SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
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___ Preliminary proxy statement
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___ Confidential, for use of the Commission only (as permitted by
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___ Soliciting Materials under Rule 14a-12
Principal Equity Income Fund, Inc.
(Name of Registrant as Specified in Its Charter)
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For Internal Use Only. Not to be Distributed to the Public
Headline: Principal Mutual Funds Combined Platform Client
Communications Now Available
Several weeks ago, we announced plans to strengthen and expand our retail mutual
fund business by combining Principal Mutual Funds into the existing Principal
Investors Fund. The Board of Directors of each of our retail mutual funds
unanimously approved this proposal. Later this week, proxies will be mailed to
shareholders of record March 24, 2005, asking them to vote.
We've created the attached Q&A guide [link to Q&A] to help you address questions
you may receive from clients regarding this proposal. The guide is for internal
use only; it is not to be distributed to the public.
In addition, we have attached a pre-approved call script [link to call script]
and letter [link to letter] that you can use with your clients. Your support of
this proposal is key to its success. If your clients contact you, please
encourage them to vote. They can do so by completing and returning their
ballots, calling the proxy firm at 888-999-5346, or voting online (instructions
for which can be found on the proxy materials).
Watch your mail for further updates about this important initiative. Thank you
for your assistance and support. To learn more, call the Principal Investment
Products Marketing at 800-451-5447, opt. 3, 2.
Q&A Guide: Expansion of Principal Investors Fund, Inc. Platform
For Internal Use Only. Not to be Distributed to the Public.
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OVERVIEW
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What is happening?
We have made plans to strengthen and expand our retail mutual fund business by
asking the retail shareholders to approve combination of Principal Mutual Funds
into the existing Principal Investors Fund. On July 1, 2005, 33 funds of
Principal Investors Fund will begin offering shares to retail investors. All 33
funds will offer Class A shares. Twenty-four of the funds will also offer Class
B shares.
Why are funds being combined? How will this benefit shareholders?
The proposal to combine funds is intended to create a larger, single fund family
that is expected to achieve economies of scale and operate with greater
efficiency and lower overall costs. The expanded investment platform will be
available to retail shareholders on July 1, 2005.
How will funds be combined? What happens to shareholders who own Principal
Mutual Funds?
Under the proposed strategy, each of the 22 retail funds, collectively known as
Principal Mutual Funds, will be combined into a corresponding fund of Principal
Investors Fund. Subject to shareholder approval, each shareholder of a retail
fund will become a shareholder of the corresponding fund of Principal Investors
Fund. Shareholder accounts will have the same value immediately before and after
funds are combined, though not necessarily the same number of shares due to
differences in fund shares prices.
When will the new share classes be available for sale to retail customers?
The new share classes -- Principal Investors Fund Class A and B shares -- will
be available to retail investors beginning July 1, 2005. Purchases into the
Principal Mutual Funds will be accepted through June 30, 2005.
What happens next?
Proxies will be mailed to shareholders of record as of March 23, 2005, sometime
the third week of April. These shareholders will be asked to vote. The proxy
firm will be contacting those who don't vote their shares. We have asked
registered representatives to help support this initiative by encouraging their
clients to vote.
Note: The following pages contain more specific questions, grouped by topic.
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FUNDS
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How many funds will there be altogether? How many fund managers?
Through the combination of the Principal Mutual Funds and Principal Investors
Fund, retail investors will have access to a broader and deeper array of funds -
33 funds sub-advised by 13 managers, covering the major investment style boxes,
plus the Principal LifeTime Funds and some unique options such as preferred
securities and an inflation-protection fund.
Why are we offering only some of the funds in Class B shares?
Industry trends indicate that many our competing fund families are moving away
from offering Class B shares. As a result, we are anticipating that demand for
these shares will likely diminish rather than grow. We believe that the funds we
have selected to offer in Class B shares will meet the asset allocation and
diversification needs of our shareholders.
How were specific funds selected to be combined and are the investment
objectives of the funds that will be combined the same? The Board of Directors
of each Principal Mutual Fund unanimously approved combining these funds into
the Principal Investors Fund platform. Careful consideration was given to the
combining of the funds. In each instance, the investment objectives of the
retail funds and their corresponding funds are very similar. And, in most cases,
the funds share the same investment manager. For example, Principal Partners
LargeCap Value Fund will combine with Principal Investors Partners LargeCap
Value Fund, both of which have Alliance Bernstein as investment manager. You
should be aware that two funds--Principal International Fund and Principal
SmallCap Fund--are combining into one fund--Principal Diversified International
Fund.
