund, Balanced Fund, Emerging Growth Fund, Growth
Fund and World Fund each may not:
(1) Issue any senior securities as defined in the Investment Company
Act of 1940. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in accordance
with restrictions described below do not involve the issuance of a
senior security.
(2) Purchase or retain in its portfolio securities of any issuer if
those officers or directors of the Fund or its Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(3) Invest in commodities or commodity contracts, but it may purchase
and sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which
are secured by real estate and securities of issuers which invest
or deal in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Fund's total assets at
the time of the borrowing. The Balanced Fund may borrow only from
banks.
(6) Make loans, except that the Fund may (i) purchase and hold debt
obligations in accordance with its investment objective and
policies, (ii) enter into repurchase agreements, and (iii) lend its
portfolio securities without limitation against collateral
(consisting of cash or securities issued or guaranteed by the
United States Government or its agencies or instrumentalities)
equal at all times to not less than 100% of the value of the
securities loaned.
(7) Invest more than 5% of its total assets in the securities of any
one issuer (other than obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities)
except that this limitation shall apply only with respect to 75% of
the total assets of the Aggressive Growth Fund, Asset Allocation
Fund, Growth Fund and World Fund; or purchase more than 10% of the
outstanding voting securities of any one issuer.
(8) Act as an underwriter of securities, except to the extent the Fund
may be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(9) Concentrate its investments in any particular industry or
industries, except that the Fund may invest not more than 25% of
the value of its total assets in a single industry.
(10) Sell securities short (except where the Fund holds or has the right
to obtain at no added cost a long position in the securities sold
that equals or exceeds the securities sold short) or purchase any
securities on margin, except it may obtain such short-term credits
as are necessary for the clearance of transactions. The deposit or
payment of margin in connection with transactions in options and
financial futures contracts is not considered the purchase of
securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in securities of
issuers which invest in or sponsor such programs.
Each of these Funds has also adopted the following restrictions which are
not fundamental policies and may be changed without shareholder approval. It is
contrary to each Fund's present policy to:
(1) Invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market, including all covered spread options and the assets used as
cover for any options written in the Over-the-Counter market are
included as part of this 10% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2%
may be invested in warrants that are not listed on the New York or
American Stock Exchange. The 2% limitation for the World Fund does
not apply to warrants listed on the Toronto Stock Exchange or the
Chicago Board Options Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Fund's investments in
all such issuers to exceed 5% of the value of its total assets.
(4) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on futures contracts are not deemed to be
pledges or other encumbrances.
(5) Invest in companies for the purpose of exercising control
or management.
(6) Invest more than 10% (25% for the Aggressive Growth Fund) of its
total assets in securities of foreign issuers. This restriction
does not pertain to the World Fund or the Asset Allocation Fund.
(7) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
Options on financial futures contracts and options on securities
indices will be used solely for hedging purposes; not for
speculation.
(8) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(9) Invest in arbitrage transactions.
(10) Invest in real estate limited partnership interests.
The Balanced Fund and Emerging Growth Fund have also adopted the
following restrictions which are not fundamental policies and may be changed
without shareholder approval. It is contrary to each such Fund's present policy
to:
(1)Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization or
by purchase in the open market of securities of closed-end companies
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved, and if immediately
thereafter not more than 10% of the value of the Fund's total assets
would be invested in such securities.
The Aggressive Growth Fund, Asset Allocation Fund, Growth Fund and World
Fund have also adopted the following restriction which is not a fundamental
policy and may be changed without shareholder approval. It is contrary to each
such Fund's present policy to:
(1) Invest its assets in the securities of any investment company
except that the Fund may invest not more than 10% of its assets in
securities of other investment companies, invest not more than 5%
of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation or plan of reorganization, and the Fund may
purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
Capital Accumulation Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Capital
Accumulation Fund may not:
(1) Concentrate its investments in any one industry. No more than 25%
of the value of its total assets will be invested in any one
industry.
(2) Purchase the securities of any issuer if the purchase will cause
more than 5% of the value of its total assets to be invested in the
securities of any one issuer (except U. S. Government securities).
(3) Purchase the securities of any issuer if the purchase will cause
more than 10% of the voting securities, or any other class of
securities of the issuer, to be held by the Fund.
(4) Underwrite securities of other issuers, except that the Fund may
acquire portfolio securities under circumstances where if sold the
Fund might be deemed an underwriter for purposes of the Securities
Act of 1933. The Fund will not purchase securities, including
obligations acquired in private offerings (see (14) below), which
are subject to legal or contractual restrictions upon resale or are
otherwise not readily marketable, if the purchase will cause more
than 10% of the value of its assets to be invested in such
securities.
(5) Purchase securities of any company with a record of less than three
years' continuous operation (including that of predecessors) if the
purchase would cause the value of the Fund's aggregate investments
in all such companies to exceed 5% of the Fund's total assets.
(6) Engage in the purchase and sale of illiquid interests in real
estate. For this purpose, readily marketable interests in real
estate investment trusts are not interests in real estate.
(7) Engage in the purchase and sale of commodities or commodity
contracts.
(8) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization.
(9) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or its Manager owning
beneficially more than one-half of one percent (0.5%) of the
securities of the issuer together own beneficially more than 5% of
such securities.
(10) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
Fund will not participate on a joint or joint and several basis in
any trading account in securities or effect a short sale of any
security, except in connection with an underwriting in which it is
a participant in the circumstances specified in (4) above. The Fund
will not issue or acquire put and call options.
(11) Invest in companies for the purpose of exercising control or
management.
(12) Invest more than 5% of its assets at the time of purchase in rights
and warrants (other than those that have been acquired in units or
attached to other securities).
(13) Invest more than 20% of its total assets in securities of foreign
issuers.
In addition:
(14) The Fund may make loans only through the purchase in private
offerings of debentures or other evidences of indebtedness of types
customarily purchased by institutional investors, but such
purchases shall be subject to the limitation contained in (4)
above.*
(15) The Fund does not propose to borrow money except for temporary or
emergency purposes from banks in an amount not to exceed the lesser
of (i) 5% of the value of the Fund's assets, less liabilities other
than such borrowings, or (ii) 10% of the Fund's assets taken at
cost at the time such borrowing is made. The Fund may not pledge,
mortgage, or hypothecate its assets (at value) to an extent greater
than 15% of the gross assets taken at cost.
(16) It is contrary to the Fund's present policy to purchase warrants in
excess of 5% of its total assets of which 2% may be invested in
warrants that are not listed on the New York or American Stock
Exchange.
* It is anticipated that any debt securities acquired subject to
"Restriction 14" will be convertible into or carry rights or
warrants to purchase common stock or to participate in earnings,
unless acquired for temporary defensive or liquidity purposes.
INCOME-ORIENTED FUNDS
Investment Objectives
Principal Bond Fund, Inc. ("Bond Fund") seeks to provide
as high a level of income as is consistent with preservation of
capital and prudent investment risk.
Principal Government Securities Fund, Inc. ("Government
Securities Fund") seeks a high level of current income, liquidity
and safety of principal by purchasing obligations issued or
guaranteed by the United States Government or its agencies, with
emphasis on Government National Mortgage Association Certificates
("GNMA Certificates"). The guarantee by the United States
Government extends only to principal and interest; Fund shares are
not guaranteed by the United States Government. There are certain
risks unique to GNMA Certificates.
Principal High Yield Fund, Inc. ("High Yield Fund") seeks
high current income primarily by purchasing high yielding, lower or
non-rated fixed income securities which are believed to not involve
undue risk to income or principal. Capital growth is a secondary
objective when consistent with the objective of high current
income.
Investment Restrictions
Bond Fund, High Yield Fund
Each of the following numbered restrictions is a matter of
fundamental policy and may not be changed without shareholder approval.
The Bond Fund and High Yield Fund each may not:
(1) Issue any senior securities as defined in the Investment Company
Act of 1940. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in accordance
with restrictions described below do not involve the issuance of a
senior security.
(2) Purchase or retain in its portfolio securities of any issuer if
those officers or directors of the fund or its Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(3) Invest in commodities or commodity contracts, but it may purchase
and sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which
are secured by real estate and securities of issuers which invest
or deal in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Fund's total
assets at the time of the borrowing. The Bond Fund and High Yield
Fund may borrow only from banks.
(6) Make loans, except that the Fund may (i) purchase and hold debt
obligations in accordance with its investment objective and
policies, (ii) enter into repurchase agreements, and (iii) lend its
portfolio securities without limitation against collateral
(consisting of cash or securities issued or guaranteed by the
United States Government or its agencies or instrumentalities)
equal at all times to not less than 100% of the value of the
securities loaned.
(7) Invest more than 5% of its total assets in the securities of any
one issuer (other than obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities); or
purchase more than 10% of the outstanding voting securities of any
one issuer.
(8) Act as an underwriter of securities, except to the extent the Fund
may be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
(9) Concentrate its investments in any particular industry or
industries, except that the Bond Fund and High Yield Fund each may
invest not more than 25% of the value of its total assets in a
single industry.
(10) Sell securities short (except where the Fund holds or has the right
to obtain at no added cost a long position in the securities sold
that equals or exceeds the securities sold short) or purchase any
securities on margin, except it may obtain such short-term credits
as are necessary for the clearance of transactions. The deposit or
payment of margin in connection with transactions in options and
financial futures contracts is not considered the purchase of
securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in securities of
issuers which invest in or sponsor such programs.
Each of these Funds has also adopted the following restrictions which are
not fundamental policies and may be changed without shareholder approval. It is
contrary to each Fund's present policy to:
(1) Invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market, including all covered spread options and the assets used as
cover for any options written in the Over-the-Counter market are
included as part of this 10% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2%
may be invested in warrants that are not listed on the New York or
American Stock Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Fund's investments in
all such issuers to exceed 5% of the value of its total assets.
(4) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization
or by purchase in the open market of securities of closed-end
companies where no underwriter or dealer's commission or profit,
other than a customary broker's commission, is involved, and if
immediately thereafter not more than 10% of the value of the Fund's
total assets would be invested in such securities.
(5) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on futures contracts are not deemed to be
pledges or other encumbrances.
(6) Invest in companies for the purpose of exercising control or
management.
(7) Invest more than 20% of its total assets in securities of foreign
issuers.
(8) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
Options on financial futures contracts and options on securities
indices will be used solely for hedging purposes; not for
speculation.
(9) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(10) Invest in arbitrage transactions.
(11) Invest in real estate limited partnership interests.
