As filed with the Securities and Exchange Commission on March __, 2005
Registration No. 333-________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
[ ] Pre-Effective Amendment No. __
[ ] Post-Effective Amendment No. __
PRINCIPAL INVESTORS FUND, INC.
(Exact name of Registrant as specified in charter)
680 8th Street, Des Moines, Iowa 50392-0200
(Address of Registrant's Principal Executive Offices)
800-247-4123
(Registrant's Telephone Number, Including Area Code)
Michael D. Roughton
Counsel, Principal Investors Fund, Inc.
711 High Street, Suite 405 West
Des Moines, Iowa 50392-0200
(Name and Address of Agent for Service)
Copies of all communications to:
John W. Blouch
Dykema Gossett PLLC
1300 I Street, N.W.
Washington, D.C. 20005-3353
202-906-8714; 202-906-8669 (Fax)
Approximate date of proposed public offering: As soon as practicable after this
Registration Statement becomes effective.
Title of Securities Being Registered:
Class A and Class B Common Stock, par value $.01 per share.
No filing fee is due because an indefinite number of shares have been registered
in reliance on Section 24(f) under the Investment Company Act of 1940, as
amended.
It is proposed that this filing will become effective on April __, 2005,
pursuant to Rule 488.
PRINCIPAL INVESTORS FUND, INC.
Form N-14
Cross Reference Sheet
Pursuant to Rule 481(a) under the Securities Act of 1933
Part A. Information Required in the Prospectus
Form N-14 Item Caption in Proxy Statement/Prospectus
Item 1 Beginning of Registration Statement and Cover Page
Outside Front Cover or Prospectus
Item 2 Beginning and Outside Back Cover Page Cover Page; Table of Contents
of Prospectus
Item 3 Synopsis and Risk Factors Overview of Proposed Reorganization; Proposals 1 - 21
Item 4 Information About the Transaction Letter to Shareholders; Questions and Answers; Overview
of Proposed Reorganization; Information About the
Reorganization
Item 5 Information About the Registrant Letter to Shareholders; Questions and Answers; Overview
of Proposed Reorganization; Information About the
Reorganization; Comparative Information About the PMF and
PIF Funds
Item 6 Information About the Fund Being Letter to Shareholders; Questions and Answers; Overview
Acquired of Proposed Reorganization; Information About the
Reorganization; Comparative Information About the PMF and
PIF Funds
Item 7 Voting Information Letter to Shareholders; Questions and Answers; Voting
Information; Appendix E
Item 8 Interest of Certain Persons and Experts Not Applicable
Item 9 Additional Information Required for Not Applicable
Reoffering by Persons Deemed to be
Underwriters
Part B. Information Required in a Statement of Additional Information
Form N-14 Item Caption in Statement of Information
- -------------- -----------------------------------
Item 10 Cover Page Cover Page
Item 11 Table of Contents Table of Contents
Item 12 Additional Information About the Statement of Additional Information of Principal
Registrant Investors Fund, Inc., dated March 1, 2005
Item 13 Additional Information About the Fund Statements of Additional Information of the Acquired
Being Acquired Funds, dated March 1, 2005
Item 14 Financial Statements Financial Statements
Part C. Other Information
The information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
PRINCIPAL MUTUAL FUNDS
680 8th Street
Des Moines, Iowa 50392-0200
April __, 2005
Dear Shareholder:
A joint special meeting of shareholders of the separate funds collectively
and commonly known as the Principal Mutual Funds ("PMF") will be held at 2:00
p.m., Central Daylight Time, on June 16, 2005, at the offices of Principal
Management Corporation, 680 8th Street, Des Moines, Iowa 50392-0200, to consider
a proposed reorganization providing for the combination of each of the PMF Funds
(the "Acquired Funds") into a corresponding separate series (each an "Acquiring
Fund") of Principal Investors Fund, Inc. ("PIF") (the "Reorganization"). The
Reorganization is described in detail in the enclosed Proxy Statement/Prospectus
and summarized in the attached information sheet.
The Board of Directors of each Acquired Fund has unanimously approved the
Reorganization and believes that it will benefit you. All the PMF and PIF funds
are sponsored by Principal Life Insurance Company and have the same investment
advisor, Principal Management Corporation. The Board believes the Reorganization
will address the persistent distribution issues of the PMF funds by combining
them into the PIF funds, which are experiencing significant net sales. Combining
the PMF funds into PIF is intended to create a larger fund family that is
expected to achieve economies of scale and operate with greater efficiency and
lower overall costs. Each of the Acquired Funds and its corresponding Acquiring
Fund have the same or substantially similar investment objectives, and many have
the same Sub-Advisors. In most cases, the Acquiring Funds are expected to have
the same or lower expense ratios than their corresponding Acquired Funds, and
the Acquiring Funds generally have had stronger performance records. Combining
the funds will not result in any dilution of the interests of existing
shareholders of the Acquired Funds.
Enclosed you will find a Notice of Special Joint Meeting of Shareholders, a
Proxy Statement/Prospectus, and a proxy ballot for the shares of each Acquired
Fund owned by you as of March 23, 2005, the record date for the meeting. Also
enclosed for additional information is the current PIF Prospectus. Please read
these materials carefully. In order for your shares to be voted at the meeting,
you are urged promptly to complete and mail your proxy ballot(s) in the enclosed
postage-paid envelope, allowing sufficient time for its receipt by June 15,
2005.
We appreciate your taking the time to respond to this important matter.
Your vote is important. If you have any questions regarding the Reorganization
or need additional information, please call us toll-free at 1-800- ________.
Sincerely,
/s/ RALPH C. EUCHER
Ralph C. Eucher
President and Chief Executive Officer
IMPORTANT INFORMATION TO HELP YOU
UNDERSTAND AND VOTE ON THE REORGANIZATION
Please read the complete Proxy Statement/Prospectus. For your
convenience, we are providing this brief overview of the proposed Reorganization
on which you are being asked to vote.
What is the Reorganization?
Under the Reorganization, each of the separate funds of Principal
Mutual Funds ("PMF") listed below (each an "Acquired Fund") will be combined
into a corresponding separate series (each an "Acquiring Fund") of Principal
Investors Fund, Inc. ("PIF"), and each shareholder of an Acquired Fund will
become a shareholder of the corresponding Acquiring Fund. A shareholder's
position will have the same value both immediately before and immediately after
the Reorganization. The shareholders of each Acquired Fund must take the
necessary action to approve its combination with the corresponding Acquiring
Fund before the combination may be effected. The scheduled effective date for
the Reorganization is as of the close of regularly scheduled trading on the New
York Stock Exchange on June 30, 2005 (or such other date as may be agreed upon).
Corresponding
PMF Acquired Fund PIF Acquiring Fund
Principal Balanced Fund, Inc. -- PIF Disciplined LargeCap Blend Fund
Principal Capital Value Fund, Inc. -- PIF LargeCap Value Fund
Principal Partners LargeCap Value Fund, Inc. -- PIF Partners LargeCap Value Fund
Principal Equity Income Fund, Inc. -- PIF Equity Income Fund
Principal Partners Blue Chip Fund, Inc. -- PIF Partners LargeCap Blend Fund I
Principal Partners LargeCap Blend Fund, Inc. -- PIF Partners LargeCap Blend Fund
Principal LargeCap Stock Index Fund, Inc. -- PIF LargeCap S&P 500 Index Fund
Principal Growth Fund, Inc. -- PIF LargeCap Growth Fund
Principal Partners Equity Growth Fund, Inc. -- PIF Partners LargeCap Growth Fund I
Principal MidCap Fund, Inc. -- PIF MidCap Blend Fund
Principal Partners MidCap Growth Fund, Inc. -- PIF Partners MidCap Growth Fund
Principal SmallCap Fund, Inc. -- PIF SmallCap Blend Fund
Principal Partners SmallCap Growth Fund, Inc. -- PIF Partners SmallCap Growth Fund II
Principal Real Estate Securities Fund, Inc. -- PIF Real Estate Securities Fund
Principal Bond Fund, Inc. -- PIF Bond & Mortgage Securities Fund
Principal Government Securities Income Fund, Inc. -- PIF Government Securities Fund
Principal Tax-Exempt Bond Fund, Inc. -- PIF Tax-Exempt Bond Fund
Principal International Fund, Inc. -- PIF Diversified International Fund
Principal International SmallCap Fund, Inc. -- PIF Diversified International Fund
Principal Limited Term Bond Fund, Inc. -- PIF High Quality Short-Term Bond Fund
Principal Cash Management Fund, Inc. -- PIF Money Market Fund
Principal International Emerging Markets Fund, Inc. -- PIF International Emerging Markets Fund
What are the reasons for the Reorganization?
All the PMF and PIF funds are sponsored by Principal Life Insurance
Company and have the same investment advisor, Principal Management Corporation
(the "Manager"). Combining the PMF funds into PIF is intended to address
persistent distribution issues of the PMF funds. Combining the PMF funds into
the PIF funds, which are experiencing significant net sales, will create a
larger fund family that is expected to achieve economies of scale and operate
with greater efficiency and lower overall costs. After the Reorganization,
shareholders of the Acquired Funds will have as additional investment options,
and will be able to exchange shares with, a number of PIF Funds in addition to
the Acquiring Funds. Each of the Acquired Funds and its corresponding Acquiring
Fund have the same or substantially similar investment objectives, and many have
the same Sub-Advisors. In most cases, the Acquiring Funds are expected to have
the same or lower expense ratios than their corresponding Acquired Funds. In
those instances in which the expense ratios of an Acquiring Fund, immediately
after the Reorganization, are expected to be higher, the Manager has agreed to
contractually cap expenses so that they will not exceed pre-combination expenses
for a three-year period in the case of the combinations involving the Principal
MidCap, Principal Partners MidCap Growth, Principal Partners SmallCap Growth and
Principal Tax-Exempt Bond Funds, and for a four-year period in the case of the
combination involving the Principal Bond Fund. Although future expense ratios
cannot be known, these expense cap periods are intended to keep the total
expenses borne by shareholders of these Acquired Funds approximately at or below
the same level as they would have been without the Reorganization. In addition,
the Acquiring Funds generally have had stronger performance records. The Board
of Directors of each Acquired Fund and of PIF have determined that combining the
Funds will not result in any dilution of the interests of existing shareholders
of the Acquired and Acquiring Funds, respectively. For detailed information
about the investment objectives and policies, expense ratios and performance
records of the specific funds involved in each fund combination, please refer to
the Proxy Statement/Prospectus.
Will I incur any fee in connection with the Reorganization?
You will not incur directly any fee in connection with the
Reorganization. Under the Plan, and because each Acquired Fund will also be
electing its Board of Directors, the first $1,000,000 of the expenses relating
to holding a shareholders meeting in connection with the proposed Reorganization
will be allocated among the Acquired Funds based on the ratio of the open
accounts of each Acquired Fund to the open accounts of all the Acquired Funds as
of February 28, 2005. The Manager will pay 50% of the balance of the expenses
relating to the Reorganization, and the remaining 50% will be allocated among
the Acquired Funds in the same manner as the first $1,000,000 of expenses,
except that the Manager will pay 100% of such expenses allocated to the
following Acquired Funds which are not expected to experience reduced expense
ratios as a result of the Reorganization: the Principal Bond Fund, Principal
MidCap Fund, Principal Tax-Exempt Bond Fund, Principal Partners LargeCap Value
Fund, Principal Partners SmallCap Growth Fund, Principal International Fund and
Principal Partners MidCap Growth Fund. Shareholders of each Acquired Fund, will
therefore bear indirectly the expenses allocated to and paid by the Acquired
Fund.
What happens if a proposed fund combination is not approved?
If shareholders of an Acquired Fund do not approve the Reorganization,
the Reorganization will not take place as to that Acquired Fund, and its Board
of Directors will take such action as it deems appropriate and in the best
interests of the shareholders of that Fund. Following the Reorganization,
Princor Financial Services Corporation ("Princor"), the Funds' principal
underwriter, anticipates focusing its marketing efforts on PIF, emphasizing the
greater investment choice that PIF offers and the generally lower expense ratios
of the PIF Funds. Princor may also consider discontinuing the distribution of
shares of the Acquired Funds. Those Acquired Funds that do not approve the
Reorganization may experience high expense ratios if assets in those Funds
decline.
Following the Reorganization, will shareholders of the Acquired Funds be able to
find the daily share values of the Acquiring Funds in newspapers?
Yes, following the Reorganization, shareholders will be able to find
the daily share values for the Acquiring Funds in newspapers, generally under
the heading "Principal Investors."
What are the federal income tax implications?
The transactions contemplated by each fund combination will result in a
tax-free "reorganization" under Section 368(a) of the Internal Revenue Code.
Each Acquired Fund and its corresponding Acquiring Fund will obtain an opinion
from tax counsel to the effect that no gain or loss will be recognized by either
Fund or its shareholders in connection with the combination, that your tax cost
basis will not change, and that your holding period for the Acquiring Fund
securities acquired in the combination will include your holding period for your
Acquired Fund shares.
Has the Board of Directors approved the Reorganization?
Yes. The Board of Directors of each of the Acquired Funds has unanimously
approved the Reorganization and recommends that you vote in favor of the
Reorganization.
What if there are not enough votes to reach a quorum or a favorable vote on a
fund combination by the scheduled date of the shareholder meeting?
If a quorum or a favorable vote is not obtained for a particular fund
combination, the meeting with respect to the affected Acquired Fund may be
postponed to allow time to solicit additional proxies from shareholders. We urge
you to vote promptly after reviewing the enclosed materials so that the meeting
is not delayed and the additional expenses of continued solicitation can be
avoided.
How do I vote my shares?
Voting is easy. You may vote your shares by completing and signing the
enclosed proxy ballot and mailing it in the enclosed postage-paid envelope or,
if it is more convenient, you may vote by touch-tone telephone or via the
Internet. Refer to your proxy ballot for the toll-free telephone number or
Internet address. If you need any assistance or have any questions concerning
the Reorganization or how to vote your shares, please call 1-800-__________.
How do I sign the proxy ballot?
Individual Accounts: Shareholders should sign exactly as their names appear
in the account registration shown on the proxy ballot.
Joint Accounts: Either owner may sign, but the name of the person signing
should conform exactly to a name that appears in the account registration shown
on the proxy ballot.
All Other Accounts: The person signing must indicate his or her capacity.
For example, a trustee for a trust or other entity should sign, "John A. Doe,
Trustee."
PRINCIPAL MUTUAL FUNDS
680 8th Street
Des Moines, Iowa 50392-0200
NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 16, 2005
To the Shareholders of the Principal Mutual Funds:
Principal Balanced Fund, Inc. Principal SmallCap Fund, Inc.
Principal Capital Value Fund, Inc. Principal Partners SmallCap Growth Fund, Inc.
Principal Partners LargeCap Value Fund, Inc. Principal Real Estate Securities Fund, Inc.
Principal Equity Income Fund, Inc. Principal Bond Fund, Inc.
Principal Partners Blue Chip Fund, Inc. Principal Government Securities Income Fund, Inc.
Principal Partners LargeCap Blend Fund, Inc. Principal Tax-Exempt Bond Fund, Inc.
Principal LargeCap Stock Index Fund, Inc. Principal International Fund, Inc.
Principal Growth Fund, Inc. Principal International SmallCap Fund, Inc.
Principal Partners Equity Growth Fund, Inc. Principal Limited Term Bond Fund, Inc.
Principal MidCap Fund, Inc. Principal Cash Management Fund, Inc.
Principal Partners MidCap Growth Fund, Inc. Principal International Emerging Markets Fund, Inc.
Notice is hereby given that a Joint Special Meeting of the Shareholders
(the "Meeting") of each of the Principal Mutual Funds will be held at 2:00 p.m.,
Central Daylight Time, on June 16, 2005, at the offices of Principal Management
Corporation, 680 8th Street, Des Moines, Iowa 50392-0200. The Meeting is being
held to consider and vote on the following proposals as well as any other
business that may properly come before the meeting or any adjournment thereof:
Proposal 1 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
Balanced Fund, Inc. (an "Acquired Fund") into the PIF Disciplined LargeCap Blend Fund (an
"Acquiring Fund").
(Shareholders of the Principal Balanced Fund will vote on this proposal)
Proposal 2 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
Capital Value Fund, Inc. (an "Acquired Fund") into the PIF LargeCap Value Fund (an "Acquiring
Fund").
(Shareholders of the Principal Capital Value Fund will vote on this proposal)
Proposal 3 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
Partners LargeCap Value Fund, Inc. (an "Acquired Fund") into the PIF Partners LargeCap Value
Fund (an "Acquiring Fund").
(Shareholders of the Principal Partners LargeCap Value Fund will vote on this proposal)
Proposal 4 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
Equity Income Fund, Inc. (an "Acquired Fund") into the PIF Equity Income Fund (an "Acquiring
Fund").
(Shareholders of the Principal Equity Income Fund will vote on this proposal)
Proposal 5 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
Partners Blue Chip Fund, Inc. (an "Acquired Fund") into the
PIF Partners LargeCap Blend Fund I (an "Acquiring Fund").
(Shareholders of the Principal Partners Blue Chip Fund will
vote on this proposal)
Proposal 6 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
Partners LargeCap Blend Fund, Inc. (an "Acquired Fund") into the PIF Partners LargeCap Blend
Fund (an "Acquiring Fund").
(Shareholders of the Principal Partners LargeCap Blend Fund
will vote on this proposal)
Proposal 7 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
LargeCap Stock Index Fund, Inc. (an "Acquired Fund") into
the PIF LargeCap S&P 500 Index Fund (an "Acquiring Fund").
(Shareholders of the Principal LargeCap Stock Index Fund
will vote on this proposal)
Proposal 8 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
Growth Fund, Inc. (an "Acquired Fund") into the PIF LargeCap Growth Fund (an "Acquiring Fund").
(Shareholders of the Principal Growth Fund will vote on this proposal)
Proposal 9 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
Partners Equity Growth, Inc. (an "Acquired Fund") into the PIF Partners LargeCap Growth Fund I
(an "Acquiring Fund").
(Shareholders of the Principal Partners Equity Growth will
vote on this proposal)
Proposal 10 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
MidCap Fund, Inc. (an "Acquired Fund") into the PIF MidCap Blend Fund (an "Acquiring Fund").
(Shareholders of the Principal MidCap Fund will vote on this proposal)
Proposal 11 Approval of Agreement and Plan of Reorganization
providing for the combination of the Principal Partners
MidCap Growth Fund, Inc. (an "Acquired Fund") into the PIF
Partners MidCap Growth Fund (an "Acquiring Fund").
(Shareholders of the Principal Partners MidCap Growth Fund
will vote on this proposal)
Proposal 12 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
SmallCap Fund, Inc. (an "Acquired Fund") into the PIF SmallCap Blend Fund (an "Acquiring Fund").
(Shareholders of the Principal SmallCap Fund will vote on this proposal)
Proposal 13 Approval of Agreement and Plan of Reorganization
providing for the combination of the Principal Partners
SmallCap Growth Fund, Inc. (an "Acquired Fund") into the PIF
Partners SmallCap Growth Fund II (an "Acquiring Fund").
(Shareholders of the Principal Partners SmallCap Growth Fund
will vote on this proposal)
Proposal 14 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
Real Estate Securities Fund, Inc. (an "Acquired Fund") into the PIF Real Estate Securities Fund
(an "Acquiring Fund").
(Shareholders of the Principal Real Estate Securities Fund
will vote on this proposal)
Proposal 15 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
Bond Fund, Inc. (an "Acquired Fund") into the PIF Bond & Mortgage Securities Fund (an "Acquiring
Fund").
(Shareholders of the Principal Bond Fund, Inc. will vote on this proposal)
Proposal 16 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
Government Securities Income Fund, Inc. (an "Acquired Fund") into the PIF Government Securities
Fund (an "Acquiring Fund").
(Shareholders of the Principal Government Securities Income
Fund will vote on this proposal)
Proposal 17 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
Tax-Exempt Bond Fund, Inc. (an "Acquired Fund") into the PIF
Tax-Exempt Bond Fund (an "Acquiring Fund"). (Shareholders of
the Principal Tax-Exempt Bond Fund will vote on this
proposal)
Proposal 18 Approval of Agreement and Plan of Reorganization providing for the combination of each of the
Principal International Fund, Inc. (an "Acquired Fund") and the Principal International SmallCap
Fund, Inc. (an "Acquired Fund") into the PIF Diversified International Fund (an "Acquiring
Fund").
(Shareholders of the Principal International Fund and
Principal International SmallCap Fund will vote separately
on this proposal)
Proposal 19 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
Limited Term Bond Fund, Inc. (an "Acquired Fund") into the PIF High Quality Short-Term Bond Fund
(an "Acquiring Fund").
(Shareholders of the Principal Limited Term Bond Fund will
vote on this proposal)
Proposal 20 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
Cash Management Fund, Inc. (an "Acquired Fund") into the PIF Money Market Fund (an "Acquiring
Fund").
(Shareholders of the Principal Cash Management Fund will vote on this proposal)
Proposal 21 Approval of Agreement and Plan of Reorganization providing for the combination of the Principal
International Emerging Markets Fund, Inc. (an "Acquired Fund") into the PIF International
Emerging Markets Fund (an "Acquiring Fund").
(Shareholders of the Principal International Emerging
Markets Fund will vote on this proposal)
Proposal 22 Election of the Board of Directors of each of the Principal Mutual Funds.
(Shareholders of each of the Principal Mutual Funds will
vote separately on this Proposal)
The Board of Directors of each of the Principal Mutual Funds recommends
that shareholders of the Fund vote FOR the Proposal that pertains to that Fund
and FOR the election of all nominees for Director.
Approval of each Proposal for a fund combination will require the
affirmative vote of the holders of at least a "Majority of the Outstanding
Voting Securities" (as defined in the accompanying Proxy Statement/Prospectus)
of the Acquired Fund. To be elected a Director of a Principal Mutual Fund, a
nominee must receive the affirmative vote of the holders of a plurality of the
shares voted in the election of Directors at the meeting of the Fund.
Each shareholder of record at the close of business on March 23, 2005
is entitled to receive notice of and to vote at the meeting.
Please read the attached Proxy Statement/Prospectus.
By order of the Boards of Directors
/s/ A. S. FILEAN
A. S. Filean
Senior Vice President and Secretary
April __, 2005
Des Moines, Iowa.
Principal Mutual Funds Principal Investors Fund, Inc.
680 8th Street 680 8th Street
Des Moines, Iowa 50392-0200 Des Moines, Iowa 50392-0200
("PMF") ("PIF")
-------------------------
PROXY STATEMENT/PROSPECTUS
Relating to the Acquisition of All the Assets, Subject to All the Liabilities,
of the Acquired Funds (Listed Below), Each a Separate Company and Collectively
Known as the Principal Mutual Funds, by and in Exchange for Class A and Class B
Shares of the Corresponding Acquiring Funds (Listed Below), Each a Separate
Series of Principal Investors Fund, Inc.
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of each of the separate funds known
collectively as the Principal Mutual Funds ("PMF") of proxies to be used at a
Joint Special Meeting of Shareholders of all of the Acquired Funds listed below
to be held at 2:00 p.m., Central Daylight Time on June 16, 2005 at the offices
of Principal Management Corporation, 680 8th Street, Des Moines, Iowa 50392-0200
(the "Meeting"). This Proxy Statement/Prospectus is first being mailed to
shareholders on or about April __, 2005.
At the Meeting, shareholders of each Acquired Fund will be asked to
consider and approve a proposed Agreement and Plan of Reorganization (the
"Plan") providing for the combination of the Acquired Fund, each a separate
company, into a corresponding separate series (each an "Acquiring Fund") of
Principal Investors Fund, Inc. ("PIF") (the "Reorganization"). Under the Plan,
(i) all the assets, subject to all of the liabilities, of each Acquired Fund
will be transferred to its corresponding Acquiring Fund in exchange for Class A
and Class B shares of the Acquiring Fund; (ii) holders of Class A shares of the
Acquired Fund will receive that number of Class A shares of the corresponding
Acquiring Fund equal in value at the time of the exchange to the value of the
holder's Class A shares of the Acquired Fund at such time; (iii) holders of
Class B shares of the Acquired Fund will receive that number of Class B shares
of the corresponding Acquiring Fund equal in value at the time of the exchange
to the value of the holder's Class B shares of the Acquired Fund at such time;
and (iv) the Acquired Fund will be liquidated and dissolved. Each combination
that is approved by shareholders is expected to become effective as of the close
of regularly scheduled trading on the New York Stock Exchange on June 30, 2005.