How will The Principal distribute funds?
The funds will continue to be distributed through our existing distribution
channels, including Princor Registered Representatives (primarily career agents
and life insurance brokers with The Principal(R)), and outside broker dealers.
The enhanced platform should be a tool to help expand our opportunities with
other distribution channels.
When will new ticker symbols be identified? When will new symbols first start
appearing in the newspaper?
Principal Investors Fund Class A and B shares will not appear in the newspaper
listings until the required number of shareholders or fund asset levels is
reached. As the funds receive their ticker symbols, we will announce them
internally and to registered representatives via eFP. Once the ticker symbol is
received, the funds typically begin to appear in the daily newspaper listings
within a week. Not all funds will always appear in all newspaper listings due to
space constraints and the editorial policies of the various newspapers.
How does this initiative affect the Path and Path for Income models?
New Path and Path for Income "select" models are being designed that feature the
Principal Investors Fund Class A shares. These updates will be released in early
July.
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RETAIL SALES
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When will the new funds be available for sale to retail customers?
The new funds (Principal Investors Fund Class A and B shares) will be available
to retail shareholders beginning July 1, 2005. The Principal Mutual Funds will
not be offered after June 30, 2005.
When will information and marketing materials be available to registered
representatives?
Training will continue on an ongoing basis. Updates and other information will
be shared via eFP and other means. The release of marketing materials will be
timed with the distribution of the new prospectus in early July.
When can registered representatives start discussing with clients?
Registered representatives can tell clients they will receive a proxy statement,
and encourage them to vote. Representatives cannot start proactively promoting
the new Principal Investors Fund Class A and B-shares until they have the new
prospectus, which should be on or about July 1, 2005.
Which shares will registered representatives sell under the new platform?
Princor registered representatives (primarily career agents and life insurance
brokers associated with The Principal) will sell Class A & B shares. Principal
ConnectionSM will continue to sell Class J shares.
Will there be changes in compensation for registered representatives?
No compensation changes are currently planned in conjunction with the combined
platform. The funds will keep the same Class A & B share sales charge tables
that are currently in place and dealer concession levels will also remain
unchanged.
Does The Principal expect to attract new registered representatives with the
combining of fund families?
Yes. The enhanced investment platform will be attractive to prospective "career
agent" recruits and to independent producers. In addition, we hope that the
strengthened platform will help expand the breadth of distribution by helping
The Principal gain entrance to additional channels such as regional broker
dealers and wirehouses.
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VOTING
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How does the Board of Directors of each Fund suggest that shareholders vote?
After careful consideration, the Board of each of the retail funds has
unanimously determined that the proposed combinations can benefit the
shareholders and recommends that shareholders cast their votes "FOR" the
proposed combination.
How do shareholders vote their shares?
Voting is easy. Shareholders may vote their shares by completing and signing
the proxy ballot and mailing it in the postage-paid envelope or, if it is more
convenient, they may vote by telephone or via the Internet. If shareholders
need any assistance or have any questions, they should call the toll-free phone
number listed on their proxy (888-999-5346).
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How do shareholders sign the proxy ballot?
Individual Accounts: Shareholders should sign exactly as their names appear on
he proxy ballot.
Joint Accounts: Either owner may sign, but the shareholder signing should sign
xactly as their name appears on the ballot.
All Other Accounts: The authorized person must indicate his or her capacity.
For example, a trustee for a trust should sign, "John A. Doe, Trustee."
What if a shareholder doesn't understand the proxy information? Who can help
them? Shareholders should call the toll-free phone number listed on their proxy
(888-999-5346).
What if a shareholder doesn't receive a proxy?
All Principal Mutual Funds shareholders as of record date on March 23, 2005
should receive a ballot in the mail sometime in April. If shareholders don't
receive or misplace their ballot, they can call the toll-free number
(888-999-5346) for assistance.
What if a shareholder's mutual fund account(s) are small; does that person's
vote matter?
Every vote matters. All shareholders should be encouraged to vote regardless of
the size of their account(s).
What happens to an individual shareholder who votes against the combination of a
fund, but whose fund is combined anyway? Is their continued relationship with
The Principal at risk? No. Registered representatives will help individual
shareholders understand the benefits of combining the fund families, and how
current funds will map to the Principal Investors Fund platform. Shareholder
participation will continue unless, of course, the individual shareholder
chooses to redeem shares.