Government Securities Fund
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Government
Securities Fund may not:
(1) Issue any senior securities as defined in the Act except insofar as
the Fund may be deemed to have issued a senior security by reason
of (a) purchasing any securities on a standby, when-issued or
delayed delivery basis; or (b) borrowing money in accordance with
restrictions described below.
(2) Purchase any securities other than obligations issued or guaranteed
by the United States Government or its agencies or
instrumentalities. There is no limit on the amount of its assets
which may be invested in the securities of any one issuer of such
obligations.
(3) Act as an underwriter of securities, except to the extent the Fund
may be deemed to be an underwriter in connection with the sale of
GNMA certificates held in its portfolio.
(4) Engage in the purchase and sale of interests in real estate,
including interests in real estate investment trusts (although it
will invest in securities secured by real estate or interests
therein, such as mortgage-backed securities) or invest in
commodities or commodity contracts, oil and gas interests, or
mineral exploration or development programs.
(5) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization.
(6) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or its Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(7) Sell securities short or purchase any securities on margin, except
it may obtain such short-term credits as are necessary for the
clearance of transactions. The deposit or payment of margin in
connection with transactions in options and financial futures
contracts is not considered the purchase of securities on margin.
(8) Invest in companies for the purpose of exercising control or
management.
(9) Make loans, except that the Fund may purchase or hold debt
obligations in accordance with the investment restrictions set
forth in paragraph (2) and may enter into repurchase agreements for
such securities, and may lend its portfolio securities without
limitation against collateral consisting of cash, or securities
issued or guaranteed by the United States Government or its
agencies or instrumentalities, which is equal at all times to 100%
of the value of the securities loaned.
(10) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Fund's total assets at
the time of the borrowing.
(11) Enter into repurchase agreements maturing in more than seven days
if, as a result thereof, more than 10% of the value of the Fund's
total assets would be invested in such repurchase agreements and
other assets without readily available market quotations.
(12) Participate on a joint or joint and several basis in any trading
account in securities.
(13) Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
(14) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
The Government Fund has also adopted the following restriction which is
not a fundamental policy and may be changed without shareholder approval. It is
contrary to the Government Fund's present policy to:
(1)Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings. The deposit of underlying securities and other assets in
escrow and other collateral arrangements in connection with
transactions in put and call options, futures contracts and options
on future contracts are not deemed to be pledges or other
encumbrances.
<PAGE>
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MONEY MARKET FUND
Investment Objective
Principal Money Market Fund, Inc. ("Money Market Fund") seeks as
high a level of income available from short-term securities as is
considered consistent with preservation of principal and
maintenance of liquidity by investing in a portfolio of money
market instruments.
Investment Restrictions
Money Market Fund
Each of the following numbered restrictions is a matter of
fundamental policy and may not be changed without shareholder approval.
The Money Market Fund may not:
(1) Concentrate its investments in any one industry. No more than 25%
of the value of its total assets will be invested in securities of
issuers having their principal activities in any one industry,
other than securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities, or obligations of domestic
branches of U.S. banks and savings institutions. (See
"Bank Obligations").
(2) Purchase the securities of any issuer if the purchase will cause
more than 5% of the value of its total assets to be invested in the
securities of any one issuer (except securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities).
(3) Purchase the securities of any issuer if the purchase will cause
more than 10% of any class of securities of the issuer to be held
by the Fund (other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities).
(4) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under the federal securities laws; or knowingly
purchase any security restricted as to disposition under the
federal securities laws.
(5) Purchase securities of any company with a record of less than 3
years continuous operation (including that of predecessors) if the
purchase would cause the value of the Fund's aggregate investments
in all such companies to exceed 5% of the value of the Fund's total
assets.
(6) Engage in the purchase and sale of illiquid interests in real
estate, including interests in real estate investment trusts
(although it may invest in securities secured by real estate or
interests therein) or invest in commodities or commodity contracts,
oil and gas interests, or mineral exploration or development
programs.
(7) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization.
(8) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or its Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(9) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
Fund will not participate on a joint or joint and several basis in
any trading account in securities or effect a short sale of any
security. The Fund will not issue or acquire put and call options,
straddles or spreads or any combination thereof.
(10) Invest in companies for the purpose of exercising control or
management.
(11) Make loans to others except through the purchase of debt
obligations in which the Fund is authorized to invest and by
entering into repurchase agreements (see "Fund Investments").
(12) Borrow money, except from banks for temporary or emergency
purposes, including the meeting of redemption requests which might
otherwise require the untimely disposition of securities, in an
amount not to exceed the lesser of (1) 5% of the value of the
Fund's assets, or (ii) 10% of the value of the Fund's net assets
taken at cost at the time such borrowing is made. The Fund will not
issue senior securities except in connection with such borrowings.
The Fund may not pledge, mortgage, or hypothecate its assets (at
value) to an extent greater than 10% of the net assets.
(13) Invest in uncertificated time deposits maturing in more than seven
days; uncertificated time deposits maturing from two business days
through seven calendar days may not exceed 10% of the value of the
Fund's total assets.
(14) Enter into repurchase agreements maturing in more than seven days
if, as a result thereof, more than 10% of the value of the Fund's
total assets would be invested in such repurchase agreements and
other assets (excluding time deposits) without readily available
market quotations.
FUND INVESTMENTS
The following information further supplements the discussion of the
Funds' investment objectives and policies in the Prospectus under the caption
"INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS."
Selections of equity securities for the Funds, except the Aggressive
Growth and Asset Allocation Funds, are made based upon an approach described
broadly as that of fundamental analysis. Three basic steps are involved in this
analysis. First is the continuing study of basic economic factors in an effort
to conclude what the future general economic climate is likely to be over the
next one to two years. Second, given some conviction as to the likely economic
climate, the Fund attempts to identify the prospects for the major industrial,
commercial and financial segments of the economy, by looking at such factors as
demand for products, capacity to produce, operating costs, pricing structure,
marketing techniques, adequacy of raw materials and components, domestic and
foreign competition, and research productivity, to ascertain prospects for each
industry for the near and intermediate term. Finally, determinations are made
regarding earnings prospects for individual companies within each industry by
considering the same types of factors described above. These earnings prospects
are then evaluated in relation to the current price of the securities of each
company.
Although the Funds may pursue the investment practices described under
the captions Restricted Securities, Foreign Securities, Spread Transactions,
Options on Securities and Securities Indices, and Futures Contracts and Options
on Futures Contracts, Currency Contracts, Repurchase Agreements, Lending of
Portfolio Securities and When Issued and Delay of Delivery Securities, none of
the Funds either committed during the last fiscal year or currently intends to
commit during the present fiscal year more than 5% of its net assets to any of
the practices, with the following exceptions. Investments in foreign securities
by the Aggressive Growth, Asset Allocation and World Funds are expected to
exceed 5% of each fund's net assets.
Restricted Securities
Each of the following Principal Funds has adopted investment restrictions
as non-fundamental policies that limit its investments in restricted securities
and other illiquid securities to 10% of its assets: Aggressive Growth, Asset
Allocation, Balanced, Bond, Capital Accumulation, Emerging Growth, Growth, High
Yield and World Funds.
Generally, restricted securities are not readily marketable because they
are subject to legal or contractual restrictions upon resale. They may be sold
only in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 or in a transaction which is exempt from
the registration requirements of that act. When registration is required, a Fund
may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Fund may by permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to sell. Restricted securities and other securities not readily
marketable will be priced at fair value as determined in good faith by or under
the direction of the Board of Directors.
Foreign Securities
Each of the following Principal Funds has adopted investment restrictions
as non-fundamental policies that limit its investments in foreign securities to
the indicated percentage of its assets: Asset Allocation and World Funds - 100%
; Aggressive Growth Fund - 25%; Bond, Capital Accumulation, High Yield 20%;
Balanced, Emerging Growth and Growth Funds - 10%.
Investment in foreign securities presents certain risks, including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. Each Fund's investment in foreign securities may also
result in higher custodial costs and the costs associated with currency
conversions.
Spread Transactions, Options on Securities and Securities Indices, and Futures
Contracts and Options on Futures Contracts
The Aggressive Growth, Asset Allocation, Balanced, Bond, Emerging Growth,
Government Securities, Growth, High Yield and World Funds may each engage in the
practices described under this heading. None of the Funds will invest more than
5% of its assets in the purchase of call and put options on individual
securities, securities indices and futures contracts. In the following
discussion, the terms "the Fund," "each Fund" or "the Funds" refer to each of
these Funds.
Spread Transactions
Each Fund may purchase from securities dealers covered spread options.
Such covered spread options are not presently exchange listed or traded. The
purchase of a spread option gives the Fund the right to put, or sell, a security
that it owns at a fixed dollar spread or fixed yield spread in relationship to
another security that the Fund does not own, but which is used as a benchmark.
The risk to the Fund in purchasing covered spread options is the cost of the
premium paid for the spread option and any transaction costs. In addition, there
is no assurance that closing transactions will be available. The purchase of
spread options can be used to protect each Fund against adverse changes in
prevailing credit quality spreads, i.e., the yield spread between high quality
and lower quality securities. The security covering the spread option will be
maintained in a segregated account by each Fund's custodian. The Funds do not
consider a security covered by a spread option to be "pledged" as that term is
used in the Funds' policy limiting the pledging or mortgaging of assets.
Options on Securities and Securities Indices
Each Fund may write (sell) and purchase call and put options on
securities in which it may invest and on securities indices based on securities
in which the Fund may invest. The Funds may write call and put options to
generate additional revenue, and may write and purchase call and put options in
seeking to hedge against a decline in the value of securities owned or an
increase in the price of securities which the Fund plans to purchase.
Writing Covered Call and Put Options. When a Fund writes a call
option, it gives the purchaser of the option, in return for the premium it
receives, the right to buy from the Fund the underlying security at a specified
price at any time before the option expires. When a Fund writes a put option, it
gives the purchaser of the option, in return for the premium it receives, the
right to sell to the Fund the underlying security at a specified price at any
time before the option expires.
The premium received by a Fund, when it writes a put or call option,
reflects, among other factors, the current market price of the underlying
security, the relationship of the exercise price to the market price, the time
period until the expiration of the option and interest rates. The premium will
generate additional income for the Fund if the option expires unexercised or is
closed out at a profit. By writing a call, a Fund limits its opportunity to
profit from any increase in the market value of the underlying security above
the exercise price of the option, but it retains the risk of loss if the price
of the security should decline. By writing a put, a Fund assumes the risk that
it may have to purchase the underlying security at a price that may be higher
than its market value at time of exercise.
The Funds write only covered options and will comply with applicable
regulatory and exchange cover requirements. The Funds usually will own the
underlying security covered by any outstanding call option that it has written.