The consummation of each combination of an Acquired Fund into its corresponding
Acquiring Fund may occur regardless of whether the consummation of any other
combination of an Acquired Fund into an Acquiring Fund occurs. The terms and
conditions of the Reorganization are more fully described in this Proxy
Statement/Prospectus and in the Agreement and Plan of Reorganization attached
hereto as Appendix A.
Corresponding
PMF Acquired Fund PIF Acquiring Fund
Principal Balanced Fund, Inc. -- PIF Disciplined LargeCap Blend Fund
Principal Capital Value Fund, Inc. -- PIF LargeCap Value Fund
Principal Partners LargeCap Value Fund, Inc. -- PIF Partners LargeCap Value Fund
Principal Equity Income Fund, Inc. -- PIF Equity Income Fund
Principal Partners Blue Chip Fund, Inc. -- PIF Partners LargeCap Blend Fund I
Principal Partners LargeCap Blend Fund, Inc. -- PIF Partners Large Cap Blend Fund
Principal LargeCap Stock Index Fund, Inc. -- PIF LargeCap S&P 500 Index Fund
Principal Growth Fund, Inc. -- PIF LargeCap Growth Fund
Principal Partners Equity Growth Fund, Inc. -- PIF Partners LargeCap Growth Fund I
Principal MidCap Fund, Inc. -- PIF MidCap Blend Fund
Principal Partners MidCap Growth Fund, Inc. -- PIF Partners MidCap Growth Fund
Principal SmallCap Fund, Inc. -- PIF SmallCap Blend Fund
Principal Partners SmallCap Growth Fund, Inc. -- PIF Partners SmallCap Growth Fund II
Principal Real Estate Securities Fund, Inc. -- PIF Real Estate Securities Fund
Principal Bond Fund, Inc. -- PIF Bond & Mortgage Securities Fund
Principal Government Securities Income Fund, Inc. -- PIF Government Securities Fund
Principal Tax-Exempt Bond Fund, Inc. -- PIF Tax-Exempt Bond Fund
Principal International Fund, Inc. -- PIF Diversified International Fund
Principal International SmallCap Fund, Inc. -- PIF Diversified International Fund
Principal Limited Term Bond Fund, Inc. -- PIF High Quality Short-Term Bond Fund
Principal Cash Management Fund, Inc. -- PIF Money Market Fund
Principal International Emerging Markets Fund, Inc. -- PIF International Emerging Markets Fund
This Proxy Statement/Prospectus sets forth concisely the information
you should know before voting on the proposed Reorganization. You should retain
it for future reference. The Annual and Semi-Annual Reports to Shareholders of
PMF and PIF contain additional information about the investments of,
respectively, the Acquired Funds and the Acquiring Funds. Copies of these
reports, which contain discussions of the market conditions and investment
strategies that significantly affected such Funds during their fiscal years
ended October 31, 2004, may be obtained at no charge by calling the respective
toll free numbers listed below for PMF and PIF.
The following documents have been filed with the Securities and
Exchange Commission ("SEC") and are incorporated by reference into this Proxy
Statement/Prospectus:
- -- The Prospectus of PIF (relating to the Acquiring Funds) A copy of the PIF Prospectus accompanies this
dated April ___, 2005 (the "PIF Prospectus"). Proxy Statement/Prospectus.
- -- The Statement of Additional Information dated April ___, Copies of the Statement of Additional Information
2005 relating to this Proxy Statement/Prospectus (the are available at no charge by writing to PMF at the
"Statement of Additional Information"). above address or by calling toll free at 1-800-247-4123.
- -- The Prospectuses of the Acquired Funds dated March 1, Copies of the PMF Prospectus and the PMF SAI are
2005 (collectively, the "PMF Prospectus"). available at no charge by writing to PMF at the
above address or by calling toll free at 1-800-247-4123
- -- The Statements of Additional Information of the Acquired
Funds dated March 1, 2005 (collectively, the "PMF SAI").
Shareholders who have questions about the Reorganization or this Proxy
Statement/Prospectus may call toll-free at 1-800-_______.
The Acquired Funds and PIF are subject to the informational
requirements of the Securities Exchange Act of 1934 and the Investment Company
Act of 1940 and file reports, proxy materials and other information with the
SEC. Such reports, proxy materials and other information may be inspected and
copied at the Public Reference Room of the SEC at 450 Fifth Street, N.W.
Washington, D.C. 20549-0102 (information on the operation of the Public
Reference Room may be obtained by calling the SEC at 1-202-942-8090). Such
materials are also available on the SEC's EDGAR Database on its Internet site at
www.sec.gov, and copies may be obtained, after paying a duplicating fee, by
email request addressed to public info@sec.gov or by writing to the SEC's Public
Reference Room.
The SEC has not approved or disapproved these securities or passed upon
the accuracy or adequacy of this Proxy Statement/Prospectus. Any representation
to the contrary is a criminal offense.
The date of this Proxy Statement/Prospectus is April __, 2005.
PROXY STATEMENT/PROSPECTUS
Table of Contents
Page
Introduction...............................................................
Overview of the Proposed Reorganization....................................
Proposal 1 Approval of Agreement and Plan of Reorganization providing for the
combination of the Principal Balanced Fund, Inc. into the PIF Equity Income Fund...........
Proposal 2 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal Capital Value Fund, Inc. into the PIF LargeCap Value Fund.....
Proposal 3 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal Partners LargeCap Value Fund, Inc. into the PIF Partners
LargeCap Value Fund............................................................
Proposal 4 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal Equity Income Fund, Inc. into the PIF Equity Income Fund......
Proposal 5 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal Partners Blue Chip Fund, Inc. into the PIF Partners LargeCap
Blend Fund I...................................................................
Proposal 6 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal Partners LargeCap Blend Fund, Inc. into the PIF Partners
LargeCap Blend Fund............................................................
Proposal 7 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal LargeCap Stock Index Fund, Inc. into the PIF LargeCap S&P 500
Index Fund.....................................................................
Proposal 8 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal Growth Fund, Inc. into the PIF LargeCap Growth Fund...........
Proposal 9 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal Partners Equity Growth Fund, Inc. into the PIF Partners
LargeCap Growth Fund I.........................................................
Proposal 10 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal MidCap Fund, Inc. into the PIF MidCap Blend Fund..............
Proposal 11 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal Partners MidCap Growth Fund, Inc. into the PIF Partners
MidCap Growth Fund.............................................................
Proposal 12 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal SmallCap Fund, Inc. into the PIF SmallCap Blend Fund..........
Proposal 13 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal Partners SmallCap Growth Fund, Inc. into the PIF Partners
SmallCap Growth Fund II........................................................
Proposal 14 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal Real Estate Securities Fund, Inc. into the PIF Real Estate
Securities Fund................................................................
Proposal 15 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal Bond Fund, Inc. into the PIF Bond & Mortgage Securities Fund..
Proposal 16 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal Government Securities Income Fund, Inc. into the PIF
Government Securities Fund.....................................................
Proposal 17 Approval of Agreement and Plan of Reorganization providing
for the combination of the Principal Tax-Exempt Bond Fund,
Inc. into the PIF Tax-Exempt Bond Fund..
Proposal 18 Approval of Agreement and Plan of Reorganization providing
for the combination of each of the Principal International
Fund, Inc. and the Principal International SmallCap Fund,
Inc. into the PIF Diversified International Fund..
Proposal 19 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal Limited Term Bond Fund, Inc. into the PIF
High Quality Short-Term Bond Fund..............................................
Proposal 20 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal Cash Management Fund, Inc. into the PIF
Money Market Fund.............................................................
Proposal 21 Approval of Agreement and Plan of Reorganization providing for the combination
of the Principal International Emerging Markets Fund, Inc. into the PIF
International Emerging Markets Fund............................................
Proposal 22 Election of the Board of Directors of each of the Principal Mutual Funds........
Information About the Reorganization............................................
Agreement and Plan of Reorganization.......................................
Reasons for the Reorganization.............................................
Board Consideration of the Reorganization..................................
Description of Securities to Be Issued.....................................
Federal Income Tax Consequences............................................
Capitalization..................................................................
Comparative Information About the PMF and PIF Funds.............................
Multiple Classes of Shares.................................................
Rule 12b-1 Fees............................................................
Costs of Investing.........................................................
Purchases, Redemptions and Exchanges of Shares.............................
Dividends and Distributions................................................
Fundamental Investment Restrictions........................................
Location of Further Information About the Funds............................
Voting Information..............................................................
Legal Matters...................................................................
Financial Statements............................................................
Other...........................................................................
Appendix A - Agreement and Plan of Reorganization.............................
Appendix B - Comparison of Fundamental Investment Restrictions................
Appendix C - Debt Security Ratings............................................
Appendix D -- Audit and Nominating Committee Charter...........................
Appendix E - Outstanding Shares and Share Ownership...........................
INTRODUCTION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of each of the PMF Acquired Funds of
proxies to be used at a Joint Special Meeting of Shareholders of all the
Acquired Funds to be held at 2:00 p.m., Central Daylight Time on June 16, 2005
at the offices of Principal Management Corporation, 680 8th Street, Des Moines,
Iowa 50392-0200. The purpose of the Meeting is for the shareholders of each
Acquired Fund to consider the proposed Reorganization providing for the
combination of the Acquired Fund into its corresponding Acquiring Fund, each a
separate series of PIF. Each shareholder of record of an Acquired Fund at the
close of business on March 23, 2005 (the "Record Date") is entitled to one vote
at the Meeting for each share (and fractional votes for fractional shares) of
the Acquired Fund held.
PMF and PIF. Each of the PMF Acquired Funds is a Maryland corporation
and an open-end management investment company, commonly known as a mutual fund,
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The shares of the Acquired Funds (except the Principal LargeCap Stock
Index Fund and the Principal Limited Term Bond Fund) are offered to the public
in two classes: Class A shares and Class B shares. The Principal LargeCap Stock
Index Fund and the Principal Limited Term Bond Fund offer only Class A shares.
PIF is also a Maryland corporation and an open-end management investment company
registered under the 1940 Act. PIF is a "series" mutual fund and currently
offers 54 separate series, or portfolios, including the Acquiring Funds. The
shares of the Acquiring Funds are currently offered in a number of classes
mainly to retirement plans and individual retirement accounts. In connection
with the Reorganization, most of the Acquiring Funds will issue two new classes
of shares, Class A shares and Class B shares, and after the Reorganization will
offer these new shares to the public as well as continuing to sell their current
classes of shares to retirement plans and individual retirement accounts. See
"Comparative Information About the PMF and PIF Funds - Multiple Classes of
Shares" below.
Following the Reorganization, certain series of PIF in addition to the
Acquiring Funds will also offer new Class A shares and will be available to
former shareholders of the Acquired Funds for purposes of exchanging their
shares of the Acquiring Funds and as additional investment options. These PIF
series are:
PIF Partners LargeCap Growth Fund II PIF Preferred Securities Fund PIF LifeTime 2030 Fund*
PIF Partners MidCap Value Fund* PIF Inflation Protection Fund PIF LifeTime 2040 Fund*
PIF SmallCap Value Fund* PIF LifeTime 2010 Fund PIF LifeTime 2050 Fund
PIF Partners MidCap Growth Fund I PIF LifeTime 2020 Fund* PIF LifeTime Strategic Income Fund
- ---------------
<FN>
* Following the Reorganization, these series will also offer Class B shares.
</FN>
The sponsor of each of the Acquired Funds and of PIF is Principal
Life Insurance Company ("Principal Life"), the investment advisor to each of the
Acquired and Acquiring Funds is Principal Management Corporation (the "Manager")
and the principal underwriter for the Acquired Funds and for PIF is Princor
Financial Services Corporation ("Princor"). Principal Global Investors LLC
("Principal Global") is the Sub-Advisor for many of the Acquired and Acquiring
Funds. Principal Life, an insurance company organized in 1879 under the laws of
Iowa, the Manager, Princor and Principal Global are indirect, wholly-owned
subsidiaries of Principal Financial Group, Inc. Their address is the Principal
Financial Group, Des Moines, Iowa 50392-0200.
Investment Management. The Manager has entered into a Management
Agreement with each of the Acquired Funds and with PIF with respect to each of
the Acquiring Funds. In each Management Agreement, the Manager agrees to provide
investment advisory services and certain corporate administrative services to
the Fund. As permitted by the Management Agreements, the Manager has entered
into Sub-Advisory Agreements with Sub-Advisors with respect to many of the
Funds. Under a Sub-Advisory Agreement, the Sub-Advisor agrees to assume the
obligations of the Manager to provide investment advisory services for a
specific Fund. Sub-Advisors are compensated by the Manager, not by the Funds.
The Manager is registered as an investment adviser under the Investment Advisers
Act of 1940 (the "Advisers Act"). Each of the Sub-Advisors to the Acquired Funds
and the Acquiring Funds is also registered as an investment advisor under the
Advisers Act or is exempt from such registration.
OVERVIEW OF THE PROPOSED REORGANIZATION
Form and Consequence of the Reorganization. At a meeting held on
February 24, 2005, the Board of Directors of each of the Acquired Funds,
including all the Directors who are not "interested persons" (as defined in the
1940 Act) of each Acquired Fund (the "Independent Directors"), unanimously
approved an Agreement and Plan of Reorganization (the "Plan") providing for the
combination of each Acquired Fund into its corresponding Acquiring Fund (each, a
"Combination"). In connection with each Combination, under the Plan, (i) all the
assets, subject to all the liabilities, of the Acquired Fund will be transferred
to its corresponding Acquiring Fund in exchange for Class A and Class B shares
of the Acquiring Fund; (ii) holders of Class A shares of the Acquired Fund will
receive that number of Class A shares of the corresponding Acquiring Fund equal
in value at the time of the exchange to the value of the holder's Class A shares
of the Acquired Fund at such time; (iii) holders of Class B shares of the
Acquired Fund will receive that number of Class B shares of the corresponding
Acquiring Fund equal in value at the time of the exchange to the value of the
holder's Class B shares of the Acquired Fund at such time; and (iv) the Acquired
Fund will be liquidated and dissolved.
As a result of the Reorganization, shareholders of the Acquired Funds
will become shareholders of the Acquiring Funds as follows:
If you own shares of the . . . You will receive shares of the . . .
Principal Balanced Fund PIF Disciplined LargeCap Blend Fund
Principal Capital Value Fund PIF LargeCap Value Fund
Principal Partners LargeCap Value Fund PIF Partners LargeCap Value Fund
Principal Equity Income Fund PIF Equity Income Fund
Principal Partners Blue Chip Fund PIF Partners LargeCap Blend Fund I
Principal Partners LargeCap Blend Fund PIF Partners LargeCap Blend Fund
Principal LargeCap Stock Index Fund PIF LargeCap S&P 500 Index Fund
Principal Growth Fund PIF Large Growth Fund
Principal Partners Equity Growth Fund PIF LargeCap Growth Fund I
Principal MidCap Fund PIF MidCap Blend Fund
Principal Partners MidCap Growth Fund PIF Partners MidCap Growth Fund
Principal SmallCap Fund PIF SmallCap Blend Fund
Principal Partners SmallCap Growth Fund PIF Partners SmallCap Growth Fund II
Principal Real Estate Securities Fund PIF Real Estate Securities Fund
Principal Bond Fund PIF Bond & Mortgage Securities Fund
Principal Government Securities Income Fund PIF Government Securities Fund
Principal Tax-Exempt Bond Fund PIF Tax-Exempt Bond Fund
Principal International Fund PIF Diversified International Fund
Principal International SmallCap Fund PIF Diversified International Fund
Principal Limited Term Bond Fund PIF High Quality Short-Term Bond Fund
Principal Cash Management Fund PIF Money Market Fund
Principal International Emerging Markets Fund PIF International Emerging Markets Fund
In each Combination, the Acquiring Fund will issue a number of shares with
a total value equal to the total value of the net assets of its corresponding
Acquired Fund, and each shareholder of the Acquired Fund will receive the number
of full and fractional shares of the Acquiring Fund with a total value equal to
the total value of that shareholder's shares of the Acquired Fund, as of the
close of regularly scheduled trading on the New York Stock Exchange on the
closing date of the Reorganization, which is currently expected to be June 30,
2005 (the "Closing Date").
No gain or loss will be recognized by any Acquired Fund, Acquiring Fund or
shareholder of an Acquired Fund for federal income tax purposes as a result of
the Reorganization. See "Information About the Reorganization -- Federal Income
Tax Consequences."
The Reorganization will not result in any material change in the purchase,
redemption and exchange procedures followed with respect to shares. See
"Comparative Information About the PMF and PIF Funds - Purchases, Redemptions
and Exchanges of Shares."
Each Combination that is approved by shareholders of an Acquired Fund is
expected to become effective as of the close of trading on the New York Stock
Exchange on the Closing Date (the "Effective Time"). The impact of a Combination
on an Acquiring Fund is reflected in the information provided under
"Capitalization" below. Completion of the Reorganization as to any Acquired Fund
is not contingent on approval by shareholders of the corresponding Acquiring
Fund.
Reasons for the Reorganization. Combining the PMF Acquired Funds into PIF
is intended to address persistent distribution issues of the PMF Funds by
combining them into PIF Funds, which are experiencing significant net sales, and
to create a larger family of funds sponsored by Principal Life and managed by
the Manager that is expected to achieve economies of scale and operate with
greater efficiency and lower overall costs. As described above, after the
Reorganization, shareholders of the Acquired Funds will have as additional
investment options, and will be able to exchange their shares with, a number of
PIF Funds in addition to the Acquiring Funds. Each of the Acquired Funds and its
corresponding Acquiring Fund have the same or substantially similar investment
objectives, and many have the same Sub-Advisors. In most cases, the Acquiring
Funds are expected to have the same or lower expense ratios than their
corresponding Acquired Funds. In those instances in which the expense ratios of
an Acquiring Fund are expected to be higher immediately after the
Reorganization, the Manager has agreed to contractually cap expenses so that
they will not exceed pre-Combination expenses for a three-year period in the
case of the Combinations involving the Principal MidCap, Principal Partners
MidCap Growth, Principal Partners SmallCap Growth and Principal Tax-Exempt Bond
Funds, and for a four-year period in the case of the Combination involving the
Principal Bond Fund. Although future expense ratios cannot be known, these
expense cap periods are intended to keep the total expenses borne by
shareholders of these Acquired Funds approximately at or below the same level as
they would have been without the Reorganization. In addition, the Acquiring
Funds generally have had stronger performance records. The discussion below of
each Proposal contains detailed information about the investment objectives and
policies, expense ratios and performance records of the specific Funds involved
in each Combination.
With respect to each Combination, the Acquired Fund's Board believes that
the expected advantages to shareholders outweigh any disadvantages, that the
Combination will be in the best interests of shareholders, and that the
interests of existing shareholders of the Acquired Fund will not be diluted as a
result of the Combination. Factors that the Board considered in deciding to
approve the Reorganization generally are discussed below under "Information
About the Reorganization - Board Consideration of the Reorganization."
Particular factors that the Board considered in approving each individual
Combination of an Acquired Fund are discussed with respect to the Proposal
dealing with that Combination under "Board Consideration of Combination."
The Board of PIF believes that each Combination is in the best interests of
the existing shareholders of the Acquiring Funds and will not dilute the
interests of those shareholders.
Election of Board of Directors of Acquired Funds. Although the
Reorganization contemplates that all the Acquired Funds will be combined into
PIF and will thereafter no longer operate as separate funds, it is possible that
shareholders of one or more of the Acquired Funds will not approve the
Reorganization and that any such Fund will consequently continue as a separate
fund pending further action by its Board of Directors. The Board of Directors of
each of the Acquired Funds has determined that, in view of such possibility and
to avoid the expense of having another proxy solicitation and shareholders
meeting following the Reorganization, the shareholders of each Acquired Fund
will also be asked at the Meeting to elect the Board of Directors of that Fund.
Each person who is a current Director and nominee for election to the Board of
Directors of an Acquired Fund is also a Director of PIF. See Proposal 22
("Election of the Board of Directors of each of the Principal Mutual Funds").
PIF Shareholders Meeting. The Board of Directors of PIF, at a meeting held
on February 24, 2005, called a meeting of shareholders of PIF for May 26, 2005
at which the shareholders of PIF will be asked to approve a number of matters
(the "PIF Shareholders Meeting"). The matters relating to one or more of the
Acquiring Funds include proposals to:
(i) reclassify the investment objective of each of the Acquiring Funds from a
"fundamental" investment policy, which may not be changed without shareholder
approval, to a "non-fundamental" investment policy which may be changed by the
Board without shareholder approval;
(ii) amend the PIF Articles of Incorporation to permit the PIF Board of
Directors, without shareholder approval: (a) to approve combinations involving
the PIF Funds; (b) to liquidate the assets attributable to a PIF Fund or a class
of shares thereof and terminate such Fund or class of shares; and (c) to
designate a class of shares of a PIF Fund as a separate series or PIF Fund, all
for purposes of facilitating future combinations of PIF Funds that the PIF Board
determines are in the best interests of the affected shareholders (see
"Information About the Reorganization - Description of Securities to Be
Issued");
(iii) amend the fundamental investment restriction of each Acquiring Fund with
respect to borrowing to authorize each Acquiring Fund to borrow to the maximum
extent permitted by the 1940 Act (see "Comparative Information About the PMF and
PIF Funds - Fundamental Investment Restrictions");
(iv) permit the Manager to select and contract with Sub-Advisors (other than
Sub-Advisors affiliated with the Manager), after approval by the PIF Board but
without shareholder approval, for the following Acquiring Funds: the PIF
LargeCap Growth, LargeCap Value, LargeCap S&P 500 Index, MidCap Blend, SmallCap
Blend, Real Estate Securities, Bond & Mortgage Securities, Government
Securities, Diversified International, High Quality Short-Term Bond, Money
Market and International Emerging Markets Funds (the shareholders of each of the
corresponding Acquired Funds, except for the Principal LargeCap Stock Index
Fund, have previously authorized these procedures with respect to the Acquired
Fund) (it is expected that, prior to the Reorganization, the initial
shareholders of the PIF Equity Income and Tax-Exempt Bond Funds will also
approve such procedures; the shareholders of each of the corresponding Acquired
Funds have also previously authorized these procedures with respect to the
Acquired Fund); and
(v) approve: (a) a sub-advisory agreement appointing Columbus Circle Investors
("CCI") as the new Sub-Advisor to the PIF LargeCap Growth Fund (see Proposal
8);.(b) sub-sub-advisory agreements appointing Spectrum Asset Management, Inc.
("Spectrum") and Principal Real Estate Investors, LLC ("Principal-REI") as new
sub-sub-advisors to the PIF Equity Income Fund (see Proposal 4); and (c)
sub-sub-advisory agreements appointing Spectrum and Post Advisory Group, LLC
("Post") as new sub-sub-advisors to the PIF Bond & Mortgage Securities Fund (see
Proposal 15). Each of CCI, Spectrum, Post and Principal-REI is an affiliate of
the Manager.
The impact of certain of these proposals on a particular Combination is
discussed under the Proposal with respect to that Combination. The impact of
other proposals is discussed as indicated above under "Information About the
Reorganization" or "Comparative Information About the PMF and PIF Funds."
PROPOSAL 1
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL BALANCED FUND, INC.
INTO THE PIF DISCIPLINED LARGECAP BLEND FUND
(Principal Balanced Fund Only)
Overview
Shareholders of the Principal Balanced Fund, Inc. (the "Acquired Fund")
are being asked to approve the Reorganization providing for the Combination of
that Fund into the PIF Disciplined LargeCap Blend Fund (the "Acquiring Fund").