What alternatives do shareholders have if they don't want fund(s) combined?
Shareholders can vote "no" or sell their shares. Selling the shares would be a
taxable event if the fund is held in a nonqualified account.
What happens if a proposed fund combination is not approved or a quorum
(insufficient number of votes received to hold a meeting) is not reached?
If shareholders of a fund do not approve the proposal or a quorum cannot be
reached, the combination cannot take place as to that fund. If the proposal
fails to pass on a fund, its Board of Directors will determine the appropriate
action to take. If a quorum is not reached, the shareholder meeting will be
delayed to allow time to solicit additional proxies. Shareholders are urged to
vote promptly after reviewing the materials so that the meeting is not delayed.
When will shareholders be notified if their fund(s) received enough votes to be
combined? How will shareholders be notified? Shareholders will receive
confirmation that their funds were combined on their second quarter mutual fund
statement. They will also be able to see their new funds online on July 1, 2005,
the day after the combination becomes effective.
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PERFORMANCE
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Is the combining of fund families related to any performance issues?
No. The combining of fund families is not related to the performance of the
Principal Mutual Funds. Since the Principal Investors Fund portfolios were
created (beginning in December 2000), they and the corresponding Principal
Mutual Fund portfolio have been managed very similarly. In most cases, the same
investment managers using the same strategies and processes have managed the
portfolios. During this time of common existence, the two portfolios have
performed similarly--with any differences primarily attributable to differing
expenses.
How will combining the fund families impact performance?
The goal of combining Principal Mutual Funds with Principal Investors Fund is
to create larger portfolios, which we believe will help lead to economies of
scale, more efficient investment management and potentially lower overall
costs. However, as always, the main impact on investment performance will come
from the skill exercised by the investment manager.
How will performance histories be illustrated?
When showing historical performance, the Principal Investor Fund Class I-share
performance (adjusted for Class A or B share expenses) will be shown, as these
are the "surviving" funds. Class A and Class B performance will be calculated
and shown back to the effective date of the acquiring Principal Investors Fund,
Class I. The performance record of the Principal Mutual Funds will be
discarded. This is in compliance with industry standards and regulations
Does that mean the fund will not show five or ten-year historical performance
for the new Class A and B-shares? That is correct. Until the Principal
Investors Funds Class I-share reach their five- and/or ten-year anniversaries,
no longer-term historical performance for the new Class A and B shares will be
available.
What changes to investment managers are being made?
No investment managers are changing at this time. Four additional sub-advisors
currently not available to retail shareholders will become available on July 1,
2005. As always, all investment managers are subject to the Principal Due
Diligence ProgramSM -our rigorous screening, selection and monitoring process.
How are portfolio managers selected?
Our portfolios are subject to one of the industry's most thorough manager
selection and ongoing monitoring processes. Through the Principal Due Diligence
ProgramSM, we meticulously select premier retirement-focused portfolio managers
who give investors a choice of different fund styles and enhanced flexibility.
We monitor each manager's performance continuously.
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COSTS
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How will combining fund families impact expense ratios?
Each acquiring fund is expected to have the same or lower expense ratio than the
corresponding Principal Mutual Fund. More complete details are available in the
proxy statement.
What costs or fees will shareholders incur as a result of combining funds?
The shareholders will not directly incur any costs or fees associated with the
combination; they will not get a bill and there will be no deductions from their
account(s). Each Principal Mutual Fund will pay the initial portion of such
cost. The balance of costs will then be shared by Principal Management
Corporation, which is the funds' manager, and the acquired fund, with each
paying approximately half. As a result, shareholders of each Principal Mutual
Fund will indirectly bear a share of the costs.
What costs or fees will current Principal Investors Fund shareholders incur as a
result of the combination?
Current shareholders of the Principal Investors Fund will not bear the cost of
the combination either directly or indirectly.
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OPERATIONS
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How will the combining of fund families impact operations at The Principal?
The goal of combining fund families is to deepen our fund platform, which
should have a positive impact on growth and operations.
What will happen to Principal Mutual Fund shareholders' account numbers?
Base account numbers will remain the same, but the three-digit fund codes will
change. This information will be reflected on second quarter 2005 shareholder
statements as well as online starting on July 1, 2005.
What will happen to the Account History of the Principal Mutual Fund accounts?
The account history will remain intact after the two fund platforms are
combined. Clients will see the combination taking effect on June 30, 2005, but
will still be able to see previous account transactions just as they do today.