With respect to an outstanding put option that it has written, each Fund will
deposit and maintain with its custodian cash, U.S. Government securities or
other liquid securities with a value at least equal to the exercise price of the
option.
Once a Fund has written an option, it may terminate its obligation,
before the option is exercised, by effecting a closing transaction, which is
accomplished by the Fund's purchasing an option of the same series as the option
previously written. The Funds will have a gain or loss depending on whether the
premium received when the option was written exceeds the closing purchase price
plus related transaction costs.
Purchasing Call and Put Options. When a Fund purchases a call
option, it receives, in return for the premium it pays, the right to buy from
the writer of the option the underlying security at a specified price at any
time before the option expires. The Fund may purchase call options in
anticipation of an increase in the market value of securities that it intends
ultimately to buy. During the life of the call option, the Fund would be able to
buy the underlying security at the exercise price regardless of any increase in
the market price of the underlying security. In order for a call option to
result in a gain, the market price of the underlying security must rise to a
level that exceeds the sum of the exercise price, the premium paid and
transaction costs.
When a Fund purchases a put option, it receives, in return for the
premium it pays, the right to sell to the writer of the option the underlying
security at a specified price at any time before the option expires. The Fund
may purchase put options in anticipation of a decline in the market value of the
underlying security. During the life of the put option, the Fund would be able
to sell the underlying security at the exercise price regardless of any decline
in the market price of the underlying security. In order for a put option to
result in a gain, the market price of the underlying security must decline,
during the option period, below the exercise price sufficiently to cover the
premium and transaction costs.
Once a Fund has purchased an option, it may close out its position by
selling an option of the same series as the option previously purchased. The
Fund will have a gain or loss depending on whether the closing sale price
exceeds the initial purchase price plus related transaction costs.
Options on Securities Indices. Each Fund may purchase and sell put
and call options on any securities index based on securities in which the Fund
may invest. Securities index options are designed to reflect price fluctuations
in a group of securities or segment of the securities market rather than price
fluctuations in a single security. Options on securities indices are similar to
options on securities, except that the exercise of securities index options
requires cash payments and does not involve the actual purchase or sale of
securities. The Funds would engage in transactions in put and call options on
securities indices for the same purposes as they would engage in transactions in
options on securities. When a Fund writes call options on securities indices, it
will hold in its portfolio underlying securities which, in the judgment of the
Manager or the Sub-Advisor, correlate closely with the securities index and
which have a value at least equal to the aggregate amount of the securities
index options.
Risks Associated with Options Transactions. An options position may
be closed out only on an exchange which provides a secondary market for an
option of the same series. Although the Funds will generally purchase or write
only those options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market on an exchange will exist
for any particular option, or at any particular time. For some options, no
secondary market on an exchange or elsewhere may exist. If a Fund is unable to
effect closing sale transactions in options it has purchased, the Fund would
have to exercise its options in order to realize any profit and may incur
transaction costs upon the purchase or sale of underlying securities pursuant
thereto. If a Fund is unable to effect a closing purchase transaction for a
covered option that it has written, it will not be able to sell the underlying
securities, or dispose of the assets held in a segregated account, until the
option expires or is exercised. A Fund's ability to terminate option positions
established in the over-the-counter market may be more limited than for
exchange-traded options and may also involve the risk 35 that broker-dealers
participating in such transactions might fail to meet their obligations.
Futures Contracts and Options on Futures
Each Fund may purchase and sell financial futures contracts and options
on those contracts. Financial futures contracts are commodities contracts based
on financial instruments such as U.S. Treasury bonds or bills or on securities
indices such as the S&P 500 Index. Futures contracts, options on futures
contracts and the commodity exchanges on which they are traded are regulated by
the Commodity Futures Trading Commission ("CFTC"). Through the purchase and sale
of futures contracts and related options, a Fund may seek to hedge against a
decline in securities owned by the Fund or an increase in the price of
securities which the Fund plans to purchase.
Futures Contracts. When a Fund sells a futures contract based on a
financial instrument, the Fund becomes obligated to deliver that kind of
instrument at a specified future time for a specified price. When a Fund
purchases that kind of contract, it becomes obligated to take delivery of the
instrument at a specified time and to pay the specified price. In most
instances, these contracts are closed out by entering into an offsetting
transaction before the settlement date, thereby canceling the obligation to make
or take delivery of specific securities. The Fund realizes a gain or loss
depending on whether the price of an offsetting purchase plus transaction costs
are less or more than the price of the initial sale or on whether the price of
an offsetting sale is more or less than the price of the initial purchase plus
transaction costs. Although the Funds will usually liquidate futures contracts
on financial instruments in this manner, they may instead make or take delivery
of the underlying securities whenever it appears economically advantageous to do
so.
A futures contract based on a securities index provides for the purchase
or sale of a group of securities at a specified future time for a specified
price. These contracts do not require actual delivery of securities, but result
in a cash settlement based upon the difference in value of the index between the
time the contract was entered into and the time it is liquidated, which may be
at its expiration or earlier if it is closed out by entering into an offsetting
transaction.
When a futures contract is purchased or sold a brokerage commission is
paid, but unlike the purchase or sale of a security or option, no price or
premium is paid or received. Instead, an amount of cash or U.S. Government
securities, which varies, but is generally about 5% of the contract amount, is
deposited by the Fund with its custodian for the benefit of the futures
commission merchant through which the Fund engages in the transaction. This
amount is known as "initial margin." It does not involve the borrowing of funds
by the Fund to finance the transaction, but instead represents a "good faith"
deposit assuring the performance of both the purchaser and the seller under the
futures contract. It is returned to the Fund upon termination of the futures
contract, if all the Fund's contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin,"
are required to be made on a daily basis as the price of the futures contract
fluctuates, making the long or short positions in the futures contract more or
less valuable, a process known as "marking to market." If the position is closed
out by taking an opposite position prior to the settlement date of the futures
contract, a final determination of variation margin is made, additional cash is
required to be paid to or released by the broker, and the Fund realizes a loss
or gain.
In using futures contracts, the Funds will seek to establish more
certainly than would otherwise be possible the effective price of or rate of
return on portfolio securities or securities that the Fund proposes to acquire.
A Fund, for example, may sell futures contracts in anticipation of a rise in
interest rates which would cause a decline in the value of its debt investments.
When this kind of hedging is successful, the futures contracts should increase
in value when the Fund's debt securities decline in value and thereby keep the
Fund's net asset value from declining as much as it otherwise would. A Fund may
also sell futures contracts on securities indices in anticipation of or during a
stock market decline in an endeavor to offset a decrease in the market value of
its equity investments. When a Fund is not fully invested and anticipates an
increase in the cost of securities it intends to purchase, it may purchase
financial futures contracts. When increases in the prices of equities are
expected, a Fund may purchase futures contracts on securities indices in order
to gain rapid market exposure that may partially or entirely offset increases in
the cost of the equity securities it intends to purchase.
Options on Futures. The Funds may also purchase and write call and
put options on futures contracts. A call option on a futures contract gives the
purchaser the right, in return for the premium paid, to purchase a futures
contract (assume a long position) at a specified exercise price at any time
before the option expires. A put option gives the purchaser the right, in return
for the premium paid, to sell a futures contract (assume a short position), for
a specified exercise price, at any time before the option expires.
Upon the exercise of a call, the writer of the option is obligated to
sell the futures contract (to deliver a long position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a put, the
writer of the option is obligated to purchase the futures contract (deliver a
short position to the option holder) at the option exercise price, which will
presumably be higher than the current market price of the contract in the
futures market. However, as with the trading of futures, most options are closed
out prior to their expiration by the purchase or sale of an offsetting option at
a market price that will reflect an increase or a decrease from the premium
originally paid.
Options on futures can be used to hedge substantially the same risks as
might be addressed by the direct purchase or sale of the underlying futures
contracts. For example, if a Fund anticipated a rise in interest rates and a
decline in the market value of the debt securities in its portfolio, it might
purchase put options or write call options on futures contracts instead of
selling futures contracts.
If a Fund purchases an option on a futures contract, it may obtain
benefits similar to those that would result if it held the futures position
itself. But in contrast to a futures transaction, the purchase of an option
involves the payment of a premium in addition to transaction costs. In the event
of an adverse market movement, however, the Fund will not be subject to a risk
of loss on the option transaction beyond the price of the premium it paid plus
its transaction costs.
When a Fund writes an option on a futures contract, the premium paid by
the purchaser is deposited with the Fund's custodian, and the Fund must maintain
with its custodian all or a portion of the initial margin requirement on the
underlying futures contract. The Fund assumes a risk of adverse movement in the
price of the underlying futures contract comparable to that involved in holding
a futures position. Subsequent payments to and from the broker, similar to
variation margin payments, are made as the premium and the initial margin
requirement are marked to market daily. The premium may partially offset an
unfavorable change in the value of portfolio securities, if the option is not
exercised, or it may reduce the amount of any loss incurred by the Fund if the
option is exercised.
Risks Associated with Futures Transactions. There are a number of
risks associated with transactions in futures contracts and related options. A
Fund's successful use of futures contracts is subject to the Manager's and the
Sub-Advisor's ability to predict correctly the factors affecting the market
values of the Fund's portfolio securities. For example, if a Fund was hedged
against the possibility of an increase in interest rates which would adversely
affect debt securities held by the Fund and the prices of those debt securities
instead increased, the Fund would lose part or all of the benefit of the
increased value of its securities which it hedged because it would have
offsetting losses in its futures positions. Other risks include imperfect
correlation between price movements in the financial instrument or securities
index underlying the futures contract, on the one hand, and the price movements
of either the futures contract itself or the securities held by the Fund, on the
other hand. If the prices do not move in the same direction or to the same
extent, the transaction may result in trading losses.
Prior to exercise or expiration, a position in futures may be terminated
only by entering into a closing purchase or sale transaction. This requires a
secondary market on the relevant contract market. The Fund will enter into a
futures contract or related option only if there appears to be a liquid
secondary market therefor. There can be no assurance, however, that such a
liquid secondary market will exist for any particular futures contract or
related option at any specific time. Thus, it may not be possible to close out a
futures position once it has been established. Under such circumstances, the
Fund would continue to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such situations, if the Fund
has insufficient cash, it may be required to sell portfolio securities to meet
daily variation margin requirements at a time when it may be disadvantageous to
do so. In addition, the Fund may be required to perform under the terms of the
futures contracts it holds. The inability to close out futures positions also
could have an adverse impact on the Fund's ability effectively to hedge its
portfolio.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. This daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
Limitations on the Use of Futures and Options on Futures. Each Fund
intends to come within an exclusion from the definition of "commodity pool
operator" provided by CFTC regulations by complying with certain limitations on
the use of futures and related options prescribed by those regulations.