For a summary discussion of the form and consequences of, and the reasons for,
the Reorganization, see "Overview of the Proposed Reorganization."
Comparison of Acquired and Acquiring Funds
Principal Balanced Fund, Inc. PIF Disciplined LargeCap Blend Fund
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as of $101,008,129 $248,016,738
10/31/2004:
Investment Principal Global is the Sub-Advisor to both Funds.
Sub-Advisor:
Portfolio The portfolio managers for the Acquired Fund The portfolio managers for the Acquiring Fund
Managers: are: are:
--Paul A. Dow, CFA, managing director of U.S. --Mustafa Sagun, CFA, manager of quantitative
equities. research.
--Dirk Laschanzky, CFA, portfolio manager. --Jeffrey A. Schwarte, CFA, associate
portfolio manager and equity analyst.
Investment The Acquired Fund seeks to generate a total The Acquiring Fund seeks long-term growth of
Objectives: return consisting of current income and capital.
long-term growth of capital.
Main Investment The Acquired Fund seeks growth of capital and The Acquiring Fund invests primarily in
Strategies: current income by investing primarily in common stocks of large capitalization
common stocks and corporate bonds. It may companies. Under normal market conditions,
also invest in other equity securities, the Fund invests at least 95% of its assets
government bonds and notes and cash. Though in common stocks of companies with large
the percentages in each category are not market capitalizations (those with market
fixed, common stocks generally represent 40% capitalizations similar to companies in the
to 70% of the Fund's assets. The remainder of S&P 500 Index) (as of December 31, 2004, this
the Fund's assets is invested in bonds and range was between $749 million and $386
cash. billion) at the time of purchase. Market
capitalization is defined as total current
In selecting common stocks, the Sub-Advisor market value of a company's outstanding
looks for companies with predictable earnings common stock.
which are believed to be undervalued. In
response to changes in economic conditions, In selecting securities for investment, the
the Sub-Advisor may change the make-up of the Sub-Advisor looks at stocks with value and/or
portfolio and emphasize different market growth characteristics and constructs an
sectors by buying and selling portfolio stocks. investment portfolio that has a "blend" of
stocks with these characteristics. In
The Fund may invest up to 20% of its assets in managing the assets of the Fund, the
securities of foreign companies. Sub-Advisor does not have a policy of
preferring one of these categories to the
Fixed-income securities are purchased to other. The value orientation emphasizes
generate income and for capital appreciation buying stocks at less than their investment
purposes when the Sub-Advisor believes value and avoiding stocks whose price has
declining interest rates may increase market been artificially built up. The growth
value. Deep discount bonds (those selling at orientation emphasizes buying stocks of
a substantial discount from their face amount) companies whose potential for growth of
may also be purchased. The Fund may also capital and earnings is expected to be above
invest in bonds with speculative average.
characteristics but does not intend to invest
more than 10% of its assets in securities The Sub-Advisor believes that changes in
rated below BBB by Standard & Poor's Rating market expectations drive stock prices. Early
Service or Baa by Moody's Investor Service, identification of improving business
Inc. fundamentals, early identification of positive
change in expectations regarding future
profitability of companies and paying prices
that are below "fair value" for these stocks
will result in investment management success.
The Sub-Advisor's investment process is
designed to systematically identify stocks
with desirable characteristics and combine
these stocks in a risk-managed portfolio to
maximize return potential by controlling risk.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting securities of other issuers,
diversification or concentration of investments and short sales of securities. For a comparison
of the fundamental restrictions of the Funds, see Appendix B to this Proxy
Statement/Prospectus. See also "Comparative Information About the PMF and PIF Funds -
Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt instruments without a fixed maturity).
In addition, both Funds may purchase U.S. government securities, preferred stocks and debt
securities, whether or not convertible into or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its investment objective.
Although the Acquired and Acquiring Funds have similar investment
objectives and strategies in that both seek long-term growth of capital by
investing in common stocks and other equity securities and both may invest in
foreign securities, the Acquired Fund also has current income as an objective
and may invest in government and corporate bonds to a larger extent than the
Acquiring Fund.
The investment objectives and principal investment policies and strategies
of the Acquired Fund and the Acquiring Fund are more fully described in the PMF
Prospectus and the PIF Prospectus, respectively. Additional information about
such policies and the types of securities the Sub-Advisors can select for the
respective Funds is contained in the PMF SAI and the Statement of Additional
Information. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds" below.
For an explanation of debt securities ratings with respect to the Principal
Balanced Fund, see Appendix C to this Proxy Statement/Prospectus.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired and
Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal PIF Disciplined
Balanced Fund LargeCap Blend Fund
(Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount
redeemed/exchanged): 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
- ---------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the
Effective Time of the Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Balanced Fund Class A 0.60% 0.20% 0.46% 1.26%
(Acquired Fund) Class B 0.60% 0.93% 0.54% 2.07%
PIF Disciplined LargeCap Blend Fund Class A 0.60% 0.20% 0.41% 1.21%
(Acquiring Fund) Class B 0.60% 0.93% 0.47% 2.00%
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Balanced Fund Class A $696 $952 $1,227 $2,010
(Acquired Fund) Class B $651 $1,064 $1,493 $2,716
PIF Disciplined LargeCap Blend Fund Class A $691 $937 $1,202 $1,957
(Acquiring Fund) Class B $615 $955 $1,310 $2,028
If you do not sell your shares at the end of the period:
Principal Balanced Fund Class A $696 $952 $1,227 $2,010
(Acquired Fund) Class B $210 $649 $1,114 $2,095
PIF Disciplined LargeCap Blend Fund Class A $691 $937 $1,202 $1,957
(Acquiring Fund) Class B $203 $627 $1,078 $2,028
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal Balanced Fund PIF Disciplined LargeCap Blend Fund
(Acquired Fund) (Acquiring Fund)
0.60% of the first $100 million; 0.60% of the first $500 million;
0.55% of the next $100 million; 0.58% of the next $500 million;
0.50% of the next $100 million; 0.56% of the next $500 million; and
0.45% of the next $100 million; and 0.55% of the excess over $1.5 billion of
0.40% of the excess over $400 million of average daily net assets.
average daily net assets.
Principal Global, the Sub-Advisor to both the Acquired and Acquiring
Funds, is an indirect wholly-owned subsidiary of Principal Life and an affiliate
of the Manager. Its principal offices are located at 801 Grand Avenue, Des
Moines, Iowa 50392. For its services, the Sub-Advisor is paid a fee by the
Manager, and not by either Fund.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Although the Acquired and Acquiring Funds have substantially similar risks
insofar as they both seek long-term growth of capital by investing in common
stocks and other equity securities and both invest in foreign securities, the
Acquired Fund also has current income as an investment objective and may invest
in government and corporate bonds to a greater extent than the Acquiring Fund,
which exposes the Acquiring Fund to different risks. The main risks of the Funds
include:
Risks applicable to both Funds:
Market Because the Funds purchase equity securities, they are subject to the risk that stock prices
Risk: will fall over short or extended periods of time. Individual companies may report poor
results or be negatively effected by industry and/or
economic trends and developments. In response, the price
of securities issued by such companies may decline. These
factors contribute to price volatility.
Foreign Securities Both Funds may invest in foreign securities, which carry risks that are not generally found
Risk: in stocks of U.S. companies. These risks include the loss of value as a result of political,
financial, and economic events in foreign countries. In addition, foreign securities may be
subject to less stringent accounting and disclosure standards than are required of U.S.
companies.
Risks applicable to the Acquired Fund:
Fixed-Income Fixed-income security values change daily. Their prices reflect changes in interest rates,
Securities market conditions and announcements of other economic, political or financial information.
Risk: Securities held by the Fund may be affected by factors such as changing interest rates. When
interest rates rise, the value of fixed-income securities
will generally fall. Conversely, a drop in interest rates
will generally cause an increase in the value of
fixed-income securities.
U.S. Government This Fund may invest in debt and mortgage-backed securities
Sponsored issued by government-sponsored enterprises such as the
Securities Risks: Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association and the Federal Home Loan Banks. Although the issuing agency,
instrumentality or corporation may be chartered or sponsored by the U.S. government, its securities are not
issued or guaranteed by the U.S. Treasury.
Market Segment Risk: Because this Fund invests in both stocks
and bonds, it may underperform stock funds when stocks
are in favor and underperform bond funds when bonds are
in favor.
Risks applicable to the Acquiring Fund:
Market Segment Risk: The Acquiring Fund is subject to the risk that its principal market segment, large
capitalization stocks, may underperform compared to the equity markets as a whole. The
securities purchased by the Fund present greater opportunities for growth because of high
potential earnings growth, but may also involve greater risk than securities that do not have
the same potential. The value of the Fund's equity securities may fluctuate on a daily
basis. As with all mutual funds, as the value of the Fund's assets rise or fall, the Fund's
share price changes. If you sell your shares when their value is less that the price you
paid, you will lose money.
The primary risks of investing in the Acquired and Acquiring Funds also
differ in that the Acquiring Fund may have a slightly greater exposure to
foreign securities risk because a larger portion of the Acquiring Fund's
portfolio may be invested in foreign securities.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Balanced Fund (Acquired Fund)*
Class A (before taxes) 9.32% 0.42% 6.45% N/A 12/18/1987
(after taxes on distributions)** 8.88% -0.26% 4.77% N/A
(after taxes on distributions and sale of 6.27% -0.02% 4.69% N/A
shares)
Class B 8.44% -0.34% 5.87% N/A 12/09/1994
PIF Disciplined LargeCap Blend Fund (Acquiring Fund)
Institutional Class 12/30/2002
- --Class A (before taxes) 12.16% N/A N/A 19.57%
(after taxes on distributions)** 11.98% N/A N/A 18.98%
(after taxes on distributions and sale of 8.11% N/A N/A 16.58%
shares)
- --Class B 11.28% N/A N/A 18.63%
<FN>
- ------------------
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --Although the Acquired Fund and the Acquiring Fund have some differences in
investment objectives, policies and risks, the Board determined that, of all the
series of PIF, the Acquiring Fund offered the best opportunity for affording
shareholders of the Acquired Fund a reasonable measure of continuity in their
investment expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization;
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --Principal Global, the Sub-Advisor to the Acquired Fund, is also the
Sub-Advisor to the Acquiring Fund and may be expected to provide continuity in
the quality of its investment advisory services;
- --The Acquiring Fund has a higher investment management fee rate structure than,
but at current asset levels the management fee rate is the same as that of, the
Acquired Fund, and the Acquiring Fund is expected to have lower overall expense
ratios than the Acquired Fund;
- -- The Acquiring Fund has been operational for a shorter period than the
Acquired Fund, but during their common period of existence has outperformed the
Acquired Fund; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 2
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING
FOR THE COMBINATION OF THE PRINCIPAL CAPITAL VALUE FUND, INC. INTO THE
PIF LARGECAP VALUE FUND
(Principal Capital Value Fund Only)
Overview
Shareholders of the Principal Capital Value Fund, Inc. (the "Acquired
Fund") are being asked to approve the Reorganization providing for the
Combination of that Fund into the PIF LargeCap Value Fund (the "Acquiring
Fund"). For a summary discussion of the form and consequences of, and the
reasons for, the Reorganization, see "Overview of the Proposed Reorganization."
Comparison of Acquired and Acquiring Funds
Principal Capital Value Fund, Inc. PIF LargeCap Value Fund
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as $338,795,730 $122,245,412
of 10/31/2004:
Investment Principal Global is the Sub-Advisor to both Funds.
Sub-Advisor and
Portfolio Manager: The portfolio manager for both Funds is John Pihlblad, CFA, director of quantitative
portfolio management.
Investment Both the Acquired Fund and the Acquiring Fund seek to provide long-term capital growth. In
Objectives: addition, the Acquired Fund has a secondary investment objective of growth of investment
income.
Main Investment Both Funds invest primarily in common stock and other equity securities of large capitalization
Strategies: companies. Under normal market conditions, each Fund invests at least 80% of its assets in
common stocks of companies with large market capitalizations, at the time of purchase, similar
to companies in the Russell 1000 Value Index (as of December 31, 2004, this range was
between $495 million and $385 billion). Up to 20% of the Acquired Fund's total assets may
be invested in foreign securities, whereas up to 25% of the Acquiring Fund's total assets may
be invested in foreign securities.
Both Funds invest in stocks that, in the opinion of the Sub-Advisor, are undervalued in the
marketplace at the time of purchase. Value stocks are often characterized by below average
price/earnings ratios (P/E) and above average dividend yields relative to the overall market.
Securities for each Fund are selected by consideration of the quality and price of individual
issuers rather than forecasting stock market trends. The selection process focuses on four key
elements:
o determination that a stock is selling below its fair
market value;
o early recognition of changes in a company's underlying fundamentals;
o evaluation of the sustainability of fundamental changes; and
o by monitoring a stock's behavior in the market, evaluation of the timeliness of the investment.
The Sub-Advisor focuses on its stock selections on established companies that it believes have
a sustainable competitive advantage. Its constructs a portfolio that is "benchmark aware" in
that it is sensitive to the sector (companies with similar characteristics) and security weights of
its benchmark. However both Funds are actively managed and are prepared to over- or under-
weight sectors and industries differently from the benchmark.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate or
commodities, borrowing money, making loans, underwriting securities of other issuers,
diversification or concentration of investments and short sales of securities. For a comparison
of the fundamental restrictions of the Funds, see Appendix B to this Proxy
Statement/Prospectus. See also "Comparative Information About the PMF and PIF Funds -
Fundamental Investment Restrictions."
Temporary Defensive For temporary defensive purposes in times of unusual or adverse market conditions, both the
Investing: Acquired Fund and the Acquiring Fund may invest without limit in cash and cash equivalents
(which include bank notes, bank certificates of deposit, bankers' acceptances, repurchase
agreements, commercial paper and commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both Funds may purchase U.S. government
securities, preferred stocks and debt securities, whether or not convertible into or carrying
rights for common stock. In taking such defensive measures, either Fund may fail to achieve
its investment objective.
Although the Acquired Fund, but not the Acquiring Fund, has a secondary
investment objective of growth of investment income, both Funds have the same
principal investment objective and the same investment policies, pursue the same
investment strategies and invest in the same kinds of securities.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing" below.
Principal PIF LargeCap
Capital Value Fund Value Fund
(Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
<FN>
- --------------------
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the
Effective Time of the Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Capital Value Fund Class A 0.59% 0.14% 0.22% 0.95%
(Acquired Fund) Class B 0.59% 0.73% 0.32% 1.64%
PIF LargeCap Value Fund Class A 0.45% 0.14% 0.20% 0.79%
(Acquiring Fund) Class B 0.45% 0.73% 0.31% 1.49%
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Capital Value Fund Class A $666 $860 $1,070 $1,674
(Acquired Fund) Class B $580 $849 $1,128 $1,673
PIF LargeCap Value Fund Class A $651 $813 $989 $1,497
(Acquiring Fund) Class B $566 $804 $1,051 $1,501
If you do not sell your shares at the end of the period:
Principal Capital Value Fund Class A $666 $860 $1,070 $1,674
(Acquired Fund) Class B $167 $517 $892 $1,673
PIF LargeCap Value Fund Class A $651 $813 $989 $1,497
(Acquiring Fund) Class B $152 $471 $813 $1,501
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal Capital Value Fund PIF LargeCap Value Fund
(Acquired Fund) (Acquiring Fund)
0.60% of the first $250 million; 0.45% of the first $500 million;
0.55% of the next $250 million; 0.43% of the next $500 million;
0.50% of the next $250 million; 0.41% of the next $500 million; and
0.45% of the next $250 million; and 0.40% of the excess over $1.5 billion
0.40% of the excess over $1 billion of of average daily net assets.
average daily net assets.
Principal Global, the Sub-Advisor to both the Acquired and Acquiring
Funds, is an indirect wholly-owned subsidiary of Principal Life and an affiliate
of the Manager. Its principal offices are located at 801 Grand Avenue, Des
Moines, Iowa 50392. For its services, the Sub-Advisor is paid a fee by the
Manager, and not by either Fund.
At the PIF Shareholders Meeting, shareholders of the Acquiring Fund
will be asked to approve a proposal that will permit the Manager, pursuant to an
SEC order, to select and contract with Sub-Advisors to the Acquiring Fund (other
than Sub-Advisors affiliated with the Manager) after approval by the PIF Board
of Directors but without shareholder approval. If approved by shareholders of
the Acquiring Fund, the proposal will not be implemented until the PIF Board
determines to manage the Acquiring Fund in reliance on the SEC order. The
shareholders of the Acquired Fund have previously approved granting the Manager
comparable authority to select and contract with Sub-Advisors to the Acquired
Fund (other than Sub-Advisors affiliated with the Manager) after approval by the
Board of Directors of the Acquired Fund but without shareholder approval.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek long-term capital
appreciation by investing primarily in a diversified mix of the common stocks
and equity securities of companies with large market capitalizations, they have
substantially the same risks. The main risks include:
Stock Because they both purchase equity securities, the Funds are subject to the risk that stock
Market prices will fall over short or extended periods of time.
Risk: Individual companies may report poor results or be negatively affected by
industry and/or economic trends and developments.
In response, the price of securities issued by such
companies may decline. These factors contribute to price
volatility, which is the principal risk of investing in
the Funds.
Foreign Securities The Funds may invest in foreign securities, which carry risks that are not generally found in
Risk: stocks of U.S. companies. These risks include the loss of value as a result of political,
financial, and economic events in foreign countries. In addition, foreign securities may be
subject to less stringent accounting and disclosure standards than are required of U.S.
companies.
Market Segment Risk: Both of the Funds are subject to the risk
that their principal market segment, large capitalization
value stocks, may underperform compared to other market
segments or to the equity markets as a whole. The value
of each Fund's securities may fluctuate on a daily basis.
As with all mutual funds, as the value of each Fund's
assets rise or fall, the Fund's share price changes. If
you sell your shares when their value is less than the
price you paid, you will lose money.
Value Stocks The Funds' investments in value stocks carry the risk that the
Risk: market will not recognize a security's intrinsic value for a long time or
that a stock judged to be undervalued may actually be appropriately priced.
The primary risks of investing in the Acquired and Acquiring Funds
differ in that the Acquiring Fund may have a slightly greater exposure to
foreign securities risk because a larger portion of the Acquiring Fund's
portfolio may be invested in foreign securities. Because both Funds have the
same principal investment objective and the same investment policies, pursue the
same investment strategies and invest in the same kinds of securities, the
Acquired Fund's secondary investment objective of growth of investment income
does not affect materially the relative risks of investing in the two Funds.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December
31, 2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Capital Value Fund (Acquired Fund)*
Class A (before taxes) 12.06% 1.90% 9.17% N/A 10/15/1969
(after taxes on distributions)** 11.87% 1.40% 7.39% N/A
(after taxes on distributions and sale 8.09% 1.39% 7.18% N/A
of shares)
Class B 11.34% 1.10% 8.52% N/A 12/09/1994
PIF LargeCap Value Fund (Acquiring Fund)
Institutional Class 03/01/2001
- --Class A (before taxes) 12.02% N/A N/A 4.09%
(after taxes on distributions)** 11.24% N/A N/A 3.63%
(after taxes on distributions and sale 8.80% N/A N/A 3.34%
of shares)
- --Class B 11.25% N/A N/A 3.36%
<FN>
- ------------------
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have substantially the same
investment objectives, policies and risks, and their combination will offer
shareholders of the Acquired Fund continuity of investment objectives and
expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --Principal Global, the Sub-Advisor to the Acquired Fund, is also the
Sub-Advisor to the Acquiring Fund and may be expected to provide continuity in
the quality of its investment advisory services and personnel;
- --The Acquiring Fund has a lower investment management fee and is expected to
have lower overall expense ratios than the Acquired Fund;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund, but during the most recent fiscal-year period the two Funds have had
substantially comparable performance; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 3
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE COMBINATION
OF THE PRINCIPAL PARTNERS LARGECAP VALUE FUND, INC.
INTO THE
PIF PARTNERS LARGECAP VALUE FUND
(Principal Partners LargeCap Value Fund Only)
Overview
Shareholders of the Principal Partners LargeCap Value Fund, Inc. (the
"Acquired Fund") are being asked to approve the Reorganization providing for the
Combination of that Fund into the PIF Partners LargeCap Value Fund (the
"Acquiring Fund"). For a summary discussion of the form and consequences of, and
the reasons for, the Reorganization, see "Overview of the Proposed
Reorganization."
Comparison of Acquired and Acquiring Funds
Principal Partners LargeCap Value Fund PIF Partners LargeCap Value Fund
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as $60,644,405 $1,338,684,988
of 10/31/2004:
Investment Alliance Capital Management, L.P. ("Alliance"), through its wholly-owned subsidiary,
Sub-Advisor and AllianceBernstein Investment Research and Management ("Bernstein"), is the Sub-Advisor to both
Portfolio Funds.
Managers:
The portfolio managers for both Funds are:
--Marilyn G. Fedak, CFA, Executive Vice President and Chief Investment Officer
for U.S. Value Equities; and
--John D. Phillips, Jr., CFA, Senior Portfolio Manager - U.S. Value Equities.
Investment Both Funds seek long-term growth of capital.
Objectives:
Main Investment Both Funds invest primarily in undervalued equity securities of companies among the 750
Strategies: largest by market capitalization that the Sub-Advisor believes offer above-average potential
for growth in future earnings. Under normal market
conditions, both Funds generally invest at least 80% of
their assets in common stocks of companies with large
market capitalizations, similar to companies in the Russell
1000 Value Index (as of December 31, 2004, this range was
between $495 million and $385 billion), at the time of
purchase. Each Fund may invest up to 25% of its total
assets in securities of foreign companies.
Bernstein employs an investment strategy, generally
described as "value investing," that involves seeking
securities that:
o exhibit low financial ratios (particularly stock
price-to-book value, or liquidation value, but also
stock price-to-earnings and stock price-to-cash flow);
o can be acquired for less than what Bernstein believes
is the issuer's intrinsic value; or
o have a price which appears attractive relative to the
value of the dividends expected to be paid by the
issuer in the future.
Value oriented investing entails a strong "sell discipline"
in that it generally requires the sale of securities that
have reached their intrinsic value or a target financial
ratio. Value oriented investments may include securities of
companies in cyclical industries during periods when such
securities appear to Bernstein to have strong potential for
capital appreciation or securities of "special situation"
companies. A special situation company is one that
Bernstein believes has potential for significant future
earnings growth but has not performed well in the recent
past. These situations include companies with management
changes, corporate or asset restructuring or significantly
undervalued assets. For Bernstein, identifying special
situation companies and establishing an issuer's intrinsic
value involve fundamental research about such companies and
issuers.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
Because the Acquired and Acquiring Funds both seek long-term growth of
capital by investing primarily in a diversified mix of the common stocks and
equity securities of companies with large market capitalizations, emphasize
value stocks and may invest in foreign securities, they have substantially the
same investment objectives and strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal Partners PIF Partners LargeCap
LargeCap Value Fund Value Fund
(Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
<FN>
- --------------------
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the
Effective Time of the Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Partners LargeCap Value Fund Class A 0.75% 0.25% 0.50% 1.50%*
(Acquired Fund) Class B 0.75% 0.92% 0.56% 2.23%*
PIF Partners LargeCap Value Fund Class A 0.78% 0.25% 0.43% 1.46%
(Acquiring Fund) Class B 0.78% 0.92% 0.50% 2.20%
- ----------
<FN>
* The Manager voluntarily agreed to limit the Acquired Fund's expenses and,
if necessary, pay expenses normally payable by that Fund through the period
ended February 28, 2006. If such expense limit were reflected in the table,
the Acquired Fund's "total fund operating expenses" would be 1.46% for
Class A shares and 2.20% for Class B shares.