What about Automatic Investment Plans and Systematic Withdrawal Plans?
Automatic Investment Plans (AIP) and Systematic Withdrawal Plans (SWP) will be
moved with the shareholder's fund account. So, if a shareholder has an AIP or
SWP prior to the combining of fund families, the AIP or SWP will continue once
the account moves to the new Principal Investors Fund.
Does the combining of fund families apply to money market / cash management
accounts?
Yes. Shareholders of the Principal Cash Management Fund, Inc., will receive a
proxy and be asked to vote their shares.
Will shareholders with money market / cash management accounts be issued new
checks? If not, can they still use their old checks? Customers with
check-writing privileges will not receive new checks. Instead, they are
encouraged to use their existing supply of checks. New checks will be issued
when shareholders have exhausted their existing supply and placed an order for
additional supply.
How should Principal Mutual Funds shareholders report this event on their 2005
tax returns?
The combinations of the funds are not taxable events. There are no anticipated
income tax implications as a result of the combined platform unless
shareholders redeem shares. In January 2006, shareholders (with non-qualified
accounts) will receive 1099 forms for both the current Principal Mutual Funds
and the new Principal Investors Fund for other types of taxable occurrences,
such as dividend and capital gains distributions.
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RATIONALE
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Why is The Principal doing this now? Why wasn't a single platform created
initially?
When the Principal Investors Funds platform first launched in 2000, the
objectives were to offer mutual funds designed specifically for the retirement
plan market and to eventually create a common investment platform for all
investors. The complexities of a product launch of that size made attempting an
integration of the retail funds at the same time unworkable. We felt that
shareholders would be better served if we launched the Principal Investors Fund
platform first, then focused on the intricate details of combining the retail
funds to create a common investment platform at a later time. That time is now.
How will this combining of fund families benefit The Principal? The expanded
platform should help The Principal:
o Increase sales by simplifying the sales process through a single platform
available to retail investors and retirement plan participants;
o Grow assets under management;
o Innovate and create future funds, by leveraging the size of the expanded
platform;
o Retain and recruit registered representatives; and,
o Expand distribution.
Are other fund family shifts on the horizon?
The Principal is always seeking avenues to improve performance and grow assets.
Regarding the Principal Variable Contracts Fund, this platform of funds must
remain separate from Principal Investors Fund in order to preserve the
tax-advantaged status of the variable contracts for which it acts as the
investment option.
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RETIREMENT PLANS
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How does the combining of fund families impact company-sponsored retirement
plans provided through The Principal? The combination of fund families has
limited impact on most company-sponsored retirement plans provided through The
Principal. Crossover occurs in two instances--the first in certain
small-business retirement plans such as SIMPLEs and SEPs that use Principal
Mutual Funds Class A and B-shares as their funding vehicle. The second instance
is with a very small number of nonqualified clients whose plans include Class
A-shares. We will be working directly with these plan sponsors to ensure a
smooth transition.
What action, if any, do plan sponsors need to take? Plan participants?
Impacted plan sponsors will receive proxy materials and will be asked to
distribute them to plan participants. We will work with the sponsors to ensure a
smooth and successful transition.
With so much effort being made to expand its retail investment platform, is The
Principal shifting focus away from the retirement plan business? The Principal
remains the nation's 401(k) leader and total retirement solutions innovator.
Our goal has always been to create a common investment platform for retail
investors and institutional investors. The investment objectives of the retail
funds and their corresponding funds are very similar and, in most cases, share
the same investment manager. This proposal simply moves us toward creating a
larger, single investment platform with greater economies of scale, greater
efficiency and potentially lower overall costs. This transition should benefit
all of our clients, including plan sponsors and retirement plan participants.
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CERTIFICATES
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Why does The Principal need shareholders to return certificated shares?
Pending shareholder approval, after the combination (scheduled for June 30,
2005), the Principal Mutual Funds will cease to exist. Certificates need to be
returned to ensure proper disposition of the shares. The process to retrieve
outstanding certificates has already started and many shareholders have already
returned their certificates.
Will shareholders get replacement certificates?
No. The Principal Investor Fund will not issue any certificates.
What if shareholders have misplaced their certificates, or are using them as
collateral? What should they do?
In a letter sent to all shareholders who hold certificates, we asked them to
contact us immediately if they no longer had possession of their certificates
for any reason. We are hoping that these are isolated instances and will manage
any such situations on a case-by-case basis.
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