None of the Funds will purchase or sell futures contracts or options
thereon if immediately thereafter the aggregate initial margin and premiums
exceed 5% of the fair market value of the Fund's assets, after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into (except that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount generally may be excluded in computing
the 5%).
The Funds will enter into futures contracts and related options
transactions only for bona fide hedging purposes as permitted by the CFTC and
for other appropriate risk management purposes, if any, which the CFTC may deem
appropriate for mutual funds excluded from the regulations governing commodity
pool operators. The Funds are not permitted to engage in speculative futures
trading. Each Fund will determine that the price fluctuations in the futures
contracts and options on futures used for hedging or risk management purposes
are substantially related to price fluctuations in securities held by the Fund
or which it expects to purchase. In pursuing traditional hedging activities,
each Fund will sell futures contracts or acquire puts to protect against a
decline in the price of securities that the Fund owns, and each Fund will
purchase futures contracts or calls on futures contracts to protect the Fund
against an increase in the price of securities the Fund intends to purchase
before it is in a position to do so.
When a Fund purchases a futures contract, or purchases a call option on a
futures contract, it will maintain an amount of cash, cash equivalents or
short-term high grade fixed income securities in a segregated account with the
Fund's custodian, so that the amount so segregated plus the amount of initial
margin held for the account of its broker equals the market value of the futures
contract.
The Funds will not maintain open short positions in futures contracts,
call options written on futures contracts, and call options written on
securities indices if, in the aggregate, the value of the open positions (marked
to market) exceeds the current market value of that portion of its securities
portfolio being hedged by those futures and options plus or minus the unrealized
gain or loss on those open positions, adjusted for the historical volatility
relationship between that portion of the portfolio and the contracts (i.e., the
Beta volatility factor). To the extent a Fund has written call options on
specific securities in that portion of its portfolio, the value of those
securities will be deducted from the current market value of that portion of the
securities portfolio. If this limitation should be exceeded at any time, the
Fund will take prompt action to close out the appropriate number of open short
positions to bring its open futures and options positions within this
limitation.
Currency Contracts
The Aggressive Growth, Asset Allocation and World Funds may engage in
currency transactions with securities dealers, financial institutions or other
parties that are deemed creditworthy by the Fund's Sub-Advisor to hedge the
value of portfolio securities denominated in particular currencies against
fluctuations in relative value. Currency transactions include forward currency
contracts, exchange-listed currency futures contracts and options thereon and
exchange-listed and over-the-counter options on currencies. A forward currency
contract involves a privately negotiated obligation to purchase or sell (with
delivery generally required) a specific currency at a future date, which may be
any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract.
The Funds will engage in currency transactions only for hedging and other
non-speculative purposes, including transaction hedging and position hedging.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. The Funds will not enter into a transaction
to hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
The Funds may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or decline
in value relative to other currencies to which the Fund has or in which the Fund
expects to have exposure. To reduce the effect of currency fluctuations on the
value of existing or anticipated holdings of its securities, the Fund may also
engage in proxy hedging. Proxy hedging is often used when the currency to which
a Fund's holding is exposed is difficult to hedge generally or difficult to
hedge against the dollar. Proxy hedging entails entering into a forward contract
to sell a currency, the changes in the value of which are generally considered
to be linked to a currency or currencies in which some or all of a Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
Except when a Fund enters into a forward contract in connection with the
purchase or sale of a security denominated in a foreign currency or for other
non-speculative purposes, which requires no segregation, a currency contract
that obligates the Fund to buy or sell a foreign currency will generally require
the Fund to hold an amount of that currency or liquid securities denominated in
that currency equal to the Fund's obligations or to segregate liquid high grade
debt obligations equal to the amount of the Fund's obligations.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that a Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sale of currency and related instruments can be adversely affected by government
exchange controls, limitations or restrictions on repatriation of currency, and
manipulations or exchange restrictions imposed by governments. These forms of
governmental actions can result in losses to a Fund if it is unable to deliver
or receive currency or monies in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as incurring transaction costs. Currency exchange rates may
also fluctuate based on factors extrinsic to a country's economy. Buyers and
sellers of currency futures contracts are subject to the same risks that apply
to the use of futures contracts generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures contracts is relative
new, and the ability to establish and close out positions on these options is
subject to the maintenance of a liquid market that may not always be available.
Repurchase Agreements
All Principal Funds, except the Capital Accumulation, may invest in
repurchase agreements. None of the Funds will enter into repurchase agreements
that do not mature within seven days if any such investment, together with other
illiquid securities held by the Fund, would amount to more than 10% of its
assets. Repurchase agreements will typically involve the acquisition by the Fund
of debt securities from a selling financial institution such as a bank, savings
and loan association or broker-dealer. A repurchase agreement provides that the
Fund will sell back to the seller and that the seller will repurchase the
underlying securities at a specified price and at a fixed time in the future.
Repurchase agreements may be viewed as loans by a Fund collateralized by the
underlying securities ("collateral"). This arrangement results in a fixed rate
of return that is not subject to market fluctuation during the Fund's holding
period. Although repurchase agreements involve certain risks not associated with
direct investments in debt securities, each of the Funds follows procedures
established by its Board of Directors which are designed to minimize such risks.
These procedures include entering into repurchase agreements only with large,
well-capitalized and well-established financial institutions, which have been
approved by the Fund's Board of Directors and which the Fund's Manager believes
present minimum credit risks. In addition, the value of the collateral
underlying the repurchase agreement will always be at least equal to the
repurchase price, including accrued interest. In the event of a default or
bankruptcy by a selling financial institution, the affected Fund bears a risk of
loss. In seeking to liquidate the collateral, a Fund may be delayed in or
prevented from exercising its rights and may incur certain costs. Further to the
extent that proceeds from any sale upon a default of the obligation to
repurchase were less than the repurchase price, the Fund could suffer a loss.
Lending of Portfolio Securities
All Principal Funds, except the Capital Accumulation and Money Market
Funds, may lend their portfolio securities. None of the Principal Funds intends
to lend its portfolio securities if as a result the aggregate of such loans made
by the Fund would exceed 30% of its total assets. Portfolio securities may be
loaned to unaffiliated broker-dealers and other unaffiliated qualified financial
institutions provided that such loans are callable at any time on not more than
five business days' notice and that cash or government securities equal to at
least 100% of the market value of the securities loaned, determined daily, is
deposited by the borrower with the Fund and is maintained each business day in a
segregated account. While such securities are on loan, the borrower will pay the
Fund any income accruing thereon, and the Fund may invest any cash collateral,
thereby earning additional income, or may receive an agreed upon fee from the
borrower. Borrowed securities must be returned when the loan is terminated. Any
gain or loss in the market price of the borrowed securities which occurs during
the term of the loan inures to the Fund and its shareholders. A Fund may pay
reasonable administrative, custodial and other fees in connection with such
loans and may pay a negotiated portion of the interest earned on the cash or
government securities pledged as collateral to the borrower or placing broker. A
Fund does not vote securities that have been loaned, but it will call a loan of
securities in anticipation of an important vote.
When-Issued and Delayed Delivery Securities
Each of the Principal Funds may from time to time purchase securities on
a when-issued basis and may purchase or sell securities on a delayed delivery
basis. The price of such a transaction is fixed at the time of the commitment,
but delivery and payment take place on a later settlement date, which may be a
month or more after the date of the commitment. No interest accrues to the
purchaser during this period, and the securities are subject to market
fluctuation, which involves the risk for the purchaser that yields available in
the market at the time of delivery may be higher than those obtained in the
transaction. Each Fund will only purchase securities on a when-issued or delayed
delivery basis with the intention of acquiring the securities, but a Fund may
sell the securities before the settlement date, if such action is deemed
advisable. At the time a Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value, each day, of the securities in determining its net
asset value. Each Fund will also establish a segregated account with its
custodian bank in which it will maintain cash or cash equivalents, United States
Government securities and other high grade debt obligations equal in value to
the Fund's commitments for such when-issued or delayed delivery securities. The
availability of liquid assets for this purpose and the effect of asset
segregation on a Fund's ability to meet its current obligations, to honor
requests for redemption and to have its investment portfolio managed properly
will limit the extent to which the Fund may engage in forward commitment
agreements. Except as may be imposed by these factors, there is no limit on the
percent of a Fund's total assets that may be committed to transactions in such
agreements.
Money Market Instruments
The Money Market Fund will invest all of its available assets in money
market instruments maturing in 397 days or less. The types of instruments which
this Fund may purchase are described below.
(1) U.S. Government Securities -- Securities issued or guaranteed by
the U.S. Government, including treasury bills, notes and bonds.
(2) U.S. Government Agency Securities -- Obligations issued or
guaranteed by agencies or instrumentalities of the U.S. Government.
U.S. agency obligations include, but are not limited to, the
Student Loan Marketing Association, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association. U.S.
instrumentality obligations include, but are not limited to, the
Export-Import Bank and Farmers Home Administration. Some
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, such as those issued by Federal
Intermediate Credit Banks, are supported by the right of the
issuer to borrower from the Treasury, others such as those issued
by the Federal National Mortgage Association, by discretionary
authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality, and others, such as those
issued by the Student Loan Marketing Association, only by the
credit of the agency or instrumentality.
(3) Bank Obligations -- Certificates of deposit, time deposits and
bankers' acceptances of U.S. commercial banks having total assets
of at least one billion dollars, and of the overseas branches of
U.S. commercial banks and foreign banks, which in the Manager's
opinion, are of comparable quality, provided each such bank with
its branches has total assets of at least five billion dollars, and
certificates, including time deposits of domestic savings and loan
associations having at least one billion dollars in assets which
are insured by the Federal Savings and Loan Insurance Corporation.
The Fund may acquire obligations of U.S. banks which are not
members of the Federal Reserve System or of the Federal Deposit
Insurance Corporation. Any obligations of foreign banks shall be
denominated in U.S. dollars. Obligations of foreign banks and
obligations of overseas branches of U.S. banks are subject to
somewhat different regulations and risks than those of U.S.
domestic banks. For example, an issuing bank may be able to
maintain that the liability for an investment is solely that of the
overseas branch which could expose the Fund to a greater risk of
loss. In addition, obligations of foreign banks or of overseas
branches of U.S. banks may be affected by governmental action in
the country of domicile of the branch or parent bank. Examples of
adverse foreign governmental actions include the imposition of
currency controls, the imposition of withholding taxes on interest
income payable on such obligations, interest limitations, seizure
or nationalization of assets, or the declaration of a moratorium.