</FN>
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Partners LargeCap Value Fund Class A $719 $1,022 $1,346 $2,263
(Acquired Fund) Class B $637 $1,023 $1,424 $2,294
PIF Partners LargeCap Value Fund Class A $715 $1,010 $1,327 $2,221
(Acquiring Fund) Class B $634 $1,014 $1,409 $2,259
If you do not sell your shares at the end of the period:
Principal Partners LargeCap Value Fund Class A $719 $1,022 $1,346 $2,263
(Acquired Fund) Class B $226 $697 $1,195 $2,294
PIF Partners LargeCap Value Fund Class A $715 $1,010 $1,327 $2,221
(Acquiring Fund) Class B $223 $688 $1,180 $2,259
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal Partners LargeCap Value Fund PIF Partners LargeCap Value Fund
(Acquired Fund) (Acquiring Fund)
0.75% of the first $250 million; 0.80% of the first 500 million;
0.70% of the next $250 million; 0.78% of the next $500 million;
0.65% of the next $250 million; 0.76% of the next $500 million; and
0.60% of the next $250 million; and 0.75% of the excess over $1.5 billion
0.55% of the excess over $1 billion of of average daily net assets.
average daily net assets.
Alliance, through Bernstein, is the Sub-Advisor to both the Acquired
and Acquiring Funds. Bernstein is located at 767 Fifth Avenue, New York, New
York 10153, and Alliance is located at 1345 Avenue of the Americas, New York,
New York 10105. For its services, the Sub-Advisor is paid a fee by the Manager,
and not by either Fund.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek long-term growth of
capital by investing primarily in a diversified mix of the common stocks and
equity securities of companies with large market capitalizations, emphasize
value stocks and may invest in foreign securities, they have substantially the
same risks. The main risks include:
Stock Because they both purchase equity securities, the Funds
Market are subject to the risk that stock prices will fall over
Risk: short or extended periods of time. Individual companies
may report poor results or be negatively effected by
industry and/or economic trends and developments.
In response, the price of securities issued by such
companies may decline. These factors contribute to price
volatility, which is the principal risk of investing in
the Funds.
Foreign Securities The Funds may invest in foreign securities, which carry
Risk: risks that are not generally found in stocks of U.S.
companies. These risks include the loss of value as a
result of political, financial, and economic events in
foreign countries. In addition, foreign securities may be
subject to less stringent accounting and disclosure
standards than are required of U.S. companies.
Market Segment The Funds are subject to the risk that their principal
Risk: market segment, large capitalization
stocks, may underperform compared to other market
segments or to the equity markets as a whole. The value
of each Fund's securities may fluctuate on a daily basis.
As with all mutual funds, as the value of each Fund's
assets rises or falls, the Fund's share price changes. If
you sell your shares when their value is less than the
price you paid, you will lose money.
Value Stocks The Funds' investments in value stocks carry the risk
Risk: that the market will not recognize a security's intrinsic
value for a long time or that a stock judged to be
undervalued may actually be appropriately priced.
Active Portfolio Both Funds may actively trade securities in an attempt to
Trading Risk: achieve their investment objectives. High turnover rates
may increase the Funds' trading costs and may have an
adverse impact on their performance.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Partners LargeCap Value Fund
(Acquired Fund)*
Class A (before taxes) 12.95% N/A N/A 7.49% 12/22/2000
(after taxes on distributions)** 12.58% N/A N/A 7.22%
(after taxes on distributions and sale 8.89% N/A N/A 6.35%
of shares)
Class B 12.18% N/A N/A 6.69% 12/22/2000
PIF Partners LargeCap Value Fund (Acquiring Fund)
Institutional Class 12/06/2000
- --Class A (before taxes) 12.58% N/A N/A 7.56%
(after taxes on distributions)** 12.22% N/A N/A 7.12%
(after taxes on distributions and sale 8.64% N/A N/A 6.29%
of shares)
- --Class B 11.75% N/A N/A 6.77%
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have substantially the same
investment objectives, policies and risks, and their combination will offer
shareholders of the Acquired Fund continuity of investment objectives and
expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The fundamental investment restrictions of the two Funds reflect differences
that the Board does not believe are material in light of the benefits of the
Combination;
- --Bernstein, the Sub-Advisor to the Acquired Fund, is also the Sub-Advisor to
the Acquiring Fund and may be expected to provide continuity in the quality of
its investment advisory services and personnel;
- --Although the Acquired Fund has a lower investment management fee, the
Acquiring Fund currently has lower other expenses and an overall expense ratio
that is expected to be comparable to that of the Acquired Fund;
- --The Acquiring Fund has performed somewhat better than the Acquired Fund since
their inception; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 4
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR
THE COMBINATION OF THE PRINCIPAL EQUITY INCOME FUND, INC. INTO
THE PIF EQUITY INCOME FUND
(Principal Equity Income Fund Only)
Overview
Shareholders of the Principal Equity Income Fund, Inc. (the "Acquired
Fund") are being asked to approve the Reorganization providing for the
Combination of that Fund into the PIF Equity Income Fund (the "Acquiring Fund").
For a summary discussion of the form and consequences of, and the reasons for,
the Reorganization, see "Overview of the Proposed Reorganization" above.
Comparison of Acquired and Acquiring Funds
Principal Equity Income Fund, Inc. PIF Equity Income Fund
(Acquired Fund) (Acquiring Fund)
Business A separate Fund. A separate series of PIF
Net assets as of $80,896,763 None. The Acquiring Fund will commence
10/31/2004: operations at the time of the Reorganization.
Investment Principal Global is the Sub-Advisor to both Funds.
Sub-Advisors and
Portfolio The portfolio manager for both Funds is Dirk Laschanzky, CFA, portfolio manager.
Managers:
Investment The Acquired Fund and the Acquiring Fund both seek to achieve high current income and
Objectives: long-term growth of income and capital.
Main Investment The Acquired Fund and the Acquiring Fund both invest primarily in equity securities, preferred
Strategies: securities, real estate investment trusts (REITs) and convertible securities. Under normal
circumstances, both Funds invest at least 80% of their
total assets in equity securities. In selecting securities
for the Funds, Principal Global emphasizes securities with
potentially high dividend yields.
When investing in equity securities, Principal Global seeks
stocks that it believes are undervalued in the marketplace
at the time of purchase. Value stocks are often considered
to be cheap relative to the company's perceived value. Such
stocks may be characterized by below average price-earnings
(P/E) ratios and above average dividend yields relative to
the overall market. Securities are selected by
consideration of the quality and price of individual
issuers rather than forecasting stock market trends. In
selecting preferred securities, Principal Global focuses on
the financial services industry (i.e., banking, insurance
and commercial finance). For a security to be considered,
Principal Global will assess the credit risk within the
context of the yield available on the preferred security.
REITs are corporations or business trusts that are
permitted to eliminate corporate level federal income taxes
by meeting certain requirements of the Internal Revenue
Code. In selecting REITs for the Funds, Principal Global
focuses on equity REITs that primarily own property and
generate revenues from rental income. Principal Global
seeks to diversify the each Fund's REIT holdings by
property types (e.g., apartments, shopping malls, office
and industrial buildings).
Under normal circumstances, at least 25% of the total
assets of the Acquired Fund will be invested in securities
of companies in the utilities industry with no policy to
concentrate in any particular segment of the utilities
industry.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
Both the Acquired Fund and the Acquiring Fund have the same investment
objectives and substantially the same strategies, except that the Acquired Fund,
but not the Acquiring Fund, has a stated strategy of investing at least 25% of
its assets in securities of companies in the utilities industry.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing" below.
Principal Equity Income Fund PIF Equity Income Fund
(Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases (as a %
of offering price): 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC) (as
a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
of amount redeemed/exchanged):
- ---------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the
Effective Time of the Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Equity Income Fund Class A 0.60% 0.24% 0.43% 1.27%
(Acquired Fund) Class B 0.60% 0.92% 0.58% 2.10%
PIF Equity Income Fund * Class A 0.60% 0.24% 0.41% 1.25%
(Acquiring Fund) Class B 0.60% 0.92% 0.56% 2.08%
- ----------------
<FN>
* The Acquiring Fund will not issue shares prior to the Effective Time of the
Reorganization. The estimated expenses for the fiscal year ending October
31, 2005 shown in the table are based on the fees which will be in effect
and on the other expenses which it is estimated the Acquiring Fund will
incur subsequent to the Closing Date. The fees and expenses shown in the
table are intended to reflect those that will be effect on an ongoing basis
after the Combination. They are likely to be different from the actual
expenses of the Acquiring Fund for fiscal year 2005 because the Acquiring
Fund will carry over the financial statements of the Acquired Fund and
report the historical financial information of that Fund for periods prior
to the Effective Time as its own.
</FN>
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
(3) Principal Equity Income Fund Class A $697 $955 $1,232 $2,021
(Acquired Fund) Class B $625 $985 $1,360 $2,120
(2) PIF Equity Income Fund Class A $695 $949 $1,222 $1,999
(Acquiring Fund) Class B $623 $979 $1,350 $2,098
If you do not sell your shares at the end of the period:
(3) Principal Equity Income Fund Class A $697 $955 $1,232 $2,021
(Acquired Fund) Class B $213 $658 $1,129 $2,120
(2) PIF Equity Income Fund Class A $695 $949 $1,222 $1,999
(Acquiring Fund) (Estimated for 2005 Class B $211 $652 $1,119 $2,098
assuming Combination of (1) and (2))
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Funds and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal Equity Income Fund PIF Equity Income Fund
(Acquired Fund) (Acquiring Fund)
0.60% of the first $100 million; 0.60% of the first $500 million;
0.55% of the next $100 million; 0.58% of the next $500 million;
0.50% of the next $100 million; 0.56% of the next $500 million; and
0.45% of the next $100 million; and 0.55% of the excess over $1.5 billion
0.40% of the excess over $400 million of of average daily net assets.
average daily net assets.
Principal Global, the Sub-Advisor to both the Acquired Fund and the
Acquiring Fund, is an indirect wholly-owned subsidiary of Principal Life and an
affiliate of the Manager. Its principal offices are located at 801 Grand Avenue,
Des Moines, Iowa 50392. For its services, the Sub-Advisor is paid a fee by the
Manager, and not by either Fund.
The Board of Directors of PIF has unanimously approved proposed
sub-sub-advisory agreements appointing Spectrum and Principal-REI as new sub-
sub-advisors to the Acquiring Fund. The proposed agreements will be submitted
for approval by shareholders of the Acquiring Fund at the PIF Shareholders
Meeting. Each of Spectrum and Principal-REI is an affiliate of the Manager and a
member of the Principal Financial Group. Spectrum's offices are located at 4
High Ridge Park, Stamford, Connecticut 06905. Principal-REI's offices are
located at 801 Grand Avenue, Des Moines, Iowa 50392.
It is expected that, prior to the Reorganization, the initial
shareholder of the Acquiring Fund will approve a proposal that will permit the
Manager, pursuant to an SEC order, to select and contract with Sub-Advisors to
the Acquiring Fund (other than Sub-Advisors affiliated with the Manager) after
approval by the PIF Board of Directors but without shareholder approval. If
approved by the initial shareholder of the Acquiring Fund, the proposal will not
be implemented until the PIF Board determines to manage the Acquiring Fund in
reliance on the SEC order. The shareholders of the Acquired Fund have previously
approved granting the Manager comparable authority to select and contract with
Sub-Advisors to the Acquired Fund (other than Sub-Advisors affiliated with the
Manager) after approval by the Board of Directors of the Acquired Fund but
without shareholder approval.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both the Acquired and Acquiring Funds seek high current income and
long-term growth of income and capital by investing primarily in equity
securities with high dividend yields, including securities of REITs and of
companies in the utilities industry, they have substantially the same risks. The
main risks include:
Market Because the Funds purchase equity securities, they are subject to the risk that stock prices
Risk: will fall over short or extended periods of time. Individual companies may report poor
results or be negatively effected by industry and/or
economic trends and developments. In response, the price
of securities issued by such companies may decline. These
factors contribute to price volatility.
Interest Rate Changes in interest rates may adversely affect the value of the Funds' portfolio holdings.
Risk: When interest rates rise, the value of preferred securities will generally fall. Conversely,
when interest rates fall, the value of preferred securities will generally rise.
Prepayment or Call Some investments give the issuer the option to call, or redeem, its securities before their
Risk: maturity date. If an issuer calls its security held by a Fund during a time of declining
interest rates, the Fund may have to reinvest the
proceeds in securities with lower rates. In addition,
each Fund's appreciation may be limited by issuer call
options having more value during times of declining
interest rates.
Equity The Funds may invest in equity REITs which are affected by the changes in the value of the
REIT Risk: properties owned by the trust. Equity REITs:
o May not be diversified with regard to types of tenants
(and thus are subject to business developments of the
tenant(s));
o Are dependent upon management skills of the real estate
company;
o May not be diversified with regard to geographic
locations of the properties (and thus are subject to
regional economic developments);
o Are subject to cash flow dependency and defaults by
borrowers; and
o Could fail to qualify for tax-free pass-through of
income under the Internal Revenue Code.
Because the Acquired Fund, but not the Acquiring Fund, has a stated
strategy of investing at least 25% of its assets in utility securities, the
Acquired Fund may have exposure to sector risk, that is, the possibility that
the utilities sector may underperform other sectors or the market as a whole. As
Principal Global allocates more of the Acquired Fund's portfolio holdings to the
utilities sector, the Acquired Fund's performance will be more susceptible to
any business, economic or other developments that generally affect that sector.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds" below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, the annual total return of the Class A and Class B shares of the Acquired
Fund. The Acquiring Fund has not yet commenced operations. After the
Combination, the Acquiring Fund will assume the historical performance of the
Class A and Class B shares of the Acquired Fund as the historical performance
of, respectively, the Class A and B shares of the Acquiring Fund for periods
prior to the Effective Time of the Reorganization.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Equity Income Fund (Acquired Fund)*
Class A (before taxes) 17.35% -0.24% 8.42% N/A 12/16/1992
(after taxes on distributions)** 16.56% -1.89% 6.66% N/A
(after taxes on distributions and sale 11.85% -0.77% 6.59% N/A
of shares)
Class B 16.46% -1.07% 7.86% N/A 12/09/1994
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary. ** After-tax returns are calculated using the historical
highest individual federal marginal income tax rates and do not reflect the
impact of state and local taxes. Actual after-tax returns will depend on an
investor's tax situation and may differ from those shown, and after tax
returns shown are not relevant to investors who hold their Fund shares
through tax-deferred arrangements, such as 401(k) plans or individual
retirement accounts.
</FN>
Board Consideration of the Combination
The Board of Directors of the Acquired Fund unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's' Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by each Board in approving the
Combination of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have the same investment objectives
and substantially the same policies and risks, and their combination will offer
shareholders of the Acquired Fund continuity of investment objectives and
expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --Principal Global, the Sub-Advisor to the Acquired Fund, is also the
Sub-Advisor to the Acquiring Fund and may be expected to provide continuity in
the quality of its investment advisory services and personnel;
- --The Acquiring Fund has the same investment management fee and is expected to
have lower overall expense ratios than the Acquired Fund; the Board considered
the higher breakpoints and fees at breakpoints in the Management Agreement with
the Acquiring Fund to be a negative factor but believed that this factor was
outweighed by the slow rate of the Acquired Fund's asset growth, which meant
there was small likelihood of its reaching a breakpoint any time soon, the
prospects of the Acquiring Fund for a higher rate of asset growth and the other
expected benefits of the Combination;
- --Comparative performance of the Acquired Fund and the Acquiring Fund was not
considered a factor because the Acquiring Fund is newly organized, has no
operating history and will assume the performance of the Acquired Fund; and
- --The Combination of the Acquired Fund into the Acquiring Fund, which is part of
the larger PIF Funds, will provide shareholders of the Acquired Fund on an
ongoing basis with greater prospects for growth, efficient management and
attendant reductions in overall expenses that are available from a larger fund
family.
PROPOSAL 5
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL PARTNERS BLUE CHIP FUND, INC. INTO THE
PIF PARTNERS LARGECAP BLEND FUND I
(Principal Partners Blue Chip Fund Only)
Overview
Shareholders of the Principal Partners Blue Chip Fund, Inc. (the
"Acquired Fund") are being asked to approve the Reorganization providing for the
Combination of that Fund into the PIF Partners LargeCap Blend Fund I (the
"Acquiring Fund"). For a summary discussion of the form and consequences of, and
the reasons for, the Reorganization, see "Overview of the Proposed
Reorganization."
Comparison of Acquired and Acquiring Funds
Principal Partners Blue Chip Fund, Inc. PIF Partners LargeCap Blend Fund I
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as of $149,702,885 $31,660,946
10/31/2004:
Investment Goldman Sachs Asset Management, L.P. ("GSAM") and Wellington Management Company, LLP
Sub-Advisors and ("Wellington") are the Sub-Advisors to both Funds. While the percentage of assets of each
Portfolio fund allocated between these two Sub-Advisors is not fixed, GSAM has been managing
Managers: approximately 70% of each Fund's assets and Wellington has been managing approximately 30% of
each Fund's assets, and it is expected that these
allocations will continue immediately after the Effective
Time.
The GSAM portfolio managers for both Funds are:
--Melissa R. Brown, CFA, senior portfolio manager;
--Gary Chropuvka, CFA, member of the Portfolio Management Team; and
--Robert C. Jones, CFA, Chief Investment Officer and senior portfolio manager.
The Wellington portfolio managers for both Funds are:
--Maya K. Bittar, Vice President;
--Jeffrey L. Kripke, Vice President;
--Matthew E. Megargel, Senior Vice President and Partner; and
--Michael D. Rodier, Vice President.
Both Funds seek long-term growth of capital.
Main Investment Both Funds seek their investment objective through investment in a broadly diversified
Strategies: portfolio of large cap and blue chip equity investments representing all major sectors of the
U.S. economy. Under normal conditions, both Funds invest at
least 80% of their assets (not including securities lending
collateral and any investment of that collateral) in common
stocks of companies with large market capitalizations,
similar to the capitalizations of companies in the S&P 500
Index (as of December 31, 2004, this range was between $749
million and $386 billion), measured at the time of
purchase. Market capitalization is defined as total current
market value of a company's outstanding common stock. Up to
20% of the Acquired Fund's total assets may be invested in
foreign securities, whereas up to 25% of the Acquiring
Fund's total assets may be invested in foreign securities.
Blue chip companies are identified by size (market
capitalization), established history of earnings and
dividends, easy access to credit, superior management
structure and good industry position.
GSAM selects investments for each Fund using both a variety
of quantitative techniques and fundamental research in
seeking to maximize a Fund's expected return, while
maintaining risk, style, capitalization and industry
characteristics similar to the S&P 500 Index. GSAM seeks a
broad representation in most major sectors of the U.S.
economy and a portfolio consisting of companies with
average long-term earnings growth expectations and dividend
yields. GSAM seeks to outperform the S&P 500 Index by
overweighting stocks that are more likely to outperform the
benchmark while underweighting stocks that it believes will
lag the index. GSAM seeks to add value from stock selection
rather than sector rotation strategies or market timing.
Its approach is to combine traditional fundamental analysis
with sophisticated quantitative modeling and to carefully
construct and manage the risk in the portfolio.
GSAM uses a proprietary multi-factor model, a rigorous
computerized rating system. This quantitative investment
model is used to identify securities within a broadly
diversified portfolio of large capitalization and blue chip
companies that may exhibit the potential for above-average
returns. From this list of companies, GSAM applies a
quantitative analysis to select companies that it believes
will closely track the S&P 500 Index.
Wellington employs a two-fold investment approach that
combines top-down sector analysis and bottom-up security
selection. Macro-economic data including GDP growth rates,
employment gains, as well as the outlook for inflation and
interest rates, is considered to identify sectors and
industries that Wellington believes will grow faster than
the economy over the next 12 to 18 months.
Wellington then selects portfolio investments on the basis
of fundamental analysis, which it utilizes to identify
those securities that provide the potential for long-term
growth of capital. Fundamental analysis involves assessing
a company and its business environment, management, balance
sheet, income statement, anticipated earnings and dividends
and other related measures of value. When selecting
securities of issuers domiciled outside the U.S.,
Wellington also monitors and evaluates the economic and
political climate and the principal securities markets of
the country in which each company is located. Securities
are sold when the investment has achieved its intended
purpose or is no longer considered attractive.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
The Acquired and Acquiring Funds have the same investment objectives
and substantially the same investment strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisors can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal PIF LargeCap
Partners Blue Chip Fund Blend Fund I
(Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
- ---------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the
Effective Time of the Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Partners Blue Chip Fund Class A 0.60% 0.19% 0.46% 1.25%
(Acquired Fund) Class B 0.60% 0.93% 0.52% 2.05%
PIF Partners LargeCap Blend Fund I Class A 0.45% 0.19% 0.43% 1.07%
(Acquiring Fund) Class B 0.45% 0.93% 0.50% 1.88%
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Partners Blue Chip Fund Class A $695 $949 $1,222 $1,999
(Acquired Fund) Class B $620 $970 $1,335 $2,078
PIF Partners LargeCap Blend Fund I Class A $678 $896 $1,131 $1,806
(Acquiring Fund) Class B $603 $920 $1,249 $1,890
If you do not sell your shares at the end of the period:
Principal Partners Blue Chip Fund Class A $695 $949 $1,222 $1,999
(Acquired Fund) Class B $208 $643 $1,103 $2,078
PIF Partners LargeCap Blend Fund I Class A $678 $896 $1,131 $1,806
(Acquiring Fund) Class B $191 $591 $1,016 $1,890
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal Partners Blue Chip Fund (Acquired PIF Partners LargeCap Blend Fund I
Fund) (Acquiring Fund)
0.60% of the first $250 million; 0.45% of the first 500 million;
0.55% of the next $250 million; 0.43% of the next $500 million;
0.50% of the next $250 million; 0.41% of the next $500 million; and
0.45% of the next $250 million; and 0.40% of the excess over $1.5 billion
0.40% of the excess over $1 billion of of average daily net assets.
average daily net assets.
GSAM and Wellington are the Sub-Advisors to both the Acquired and
Acquiring Funds. GSAM is part of the Investment Management Division of Goldman,
Sachs & Co. GSAM's principal offices are located at 32 Old Slip, New York, New
York 10005. Wellington is a Massachusetts limited liability partnership with its
principal offices located at 75 State Street, Boston, Massachusetts 02109. For
their services, the Sub-Advisors are paid a fee by the Manager, and not by
either Fund.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek long-term capital
appreciation by investing primarily in a diversified mix of the common stocks
and equity securities of companies with large market capitalizations, and both
may invest in foreign securities, they have substantially the same risks. The
primary risks include:
Stock Because they both purchase equity securities, the Funds are subject to the risk that stock prices
Market will fall over short or extended periods of time. Individual companies may report poor results or be
Risk: negatively effected by industry and/or economic trends and developments. In response, the price of
securities issued by such companies may decline. These
factors contribute to price volatility, which is the
principal risk of investing in the Funds.
Foreign The Funds may invest in foreign securities, which carry risks that are not generally found in stocks
Securities of U.S. companies. These risks include loss of value as a result of political, financial, and
Risk: economic events in foreign countries. In addition, foreign securities may be subject to less
stringent accounting and disclosure standards than are required of U.S. companies.
Value Stocks The Funds' investments in value stocks carry the risk that the market will not recognize a security's
Risk: intrinsic value for a long time or that a stock judged to be undervalued may actually be
appropriately priced.
Growth Stock Because growth securities typically do not make dividend payments to shareholders, investment returns
Risk: are based on capital appreciation, making returns more dependent on market increases and decreases.
Growth stocks may therefore be more volatile than non-growth stocks.
Market Segment Both Funds are subject to the risk that their principal market segment, large capitalization stocks,
Risk: may underperform compared to other market segments or to the equity markets as a whole. Because
certain of the securities purchased by the Funds present
greater opportunities for growth due to high earnings growth
potential, they may also involve greater risk than securities
that do not have the same potential. The value of each Fund's
securities may fluctuate on a daily basis. As with all mutual
funds, as the value of the Funds' assets rise or fall, the
Funds' share prices change. If you sell your shares when
their value is less than the price you paid, you will lose
money.