Deposits in foreign banks or foreign branches of U.S. banks are not
covered by the Federal Deposit Insurance Corporation. The Fund will
only buy short-term instruments where the risks of adverse
governmental action are believed by the Manager to be minimal. The
Fund will consider these factors along with other appropriate
factors in making an investment decision to acquire such
obligations and will only acquire those which, in the opinion of
management, are of an investment quality comparable to other debt
securities bought by the Fund. The Fund may invest in certificates
of deposit of selected banks having less than one billion dollars
of assets providing the certificates do not exceed the level of
insurance (currently $100,000) provided by the applicable
government agency.
A certificate of deposit is issued against funds deposited in a
bank or savings and loan association for a definite period of time,
at a specified rate of return. Normally they are negotiable.
However, the Fund may occasionally invest in certificates of
deposit which are not negotiable. Such certificates may provide for
interest penalties in the event of withdrawal prior to their
maturity. A bankers' acceptance is a short-term credit instrument
issued by corporations to finance the import, export, transfer or
storage of goods. They are termed "accepted" when a bank guarantees
their payment at maturity and reflect the obligation of both the
bank and drawer to pay the face amount of the instrument at
maturity.
(4) Commercial Paper -- Short-term promissory notes issued by
corporations which at time of purchase are rated A-1 or better by
Standard and Poor's ("S&P") or Prime-1 or better by Moody's
Investors Service, Inc. ("Moody's") or, if not rated, issued or
guaranteed by a corporation with outstanding debt rated AA or
better by S&P or Aa or better by Moody's. The Fund will not invest
in master demand notes. (See Appendix A.)
(5) Short-term Corporate Debt -- Corporate notes, bonds and debentures
which at the time of purchase are rated AA or better by S&P or Aa
or better by Moody's provided such securities have one year or less
remaining to maturity. (See Appendix A.)
(6) Repurchase Agreements -- Instruments under which securities are
purchased from a bank or securities dealer with an agreement by the
seller to repurchase the securities at the same price plus interest
at a specified rate. (See "FUND INVESTMENTS - Repurchase
Agreements.")
The ratings of Moody's and S&P, which are described in Appendix A,
represent their opinions as to the quality of the money market instruments which
they undertake to rate. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. These ratings are the initial
criteria for selection of portfolio investments, but the Manager will further
evaluate these securities.
Portfolio Turnover
Portfolio turnover will normally differ for each Fund, may vary from year
to year, as well as within a year, and may be affected by portfolio sales
necessary to meet cash requirements for redemptions of Fund shares. The
portfolio turnover rate for a Fund is calculated by dividing the lesser of
purchases or sales of its portfolio securities during the fiscal year by the
monthly average of the value of its portfolio securities (excluding from the
computation all securities, including options, with maturities at the time of
acquisition of one year or less). A high rate of portfolio turnover generally
involves correspondingly greater brokerage commission expenses, which must be
borne directly by the Fund. Although the rate of portfolio turnover will not be
a limiting factor when it is deemed appropriate to purchase or sell securities
for a Fund, each Fund intends to limit turnover so that realized short-term
gains on securities held for less than three months do not exceed 30% of gross
income in order to qualify as a "regulated investment company" under the
Internal Revenue Code. This requirement may in some cases limit the ability of a
Fund to effect certain portfolio transactions. No portfolio turnover rate can be
calculated for the Money Market Funds because of the short maturities of the
securities in which they invest. The portfolio turnover rates for each of the
other Funds for its most recent and immediately preceding fiscal periods,
respectively, were as follows (annualized when reporting period is less than one
year): Aggressive Growth - 105.6% (for the period beginning June 1, 1994 and
ended December 31, 1994); Asset Allocation - 60.7% (for the period beginning
June 1, 1994 and ended December 31, 1994); Balanced - 31.5% and 15.8%; Bond -
18.2% and 14.0%; Capital Accumulation - 44.5% and 25.8%; Emerging Growth - 12.0%
and 22.4%; Government Securities - 23.2% and 20.4%; Growth - 0.9% (for the
period beginning May 1, 1994 and ended December 31, 1994); High Yield - 30.6%
and 28.7%; World - 14.4% (for the period beginning May 1, 1994 and ended
December 31, 1994).
DIRECTORS AND OFFICERS OF THE FUNDS
The following listing discloses the principal occupations and other
principal business affiliations of the Funds' Officers and Directors during the
past five years. All mailing addresses are The Principal Financial Group, Des
Moines, Iowa 50392, unless otherwise indicated.
P. James D. Davis, 61, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.
Roy W. Ehrle, 67, Director. 2424 Jordan Trail, West Des Moines, Iowa.
Vice Chairman, Principal Mutual Life Insurance Company, Retired.
P. Pamela A. Ferguson, 51, Director. P.O. Box 805, Grinnell, Iowa.
President, Grinnell College since 1991. Prior thereto, Associate Provost and
Dean of the Graduate School at the University of Miami.
Richard W. Gilbert, 54, Director. 543 Park Drive, Kenilworth, IL 60043.
President, Gilbert Communications, Inc. since 1993. Prior thereto, President
and Publisher, Pioneer Press.
*ss.Stephan L. Jones, 59, Director and President. Vice President,
Principal Mutual Life Insurance Company since 1986. Director and President,
Princor Financial Services Corporation and Princor Management Corporation.
*ss.David K. Kauf, 61, Director and Chairman of the Board. Senior Vice
President, Principal Mutual Life Insurance Company since 1986. Director and
Chairman of the Board, Princor Management Corporation and Princor Financial
Services Corporation.
Ronald E. Keller, 59, Director. Executive Vice President, Principal Mutual
Life Insurance Company since 1992. Prior thereto, Senior Vice President,
Principal Mutual Life Insurance Company. Director, Princor Financial Services
Corporation and Princor Management Corporation. Director and Chairman, Invista
Capital Management, Inc.
Barbara A. Lukavsky, 54, Director. 3920 Grand Avenue, Des Moines, Iowa.
President, Lu San, Inc.
P. ss.Richard G. Peebler, 65, Director. 25th and University, Des Moines,
Iowa. Professor, Drake University, College of Business and Public
Administration, since 1990.
Kristian E. Anderson, 36, Assistant Counsel. Counsel, Principal Mutual
Life Insurance Company since 1989.
Craig L. Bassett, 43, Assistant Treasurer. Associate Treasurer,
Principal Mutual Life Insurance Company since 1988.
*Michael J. Beer, 34, Financial Officer. Vice President & Financial
Officer, Princor Financial Services Corporation since 1995. Financial Officer,
Princor Financial Services Corporation and Princor Management Corporation,
1991-1994.
Arthur S. Filean, 56, Vice President and Secretary. Vice President,
Princor Financial Services Corporation since 1990.
*Ernest H. Gillum, 39, Assistant Secretary. Product Development and
Compliance Officer, Princor Financial Services Corporation and Princor
Management Corporation, since 1991. Prior thereto, Registered Investments
Products Manager, Principal Mutual Life Insurance Company.
*Brian L. Nygaard, 36, Vice President and Controller. Senior Vice President
and Chief Operating Officer and Treasurer, Princor Financial Services
Corporation since 1988. Vice President, Princor Management Corporation.
*Jerry G. Wisgerhof, 57, Treasurer. Treasurer, Principal Mutual Life
Insurance Company. Treasurer, Princor Financial Services Corporation. Vice
President and Treasurer, Princor Management Corporation.
P. Member of Audit and Nominating Committee.
* Affiliated with the Manager of the Fund or its parent and considered an
"Interested Person," as defined in the Investment Company Act of 1940, as
amended.
ss. Member of the Executive Committee. The Executive Committee is elected
by the Board of Directors and may exercise all the powers of the Board of
Directors, with certain exceptions, when the Board is not in session and shall
report its actions to the Board.
All Directors and Officers listed above hold similar positions with
twenty-four mutual funds sponsored by Principal Mutual Life Insurance Company.
In addition, James D. Davis, Stephan L. Jones, David K. Kauf, Barbara A.
Lukavsky, Richard G. Peebler and all of the officers hold similar positions with
one other Fund sponsored by Principal Mutual Life Insurance Company.
During the period ended December 31, 1994, the Funds did not pay any
salaries directly to officers but paid management fees to the Manager as
described herein. During such period, six unaffiliated directors of each Fund
(those who are not officers or directors of the Manager) as a group received the
following amounts in directors' fees ($600 Annual Retainer plus $150 per Board
of Directors or Audit and Nominating Committee meeting attended, and $75 for
attendance at any executive or special committee meetings) plus expenses of
attending the meeting, if any: Aggressive Growth, $6,576; Asset Allocation,
$6,576; Balanced, $7,746; Bond, $7,747; Capital Accumulation, $7,746; Emerging
Growth, $7,745; Government Securities, $7,746; Growth, $6,493; High Yield,
$7,745; Money Market, $7,599; and World, $6,499.
All of the outstanding shares of the Funds are owned by Principal Mutual
Life Insurance Company and its Separate Accounts B and C and Variable Life
Separate Account. As of December 31, 1994, the Officers and Directors of each
Fund as a group owned none of the outstanding shares of any of the Funds.
MANAGER AND SUB-ADVISORS
The Manager of each of the Funds is Princor Management Corporation (the
"Manager"), a wholly-owned subsidiary of Princor Financial Services Corporation
which is a wholly-owned subsidiary of Principal Holding Company. Principal
Holding Company is a holding company which is a wholly-owned subsidiary of
Principal Mutual Life Insurance Company, a mutual life insurance company
organized in 1879 under the laws of the state of Iowa. The address of the
Manager is The Principal Financial Group, Des Moines, Iowa 50392. The Manager
was organized on January 10, 1969 and since that time has managed various mutual
funds sponsored by Principal Mutual Life Insurance Company.
The Manager has executed an agreement with Invista Capital Management,
Inc. ("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced Fund, Growth
Fund and World Fund. The Manager will reimburse Invista for the cost of
providing these services. Invista, an indirectly wholly-owned subsidiary of
Principal Mutual Life Insurance Company and an affiliate of the Manager, was
founded in 1985 and manages investments for institutional investors, including
Principal Mutual Life. Assets under management at December 31, 1994 were
approximately $11.2 billion. Invista's address is 1500 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
The Manager has also executed an agreement with Morgan Stanley Asset
Management Inc. ("MSAM") under which MSAM has agreed to assume the obligations
of the Manager to provide investment advisory services for the Aggressive Growth
Fund and Asset Allocation Fund. The Manager pays MSAM a fee for such investment
advisory services. MSAM, with principal offices at 1221 Avenue of the Americas,
New York, NY 10020, provides a broad range of portfolio management services to
customers in the United States and abroad. At December 31, 1994, MSAM managed
investments totaling approximately $48.7 billion, including approximately $35.6
billion under active management and $13.1 billion as Named Fiduciary or
Fiduciary Adviser.
Each of the persons affiliated with a Fund who is also an affiliated
person of the Manager or a Sub-Advisor is named below, together with the
capacities in which such person is affiliated:
Office Held With Office Held With
Name Each Fund The Manager/Invista
Michael J. Beer Financial Officer Vice President &
Financial Officer (Manager)
Ernest H. Gillum Assistant Secretary Product Development and
Compliance Officer
(Manager)
Stephan L. Jones Director and Director and President
President (Manager)
David K. Kauf Director and Chairman Director and Chairman of
of the Board the Board (Manager)
Director (Manager)
Ronald E. Keller Director Director (Manager)
Director and Chairman of
the Board (Invista)
Brian L. Nygaard Vice President and Vice President (Manager)
Controller
Michael D. Roughton Counsel Counsel (Manager; Invista)
Jerry G. Wisgerhof Treasurer Vice President and Treasurer
(Manager)
COST OF MANAGER'S SERVICES
For providing the investment advisory services, and specified other
services, the Manager, under the terms of the Management Agreement for each
Fund, is entitled to receive a fee computed and accrued daily and payable
monthly, at the following annual rates:
Aggressive
Growth High
and Yield
Asset Emerging and All
Net Asset Value Allocation World Growth Balanced Other
of Fund Funds Fund Fund Funds Funds
---------------- ---------- ----- -------- ------- -----
First $100,000,000 .80% .75% .65% .60% .50%
Next 100,000,000 .75% .70% .60% .55% .45%
Next 100,000,000 .70% .65% .55% .50% .40%
Next 100,000,000 .65% .60% .50% .45% .35%
Over 400,000,000 .60% .55% .45% .40% .30%
There is no assurance that any of the Funds' net assets will reach
sufficient amounts to be able to take advantage of the rate decreases. The net
asset value of each Fund on December 31, 1994 and the rate of the fee for each
Fund for investment management services as provided in the Management Agreement
for the fiscal year then ended were as follows:
Management Fee
Net Assets as of For Year Ended
Fund December 31, 1994 December 31, 1994
- -------------------------- ----------------- -----------------
Aggressive Growth $ 13,770,486 .80%
Asset Allocation 28,041,057 .80
Balanced 25,043,207 .60
Bond 17,108,322 .50
Capital Accumulation 120,571,799 .49
Emerging Growth 23,911,965 .65
Government Securities 36,121,363 .50
Growth 13,086,118 .50
High Yield 9,696,812 .60
Money Market 29,371,884 .50
World 13,746,094 .75
Under a Sub-Advisory Agreement between Invista and the Manager, Invista
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the Balanced, Growth and World Funds and is reimbursed
by the Manager for the cost of providing such services.
Under a Sub-Advisory Agreement between MSAM and the Manager, MSAM
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the Aggressive Growth and Asset Allocation Funds. The
Manager pays MSAM a fee, accrued daily and payable monthly, at the following
annual rates:
Net Asset Value of Fund Fee to MSAM
----------------------- -----------
First $40 million .45%
Next $160 million .30%
Next $100 million .25%
Over $300 million .20%
Except for certain Fund expenses set out below, the Manager is
responsible for expenses, administrative duties and services including the
following: Expenses incurred in connection with the registration of the Fund and
Fund shares with the Securities and Exchange Commission and state regulatory
agencies; office space, facilities and costs of keeping the books of the Fund;
compensation of personnel and officers and any directors who are also affiliated
with the Manager; fees for auditors and legal counsel; preparing and printing
Fund prospectuses; administration of shareholder accounts, including issuance,
maintenance of open account system, dividend disbursement, reports to
shareholders, and redemption. However, some or all of these expenses may be
assumed by Principal Mutual Life Insurance Company and some or all of the
administrative duties and services may be delegated by the Manager to Principal
Mutual Life Insurance Company or affiliate thereof.
Each Fund pays for certain corporate expenses incurred in its operation.
Among such expenses, the Fund pays brokerage commissions on portfolio
transactions, transfer taxes and other charges and fees attributable to
investment transactions, any other local, state or federal taxes, the fees and
expenses of all directors of the Fund who are not persons affiliated with the
Manager, interest, fees for Custodian of the Fund, and the cost of meetings of
shareholders.
Fees paid for investment management services during the periods indicated
were as follows:
Management Fees For
---------------------------------------------------
Year Six Months Fiscal Year
Ended Ended Ended
December 31, December 31, June 30,
1994 1993 1992 1992
---- ---- ---- ----
Aggressive Growth $ 53,716* N/A N/A N/A
Asset Allocation 127,034* N/A N/A N/A
Balanced 131,488 $120,288 $ 54,775 $ 97,198
Bond 72,199 69,168 32,001 56,874
Capital Accumulation 637,781 578,904 251,983 431,658
Emerging Growth 94,644 68,441 28,626 50,561
Government Securities 195,469 163,313 82,965 146,218
Growth 24,971** N/A N/A N/A
High Yield 57,369 55,420 26,964 46,949
Money Market 125,791 120,428 64,190 130,445
World 38,147** N/A N/A N/A
* Period beginning June 1, 1994 and ended December 31, 1994.
** Period beginning May 1, 1994 and ended December 31, 1994.
The Management Agreements, Sub-Advisory Agreements and Investment Service
Agreements, pursuant to which Principal Mutual Life Insurance Company has agreed
to furnish certain personnel, services and facilities required by the Manager to
enable it to fulfill its investment advisory responsibilities for each of the
Funds except the Aggressive Growth and Asset Allocation Funds, were last
approved by each such Fund's Board of Directors on September 12, 1994. Each of
these agreements provides for continuation in effect from year to year only so
long as such continuation is specifically approved at least annually either by
the Board of Directors of the Fund or by vote of a majority of the outstanding
voting securities of the Fund, provided that in either event such continuation
shall be approved by vote of a majority of the Directors who are not "interested
persons" (as defined in the Investment Company Act of 1940) of the Manager,
Principal Mutual Life Insurance Company or its subsidiaries, the Fund and, in
the case of the Sub-Advisory Agreement for each of the Funds other than the
Aggressive Growth and Asset Allocation Funds, Invista, and in the case of the
Sub-Advisory Agreement for each of the Aggressive Growth and Asset Allocation
Funds, MSAM, cast in person at a meeting called for the purpose of voting on
such approval. The Agreements may be terminated at any time on 60 days written
notice to the Manager by the Board of Directors of the Fund or by a vote of a
majority of the outstanding securities of the Fund and by the Manager, Invista,
MSAM or Principal Mutual Life Insurance Company, as the case may be, on 60 days
written notice to the Fund. The Agreements will automatically terminate in the
event of their assignment.
BROKERAGE ON PURCHASES AND SALES OF SECURITIES
In distributing brokerage business arising out of the placement of orders
for the purchase and sale of securities for any Fund, the objective of the
Funds' Manager or Sub-Advisor is to obtain the best overall terms. In pursuing
this objective, the Manager, or Sub-Advisor, considers all matters it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and executing capability of the broker or
dealer and the reasonableness of the commission, if any (for the specific
transaction and on a continuing basis). This may mean in some instances that the
Manager, or Sub-Advisor, will pay a broker commissions that are in excess of the
amount of commission another broker might have charged for executing the same
transaction when the Manager, or Sub-Advisor, believes that such commissions are
reasonable in light of (a) the size and difficulty of transactions (b) the
quality of the execution provided and (c) the level of commissions paid relative
to commissions paid by other institutional investors. (Such factors are viewed
both in terms of that particular transaction and in terms of all transactions
that broker executes for accounts over which the Manager, or Sub-Advisor,
exercises investment discretion. The Manager, or Sub-Advisor, may purchase
securities in the over-the-counter market, utilizing the services of principal
market matters, unless better terms can be obtained by purchases through brokers
or dealers, and may purchase securities listed on the New York Stock Exchange
from non-Exchange members in transactions off the Exchange.) The Manager, or
Sub-Advisor, gives consideration in the allocation of business to services
performed by a broker (e.g. the furnishing of statistical data and research
generally consisting of information of the following types: analyses and reports
concerning issuers, industries, economic factors and trends, portfolio strategy
and performance of client accounts). If any n is made, the primary criteria used
will be to obtain the best overall terms for such transactions. The Manager, or
Sub-Advisor, may pay additional commission amounts for research services but
generally does not do so. Such statistical data and research information
received from brokers or dealers may be useful in varying degrees and the
Manager, or Sub-Advisor, may use it in servicing some or all of the accounts it
manages. Some statistical data and research information may not be useful to the
Manager, or Sub-Advisor, in managing the client account, brokerage for which
resulted in the Manager's, or Sub-Advisor's, receipt of the statistical data and
research information. However, in the Manager's, or Sub-Advisor's, opinion, the
value thereof is not determinable and it is not expected that the Manager's, or
Sub-Advisor's, expenses will be significantly reduced since the receipt of such
statistical data and research information is only supplementary to the
Manager's, or Sub-Advisor's, own research efforts. The Manager, or Sub-Advisor,
allocated portfolio transactions for the Aggressive Growth Fund, Asset
Allocation Fund, Balanced Fund, Capital Accumulation Fund, Emerging Growth Fund
and Growth Fund to certain brokers during the fiscal year ended December 31,
1994 due to research services provided by such brokers. These portfolio
transactions resulted in commissions paid to such brokers by the Funds in the
amounts of $5,355, $2,483, $1,527, $25,327, $550, and $265, respectively.
Purchases and sales of debt securities and money market instruments
usually will be principal transactions; portfolio securities will normally be
purchased directly from the issuer or from an underwriter or marketmaker for the
securities. Such transactions are usually conducted on a net basis with the Fund
paying no brokerage commissions. Purchases from underwriters will include a
commission or concession paid by the issuer to the underwriter, and the
purchases from dealers serving as marketmakers will include the spread between
the bid and asked prices.
<PAGE>
The following table shows the brokerage commissions paid during the
periods indicated. In each year, 100% of the commissions paid by each Fund went
to broker-dealers which provided research, statistical or other factual
information.