The primary risks of investing in the Acquired and Acquiring Funds
differ in that the Acquiring Fund may have a slightly greater exposure to
foreign securities risk because a larger portion of the Acquiring Fund's
portfolio may be invested in foreign securities.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds" below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Partners Blue Chip Fund (Acquired Fund)*
Class A (before taxes) 10.72% -5.22% 6.96% N/A 03/01/1991
(after taxes on distributions)** 10.60% -5.29% 6.32% N/A
(after taxes on distributions and sale of 7.12% -4.37% 5.84% N/A
shares)
Class B 9.85% -5.90% 6.37% N/A 12/09/1994
PIF Partners LargeCap Blend Fund I (Acquiring Fund)
Institutional Class 03/01/2001
- --Class A (before taxes) 10.37% N/A N/A -1.45%
(after taxes on distributions)** 10.17% N/A N/A -1.75%
(after taxes on distributions and sale of 7.00% N/A N/A -1.37%
shares)
- --Class B 9.48% N/A N/A -2.25%
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary. ** After-tax returns are calculated using the historical
highest individual federal marginal income tax rates and do not reflect the
impact of state and local taxes. Actual after-tax returns will depend on an
investor's tax situation and may differ from those shown, and after tax
returns shown are not relevant to investors who hold their Fund shares
through tax-deferred arrangements, such as 401(k) plans or individual
retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have the same investment objectives
and substantially the same investment policies and risks, and their combination
will offer shareholders of the Acquired Fund continuity of investment objectives
and expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --GSAM and Wellington, the Sub-Advisors to the Acquired Fund, are also the
Sub-Advisors to the Acquiring Fund and may be expected to provide continuity in
the quality of their investment advisory services and personnel;
- --The Acquiring Fund has a lower investment management fee and is expected to
have lower overall expense ratios than the Acquired Fund;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund, but during their common period of existence has performed somewhat better
than the Acquired Fund; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 6
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL PARTNERS LARGECAP BLEND FUND, INC. INTO THE PIF
PARTNERS LARGECAP BLEND FUND
(Principal Partners LargeCap Blend Fund Only)
Overview
Shareholders of the Principal Partners LargeCap Blend Fund, Inc. (the
"Acquired Fund") are being asked to approve the Reorganization providing for the
Combination of that Fund into the PIF Partners LargeCap Blend Fund (the
"Acquiring Fund"). For a summary discussion of the form and consequences of, and
the reasons for, the Reorganization, see "Overview of Proposed Reorganization."
Comparison of Acquired and Acquiring Funds
Principal Partners LargeCap Blend PIF Partners LargeCap Blend
Fund, Inc. Fund
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as $61,647,500 $593,171,782
of 10/31/2004:
Investment T. Rowe Price Associates, Inc. ("T. Rowe Price") is the Sub-Advisor to both Funds.
Sub-Advisor and
Portfolio The portfolio managers for both Funds are:
Managers: --William J. Stromberg, CFA, Vice President and Director of Global Research; and
--Richard T. Whitney, CFA, Vice President and a portfolio manager in the Systematic
Equity Group.
Investment Both Funds seek to provide long-term growth of capital.
Objectives:
Main Investment Both Funds pursue their investment objectives by investing primarily in equity securities of
Strategies: U.S. companies. Under normal market conditions, both Funds invest at least 80% of their
assets in common stocks of companies with large market
capitalizations, which are those with market
capitalizations within the range of companies in the
Standard & Poor's 500 Stock Index (the "S&P 500 Index") (as
of December 31, 2004, this range was between $386 million
and $749 billion), at the time of purchase. The Sub-Advisor
uses a disciplined portfolio construction process whereby
it weights each sector approximately the same as the S&P
500 Index. Individual holdings within each sector, and
their weights within the portfolio, can vary substantially
from the S&P 500 Index.
A team of equity analysts is directly responsible for
selecting stocks for each Fund. Analysts select stocks from
the industries they cover based on rigorous fundamental
analysis that assesses the quality of the business
franchise, earnings growth potential for the company and
stock valuation. Both Funds seek to take advantage of the
analysts' focused expertise in their industries. A team of
portfolio managers supervises the analysts and is
responsible for the overall structure of each Fund. The
team oversees the quantitative analysis that helps the
analysts mange their industry-specific portfolios.
Companies with similar characteristics may be grouped
together in broad categories called sectors. In determining
the amount to invest in a security, the Sub-Advisor limits
each Fund's exposure to each business sector that comprises
the S&P 500 Index. In pursuing the Funds' investment
objectives, the Sub-Advisor has discretion to purchase some
securities that do not meet its normal investment criteria,
as described above, when it perceives an unusual
opportunity for gain. These special situations might arise
when the Sub-Advisor believes a security could increase in
value for a variety of reasons, including a change in
management, an extraordinary corporate event or a temporary
imbalance in the supply of or demand for the securities.
Each Fund will generally remain fully invested, with less
than 5% cash reserves, and will be sector neutral when
compared to the S&P 500 Index. While the majority of assets
will be invested in large capitalization U.S. companies,
small and mid-capitalization and foreign stocks (up to 25%
of each Fund's assets) may also be purchased, in keeping
with each Fund's objective. Futures and options may be
employed from time to time to manage flows of cash into and
out of the Funds. Securities may be sold for a variety of
reasons, such as to secure gains, limit losses or re-deploy
assets into more promising opportunities.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
The Acquired and Acquiring Funds have the same investment objectives
and strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal Partners PIF Partners LargeCap
LargeCap Blend Fund Blend Fund
(Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
- ------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the time
of Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Partners LargeCap Blend Fund Class A 0.75% 0.25% 0.52% 1.52%*
(Acquired Fund) Class B 0.75% 0.93% 0.56% 2.24%*
PIF Partners LargeCap Blend Fund Class A 0.75% 0.25% 0.47% 1.43%
(Acquiring Fund) Class B 0.75% 0.93% 0.51% 2.18%
- --------------
<FN>
* The Manager voluntarily agreed to limit the Acquired Fund's expenses and,
if necessary, pay expenses normally payable by that Fund through the period
ended February 28, 2006. If such expense limit were reflected in the table,
the Acquired Fund's "total fund operating expenses" would be 1.48% for
Class A shares and 2.22% for Class B shares.
</FN>
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Partners LargeCap Blend Fund Class A $721 $1,028 $1,356 $2,283
(Acquired Fund) Class B $638 $1,026 $1,429 $2,309
PIF Partners LargeCap Blend Fund Class A $712 $1,001 $1,312 $2,190
(Acquiring Fund) Class B $632 $1,008 $1,399 $2,234
If you do not sell your shares at the end of the period:
Principal Partners LargeCap Blend Fund Class A $721 $1,028 $1,356 $2,283
(Acquired Fund) Class B $227 $700 $1,200 $2,309
PIF Partners LargeCap Blend Fund Class A $712 $1,001 $1,312 $2,190
(Acquiring Fund) Class B $222 $682 $1,169 $2,234
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal Partners LargeCap Blend Fund PIF Partners LargeCap Blend Fund
(Acquired Fund) (Acquiring Fund)
0.75% of the first $250 million; 0.75% of the first 500 million;
0.70% of the next $250 million; 0.73% of the next $500 million;
0.65% of the next $250 million; 0.71% of the next $500 million; and
0.60% of the next $250 million; and 0.70% of the excess over $1.5 billion
0.55% of the excess over $1 billion of of average daily net assets.
average daily net assets.
T. Rowe Price, the Sub-Advisor to both the Acquired and Acquiring
Funds, is a wholly owned subsidiary of T. Rowe Price Group, a financial services
holding company. Its principal offices are located at 100 East Pratt Street,
Baltimore, Maryland 21202. For its services, the Sub-Advisor is paid a fee by
the Manager, and not by either Fund.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek long-term capital
appreciation by investing primarily in a diversified mix of the common stocks
and equity securities of companies with large market capitalizations, and both
may invest in foreign securities, they have substantially the same risks. The
primary risks include:
Stock Because both Funds purchase equity securities, they are subject to the risk that stock prices
Market will fall over short or extended periods of time. Individual companies may report poor
Risk: results or be negatively effected by industry and/or economic trends and developments. In
response, the price of securities issued by such
companies may decline. These factors contribute to price
volatility, which is the principal risk of investing in
the Funds.
Sector Risk: Both Funds are also subject to sector risk, which
is the possibility that a certain sector may underperform
other sectors or the market as a whole. As the
Sub-Advisor allocates more of a Fund's portfolio holdings
to a particular sector, performance of that Fund will be
more susceptible to any economic, business or other
developments that generally affect that sector.
Foreign Securities The Funds may invest in foreign securities, which carry risks that are not generally found in
Risk: stocks of U.S. companies. These risks include loss of value as a result of political,
financial, and economic events in foreign countries. In addition, foreign securities may be
subject to less stringent accounting and disclosure standards than are required of U.S.
companies.
Market Segment Risk: Each Fund is subject to the risk that its principal market segment, large capitalization
value stocks, may underperform compared to other market segments or to the equity markets as
a whole. Because certain of the securities purchased by each Fund present greater
opportunities for growth, they may also involve greater risks than securities that do not
have the same potential. The value of each Fund's securities may fluctuate on a daily
basis. As with all mutual funds, as the value of each Fund's assets rise or fall, the Fund's
share price changes. If you sell your shares when their value is less than the price you
paid, you will lose money.
Growth Stock Risk: Because growth securities typically do not
make dividend payments to shareholders, investment
returns are based on capital appreciation, making returns
more dependent on market increases and decreases. Growth
stocks may therefore be more volatile than non-growth
stocks to market changes.
Value Stock Risk: The Funds may invest in value stocks, which
carry the risk that the market will not recognize a
security's intrinsic value for a long time or that a
stock judged to be undervalued may actually be
appropriately priced.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Partners LargeCap Blend Fund (Acquired Fund)*
Class A (before taxes) 9.57% N/A N/A 1.55% 12/22/2000
(after taxes on distributions)** 8.99% N/A N/A 1.42%
(after taxes on distributions and sale 6.96% N/A N/A 1.32%
of shares)
Class B 8.85% N/A N/A 0.81% 12/22/2000
PIF Partners LargeCap Blend Fund (Acquiring Fund)
Institutional Class 12/06/2000
- --Class A (before taxes) 9.59% N/A N/A 1.27%
(after taxes on distributions)** 8.46% N/A N/A 0.84%
(after taxes on distributions and sale 7.46% N/A N/A 0.96%
of shares)
- --Class B 8.81% N/A N/A 0.54%
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have the same investment objectives,
policies and risks, and their combination will offer shareholders of the
Acquired Fund continuity of investment objectives and expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The fundamental investment restrictions of the two Funds reflect differences
that the Board does not believe are material in light of the benefits of the
Combination;
- --T. Rowe Price, the Sub-Advisor to the Acquired Fund, is also the Sub-Advisor
to the Acquiring Fund and may be expected to provide continuity in the quality
of its investment advisory services and personnel;
- --The Acquiring Fund has the same investment management fee but is expected to
have lower overall expense ratios than the Acquired Fund; the Board considered
the higher breakpoints and fees at breakpoints in the Management Agreement with
the Acquiring Fund to be a negative factor but believed that this factor was
outweighed by the slow rate of the Acquired Fund's asset growth, which meant
there was small likelihood of its reaching a breakpoint any time soon, the
prospects of the Acquiring Fund for a higher rate of asset growth and the other
expected benefits of the Combination;
- --Although the Acquired Fund has historically generally outperformed the
Acquiring Fund, the two Funds for the short-term have closely comparable
performance; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 7
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL LARGECAP STOCK INDEX FUND, INC. INTO THE PIF
LARGECAP S&P 500 INDEX FUND
(Principal LargeCap Stock Index Fund Only)
Overview
Shareholders of the Principal LargeCap Stock Index Fund, Inc. (the
"Acquired Fund") are being asked to approve the Reorganization providing for the
Combination of that Fund into the PIF LargeCap S&P 500 Index Fund (the
"Acquiring Fund"). For a summary discussion of the form and consequences of, and
the reasons for, the Reorganization, see "Overview of the Proposed
Reorganization."
At the time of the Reorganization, the Acquired Fund will have
outstanding only Class A shares. Consequently, the Acquiring Fund will issue
only Class A shares in connection with the Reorganization.
Comparison of Acquired and Acquiring Funds
Principal LargeCap Stock Index Fund, Inc. PIF LargeCap S&P 500 Index Fund
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as $66,142,974 $521,098,582
of 10/31/2004:
Investment Principal Global is the Sub-Advisor to both Funds.
Sub-Advisor and
Portfolio Manager: The portfolio manager for both Funds is Dirk Laschanzky, CFA, portfolio manager.
Investment Both Funds seek to provide long-term growth of capital.
Objectives:
Main Investment Under normal market conditions, both Funds invest at least 80% of their assets in common
Strategies: stocks of companies that compose the Standard & Poor's 500 Index (the "S&P 500 Index"). The
Sub-Advisor attempts to mirror the investment performance
of the S&P 500 Index by allocating each Fund's assets in
approximately the same weightings as that index. The S&P
500 Index is an unmanaged index of 500 common stocks chosen
to reflect the industries of the U.S. economy and is often
considered a proxy for the stock market in general. Each
stock is weighted by its market capitalization, which means
that larger companies have greater representation in the
S&P 500 Index than smaller ones. Over the long term, the
Sub-Advisor seeks a very close correlation between
performance of each Fund, before expenses, and that of the
S&P 500 Index. It is unlikely that a perfect correlation of
1.00 will be achieved.
Both Funds use an indexing strategy and are not managed
according to traditional methods of "active" investment
management. Active management would include buying and
selling securities based on economic, financial and
investment judgment. Instead, both Funds use a passive
investment approach. Rather than judging the merits of a
particular stock in selecting investments, the Sub-Advisor
focuses on tracking the S&P 500 Index. The Sub-Advisor may
also use stock index futures as a substitute for the sale
or purchase of securities. It does not attempt to manage
market volatility, use defensive strategies or reduce the
effect of any long term periods of poor stock performance.
The correlation between each Fund's performance and that of
the S&P 500 Index may be affected by the Fund's expenses,
changes in securities markets, changes in the composition
of the S&P 500 Index and the timing of purchases and sales
of the Fund's shares. Both Funds may invest in futures and
options, which could carry additional risks such as losses
due to unanticipated market price movements, and could also
reduce the opportunity for gain.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
The Acquired and Acquiring Funds have the same investment objectives
and strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing" below.
Principal LargeCap Stock PIF LargeCap S&P 500
Index Fund (Acquired Fund) Index Fund
(Acquiring Fund)
Class A Class A
Maximum sales charge imposed on purchases
(as a % of offering price): 1.50%(1) 1.50%(1)
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.25%(2) 0.25%(2)
Redemption or Exchange Fee (as a % of amount 1.00%(3)(4) 1.00%(3)(4)
redeemed/exchanged):
- ------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(4) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A shares) for the fiscal year ended October
31, 2004, and (b) the estimated ratio of expenses to average net assets of the
Acquiring Fund (Class A shares) for the year ending October 31, 2005. The Class
A shares of the Acquiring Fund are a new share class which the Acquiring Fund
does not intend to sell prior to the time of Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal LargeCap Stock Index Fund Class A 0.35% 0.15% 0.51% 1.01%*
(Acquired Fund)
PIF LargeCap S&P 500 Index Fund Class A 0.15% 0.15% 0.46% 0.76%
(Acquiring Fund)
- -------------
<FN>
* The Manager voluntarily agreed to limit the Acquired Fund's expenses and,
if necessary, pay expenses normally payable by that Fund through the period
ended February 28, 2006. If such expense limit were reflected in the table,
the Acquired Fund's "total fund operating expenses" would be 0.90% for
Class A shares.
</FN>
Examples: The following examples are intended to help you compare the costs of
investing in Class A shares of the Acquired and Acquiring Funds. The examples
assume that Fund expenses continue at the rates shown in the table above, that
you invest $10,000 in the particular Fund for the time periods indicated and
that all dividends and distributions are reinvested. The examples also assume
that your investment has a 5% return each year. The examples should not be
considered a representation of future expenses of the Acquired or Acquiring
Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal LargeCap Stock Index Fund Class A $251 $467 $699 $1,368
(Acquired Fund)
PIF LargeCap S&P 500 Index Fund Class A $78 $243 $422 $942
(Acquiring Fund)
If you do not sell your shares at the end of the period:
Principal LargeCap Stock Index Fund Class A $251 $467 $699 $1,368
(Acquired Fund)
PIF LargeCap S&P 500 Index Fund Class A $78 $243 $422 $942
(Acquiring Fund)
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal LargeCap Stock Index Fund PIF LargeCap S&P 500 Index Fund
(Acquired Fund) (Acquiring Fund)
0.35% of average daily net assets. 0.15% of average daily net assets.
Principal Global, the Sub-Advisor to both the Acquired and Acquiring
Funds, is an indirect wholly-owned subsidiary of Principal Life and an affiliate
of the Manager. Its principal offices are located at 801 Grand Avenue, Des
Moines, Iowa 50392. For its services, the Sub-Advisor is paid a fee by the
Manager, and not by either Fund.
At the PIF Shareholders Meeting, shareholders of the Acquiring Fund
will be asked to approve a proposal that will permit the Manager, pursuant to an
SEC order, to select and contract with Sub-Advisors to the Acquiring Fund (other
than Sub-Advisors affiliated with the Manager) after approval by the PIF Board
of Directors but without shareholder approval. If approved by shareholders of
the Acquiring Fund, the proposal will not be implemented until the PIF Board
determines to manage the Acquiring Fund in reliance on the SEC order. The
Manager currently does not have authority to select and contract with
Sub-Advisors to the Acquired Fund (other than Sub-Advisors affiliated with the
Manager) after approval by the Board of Directors of the Acquired Fund but
without shareholder approval.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek long-term capital
appreciation by investing primarily in common stocks of companies with large
market capitalizations, they have the same risks. The primary risks include:
Stock Because both Funds purchase equity securities, they are subject to the risk that stock prices
Market will fall over short or extended periods of time. Individual companies may report poor
Risk: results or be negatively effected by industry and/or economic trends and developments. In
response, the price of securities issued by such
companies may decline. These factors contribute to price
volatility, which is the principal risk of investing in
the Funds.
Indexing Because of the difficulty and expense of executing relatively small stock trades, each Fund
Risk: may not always be invested in the less heavily weighted S&P 500 Index stocks. At times, a
Fund's portfolio may be weighted differently from the S&P
500 Index, particularly if a Fund has a small level of
assets to invest. In addition, a Fund's ability to match
the performance of the S&P 500 Index is affected to some
degree by the size and timing of cash flows into and out
of the Fund; each Fund is managed to minimize these
effects. The Sub-Advisor reserves the right to omit or
remove any of the S&P 500 Index stocks from a Fund if it
determines that the stock is not sufficiently liquid or
if extraordinary events or financial conditions lead the
Sub-Advisor to believe that the stock should not be part
of a Fund's portfolio.
Market Segment Risk: Each Fund is subject to the risk that its principal market segment, large capitalization
stocks, may underperform compared to other market segments or to the equity markets as a
whole. Because different types of stocks tend to shift in and out of favor depending on the
market and economic conditions, each Fund's performance may sometimes be lower or higher than
that of other types of funds. The value of each Fund's securities may fluctuate on a daily
basis. As with all mutual funds, as the value of each Fund's assets rise or fall, the Fund's
share price changes. If you sell your shares when their value is less than the price you
paid, you will lose money.
Growth Stock Because growth securities typically do not make dividend payments to shareholders, investment
Risk: returns are based on capital appreciation, making returns more dependent on market increases
and decreases. Growth stocks may therefore be more volatile than non-growth
stocks to market changes.
Value Stock The Funds may invest in value stocks, which carry the risk that the market will not recognize a
Risk: security's intrinsic value for a long time or that a stock judged to be undervalued may actually
be appropriately priced.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds" below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A shares of the Acquired Fund and
(ii) the annual total return of the Institutional Class shares of the Acquiring
Fund adjusted to reflect the expenses of the new Class A share class of the
Acquiring Fund. The adjustments result in lower performance than the historical
performance of the Institutional Class shares. The Class A shares of the
Acquiring Fund will not become operational until the Effective Time of the
Reorganization and will assume for periods prior to that time the historical
performance of the Institutional Class shares adjusted to reflect the expenses
of the new share class.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal LargeCap Stock Index Fund (Acquired Fund)
Class A (before taxes) 9.75% N/A N/A -1.80% 03/01/2000
(after taxes on distributions)* 9.59% N/A N/A -2.00%
(after taxes on distributions and sale 6.56% N/A N/A -1.62%
of shares)
PIF LargeCap S&P 500 Index Fund (Acquiring Fund)
Institutional Class 03/01/2001
- --Class A (before taxes) 10.00% N/A N/A 0.11%
(after taxes on distributions)* 8.70% N/A N/A -0.47%
(after taxes on distributions and sale 8.20% N/A N/A -0.06%
of shares)
- ------------------
<FN>
* After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have the same investment objectives,
policies and risks, and their combination will offer shareholders of the
Acquired Fund continuity of investment objectives and expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The fundamental investment restrictions of the two Funds reflect differences
that the Board does not believe are material in light of the benefits of the
Combination;
- --Principal Global, the Sub-Advisor to the Acquired Fund, is also the
Sub-Advisor to the Acquiring Fund and may be expected to provide continuity in
the quality of its investment advisory services and personnel;
- --The Acquiring Fund has a lower investment management fee and is expected to
have lower overall expense ratios than the Acquired Fund;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund, but during their common period of existence has performed somewhat better
than the Acquired Fund; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 8
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL GROWTH FUND, INC. INTO THE
PIF LARGECAP GROWTH FUND
(Principal Growth Fund Only)
Overview
Shareholders of the Principal Growth Fund, Inc. (the "Acquired Fund")
are being asked to approve the Reorganization providing for the Combination of
that Fund into the PIF LargeCap Growth Fund (the "Acquiring Fund"). For a
summary discussion of the form and consequences of, and the reasons for, the
Reorganization, see "Overview of Proposed Reorganization."
Comparison of Acquired and Acquiring Funds
Principal Growth Fund, Inc. PIF LargeCap Growth Fund
(Acquired Fund) (Acquiring Fund)
Business: A separate fund. A separate series of PIF.
Net assets as $293,163,497 $140,675,270
of 10/31/2004:
Investment Principal Global is the Sub-Advisor to the Columbus Circle Investors ("CCI") is the
Sub-Advisors: Acquired Fund. Sub-Advisor to the Acquiring Fund.*
Portfolio Manager: The portfolio manager for both Funds is Anthony Rizza, CFA, portfolio manager.
* Effective January 5, 2005, the PIF Board of Directors
appointed CCI as the new Sub-Advisor to the Acquiring Fund
on an interim basis pursuant to Rule 15a-4 under the 1940
Act. The PIF Board has directed that such appointment be
submitted for approval to shareholders of the Acquiring
Fund at the PIF Shareholders Meeting. See "Investment
Management Fees/Sub-Advisory Arrangements" below.
Investment The Acquired Fund seeks long-term growth of The Acquiring Fund seeks long-term growth of
Objectives: capital and secondarily growth of investment capital.
income through the purchase primarily of
common stocks, but
the Fund may invest in other securities.
Main Investment Both Funds invest primarily in common stocks and other equity securities of large
Strategies: capitalization companies with strong earnings growth potential. Under normal market
conditions, both Funds invest at least 80% of their assets
in common stocks of companies with large market
capitalizations, similar to companies in the Russell 1000
Growth Index (as of December 31, 2004, this range was
between $495 million and $385 billion), at the time of
purchase. Market capitalization is defined as total current
market value of a company's outstanding common stock.
For both Funds, the Sub-Advisor uses a bottom-up approach
(focusing on individual stock selection rather than
forecasting stock market trends) in its selection of
individual securities that it believes have an above
average potential for earnings growth. Selection is based
on fundamental analysis of a company relative to other
companies with the focus being on the Sub-Advisor's
assessment of current and future sales growth and operating
margins. Companies meeting these criteria typically have
progressed beyond the development stage and are focused on
growing the business. Up to 20% of the Acquired Fund's
total assets may be invested in foreign securities, whereas
up to 25% of the Acquiring Fund's total assets may be
invested in foreign securities.