Total Brokerage Commissions Paid
-----------------------------------------------------------
Fiscal Year Ended Six Months Ended During Fiscal Year
December 31, December 31, Ended June 30
Fund 1994 1993 1992 1992
---- ---- ---- ---- ----
Aggressive Growth $ 37,910* N/A N/A N/A
Asset Allocation 40,055* N/A N/A N/A
Balanced 14,596 $ 6,942 $ 5,715 $ 7,345
Capital Accumulation 149,871 86,990 50,396 73,217
Emerging Growth 7,527 8,601 250 838
Growth 7,280** N/A N/A N/A
World 43,151** N/A N/A N/A
* Period beginning June 1, 1994 and ended December 31, 1994.
** Period beginning May 1, 1994 and ended December 31, 1994.
Brokerage commissions were paid to Principal Financial Securities, Inc. ("PFS"),
an affiliate of the Manager, for the year ended December 31, 1994. These
commissions were paid as follows: Balanced, $294; Capital Accumulation $3,258;
Emerging Growth, $357 Growth, $632. The commission payments by the Balanced,
Capital Accumulation, Emerging Growth and Growth Funds represented 2.01%, 2.17%,
4.74% and 8.68%, respectively, of each Fund's aggregate brokerage commissions
paid during the period. The dollar amount of transactions effected through PFS
by the Balanced, Capital Accumulation, Emerging Growth and Growth Funds were
equal to 3.13%, 4.59%, 11.61%, and 14.34%, respectively, of the aggregate dollar
amount of transactions involving the payment of commissions for each Fund. No
brokerage commissions were paid to PFS during the two preceding fiscal periods.
Morgan Stanley & Co. ("Morgan Stanley"), which became an affiliate of the
Manager during 1994, received brokerage commissions for the year ended December
31, 1994 as follows: Balanced, $375 and Capital Accumulation, $4,985. The
commission payments by the Balanced and Capital Accumulation Funds represented
3.32% and 2.56%, respectively, of each Fund's aggregate brokerage commissions
paid during the period. The dollar amount of transactions effected through
Morgan Stanley by the Balanced and Capital Accumulation Funds were equal to
2.81% and 3.19%, respectively, of the aggregate dollar amount of transactions
involving the payment of commissions for each Fund.
The Manager acts as investment advisor for each of the funds sponsored by
Principal Mutual Life Insurance Company and places orders to trade portfolio
securities for each of these funds, except the Aggressive Growth Fund and Asset
Allocation Fund. If, in carrying out the investment objectives of the funds,
occasions arise when purchases or sales of the same equity securities are to be
made for two or more of the funds at the same time, a computer program will
randomly order the instructions to purchase and, whenever possible, to sell
securities. Securities purchased or proceeds of sales received on each trading
day with respect to such orders shall be allocated to the various funds placing
orders on that trading day by filling each fund's order for that day, in the
sequence arrived at by the random ordering. If purchases or sales of the same
debt securities are to be made for two or more of the Funds at the same time,
the securities will be purchased or sold proportionately in accordance with the
amount of such security sought to be purchased or sold at that time for each
fund. If the purchase or sale of securities consistent with the investment
objectives of the funds or one or more of the other clients for which MSAM acts
as investment sub-advisor or advisor is to be made at the same time, the
securities will be purchased or sold proportionately in accordance with the
amount of such security sought to be purchased or sold at that time for each
fund or client.
DETERMINATION OF NET ASSET VALUE OF FUND SHARES
Growth-Oriented and Income-Oriented Funds
The net asset values of the shares of each of the Growth-Oriented and
Income-Oriented Funds are determined daily, Monday through Friday, as of the
close of trading on the New York Stock Exchange, except on days on which changes
in the value of a Fund's portfolio securities will not materially affect the
current net asset value of that Fund's redeemable securities, on days during
which a Fund receives no order for the purchase or sale of its redeemable
securities and no tender of such a security for redemption, and on customary
national business holidays. The Funds treat as customary national business
holidays those days on which the New York Stock Exchange is closed for New
Year's Day (January 1), Washington's Birthday (third Monday in February), Good
Friday (variable date between March 20 and April 23, inclusive), Memorial Day
(last Monday in May), Independence Day (July 4), Labor Day (first Monday in
September), Thanksgiving Day (fourth Thursday in November) and Christmas Day
(December 25). The net asset value per share for each Fund is determined by
dividing the value of securities in the Fund's investment portfolio plus all
other assets, less all liabilities, by the number of Fund shares outstanding.
Securities for which market quotations are readily available, including options
and futures traded on an exchange, are valued at market value, which is
currently determined using the last reported sale price or, if no sales are
reported, as is regularly the case for some securities traded over-the-counter,
the last reported bid price. When reliable market quotations are not considered
to be readily available, which may be the case, for example, with respect to
certain debt securities, preferred stocks, foreign securities and
over-the-counter options, the investments are valued by using market quotations,
prices provided by market makers, which may include dealers with which the Fund
has executed transactions, or estimates of market values obtained from yield
data and other factors relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by the
Board of Directors. Securities with remaining maturities of 60 days or less are
valued at amortized cost. Other assets are valued at fair value as determined in
good faith by the Board of Directors of the Fund.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of the New York Stock Exchange. The
values of such securities used in computing net asset value per share are
usually determined as of such times. Occasionally, events which affect the
values of such securities and foreign currency exchange rates may occur between
the times at which they are generally determined and the close of the New York
Stock Exchange and would therefore not be reflected in the computation of the
Fund's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Manager under procedures
established and regularly reviewed by the Board of Directors. To the extent the
Fund invests in foreign securities listed on foreign exchanges which trade on
days on which the Fund does not determine its net asset value, for example
Saturdays and other customary national U.S. holidays, the Fund's net asset value
could be significantly affected on days when shareholders have no access to the
Fund.
Money Market Fund
The net asset value of shares of the Money Market Fund is determined at
the same time and on the same days as each of the Growth-Oriented Funds and
Income-Oriented Funds as described above. The net asset value per share for the
Fund is computed by dividing the total value of the Fund's securities and other
assets, less liabilities, by the number of Fund shares outstanding.
All securities held by the Money Market Fund will be valued on an
amortized cost basis. Under this method of valuation, a security is initially
valued at cost; thereafter, the Fund assumes a constant proportionate
amortization in value until maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the security.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price that would be received upon sale of the security.
Use of the amortized cost valuation method by the Money Market Fund
requires the Fund to maintain a dollar weighted average maturity of 90 days or
less and to purchase only obligations that have remaining maturities of 397 days
or less or have a variable or floating rate of interest. In addition, the Fund
can invest only in "Eligible Securities" as that term is defined in Regulations
issued under the Investment Company Act of 1940 (see the Fund's Prospectus for a
more complete description) determined by its Board of Directors to present
minimal credit risks.
The Board of Directors for the Money Market Fund have established
procedures designed to stabilize, to the extent reasonably possible, the Fund's
price per share as computed for the purpose of sales and redemptions at $1.00.
Such procedures include a directive to the Manager to test price the portfolio
or specific securities thereof upon certain changes in the Treasury Bill auction
interest rate for the purpose of identifying possible deviations in the net
asset value per share calculated by using available market quotations or
equivalents from $1.00 per share. If such deviation exceeds 1/2 of 1%, the Board
of Directors will promptly consider what action, if any, will be initiated. In
the event the Board of Directors determines that a deviation exists which may
result in material dilution or other unfair results to shareholders, the Board
will take such corrective action as it regards as appropriate, including: the
sale of portfolio instruments prior to maturity; the withholding of dividends;
redemptions of shares in kind; the establishment of a net asset value per share
based upon available market quotations; or splitting, combining or otherwise
recapitalizing outstanding shares. The Fund may also reduce the number of shares
outstanding by redeeming proportionately from shareholders, without the payment
of any monetary compensation, such value at $1.00 per share.
PERFORMANCE CALCULATION
Each of the Principal Funds may from time to time advertise its
performance in terms of total return. The figures used for total return and
yield are based on the historical performance of a Fund, show the performance of
a hypothetical investment and are not intended to indicate future performance.
Total return and yield will vary from time to time depending upon market
conditions, the composition of a Fund's portfolio and operating expenses. These
factors and possible differences in the methods used in calculating performance
figures should be considered when comparing a Fund's performance to the
performance of some other kind of investment. The calculations of total return
and yield for the Funds do not include the fees and charges of the separate
accounts that invest in the Funds and, therefore, do not reflect the investment
performance of those separate accounts.
Each Fund may also include in its advertisements performance rankings and
other performance-related information published by independent statistical
services or publishers, such as Lipper Analytical Services, Weisenberger
Investment Companies Services, Money Magazine, Forbes, The Wall Street Journal,
Barron's and Changing Times, and comparisons of the performance of a Fund to
that of various market indices, such as the S&P 500 Index, Lehman Brothers GNMA
Index, Dow Jones Industrials Index, and the Salomon Brothers Investment Grade
Bond Index.
Total Return
When advertising total return figures, each of the Growth-Oriented Funds
and Income-Oriented Funds will include its average annual total return for each
of the one, five and ten year periods (or if shorter, the period during which
its registration statement has been in effect) that end on the last day of the
most recent calendar quarter. Average annual total return is computed by
calculating the average annual compounded rate of return over the stated period
that would equate an initial $1,000 investment to the ending redeemable value
assuming the reinvestment of all dividends and capital gains distributions at
net asset value. In its advertising, a Fund may also include average annual
total return for some other period or cumulative total return for a specified
period. Cumulative total return is computed by dividing the ending redeemable
value (assuming the reinvestment of all dividends and capital gains
distributions at net asset value) by the initial investment.
The following table shows as of December 31, 1994 average annual total
return for each of the Funds for the periods indicated:
Fund 1-Year 5-Year 10-Year
Aggressive Growth 4.48%(4)
Asset Allocation 0.89%(4)
Balanced -2.09% 9.05% 10.37%(1)
Bond -2.90% 7.81% 8.91%(1)
Capital Accumulation 0.49% 8.20% 12.01%
Emerging Growth 0.78% 13.16% 15.74%(1)
Government Securities -4.53% 7.54% 8.05%(2)
Growth 8.22%(3)
High Yield 0.62% 8.76% 8.59%(1)
World -5.00%(3)
(1) Period beginning December 18, 1987 and ending December 31, 1994.
(2) Period beginning March 30, 1987 and ending December 31, 1994.
(3) Period beginning May 1, 1994 and ending December 31, 1994.
(4) Period beginning June 1, 1994 and ending December 31, 1994.
Yield
Money Market Fund
The Money Market Fund may advertise its yield and its effective yield.
Yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of one percent.
As of December 31, 1994, the Money Market Fund's yield was 5.24%. Because
realized capital gains or losses in a Fund's portfolio are not included in the
calculation, the Fund's net investment income per share for yield purposes may
be different from the net investment income per share for dividend purposes,
which includes net short-term realized gains or losses on the Fund's portfolio.