The Sub-Advisor places strong emphasis on companies it
believes are guided by high quality management teams with a
proven ability to execute. In addition, both Funds attempt
to identify and emphasize those companies that are market
leaders possessing the ability to control pricing and
margins in their respective industries. The Sub-Advisor
constructs a portfolio that is "benchmark aware" in that it
is sensitive to the sector (companies with similar
characteristics) and security weightings of its benchmark.
However, both Funds are actively managed and prepared to
over-and/or underweight sectors and industries differently
from the benchmark.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
Although the Acquired and Acquiring Funds have similar investment
objectives and strategies in that both seek long-term growth of capital by
investing primarily in equity securities of large capitalization companies, and
both may invest in foreign securities, the Acquired Fund has growth of
investment income as a secondary objective.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing" below.
Principal Growth PIF LargeCap Growth Fund
Fund (Acquiring Fund)
(Acquired Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
- ----------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the
Effective Time of Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Growth Fund Class A 0.59% 0.19% 0.37% 1.15%
(Acquired Fund) Class B 0.59% 0.92% 0.45% 1.96%
PIF LargeCap Growth Fund Class A 0.55% 0.19% 0.36% 1.10%
(Acquiring Fund) Class B 0.55% 0.92% 0.43% 1.90%
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Growth Fund Class A $685 $919 $1,172 $1,892
(Acquired Fund) Class B $611 $943 $1,290 $1,977
PIF LargeCap Growth Fund Class A $681 $905 $1,146 $1,838
(Acquiring Fund) Class B $605 $926 $1,259 $1,916
If you do not sell your shares at the end of the period:
Principal Growth Fund Class A $685 $919 $1,172 $1,892
(Acquired Fund) Class B $199 $615 $1,057 $1,977
PIF LargeCap Growth Fund Class A $681 $905 $1,146 $1,838
(Acquiring Fund) Class B $193 $597 $1,026 $1,916
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal Growth Fund, Inc. PIF LargeCap Growth Fund
(Acquired Fund) (Acquiring Fund)
0.60% of the first $250 million; 0.55% of the first 500 million;
0.55% of the next $250 million; 0.53% of the next $500 million;
0.50% of the next $250 million; 0.51% of the next $500 million; and
0.45% of the next $250 million; and 0.50% of the excess over $1.5 billion
0.40% of the excess over $1 billion of of average daily net assets.
average daily net assets.
Principal Global, the Sub-Advisor to the Acquired Fund, is an indirect
wholly-owned subsidiary of Principal Life and an affiliate of the Manager. Its
principal offices are located at 801 Grand Avenue, Des Moines, Iowa 50392. For
its services, the Sub-Advisor is paid a fee by the Manager, and not by the
Acquired Fund.
CCI, the Sub-Advisor to the Acquiring Funds, is an affiliate of the
Manager and a member of the Principal Financial Group. Its offices are located
at One Station Place, Stamford, CT 06902. For its services, the Sub-Advisor is
paid a fee by the Manager, and not by the Acquiring Fund.
Effective January 3, 2005, Principal Global acquired a controlling
interest in CCI. Effective January 5, 2005, the Board of Directors of PIF
appointed CCI as the new Sub-Advisor to the Acquiring Fund on an interim basis
pursuant to Rule 15a-4 under the 1940 Act and has directed that such appointment
be submitted for approval to shareholders of the Acquiring Fund at the PIF
Shareholders Meeting. If approved by shareholders of the Acquiring Fund, CCI
will be the new Sub-Advisor to that Fund. Principal Global had previously served
as Sub-Advisor to the Acquiring Fund. Personnel from CCI have been provided to
Principal Global to provide day-to-day investment management for the Acquired
Fund pursuant to an Investment Services Agreement among the Acquired Fund, the
Manager and Principal Life.
At the PIF Shareholders Meeting, shareholders of the Acquiring Fund
will be asked to approve a proposal that will permit the Manager, pursuant to an
SEC order, to select and contract with Sub-Advisors to the Acquiring Fund (other
than Sub-Advisors affiliated with the Manager) after approval by the PIF Board
of Directors but without shareholder approval. If approved by shareholders of
the Acquiring Fund, the proposal will not be implemented until the PIF Board
determines to manage the Acquiring Fund in reliance on the SEC order. The
shareholders of the Acquired Fund have previously approved granting the Manager
comparable authority to select and contract with Sub-Advisors to the Acquired
Fund (other than Sub-Advisors affiliated with the Manager) after approval by the
Board of Directors of the Acquired Fund but without shareholder approval.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek long-term growth of
capital by investing primarily in equity securities of large capitalization
companies, and both may invest in foreign securities, they have substantially
the same risks. The main risks include:
Stock Because both Funds purchase equity securities, they are subject to the risk that stock prices
Market will fall over short or extended periods of time. Individual companies may report poor
Risk: results or be negatively effected by industry and/or economic trends and developments. In
response, the price of securities issued by such
companies may decline. These factors contribute to price
volatility, which is the principal risk of investing in
the Funds.
Foreign Securities The Funds may invest in foreign securities, which carry risks that are not generally found in
Risk: stocks of U.S. companies. These risks include loss of value as a result of political,
financial, and economic events in foreign countries. In addition, foreign securities may be
subject to less stringent accounting and disclosure standards than are required of U.S.
companies.
Growth Stock Because growth securities typically do not make dividend payments to shareholders, investment
Risk: returns are based on capital appreciation, making returns
more dependent on market increases and decreases. Growth
stocks may therefore be more volatile than non-growth
stocks to market changes.
Market Segment Risk: Both Funds are subject to the risk that their principal market segment, large capitalization
stocks, may underperform compared to the equity markets as a whole. The securities purchased
by each Fund present greater opportunities for growth because of high potential earnings
growth, but may also involve greater risk than securities that do not have the same
potential. The value of each Fund's equity securities may fluctuate on a daily basis. As
with all mutual funds, as the value of each Fund's assets rise or fall, the Fund's share
price changes. If you sell your shares when their value is less that the price you paid, you
will lose money.
The primary risks of investing in the Acquired and Acquiring Funds
differ in that the Acquiring Fund may have a slightly greater exposure to
foreign security risk because a larger portion of the Acquiring Fund's portfolio
may be invested in foreign securities. Because both Funds have the same
principal investment objective and the same investment policies, pursue the same
investment strategies and invest in the same kinds of securities, the Acquired
Fund's secondary investment objective of growth of investment income does not
affect materially the relative risks of investing in the two Funds.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds" below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Growth Fund (Acquired Fund)*
Class A (before taxes) 8.67% -8.75% 5.45% N/A 10/15/1969
(after taxes on distributions)** 8.67% -10.05% 4.31% N/A
(after taxes on distributions and sale 5.63% -7.19% 4.63% N/A
of shares)
Class B 7.79% -9.41% 4.98% N/A 12/09/1994
PIF LargeCap Growth Fund (Acquiring Fund)
Institutional Class (before taxes) 03/01/2001
- --Class A (before taxes) 8.75% N/A N/A -4.30%
(after taxes on distributions)** 8.66% N/A N/A -4.33%
(after taxes on distributions and sale 5.80% N/A N/A -3.63%
of shares)
- --Class B 7.88% N/A N/A -5.06%
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have substantially similar investment
objectives, policies and risks, and their combination will offer shareholders of
the Acquired Fund continuity of investment objectives and expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --Although Principal Global is the Sub-Advisor to the Acquired Fund and CCI is
the new interim Sub-Advisor (and, if approved by shareholders of the Acquiring
Fund, will be the new Sub-Advisor) to the Acquiring Fund, CCI and Principal
Global are affiliates, and CCI may be expected to provide at least the same
quality of investment advisory services as provided by Principal Global to the
Acquired Fund;
- --The Acquiring Fund has a lower investment management fee and is expected to
have lower overall expense ratios than the Acquired Fund;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund, but during their common period of existence has performed somewhat better
than the Acquired Fund; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 9
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL PARTNERS EQUITY GROWTH FUND, INC. INTO THE PIF
PARTNERS LARGECAP GROWTH FUND I
(Principal Partners Equity Growth Fund Only)
Overview
Shareholders of the Principal Partners Equity Growth Fund, Inc. (the
"Acquired Fund") are being asked to approve the Reorganization providing for the
Combination of that Fund into the PIF Partners LargeCap Growth Fund I (the
"Acquiring Fund"). For a summary discussion of the form and consequences of, and
the reasons for, the Reorganization, see "Overview of Proposed Reorganization."
Comparison of Acquired and Acquiring Funds
Principal Partners Equity Growth Fund, Inc. PIF Partners LargeCap Growth Fund I
(Acquired Fund) (Acquiring Fund)
Business: A separate fund. A separate series of PIF.
Net assets as of $60,166,203 $726,363,355
10/31/2004:
Investment T. Rowe Price Associates, Inc. ("T. Rowe Price") is the Sub-Advisor to both Funds.
Sub-Advisor and
Portfolio Manager: The portfolio manager for both Funds is Robert W. Sharps, CFA, Vice President.
Investment The Acquired Fund seeks long-term capital The Acquiring Fund seeks long-term growth of
Objectives: appreciation. capital.
Main Investment Both Funds seek to maximize long-term capital appreciation by investing primarily in
Strategies: growth-oriented equity securities of the U.S. and, to a limited extent, foreign companies that
exhibit strong growth and free cash flow potential. These
companies are generally characterized as "growth"
companies. Under normal market conditions, the both Funds
invest at least 80% of their net assets in equity
securities of companies with market capitalizations larger
than the median cap of companies in the Russell 1000 Growth
Index (as of December 31, 2004, this range was between
approximately $495 billion and $385 billion), at the time
of purchase. Each Fund's investment in foreign companies
will be limited to 25% of its assets and to securities
listed on U.S. exchanges or traded in U.S. markets. Both
Funds may also purchase futures and options, in keeping
with their objectives.
The Sub-Advisor generally looks for companies with
above-average rate of earnings and cash flow growth and a
lucrative niche in the economy that gives them the ability
to sustain earnings momentum even during times of slow
economic growth. As a growth investor, the Sub-Advisor
believes that when a company increases its earnings faster
than both inflation and the overall economy, the market
will eventually reward it with a higher stock price.
In pursuing each Fund's investment objectives, the
Sub-Advisor has discretion to purchase some securities that
do not meet its normal investment criteria when it
perceives an unusual opportunity for gain. These special
situations may arise when it believes a security could
increase in value for a variety of reasons, including a
change in management, an extraordinary corporate event, or
a temporary imbalance in the supply of or demand for the
securities. Additionally, the Funds may sell securities for
a variety of reasons, such as to secure gains, limit losses
or redeploy assets into more promising opportunities.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both the
Defensive Acquired Fund and the Acquiring Fund may invest without limit in cash and cash equivalents
Investing: (which include bank notes, bank certificates of deposit, bankers' acceptances, repurchase
agreements, commercial paper and commercial paper master
notes that are floating rate debt instruments without a
fixed maturity). In addition, both Funds may purchase U.S.
government securities, preferred stocks and debt
securities, whether or not convertible into or carrying
rights for common stock. In taking such defensive measures,
either Fund may fail to achieve its investment objective.
Because both of the Acquired and Acquiring Funds seek long-term capital
growth or appreciation by investing primarily in growth-oriented equity
securities of the U.S. and, to a limited extent, foreign companies that exhibit
strong growth and free cash flow potential, they have substantially the same
investment objectives and strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal Partners Equity PIF Partners LargeCap
Growth Fund Growth Fund I
(Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
- ------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the time
of Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Partners Equity Growth Fund Class A 0.75% 0.25% 0.65% 1.65%
(Acquired Fund) Class B 0.75% 0.93% 0.69% 2.37%
PIF Partners LargeCap Growth Fund I Class A 0.74% 0.25% 0.54% 1.53%
(Acquiring Fund) Class B 0.74% 0.93% 0.59% 2.26%
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Partners Equity Growth Fund Class A $733 $1,065 $1,420 $2,417
(Acquired Fund) Class B $651 $1,064 $1,493 $2,716
PIF Partners LargeCap Growth Class A $726 $1,031 $1,361 $2,294
Fund I
(Acquiring Fund) Class B $640 $1,032 $1,439 $2,604
If you do not sell your shares at the end of the period:
Principal Partners Equity Growth Fund Class A $733 $1,065 $1,420 $2,417
(Acquired Fund) Class B $240 $739 $1,265 $2,716
PIF Partners LargeCap Growth Class A $726 $1,031 $1,361 $2,294
Fund I
(Acquiring Fund) Class B $229 $706 $1,210 $2,604
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal Partners Equity Growth Fund PIF Partners LargeCap Growth Fund I
(Acquired Fund) (Acquiring Fund)
0.75% of the first $250 million; 0.75% of the first 500 million;
0.70% of the next $250 million; 0.73% of the next $500 million;
0.65% of the next $250 million; 0.71% of the next $500 million; and
0.60% of the next $250 million; and 0.70% of the excess over $1.5 billion
0.55% of the excess over $1 billion of of average daily net assets.
average daily net assets.
T. Rowe Price, the Sub-Advisor to both the Acquired and Acquiring
Funds, is a wholly owned subsidiary of T. Rowe Price Group, a financial services
holding company. Its principal offices are located at 100 East Pratt Street,
Baltimore, Maryland 21202. For its services, the Sub-Advisor is paid a fee by
the Manager, and not by either Fund.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek long-term capital growth
or appreciation by investing primarily in growth-oriented equity securities of
the U.S. and, to a limited extent, foreign companies that exhibit strong growth
and free cash flow potential, they have substantially the same risks. The main
risks include:
Stock Because both Funds purchase equity securities, the Funds are subject to the risk that stock
Market prices will fall over short or extended periods of time. Individual companies may report
Risk: poor results or be negatively effected by industry and/or economic trends and developments.
In response, the price of securities issued by such
companies may decline. These factors contribute to price
volatility, which is the principal risk of investing in
the Funds.
Foreign Securities The Funds may invest in foreign securities, which carry risks that are not generally found in
Risk: stocks of U.S. companies. These include risks of loss of value as a result of political,
financial, and economic events in foreign countries. In addition, foreign securities may be
subject to less stringent accounting and disclosure standards than are required of U.S.
companies.
Market Segment Risk: Both Funds are subject to the risk that their principal market segment, large capitalization
growth-oriented stocks, may underperform compared to the equity markets as a whole. The
securities purchased by the Funds present greater opportunities for growth because of high
potential earnings growth, but may also involve greater risks than securities that do not
have the same potential. The value of each Fund's securities may fluctuate on a daily
basis. As with all mutual funds, as the value of each Fund's assets rise or fall, the Fund's
share price changes. If you sell your shares when their value is less that the price you
paid, you will lose money.
Growth Stock Because growth securities typically do not make dividend payments to shareholders, investment
Risk: returns are based on capital appreciation, making returns more dependent on market increases
and decreases. Growth stocks may therefore be more volatile than non-growth
stocks to market changes.
Hedging Strategies Both Funds may use futures, options, swaps and other derivative instruments to "hedge" or
Risk: protect the portfolio from adverse movements in securities prices and interest rates. Both
Funds may also use a variety of currency hedging
techniques, including forward currency contracts, to
manage exchange rate risk. The Sub-Advisor believes that
use of these instruments will benefit both Funds.
However, each Fund's performance could be worse then if
the Fund had not used such instruments if the
Sub-Advisor's judgment proves incorrect.
Active Portfolio Both Funds may actively trade portfolio securities in an attempt to achieve their investment
Trading Risk: strategy. Active trading will cause an increased portfolio turnover rate that increases each
Fund's trading costs and may have an adverse impact on performance.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Partners Equity Growth Fund (Acquired Fund)*
Class A (before taxes) 8.25% -6.80% N/A -4.53% 11/01/1999
(after taxes on distributions)** 8.25% -6.80% N/A -4.53%
(after taxes on distributions and sale 5.36% -5.65% N/A -3.79%
of shares)
Class B 7.53% -7.50% N/A -5.25% 11/01/1999
PIF Partners LargeCap Growth Fund I
(Acquiring Fund)
Institutional Class 12/06/2000
- --Class A (before taxes) 8.40% N/A N/A -6.37%
(after taxes on distributions)** 8.32% N/A N/A -6.42%
(after taxes on distributions and sale 5.57% N/A N/A -5.34%
of shares)
- --Class B 7.61% N/A N/A -7.05%
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have substantially the same
investment objectives, policies and risks, and their combination will offer
shareholders of the Acquired Fund continuity of investment objectives and
expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The fundamental investment restrictions of the two Funds reflect differences
that the Board does not believe are material in light of the benefits of the
Combination;
- --T. Rowe Price, the Sub-Advisor to the Acquired Fund, is also the Sub-Advisor
to the Acquiring Fund and may be expected to provide continuity in the quality
of its investment advisory services and personnel;
- --The Acquiring Fund has a lower investment management fee at current asset
levels and is expected to have lower overall expense ratios than the Acquired
Fund; the Board considered the higher breakpoints and fees at breakpoints in the
Management Agreement with the Acquiring Fund to be a negative factor but
believed that his factor was outweighed by the slow rate of the Acquired Fund's
asset growth, which meant there was small likelihood of its reaching breakpoint
any time soon, the prospectus of the Acquiring Fund for a higher rate of asset
growth and the other expected benefits of the Combination;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund, but during their common period of existence has performed somewhat better
than the Acquired Fund; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 10
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL MIDCAP FUND, INC. INTO THE
PIF MIDCAP BLEND FUND
(Principal MidCap Fund Only)
Overview
Shareholders of the Principal MidCap Fund, Inc. (the "Acquired Fund")
are being asked to approve the Reorganization providing for the Combination of
that Fund into the PIF MidCap Blend Fund (the "Acquiring Fund"). For a summary
discussion of the form and consequences of, and the reasons for, the
Reorganization, see "Overview of Proposed Reorganization."
Comparison of Acquired and Acquiring Funds
Principal MidCap Fund, Inc. PIF MidCap Blend Fund
(Acquired Fund) (Acquiring Fund)
Business: A separate fund. A separate series of PIF.
Net assets as $531,953,491 $86,209,482
of 10/31/2004:
Investment Principal Global is the Sub-Advisor to both Funds.
Sub-Advisor and
Portfolio Manager: The portfolio manager for both Funds is K. William Nolin, CFA, manager of domestic mid-cap
equity portfolios.
Investment The Acquired Fund seeks capital appreciation The Acquiring Fund seeks long-term capital
Objectives: by investing primarily in securities of growth.
emerging and other growth-oriented companies.
Main Investment Both Funds invest primarily in common stocks and other equity securities of medium
Strategies: capitalization companies. Under normal market conditions, both Funds invest at least 80% of
their assets in common stocks of companies with medium
market capitalizations, similar to companies in the Russell
MidCap Index (as of December 31, 2004 this range was
between $631 million and $34 billion), at the time of
purchase. Market capitalization is defined as total current
market value of a company's outstanding common stock.
In selecting securities for investment, the Sub-Advisor
looks at stocks with value and/or growth characteristics
and constructs an investment portfolio that has a "blend"
of stocks with these characteristics. In managing the
assets of the Funds, the Sub-Advisor does not have a policy
of preferring one of these categories to the other. The
value orientation emphasizes buying stocks of companies
whose potential for growth of capital and earnings is
expected to be above average.
The Sub-Advisor considers the quality and price of
individual issuers rather than forecasting stock market
trends in its selection of individual securities. Selection
is based on fundamental analysis of a company relative to
other companies with the focus being on the Sub-Advisor's
estimation of forward-looking rates of return. Up to 20% of
the Acquired Fund's total assets may be invested in foreign
securities, whereas up to 25% of the Acquiring Fund's total
assets may be invested in foreign securities.
The Sub-Advisor focuses its stock selections on established
companies that it believes have a sustainable competitive
advantage. The Sub-Advisor constructs a portfolio that is
"benchmark aware" in that it is sensitive to the sector
(companies with similar characteristics) and security
weightings of its benchmark. However, the Funds are
actively managed and prepared to over-and/or under-weight
sectors and industries differently from the benchmark.
The Funds may purchase securities issued as part of, or a
short period after, companies' initial public offerings
(IPOs) and may at times dispose of those shares shortly
after their acquisition.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both the
Defensive Acquired Fund and the Acquiring Fund may invest without limit in cash and cash equivalents
Investing: (which include bank notes, bank certificates of deposit, bankers' acceptances, repurchase
agreements, commercial paper and commercial paper master
notes that are floating rate debt instruments without a
fixed maturity). In addition, both Funds may purchase U.S.
government securities, preferred stocks and debt
securities, whether or not convertible into or carrying
rights for common stock. In taking such defensive measures,
either Fund may fail to achieve its investment objective.
Because the Acquired Fund seeks capital appreciation and the Acquiring
Fund seeks long-term capital growth, both by investing primarily in equity
securities of medium capitalization companies, and both may in invest in foreign
securities, they have substantially similar investment objectives and
strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal MidCap PIF MidCap Blend Fund
Fund (Acquiring Fund)
(Acquired Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
- ------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the
Effective Time of Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal MidCap Fund Class A 0.55% 0.20% 0.27% 1.02%
(Acquired Fund) Class B 0.55% 0.45% 0.32% 1.32%
PIF MidCap Blend Fund* Class A 0.65% 0.20% 0.26% 1.11%
(Acquiring Fund) Class B 0.65% 0.45% 0.31% 1.41%
- --------------
<FN>
* The Manager has agreed to contractually cap expenses in order to reduce the
Total Operating Expenses of the Acquiring Fund to not more than 1.02% of
average net assets for Class A shares and not more than 1.32% of average
net assets for Class B shares. This expense cap will remain in effect until
June 30, 2008.
</FN>
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal MidCap Fund Class A $673 $881 $1,106 $1,751
(Acquired Fund) Class B $549 $753 $963 $1,470
PIF MidCap Blend Fund* Class A $673 $881 $1,106 $1,751
(Acquiring Fund) Class B $549 $753 $963 $1,470
If you do not sell your shares at the end of the period:
Principal MidCap Fund Class A $673 $881 $1,106 $1,751
(Acquired Fund) Class B $134 $418 $723 $1,470
PIF MidCap Blend Fund* Class A $673 $881 $1,106 $1,751
(Acquiring Fund) Class B $134 $418 $723 $1,470
- -------------
<FN>
* These examples reflect the Manager's agreement to contractually cap
expenses in order to reduce the Total Operating Expenses of the Acquiring
Fund. This expense cap will remain in effect until June 30, 2008.
</FN>
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal MidCap Fund PIF MidCap Blend Fund
(Acquired Fund) (Acquiring Fund)
0.65% of the first $100 million; 0.65% of the first 500 million;
0.60% of the next $100 million; 0.63% of the next $500 million;
0.55% of the next $100 million; 0.61% of the next $500 million; and
0.50% of the next $100 million; and 0.60% of the excess over $1.5 billion
0.45% of the excess over $400 million of of average daily net assets.
average daily net assets.
Principal Global, the Sub-Advisor to both the Acquired and Acquiring
Funds, is an indirect wholly-owned subsidiary of Principal Life and an affiliate
of the Manager. Its principal offices are located at 801 Grand Avenue, Des
Moines, Iowa 50392. For its services, the Sub-Advisor is paid a fee by the
Manager, and not by either Fund.
At the PIF Shareholders Meeting, shareholders of the Acquiring Fund will be
asked to approve a proposal that will permit the Manager, pursuant to an SEC
order, to select and contract with Sub-Advisors to the Acquiring Fund (other
than Sub-Advisors affiliated with the Manager) after approval by the PIF Board
of Directors but without shareholder approval. If approved by shareholders of
the Acquiring Fund, the proposal will not be implemented until the PIF Board
determines to manage the Acquiring Fund in reliance on the SEC order. The
shareholders of the Acquired Fund have previously approved granting the Manager
comparable authority to select and contract with Sub-Advisors to the Acquired
Fund (other than Sub-Advisors affiliated with the Manager) after approval by the
Board of Directors of the Acquired Fund but without shareholder approval.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because the Acquired Fund seeks capital appreciation and the Acquiring Fund
seeks long-term capital growth, both by investing primarily in equity securities
of medium capitalization companies, and both may in invest in foreign
securities, they have substantially similar risks. The main risks include:
Stock Because both Funds purchase equity securities, they are subject to the risk that stock prices
Market will fall over short or extended periods of time. Individual companies may report poor
Risk: results or be negatively effected by industry and/or economic trends and developments. In
response, the price of securities issued by such
companies may decline. These factors contribute to price
volatility, which is the principal risk of investing in
the Funds.
Foreign Securities The Funds may invest in foreign securities, which carry risks that are not generally found in
Risk: stocks of U.S. companies. These risks include loss of value as a result of political,
financial, and economic events in foreign countries. In addition, foreign securities may be
subject to less stringent accounting and disclosure standards than are required of U.S.
companies.
Market Segment Each Fund is subject to the risk that its principal market segment, medium capitalization stocks,
Risk: may underperform compared to the equity markets as a
whole. Because different types of stocks tend to shift in
and out of favor depending on market and economic
conditions, each Fund's performance may sometimes be
lower or higher than that of other types of funds. The
value of each Fund's equity securities may fluctuate on a
daily basis. As with all mutual funds, as the value of
each Fund's assets rise or fall, the Fund's share price
changes. If you sell your shares when their value is less
than the price you paid, you will lose money.
Medium The medium capitalization companies in which the Funds invest may be more vulnerable to
Capitalizations Risk: adverse business or economic events than larger, more established companies. In particular,
these mid-sized companies may pose greater risk due to
narrow product lines, limited financial resources, less
depth in management or a limited trading market for their
securities.
Growth Stock Because growth securities typically do not make dividend payments to shareholders, investment
Risk: returns are based on capital appreciation, making returns
more dependent on market increases and decreases. Growth
stocks may therefore be more volatile than non-growth
stocks to market changes.
Value Stock The Funds may invest in value stocks, which carry the risk that the market will not recognize a
Risk: security's intrinsic value for a long time or that a
stock judged to be undervalued may actually be
appropriately priced.
Initial Public Each Fund is subject to the risks associated with the purchase of shares issued in IPOs by
Offerings ("IPOs") companies that have little operating history as public companies, as well as to the risks
Risk: inherent in those sectors of the market where these new issuers operate. The market for IPO
issuers has been volatile and share prices of certain
newly-public companies have fluctuated in significant
amounts over short periods of time. In addition, the
Sub-Advisor cannot guarantee continued access to IPO
offerings, and may at times dispose of those shares
shortly after their acquisition.
The primary risks of investing in the Acquired and Acquiring Funds
differ in that the Acquiring Fund may have a slightly greater exposure to
foreign securities risk because a larger portion of the Acquiring Fund's
portfolio may be invested in foreign securities.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal MidCap Fund (Acquired Fund)*
Class A (before taxes) 17.34% 9.19% 13.01% N/A 12/18/1987
(after taxes on distributions)** 15.72% 6.81% 11.39% N/A
(after taxes on distributions and sale 13.34% 6.88% 10.88% N/A
of shares)
Class B 17.04% 8.69% 12.59% N/A 12/09/1994
PIF MidCap Blend Fund (Acquiring Fund)
Institutional Class (before taxes) 03/01/2001
- --Class A (before taxes) 17.22% N/A N/A 9.80%
(after taxes on distributions)** 15.99% N/A N/A 9.27%
(after taxes on distributions and sale 12.75% N/A N/A 8.32%
of shares)
- --Class B 16.87% N/A N/A 9.48%
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have substantially similar investment
objectives, policies and risks, and their combination will offer shareholders of
the Acquired Fund continuity of investment objectives and expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --Principal Global, the Sub-Advisor to the Acquired Fund, is also the
Sub-Advisor to the Acquiring Fund and may be expected to provide continuity in
the quality of its investment advisory services and personnel;
- --Although the Acquiring Fund has a higher investment management fee and is
expected to have higher overall expense ratios than the Acquired Fund, the Board
determined that such level of expenses is within industry norms and may be
expected to decrease over time, and that the higher management fee was
outweighed by the other benefits of the Combination and the Manager's agreement
to contractually cap the expenses of the Class A and Class B shares of the
Acquiring Fund so that they will not exceed the pre-Combination expenses of the
Acquired Fund for a three-year period after the Effective Time of the
Reorganization; further, although future expense ratios cannot be known, if
sales expectations are met, the expense ratios of the Acquiring Fund are
expected to be approximately at or below the projected expense ratios of the
Acquired Fund absent the Reorganization;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund, but during their common period of existence has performed somewhat better
than the Acquired Fund; and
- --The Combination will result in a combined Fund which will have a larger asset
base and over time may be expected to operate more efficiently and have improved
prospects for growth and attendant reductions in overall expenses.
PROPOSAL 11
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL PARTNERS MIDCAP GROWTH FUND, INC. INTO THE PIF
PARTNERS MIDCAP GROWTH FUND
(Principal Partners MidCap Growth Fund Only)
Overview
Shareholders of the Principal Partners MidCap Growth Fund, Inc. (the
"Acquired Fund") are being asked to approve the Reorganization providing for the
Combination of that Fund into the PIF Partners MidCap Growth Fund (the
"Acquiring Fund"). For a summary discussion of the form and consequences of, and
the reasons for, the Reorganization, see "Overview of the Proposed
Reorganization."
Comparison of Acquired and Acquiring Funds
Principal Partners MidCap Growth PIF Partners MidCap Growth
Fund, Inc. Fund
(Acquired Fund) (Acquiring Fund)
Business: A separate fund. A separate series of PIF.
Net assets as $32,028,749 $44,505,874
of 10/31/2004:
Investment Turner Investment Partners ("Turner") is the Sub-Advisor to both Funds.
Sub-Advisor and
Portfolio The portfolio managers for both Funds are:
Managers: --Christopher K. McHugh, Senior Portfolio Manager;
--William C. McVail, Senior Portfolio Manager; and
--Robert E. Turner, CFA, Chairman and Chief Investment Officer.
Investment The Acquired Fund seeks long-term capital The Acquiring Fund seeks long term growth of
Objectives: growth by investing primarily in medium capital.
capitalization U.S. companies with strong
earnings growth potential.
Main Investment Both Funds invest primarily in common stocks and other equity securities of U.S. companies
Strategies: with strong earnings growth potential. Under normal market conditions, both Funds invest at
least 80% of their assets in common stocks of companies
with medium market capitalizations, similar to companies in
the Russell MidCap Growth Index (as of December 31, 2004
this range was between $631 million and $34 billion), at
the time of purchase. Market capitalization is defined as
total current market value of a company's outstanding
common stock.
Both Funds invest in securities of companies that are
diversified across economic sectors, and both attempt to
maintain sector concentrations that approximate those of
their current benchmark, the Russell MidCap Growth Index.
Neither Fund is an index fund, and neither limits its
investment to securities of issuers in the Russell MidCap
Growth Index. Up to 10% of the Acquired Fund's total assets
may be invested in foreign securities, whereas up to 25% of
the Acquiring Fund's total assets may be invested in
foreign securities.
The Sub-Advisor selects stocks that it believes will have
strong earnings growth potential. It invests in companies
with strong earnings dynamics, and sells those with
deteriorating earnings prospects. It believes forecasts for
market timing and sector rotations are unreliable and
introduce an unacceptable level or risk. As a result, under
normal market conditions, both Funds are fully invested.
The Funds may purchase securities issued as part of, or a
short period after, companies' initial public offerings
("IPOs"), and may at times dispose of those shares shortly
after their acquisition.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/ Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
Because both of the Acquired and Acquiring Funds seek long-term growth
of capital by investing primarily in equity securities of medium market
capitalization companies, they have substantially the same investment objectives
and strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal Partners MidCap PIF Partners MidCap
Growth Fund Growth Fund
(Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
- ------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the time
of Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Partners MidCap Growth Fund Class A 0.90% 0.25% 0.78% 1.93%*
(Acquired Fund) Class B 0.90% 0.92% 0.84% 2.66%*
PIF Partners MidCap Growth Fund** Class A 1.00% 0.25% 0.62% 1.87%
(Acquiring Fund) Class B 1.00% 0.92% 0.68% 2.60%
- --------
<FN>
* The Manager voluntarily agreed to limit the Acquired Fund's expenses and,
if necessary, pay expenses normally payable by that Fund through the period
ended February 28, 2006. If such expense limit were reflected in the table,
the Acquired Fund's Total Operating Expenses would be 1.78% for Class A
shares and 2.52% for Class B shares.
** The Manager has agreed to contractually cap expenses in order to reduce the
Total Operating Expenses of the Acquiring Fund to not more than 1.75% of
average net assets for Class A Shares and not more than 2.50% of average
net assets for Class B Shares. This expense cap will remain in effect until
June 30, 2008.
</FN>
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Partners MidCap Growth Fund Class A $760 $1,146 $1,557 $2,699
(Acquired Fund) Class B $678 $1,145 $1,635 $2,727
PIF Partners MidCap Growth Fund* Class A $743 $1,094 $1,469 $2,519
(Acquiring Fund) Class B $663 $1,102 $1,557 $2,565
If you do not sell your shares at the end of the period:
Principal Partners MidCap Growth Fund Class A $760 $1,146 $1,557 $2,699
(Acquired Fund) Class B $269 $826 $1,410 $2,727
PIF Partners MidCap Growth Fund* Class A $743 $1,094 $1,469 $2,519
(Acquiring Fund) Class B $253 $779 $1,331 $2,565
- ---------------
<FN>
* These examples reflect the Manager's agreement to contractually cap
expenses in order to reduce the Total Operating Expenses of the Acquiring
Fund. This expense cap will remain in effect until June 30, 2008.
</FN>
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal Partners MidCap Growth Fund PIF Partners MidCap Growth Fund
(Acquired Fund) (Acquiring Fund)
0.90% of average daily net assets. 1.00% of the first 500 million;
0.98% of the next $500 million;
0.96% of the next $500 million; and
0.95% of the excess over $1.5 billion
of average daily net assets.
Turner is the Sub-Advisor to both the Acquired and Acquiring Funds. Its
principal offices are located at 1205 Westlakes Drive, Suite 100, Berwyn,
Pennsylvania 19312. For its services, the Sub-Advisor is paid a fee by the
Manager, and not by either Fund.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek long-term growth of
capital by investing primarily in equity securities of medium market
capitalization companies, they have substantially the same risks. The main risks
include:
Stock Because both Funds purchase equity securities, the Funds are subject to the risk that stock
Market prices will fall over short or extended periods of time. Individual companies may report
Risk: poor results or be negatively effected by industry and/or economic trends and developments.
In response, the price of securities issued by such
companies may decline. These factors contribute to price
volatility, which is the principal risk of investing in
the Funds.
Foreign Securities The Funds may invest in foreign securities, which carry risks that are not generally found in
Risk: stocks of U.S. companies. These risks include loss of value as a result of political,
financial, and economic events in foreign countries. In addition, foreign securities may be
subject to less stringent accounting and disclosure standards than are required of U.S.
companies.
Market Segment Risk: Each Fund is subject to the risk that its principal market segment, medium capitalization
growth stocks, may underperform compared to the equity markets as a whole. The securities
purchased by the Funds present greater opportunities for growth because of high potential
earnings growth, but may also involve greater risks than securities that do not have the same
potential. The value of each Fund's equity securities may fluctuate on a daily basis. As
with all mutual funds, as the value of each Fund's assets rise or fall, the Fund's share
price changes. If you sell your shares when their value is less than the price you paid, you
will lose money.
Medium The medium capitalization companies in which the Funds invest may be more vulnerable to
Capitalization Risk: adverse business or economic events than larger, more established companies. In particular,
these mid-size companies may pose greater risk due to
narrow product lines, limited financial resources, less
depth in management or a limited trading market for their
securities.
Active Portfolio Both Funds may actively trade securities in an attempt to achieve their investment
Trading Risk objective. High turnover rates may increase each Fund's trading costs and may have an
adverse impact on that Fund's performance.
Growth Stock Risk: Because growth securities typically do not make dividend payments to shareholders, investment
returns are based on capital appreciation, making returns
more dependent on market increases and decreases. Growth
stocks may therefore be more volatile than non-growth
stocks to market changes.
Initial Public Each Fund is subject to the risks associated with the purchase of shares issued in IPOs by
Offerings ("IPOs") companies that have little operating history as public companies, as well as to the risks
Risk: inherent in those sectors of the market where these new issuers operate. The market for IPO
issuers has been volatile and share prices of certain
newly-public companies have fluctuated in significant
amounts over short periods of time. In addition, the
Sub-Advisor cannot guarantee continued access to IPO
offerings, and may at times dispose of those shares
shortly after their acquisition.
The primary risks of investing in the Acquired and Acquiring Funds
differ in that the Acquiring Fund may have a greater exposure to foreign
security risk because a larger portion of the Acquiring Fund's portfolio may be
invested in foreign securities.
The risks of investing in the Acquiring Fund are more fully described
in PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Partners MidCap Growth Fund (Acquired Fund)*
Class A (before taxes) 10.60% N/A N/A -11.58% 03/01/2000
(after taxes on distributions)** 10.60% N/A N/A -11.58%
(after taxes on distributions and sale 6.89% N/A N/A -9.45%
of shares)
Class B 9.84% N/A N/A -12.10% 03/01/2000
PIF Partners MidCap Growth
Fund (Acquiring Fund)
Institutional Class 03/01/2001
- --Class A (before taxes) 11.46% N/A N/A -0.75%
(after taxes on distributions)** 11.46% N/A N/A -0.75%
(after taxes on distributions and sale 7.45% N/A N/A -0.63%
of shares)
- --Class B 10.64% N/A N/A -1.49%
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have substantially similar investment
objectives, policies and risks, and their combination will offer shareholders of
the Acquired Fund continuity of investment objectives and expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The fundamental investment restrictions of the two Funds reflect differences
that the Board does not believe are material in light of the benefits of the
Combination;
- --Turner, the Sub-Advisor to the Acquired Fund, is also the Sub-Advisor to the
Acquiring Fund and may be expected to provide continuity in the quality of its
investment advisory services and personnel;
- --Although the Acquiring Fund has a higher investment management fee and is
expected to have higher overall expenses than the Acquired Fund immediately
after the Reorganization, the Board determined that such level of fees is within
industry norms and that overall expenses may be expected to decrease over time,
and that the impact of the higher management fee was outweighed by the other
benefits of the Combination and the Manager's agreement to contractually cap the
expenses of the Class A and Class B shares of the Acquiring Fund so that they
will not exceed the pre-Combination expenses of the Acquired Fund for a
three-year period after the Effective Time of the Reorganization; further,
although future expense ratios cannot be known, if sales expectations are met,
the expense ratios of the Acquiring Fund are expected to be approximately at or
below the projected expense ratios of the Acquired Fund absent the
Reorganization;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund, but during their common period of existence has performed somewhat better
than the Acquired Fund; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 12
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL SMALLCAP FUND, INC. INTO
THE PIF SMALLCAP BLEND FUND
(Principal SmallCap Fund Only)
Overview
Shareholders of the Principal SmallCap Fund, Inc. (the "Acquired Fund")
are being asked to approve the Reorganization providing for the Combination of
that Fund into the PIF SmallCap Blend Fund (the "Acquiring Fund"). For a summary
discussion of the form and consequences of, and the reasons for, the
Reorganization, see "Overview of the Proposed Reorganization."
Comparison of Acquired and Acquiring Funds
Principal SmallCap Fund, Inc. PIF SmallCap Blend Fund
(Acquired Fund) (Acquiring Fund)
Business: A separate fund. A separate series of PIF.
Net assets as $106,848,090 $102,700,953
of 10/31/2004:
Investment Principal Global is the Sub-Advisor to both Funds.
Sub-Advisor and
Portfolio The portfolio manager for the Acquired Fund is:
Managers: --Todd Sanders, CFA, equity analyst.
The portfolio managers for the Acquiring Fund are:
--Mustafa Sagun, CFA, manager of quantitative research; and
--Todd Sanders, CFA.
Investment Both Funds seek to provide long-term growth of capital.
Objectives:
Main Investment Both Funds invest primarily in common stocks of small capitalization companies. Under normal
Strategies: market conditions, both Funds invest at least 80% of their assets in common stocks of
companies with small market capitalizations, similar to the
companies in the Russell 2000 Index (as of December 31,
2004 this range was between $59 million and $3.6 billion),
at the time of purchase. Up to 20% of the Acquired Fund's
assets may be invested in foreign securities, whereas up to
25% of the Acquiring Fund's assets may be invested in
foreign securities.
In selecting securities for the Funds, the Sub-Advisor
looks at stocks with value and/or growth characteristics
and constructs an investment portfolio that has a "blend"
of stocks with these characteristics. The Sub-Advisor does
not have a policy of preferring one of these categories to
the other. The value orientation of the Funds emphasizes
buying stocks at less than their investment value and
avoiding stocks whose price has been artificially built up.
The growth orientation emphasizes buying stocks of
companies whose potential for growth of capital and
earnings is expected to be above average. Selection is
based on fundamental analysis of the company relative to
other companies with the focus on the Sub-Advisor's
estimation of forward-looking rates of return.
The Sub-Advisor may purchase securities issued as part of,
or a short period after, companies' initial public
offerings ("IPOs"), and may at times dispose of those
shares shortly after their acquisition.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
Because both of the Acquired and Acquiring Funds seek long-term growth
of capital by investing primarily in small capitalization companies, they have
substantially the same investment objectives and strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal SmallCap Fund PIF SmallCap Blend Fund
(Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
- ------------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the time
of Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal SmallCap Fund Class A 0.85% 0.22% 0.50% 1.57%
(Acquired Fund) Class B 0.85% 0.93% 0.53% 2.31%
PIF SmallCap Blend Fund Class A 0.75% 0.22% 0.47% 1.44%
(Acquiring Fund) Class B 0.75% 0.93% 0.49% 2.17%
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal SmallCap Fund Class A $726 $1,042 $1,381 $2,335
(Acquired Fund) Class B $645 $1,046 $1,464 $2,374
PIF SmallCap Blend Fund Class A $713 $1,004 $1,317 $2,200
(Acquiring Fund) Class B $631 $1,005 $1,394 $2,231
If you do not sell your shares at the end of the period:
Principal SmallCap Fund Class A $726 $1,042 $1,381 $2,335
(Acquired Fund) Class B $234 $721 $1,235 $2,374
PIF SmallCap Blend Fund Class A $713 $1,004 $1,317 $2,200
(Acquiring Fund) Class B $220 $679 $1,164 $2,231
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal SmallCap Fund PIF SmallCap Blend Fund
(Acquired Fund) (Acquiring Fund)
0.85% of the first $100 million; 0.75% of the first 500 million;
0.80% of the next $100 million; 0.73% of the next $500 million;
0.75% of the next $100 million; 0.71% of the next $500 million; and
0.70% of the next $100 million; and 0.70% of the excess over $1.5 billion
0.65% of the excess over $400 million of of average daily net assets.
average daily net assets.
Principal Global, the Sub-Advisor to both the Acquired and Acquiring
Funds, is an indirect wholly-owned subsidiary of Principal Life and an affiliate
of the Manager. Its principal offices are located at 801 Grand Avenue, Des
Moines, Iowa 50392. For its services, the Sub-Advisor is paid a fee by the
Manager, and not by either Fund.
At the PIF Shareholders Meeting, shareholders of the Acquiring Fund will be
asked to approve a proposal that will permit the Manager, pursuant to an SEC
order, to select and contract with Sub-Advisors to the Acquiring Fund (other
than Sub-Advisors affiliated with the Manager) after approval by the PIF Board
of Directors but without shareholder approval. If approved by shareholders of
the Acquiring Fund, the proposal will not be implemented until the PIF Board
determines to manage the Acquiring Fund in reliance on the SEC order. The
shareholders of the Acquired Fund have previously approved granting the Manager
comparable authority to select and contract with Sub-Advisors to the Acquired
Fund (other than Sub-Advisors affiliated with the Manager) after approval by the
Board of Directors of the Acquired Fund but without shareholder approval.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek long-term growth of
capital by investing primarily in small capitalization companies, they have
substantially the same risks. The main risks include:
Stock Because the Funds both purchase equity securities, the Funds are subject to the risk that
Market stock prices will fall over short or extended periods of time. Individual companies may
Risk: report poor results or be negatively effected by industry and/or economic trends and
developments. In response, the price of securities issued
by such companies may decline. These factors contribute
to price volatility (wide, rapid fluctuations), which is
the principal risk of investing in the Funds.
Small Cap Investments in companies with smaller capitalizations may involve greater risk and price
Risk: volatility than investments in larger, more mature companies. Smaller companies may be
developing or marketing new products or services for
which markets are not yet established and may never
become established. While small, unseasoned companies may
offer greater opportunities for capital growth than
larger, more established companies, they also involve
greater risks and should be considered speculative.
Foreign Securities The Funds may invest in foreign securities, which carry risks that are not generally found in
Risk: stocks of U.S. companies. These risks include loss of value as a result of political,
financial, and economic events in foreign countries. In addition, foreign securities may be
subject to less stringent accounting and disclosure standards than are required of U.S.
companies.
Value Stocks The Funds' investments in value stocks carry the risk that the market will not recognize a
Risk: security's intrinsic value for a long time or that a stock judged to be undervalued may
actually be appropriately priced.
Growth Stock Because growth securities typically do not make dividend payments to shareholders, investment
Risk: returns are based on capital appreciation, making returns more dependent on market increases
and decreases. Growth stocks may therefore be more volatile than non-growth stocks.
Market Segment Risk: The Funds are each subject to the risk that its principal market segment, small
capitalization growth stocks, may underperform compared to the equity markets as a whole. The
value of each Fund's equity securities may fluctuate on a daily basis. Each Fund's share
price may fluctuate more than that of funds primarily invested in stocks of mid- and
large-sized companies and may underperform as companies to the securities of larger
companies. As with all mutual funds, as the values of each Fund's assets rise or fall, the
Fund's share price changes. If you sell your shares when their value is less that the price
you paid, you will lose money.
Initial Public The Funds are each subject to the risks associated with the purchase of shares issued in IPOs
Offering ("IPO") by companies that have little operating history as public companies, as well as to the risks
Risk: inherent in those sectors of the market where these new issuers operate. The market for IPO
issuers has been volatile and share prices of certain
newly-public companies have fluctuated in significant
amounts over short periods of time. In addition, the
Sub-Advisor cannot guarantee continued access to IPO
offerings, and may at times dispose of those shares
shortly after their acquisition.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal SmallCap Fund (Acquired Fund)*
Class A (before taxes) 19.13% 0.30% N/A 4.61% 12/31/1997
(after taxes on distributions)** 19.13% -0.78% N/A 3.22%
(after taxes on distributions and sale 12.43% -0.39% N/A 3.12%
of shares)
Class B 18.29% -0.47% N/A 3.85% 12/31/1997
PIF SmallCap Blend Fund (Acquiring Fund)
Institutional Class 03/01/2001
- --Class A (before taxes) 15.67% N/A N/A 11.38%
(after taxes on distributions)** 14.68% N/A N/A 11.03%
(after taxes on distributions and sale 11.35% N/A N/A 9.79%
of shares)
- --Class B 14.83% N/A N/A 10.57%
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have substantially the same
investment objectives, policies and risks, and their combination will offer
shareholders of the Acquired Fund continuity of investment objectives and
expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --Principal Global, the Sub-Advisor to the Acquired Fund, is also the
Sub-Advisor to the Acquiring Fund and may be expected to provide continuity in
the quality of its investment advisory services and personnel;
- --The Acquiring Fund has a lower investment management fee and is expected to
have lower overall expense ratios than the Acquired Fund;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund, but during their common period of existence has outperformed the Acquired
Fund; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 13
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL PARTNERS SMALLCAP GROWTH FUND, INC. INTO THE
PIF PARTNERS SMALLCAP GROWTH FUND II
(Principal Partners SmallCap Growth Fund Only)
Overview
Shareholders of the Principal Partners SmallCap Growth Fund, Inc. (the
"Acquired Fund") are being asked to approve the Reorganization providing for the
Combination of that Fund into the PIF Partners SmallCap Growth Fund II (the
"Acquiring Fund"). For a summary discussion of the form and consequences of, and
the reasons for, the Reorganization, see "Overview of the Proposed
Reorganization."