Effective yield is computed by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result. The resulting effective yield figure is carried to at least
the nearest hundredth of one percent. As of December 31, 1994, the Money Market
Fund's effective yield was 5.40%.
The yield quoted at any time for the Money Market Funds represents the
amount that was earned during a specific, recent seven-day period and is a
function of the quality, types and length of maturity of instruments in the
Fund's portfolio and the Fund's operating expenses. The length of maturity for
the portfolio is the average dollar weighted maturity of the portfolio. This
means that the portfolio has an average maturity of a stated number of days for
its issues. The calculation is weighted by the relative value of each
investment.
The yield for the Money Market Fund will fluctuate daily as the income
earned on the investments of the Fund fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. It should also be emphasized that the Fund is an open-end
investment company and that there is no guarantee that the net asset value or
any stated rate of return will remain constant. A shareholder's investment in
the Fund is not insured. Investors comparing results of the Money Market Fund
with investment results and yields from other sources such as banks or savings
and loan associations should understand these distinctions. Historical and
comparative yield information may, from time to time, be presented by the Fund.
TAX STATUS
It is the policy of each Fund to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, each Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which a
Fund so qualifies, it will be exempt from federal income tax upon the amount so
distributed to investors.
For federal income tax purposes, capital gains and losses on futures
contracts or options thereon, index options or options traded on qualified
exchanges are generally treated at 60% long-term and 40% short-term. In
addition, a Fund must recognize any unrealized gains and losses on such
positions held at the end of the fiscal year. A Fund may elect out of such tax
treatment, however, for a futures or options position that is part of an
"identified mixed straddle" such as a put option purchased by the Fund with
respect to a portfolio security. Gains and losses on figures and options
included in an identified mixed straddle will be considered 100% short-term and
unrealized gain or loss on such positions will not be realized at year end. The
straddle provisions of the Code may require the deferral of realized losses to
the extent that the Fund has unrealized gains in certain offsetting positions at
the end of the fiscal year, and may also require recharacterization of all or a
part of losses on certain offsetting positions from short-term to long-term, as
well as adjustment of the holding periods of straddle positions.
One of the requirements the Funds must meet to qualify as a regulated
investment company under federal tax law is that the Fund must derive less than
30% of its gross income from gains on the sale or other disposition of
securities held for less than three months. Accordingly, the Funds will be
restricted in selling securities held or considered under Code rules to have
been held for less than three months and in engaging in certain transactions to
obtain or close positions in options and futures contracts.
The 1986 Tax Reform Act imposes an excise tax on mutual funds which fail to
distribute net investment income and capital gains by the end of the calendar
year in accordance with the provisions of the Act. The Funds intend to comply
with the Act's requirements and to avoid this excise tax.
GENERAL INFORMATION AND HISTORY
The Aggressive Growth Fund was incorporated under the laws of Maryland on
August 20, 1993 as Principal Blue Chip Fund, Inc. The Fund changed its name to
Principal Aggressive Growth Fund on May 1, 1994.
The Asset Allocation Fund was incorporated under the laws of Maryland on
August 20, 1993 as Principal Utilities Fund, Inc. The Fund changed its name to
Principal Asset Allocation Fund on May 1, 1994.
The Balanced Fund was incorporated under the laws of Maryland on November
26, 1986. Effective November 1, 1988 the Fund changed its name from Princor
Managed Investment Fund, Inc. to Principal Managed Fund, Inc. Effective May 1,
1994, the Fund changed its name to Principal Balanced Fund, Inc.
The Bond Fund was incorporated under the laws of Maryland on November 26,
1986. Effective March 20, 1987, its name was changed from Princor Corporate Bond
Fund, Inc. to Princor Bond Investment Fund, Inc. Effective November 1, 1988 the
Fund changed its name to Principal Bond Fund, Inc.
The Capital Accumulation Fund was incorporated under the laws of Maryland
on May 26, 1989 as the successor to the business of a fund with the same name
that had been incorporated in Delaware on February 6, 1969 (the "Predecessor
Fund"). Effective November 1, 1986, the Predecessor Fund changed its name from
BLC Fund, Inc. to Princor Fund, Inc. Effective November 1, 1987, the Predecessor
Fund changed its name to Princor Investment Fund, Inc. Effective November 1,
1988, the Predecessor Fund changed its name to Principal Capital Accumulation
Fund, Inc.
The Emerging Growth Fund was incorporated under the laws of Maryland on
February 20, 1987. Effective November 1, 1988, the Fund changed its name from
Princor Aggressive Growth Investment Fund, Inc. to Principal Aggressive Growth
Fund, Inc. Effective May 1, 1992, the Fund changed its name from Principal
Aggressive Growth Fund, Inc., to Principal Emerging Growth Fund, Inc.
The Government Securities Fund was incorporated under the laws of
Maryland on June 7, 1985 a BLC Federal Government Securities Fund, Inc.
Effective November 1, 1986 the Fund changed its name to Princor Federal
Government Securities Fund, Inc. On November 1, 1987, the Fund changed its name
to Princor Government Securities Investment Fund, Inc. Effective November 1,
1988, the Fund changed its name to Principal Government Securities Fund, Inc.
The High Yield Fund was incorporated under the laws of Maryland on
December 2, 1986. Effective March 20, 1987, its name was changed from Princor
High Yield Bond Investment Fund, Inc. to Princor High Yield Investment Fund,
Inc. Effective November 1, 1988, the Fund changed its name to Principal High
Yield Fund, Inc.
The Money Market Fund was incorporated under the laws of Maryland on June
10, 1982. Effective November 1, 1986, the Fund changed its name from BLC Money
Market Fund, Inc. to Princor Money Market Fund, Inc. Effective November 1, 1987,
the Fund changed its name to Princor Money Market Investment Fund, Inc.
Effective November 1, 1988, the Fund changed its name to Principal Money Market
Fund, Inc.
Effective July 1, 1992, the Bond, Capital Accumulation, Emerging Growth,
Government Securities, High Yield, Managed and Money Market Funds changed their
respective fiscal year-ends from June 30 to December 31.
Reorganization
Following is a description of a Reorganization completed by the Capital
Accumulation Fund on November 1, 1989. "Predecessor Fund" as used below means
the Capital Accumulation Fund, which was incorporated in Delaware on February 6,
1969. "Successor Fund" as used below refers to the Capital Accumulation Fund,
which was incorporated in Maryland on May 26, 1989 for the purpose of completing
the Reorganization.
On October 3, 1989, a majority of the outstanding shares of the
Predecessor Fund approved a proposal to permit the Predecessor Fund to transfer
all of its assets and liabilities to the Successor Fund in accordance with an
Agreement and Plan of Reorganization and Liquidation dated June 16, 1989 (the
"Agreement") between the Successor Fund and Predecessor Fund (the
"Reorganization"). The Agreement was authorized and approved by the Boards of
Directors of the Predecessor Fund and the Successor Fund in accordance with the
laws of Delaware and Maryland, respectively. The net asset values of the shares
were unaffected by the Reorganization.
The primary purpose for the Reorganization was to change the Predecessor
Fund's domicile, thereby eliminating an unnecessary state tax burden for which
the Predecessor Fund was responsible. The state of Delaware imposed a franchise
tax on the Predecessor Fund based upon the assets of the Predecessor Fund.
Payment of this state tax reduced the Predecessor Fund's income otherwise
distributable to the Predecessor Fund's shareholders. Maryland does not impose a
franchise tax but imposes an income tax based upon undistributed net income. The
amount of state income tax for a Maryland mutual fund is low or non-existent
because a mutual fund distributes substantially all of its net income each
fiscal year.
By voting in favor of the Agreement the shareholders authorized the
Predecessor Fund, as the sole shareholder of the Fund prior to the
Reorganization, to: (i) elect as directors of the Successor Fund all of the
Predecessor Fund's Directors at the time of the Reorganization; (ii) ratify the
selection of Ernst & Young LLP as the independent auditors of the Successor
Fund; and (iii) approve as Management Agreement and Investment Service Agreement
for the Successor Fund agreements substantially identical to the Management
Agreement and Investment Service Agreement in effect for the Predecessor Fund at
the time of the Reorganization.
In the Prospectus and Statement of Additional Information, the term
Capital Accumulation Fund is used generally to refer to the Successor Fund and
with respect to matters occurring prior to the reorganization to the Predecessor
Fund.
FINANCIAL STATEMENTS
The financial statements for the Funds for the fiscal period ended
December 31, 1994 appearing in the Annual Report to Shareholders and the report
thereon of Ernst and Young LLP, independent auditors, appearing therein are
incorporated by reference in this Statement of Additional Information. The
Annual Report will be furnished, without charge, to investors who request copies
of the Statement of Additional Information.
<PAGE>
APPENDIX A
Description of Bond Ratings:
Moody's Investors Service, Inc. Bond Ratings
Aaa:
Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa:
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A:
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa:
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba:
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa:
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca:
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C:
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
CONDITIONAL RATING: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and a
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
SHORT-TERM NOTES: The four ratings of Moody's for short-term notes are
MIG 1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality...but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk for having protection...and not
distinctly or predominantly speculative."
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess of
nine months. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's Corporation's Debt Ratings:
A Standard & Poor's debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditor's rights.
AAA:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA:
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A:
Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
BBB:
Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
BB, B, CCC, CC:
Debt rated "BB", "B", "CCC" and "CC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "CC" the highest degree
of speculation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
C:
The rating "C" is reserved for income bonds on which no interest is
being paid.
D:
Debt rated "D" is in default, and payment of interest and/or repayment
of principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by
the addition of a plus or minus sign to show relative standing within
the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of
the project being financed by the bonds being rated and indicates that
payment of debt service requirements is largely or entirely dependent
upon the successful and timely completion of the project. This rating,
however, while addressing credit quality subsequent to completion of
the project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should exercise
his own judgment with respect to such likelihood and risk.
NR:
Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does
not rate a particular type of obligation as a matter of policy.
Standard & Poor's, Commercial Paper Ratings
A Standard & Poor's Commercial Paper Rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. Ratings are applicable to
both taxable and tax-exempt commercial paper. The four categories are as
follows:
A:
Issues assigned the highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Issues that
possess overwhelming safety characteristics will be given a "+"
designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as
for issues designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations
carrying the highest designations.
B:
Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C:
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D:
This rating indicates that the issue is either in default or is expected
to be in default upon maturity.
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard &
Poor's by the issuer and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of, such information.
Standard & Poor's rates notes with a maturity of less than three years as
follows:
SP-1 A very strong, or strong, capacity to pay principal and
interest. Issues that possess overwhelming safety
characteristics will be given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