Comparison of Acquired and Acquiring Funds
Principal Partners SmallCap Growth Fund PIF Partners SmallCap Growth Fund II
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as $19,106,648 $294,904,933
of 10/31/2004:
Investment Emerald Advisers, Inc. ("Emerald") and UBS Global Asset Management (Americas) Inc., ("UBS
Sub-Advisors and Global AM") are the Sub-Advisors to both Funds.
Portfolio
Managers: The Emerald portfolio managers for both Funds are:
--Kenneth G. Mertz II, CFA, President; and
--Stacey L. Sears, Senior Vice President and Portfolio Manager.
For UBS Global AM, investment decisions for both Funds are
made by an investment management team which includes:
--Paul A. Graham, Jr., Executive Director and Co-Head of U.S. SmallCap Growth Equity; and
--David N. Wabnik, Executive Director and Co-Head of U.S. SmallCap Growth Equity.
No member of the investment management team is primarily
responsible for making portfolio purchases.
Investment Both Funds seek to provide long-term capital growth.
Objectives:
Main Investment Both Funds invest primarily in equity securities. Under normal market conditions, both Funds
Strategies: invest at least 80% of their assets in equity securities of companies with small market
capitalizations (capitalizations equal to or smaller than
the greater of $2.5 billion or the highest market
capitalization of the companies in the Russell 2000 Growth
Index) (as of December 31, 2004 this range was between $59
million and $3.6 billion), at the time of purchase. Up to
25% of each Fund's total assets may be invested in foreign
securities.
UBS Global AM seeks to invest in companies that possess
dominant market positions or franchises, a major technical
edge, or a unique competitive advantage. To this end, UBS
Global AM considers earnings revision trends, positive
stock price momentum and sales acceleration when selecting
securities. UBS Global AM may also invest in securities of
emerging growth companies which are companies that it
expects to experience above average earnings or cash flow
growth or meaningful changes in underlying asset values.
Investments in equity securities may include common stock
and preferred stock.
Utilizing fundamental analysis, Emerald seeks to invest in
the common stock of companies with distinct competitive
advantages, strong management teams, leadership positions,
high revenue and earnings growth rates versus peers,
differentiated growth drivers and limited sell-side
research.
The Funds may purchase securities issued as part of, or a
short period after, companies' initial public offerings
("IPOs"), and may at times dispose of those shares shortly
after their acquisition.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
The Acquired and Acquiring Funds have the same investment objectives
and strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisors can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal Partners PIF Partners SmallCap
SmallCap Growth Fund Growth Fund II
(Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
- --------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the
Effective Time.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Partners SmallCap Growth Fund Class A 0.90% 0.25% 0.99% 2.14%*
(Acquired Fund) Class B 0.90% 0.91% 1.07% 2.88%*
PIF Partners SmallCap Growth Fund II** Class A 1.00% 0.25% 0.87% 2.12%
(Acquiring Fund) Class B 1.00% 0.91% 0.94% 2.85%
- -----------
<FN>
* The Manager voluntarily agreed to limit the Acquired Fund's expenses and,
if necessary, pay expenses normally payable by that Fund through the period
ended February 28, 2006. If such expense limit were reflected in the table,
the Acquired Fund's Total Operating Expenses would be 1.95% for Class A
shares and 2.70% for Class B shares.
** The Manager has agreed to contractually cap expenses in order to reduce the
Total Operating Expenses of the Acquiring Fund to not more than 1.95% for
Class A shares and not more than 2.70% for Class B shares. This expense cap
will continue in effect until June 30, 2008.
</FN>
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Partners SmallCap Growth Fund Class A $780 $1,206 $1,658 $2,905
(Acquired Fund) Class B $700 $1,211 $1,740 $2,948
PIF Partners SmallCap Growth Fund II* Class A $762 $1,152 $1,567 $2,719
(Acquiring Fund) Class B $682 $1,159 $1,654 $2,767
If you do not sell your shares at the end of the period:
Principal Partners SmallCap Growth Fund Class A $780 $1,206 $1,658 $2,905
(Acquired Fund) Class B $291 $892 $1,518 $2,948
PIF Partners SmallCap Growth Fund II* Class A $762 $1,152 $1,567 $2,719
(Acquiring Fund) Class B $273 $838 $1,430 $2,767
- -----------
<FN>
* These examples reflect the Manager's agreement to contractually cap
expenses in order to reduce the Total Operating Expenses of the Acquiring
Fund. This expense cap will remain in effect until June 30, 2008.
</FN>
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal Partners SmallCap Growth Fund PIF Partners SmallCap Growth Fund II
(Acquired Fund) (Acquiring Fund)
0.90% of the first $250 million; 1.00% of the first 500 million;
0.85% of the next $250 million; 0.98% of the next $500 million;
0.80% of the next $250 million; 0.96% of the next $500 million; and
0.75% of the next $250 million; and 0.95% of the excess over $1.5 billion
0.70% of the excess over $1 billion of of average daily net assets.
average daily net assets.
Emerald and UBS Global AM are the Sub-Advisors to both the Acquired
Fund and the Acquiring Fund. Emerald is a subsidiary of Emerald Asset
Management, which is owned by eleven inside shareholders and one outside
minority shareholder. Its principal offices are located at 1703 Oregon Pike
Road, Suite 101, Lancaster, Pennsylvania 17601. UBS Global AM, a U.S.
corporation, is a subsidiary of UBS AG and a member of its UBS Global Asset
Management business group. UBS Global AM is located at 51 West 52nd Street, New
York, NY 10019. For their services, the Sub-Advisors are paid a fee by the
Manager, and not by either Fund.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek long-term growth of
capital by investing primarily in equity securities of small capitalization
companies, they have the same risks. The primary risks include:
Stock Because both Funds purchase equity securities, the Funds are subject to the risk that stock
Market prices will fall over short or extended periods of time. Individual companies may report
Risk: poor results or be negatively effected by industry and/or economic trends and developments.
In response, the price of securities issued by such
companies may decline. These factors contribute to price
volatility, which is the principal risk of investing in
the Funds.
Small Capitalization The Funds' investments in companies with smaller market capitalizations may involve greater
Risks: risks and price volatility than investments in larger, more mature companies. Smaller
companies may be developing or marketing new products or
services for which markets are not yet established and
may never become established. While small, unseasoned
companies may offer greater opportunities for capital
growth than larger, more established companies, they also
involve greater risks.
Growth Stocks Because growth securities typically do not make dividend payments to shareholders, investment
Risk: returns are based on capital appreciation, making returns more dependent on market increases
and decreases. Growth stocks may therefore be more volatile than non-growth stocks.
Sector Risk: UBS Global AM may group companies with similar characteristics into broad categories called sectors.
Sector risk is the possibility that a certain sector may
underperform other sectors or the market as a whole. To
the extent a Fund's portfolio holdings are allocated to a
particular sector, the Fund's performance will be more
susceptible to any economic, business or other
developments that generally affect that sector.
Foreign Securities The Funds may invest in foreign securities, which carry risks that are not generally found in
Risk: stocks of U.S. companies. These risks include loss of value as a result of political,
financial, and economic events in foreign countries. In addition, foreign securities may be
subject to less stringent accounting and disclosure standards than are required of U.S.
companies.
Market Segment Risk: The Funds are each subject to the risk that its principal market segment, small
capitalization growth stocks, may underperform compared to the equity markets as a whole.
The securities purchased by the Funds present greater opportunities for growth due to high
earnings growth potential, but may also involve greater risks than securities that do not
have the same potential. The value of each Fund's securities may fluctuate on a daily
basis. Each Fund's share price may fluctuate more than that of funds primarily invested in
stocks of mid- and large-sized companies. As with all mutual funds, as the value of each
Fund's assets rises or falls, the Fund's share price changes. If you sell your shares when
their value is less than the price you paid, you will lose money.
Initial Public Each Fund's purchase of shares issued in IPOs exposes it to the additional risks associated
Offerings ("IPOs") with companies that have little operating history as public companies, as well as to the
Risk: risks inherent in those sectors of the market where these new issuers operate. The market
for IPO issuers has been volatile and share prices of
certain newly-public companies have fluctuated in
significant amounts over short periods of time. In
addition, the Sub-Advisor cannot guarantee continued
access to IPO offerings and may at times dispose of those
shares shortly after their acquisition.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Partners SmallCap Growth Fund
(Acquired Fund)*
Class A (before taxes) 10.22% N/A N/A -11.38% 12/22/2000
(after taxes on distributions)** 10.22% N/A N/A -11.38%
(after taxes on distributions and sale 6.64% N/A N/A -9.38%
of shares)
Class B 9.16% N/A N/A -12.07% 12/22/2000
PIF Partners SmallCap Growth Fund II (Acquiring Fund)
Institutional Class 12/06/2000
- --Class A (before taxes) 10.03% N/A N/A -4.86%
(after taxes on distributions)** 9.62% N/A N/A -4.99%
(after taxes on distributions and sale 7.05% N/A N/A -4.11%
of shares)
- --Class B 9.22% N/A N/A -5.57%
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005 meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have the same investment objectives,
policies and risks, and their combination will offer shareholders of the
Acquired Fund continuity of investment objectives and expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The fundamental investment restrictions of the two Funds reflect differences
that the Board does not believe are material in light of the benefits of the
Combination;
- --Emerald and UBS Global AM, the Sub-Advisors to the Acquired Fund, are also the
Sub-Advisors to the Acquiring Fund and may be expected to provide continuity in
the quality of their investment advisory services and personnel;
- --Although the Acquiring Fund has a higher investment management fee and is
expected to have higher overall expenses than the Acquired Fund immediately
after the Reorganization, the Board determined that such level of fees is within
industry norms and that overall expenses may be expected to decrease over time,
and that the impact of the higher management fee was outweighed by the other
benefits of the Combination and the Manager's agreement to contractually cap the
expenses of the Class A and Class B shares of the Acquiring Fund so that they
will not exceed the pre-Combination expenses of the Acquired Fund for a
three-year period after the Effective Time of the Reorganization; further,
although future expense ratios cannot be known, if sales expectations are met,
the expense ratios of the Acquiring Fund are expected to be approximately at or
below the projected expense ratios of the Acquired Fund absent the
Reorganization;
- --The Acquiring Fund has outperformed the Acquired Fund since their inception
dates; and
- --The Combination will result in a combined Fund which will have a larger asset
base and over time may be expected to operate more efficiently and have improved
prospects for growth and attendant reductions in overall expenses.
PROPOSAL 14
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL REAL ESTATE SECURITIES FUND, INC. INTO
THE PIF REAL ESTATE SECURITIES FUND
(Principal Real Estate Securities Fund Only)
Overview
Shareholders of the Principal Real Estate Securities Fund, Inc. (the
"Acquired Fund") are being asked to approve the Reorganization providing for the
Combination of that Fund into the PIF Real Estate Securities Fund (the
"Acquiring Fund"). For a summary discussion of the form and consequences of, and
the reasons for, the Reorganization, see "Overview of Proposed Reorganization."
Comparison of Acquired and Acquiring Funds
Principal Real Estate Securities Fund, Inc. PIF Real Estate Securities Fund
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as $81,463,784 $419,075,279
of 10/31/2004:
Investment The Manager directly manages the Acquired Principal-REI is the Sub-Advisor to the
Sub-Advisors and Fund. Acquiring Fund.
Portfolio Manager:
The portfolio manager for both Funds is Kelly D. Rush, CFA,
director of Real Estate Investment Trust ("REIT") activity.
Investment Both Funds seek to generate a total return by investing primarily in equity securities of
Objectives: companies principally engaged in the real estate industry.
Main Investment Under normal markets conditions, both Funds invest at least 80% of their assets in equity
Strategies: securities of companies principally engaged in the real estate industry. For purposes of each
Fund's investment policies, a real estate company has at
least 50% of its assets, income or profits derived from
products or services related to the real estate industry.
Real estate companies include REITs and companies with
substantial real estate holdings such as paper, lumber,
hotel and entertainment companies. Companies whose products
and services relate to the real estate industry include
building supply manufacturers, mortgage lenders and
mortgage servicing companies.
REITs are corporations or business trusts that are
permitted to eliminate corporate level federal income taxes
by meeting certain requirements of the Internal Revenue
Code. REITs are characterized as:
o Equity REITs, which primarily own property and generate
revenue from rental income;
o Mortgage REITs, which invest in real estate mortgages;
and
o Hybrid REITs, which combine the characteristics of both
equity and mortgage REITs.
In selecting securities for the Funds, the Manager for the
Acquired Fund and the Sub-Advisor for the Acquiring Fund
focus on equity REITs.
Each Fund may invest up to 25% of its assets in securities of foreign real estate companies.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
Because both of the Acquired and Acquiring Funds seek to generate a
total return by investing primarily in equity securities of companies
principally engaged in the real estate industry, they have the same investment
objectives and strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Manager and the
Sub-Advisor can select for the respective Funds is contained in the PMF SAI and
the Statement of Additional Information. See "Comparative Information About the
PMF and PIF Funds -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal Real Estate PIF Real Estate
Securities Fund Securities Fund
(Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
- ----------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the
Effective Time of Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Real Estate Securities Fund Class A 0.90% 0.25% 0.49% 1.64%
(Acquired Fund) Class B 0.90% 0.91% 0.54% 2.35%
PIF Real Estate Securities Fund Class A 0.85% 0.25% 0.47% 1.57%
(Acquiring Fund) Class B 0.85% 0.91% 0.51% 2.27%
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Real Estate Securities Fund Class A $732 $1,063 $1,415 $2,407
(Acquired Fund) Class B $649 $1,058 $1,483 $2,427
PIF Real Estate Securities Fund Class A $726 $1,042 $1,381 $2,335
(Acquiring Fund) Class B $641 $1,035 $1,444 $2,347
If you do not sell your shares at the end of the period:
Principal Real Estate Securities Fund Class A $732 $1,063 $1,415 $2,407
(Acquired Fund) Class B $238 $733 $1,255 $2,427
PIF Real Estate Securities Fund Class A $726 $1,042 $1,381 $2,335
(Acquiring Fund) Class B $230 $709 $1,215 $2,347
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal Real Estate Securities Fund PIF Real Estate Securities Fund
(Acquired Fund) (Acquiring Fund)
0.90% of the first $100 million; 0.85% of the first 500 million;
0.85% of the next $100 million; 0.83% of the next $500 million;
0.80% of the next $100 million; 0.81% of the next $500 million; and
0.75% of the next $100 million; and 0.80% of the excess over $1.5 billion
0.70% of the excess over $400 million of of average daily net assets.
average daily net assets.
The Manager directly manages the Acquired Fund. Principal-REI, the
Sub-Advisor to the Acquiring Fund, is an indirect wholly-owned subsidiary of
Principal Life and an affiliate of the Manager. Its principal offices are
located at 801 Grand Avenue, Des Moines, Iowa 50392. For its services to the
Acquiring Fund, the Sub-Advisor is paid a fee by the Manager, and not by the
Fund.
At the PIF Shareholders Meeting, shareholders of the Acquiring Fund
will be asked to approve a proposal that will permit the Manager, pursuant to an
SEC order, to select and contract with Sub-Advisors to the Acquiring Fund (other
than Sub-Advisors affiliated with the Manager) after approval by the PIF Board
of Directors but without shareholder approval. If approved by shareholders of
the Acquiring Fund, the proposal will not be implemented until the PIF Board
determines to manage the Acquiring Fund in reliance on the SEC order. The
shareholders of the Acquired Fund have previously approved granting the Manager
comparable authority to select and contract with Sub-Advisors to the Acquired
Fund (other than Sub-Advisors affiliated with the Manager) after approval by the
Board of Directors of the Acquired Fund but without shareholder approval.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek to generate a total return
by investing primarily in equity securities of companies principally engaged in
the real estate industry, they have the same risks. The main risks include:
Real Estate Securities of real estate companies are subject to securities market risks as well as risks
Risk: similar to those of direct ownership of real estate. These include:
o Declines in the value of real estate;
o Risks related to general and local economic conditions;
o Dependency on management skills;
o Heavy cash flow dependency;
o Possible lack of available mortgage funds;
o Overbuilding;
o Extended vacancies in properties;
o Increases in property taxes and operating expenses;
o Changing in zoning laws;
o Expenses incurred in the cleanup of environmental problems;
o Casualty or condemnation losses; and
o Changes in interest rates.
REIT Risk: The Funds may invest in equity REITs and mortgage REITs. Equity REITs are affected by the
changes in the value of the properties owned by the trust. Mortgage REITs are affected by
the quality of the credit extended. Both equity and mortgage REITs:
o May not be diversified with regard to the types of tenants (thus subject to
business developments of the tenant(s));
o May not be diversified with regard to the geographic locations of the properties
(thus subject to regional economic developments);
o Are subject to cash flow dependency and defaults by borrowers; and
o Could fail to qualify for tax-free pass-through of income under the Internal
Revenue Code.
Foreign Securities The Funds may invest in foreign securities, which carry risks that are not generally found
Risk: in stocks of U.S. companies. These risks include loss of value as a result of political,
financial, and economic events in foreign countries. In addition, foreign securities may be
subject to less stringent accounting and disclosure standards than are required of U.S.
companies.
Stock Market Risk: The net asset value of each Fund's shares is affected by changes in the value of the
securities it owns. The prices of equity securities held by the Funds may decline in
response to certain events including those directly involving issuers of these securities,
adverse conditions affecting the general economy, or overall market declines. In the short
term, stock prices can fluctuate dramatically in response to these factors. As with all
mutual funds, as the values of each Fund's assets rise or fall, the Fund's share price
changes. If you sell your shares when their value is less than the price you paid, you will
lose money.
Sector Risk: Because the Funds invest at least 80% of their net assets in securities of companies
principally engaged in the real estate industry, the Funds are subject to sector risk; that
is, the possibility that the real estate sector may underperform other sectors or the market
as a whole. As the Manager for the Acquired Fund, or the Sub-Advisor for the Acquiring
Fund, allocates more of the Fund's portfolio holdings to the real estate sector, the Fund's
performance will be more susceptible to any economic, business or other developments that
generally affect that sector. The share prices of the Funds may fluctuate more widely than
the value of shares of a fund that invests in a broader range of industries.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Real Estate Securities Fund (Acquired Fund)*
Class A (before taxes) 33.42% 22.39% N/A 12.35% 12/31/1997
(after taxes on distributions)** 29.81% 20.44% N/A 10.63%
(after taxes on distributions and sale 24.17% 18.77% N/A 9.81%
of shares)
Class B 32.44% 21.55% N/A 11.61% 12/31/1997
PIF Real Estate Securities Fund (Acquiring Fund)
Institutional Class 03/01/2001
- --Class A (before taxes) 33.16% N/A N/A 22.61%
(after taxes on distributions)** 31.04% N/A N/A 20.93%
(after taxes on distributions and sale 22.53% N/A N/A 18.86%
of shares)
- --Class B 32.24% N/A N/A 21.76%
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have the same investment objectives,
policies and risks, and their combination will offer shareholders of the
Acquired Fund continuity of investment objectives and expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --Although the Manager directly manages the Acquired Fund and Principal-REI is
the Sub-Advisor to the Acquiring Fund, both Funds have the same portfolio
manager and Principal-REI is expected to provide at least the same quality of
investment advisory services as the Manager;
- --The Acquiring Fund has a lower investment management fee at current asset
levels, although a higher management fee rate structure at higher asset levels,
and is expected to have lower overall expense ratios than the Acquired Fund;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund, and, although the Acquiring Fund during their common period of existence
has somewhat underperformed the Acquired Fund, the performance of the two Funds
for such period is closely comparable; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 15
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL BOND FUND, INC. INTO THE
PIF BOND & MORTGAGE SECURITIES FUND
(Principal Bond Fund Only)
Overview
Shareholders of the Principal Bond Fund, Inc. (the "Acquired Fund") are
being asked to approve the Reorganization providing for the Combination of that
Fund into the PIF Bond & Mortgage Securities Fund (the "Acquiring Fund"). For a
summary discussion of the form and consequences of, and the reasons for, the
Reorganization, see "Overview of the Proposed Reorganization."
Comparison of Acquired and Acquiring Funds
Principal Bond Fund, Inc. PIF Bond & Mortgage Securities Fund
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as $210,237,090 $639,723,828
of 10/31/2004:
Investment The Manager directly manages the Acquired Fund. Principal Global is the Sub-Advisor for the
Sub-Advisors: Acquiring Fund.
Portfolio The portfolio managers for both Funds are:
Managers: --William C. Armstrong, CFA, leader of the multi-sector/core portfolio management group.
--Timothy R. Warrick, CFA, co-portfolio manager.
Investment The Acquired Fund seeks to provide as high a The Acquiring Fund seeks to provide current
Objectives: level of income as is consistent with income.
preservation of capital and prudent investment
risk.
Main Investment Under normal circumstances, both Funds invest at least 80% of their assets in intermediate
Strategies: maturity fixed-income or debt securities rated BBB or higher by Standard & Poor's Rating
Services ("S&P") or Baa or higher by Moody's Investors Service, Inc. ("Moody's"). The Funds
consider the term "bond" to mean any debt security. Normally, the Funds invest in:
o Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities;
o Mortgage-backed securities representing an interest in a pool of mortgage loans;
o Debt securities and taxable municipal bonds rated, at the time of purchase, in one of
the top four categories by S&P or Moody's or, if
not rated, in the opinion of the Manager (Acquired
Fund) and Sub-Advisor (Acquiring Fund) of
comparable quality; and
o Securities issued or guaranteed by the governments of Canada (provincial or federal
government) or the United Kingdom payable in U.S. dollars.
The rest of each Fund's assets may be invested in:
o Preferred and common stock that may be convertible
(may be exchanged for a fixed number of shares of
common stock of the same issuer) or may be
non-convertible; or
o Securities rated less than the four highest grades
of S&P or Moody's (i.e. less than investment
grade) but not lower than CCC (S&P) or Caa
(Moody's).
During the fiscal year ended October 31, 2004, the average
ratings of each Fund's assets, based on market values at
the end of each month, were as follows (all ratings are by
Moody's):
Acquired Fund Acquiring Fund
Securities rated "Aaa"..................... 54.54% 54.65%
Securities rated "Aa"...................... 5.36% 6.48%
Securities rated "A"....................... 12.11% 12.41%
Securities rated "Baa"..................... 18.26% 18.12%
Securities rated "Ba"...................... 5.20% 3.99%
Securities rated "B"....................... 4.05% 3.89%
Securities rated "Ca" or lower............. 0.48% 0.46%
The percentages for Aaa, Aa, A, Baa, Ba, B and Ca shown
above for the Acquired Fund include 0.47%, 0.41%, 0.05%,
0.10%, 0.05%, 0.23% and 0.01%, respectively, of unrated
securities that have been determined by the Manager to be
of comparable quality. The Acquiring Fund held no unrated
securities during the fiscal year ended October 31, 2004.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
Although the Acquired Fund, in contrast to the Acquiring Fund, has as
part of its investment objective preservation of capital, the Acquired Fund
and the Acquiring Fund otherwise have substantially the same investment
objectives and strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Manager and the
Sub-Advisor can select for the respective Funds is contained in the PMF SAI and
the Statement of Additional Information. See "Comparative Information About the
PMF and PIF Funds -- Location of Further Information About the Funds" below.
For an explanation of debt securities ratings, see Appendix C to this
Proxy Statement/Prospectus.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal Bond PIF Bond & Mortgage
Fund Securities Fund
(Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 4.75%(1) None 4.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
- ------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net assets
of the Acquired Fund (Class A and Class B shares) for the fiscal year ended
October 31, 2004, and (b) the estimated ratio of expenses to average net assets
of the Acquiring Fund (Class A and Class B shares) for the year ending October
31, 2005. The Class A and Class B shares of the Acquiring Fund are new share
classes which the Acquiring Fund does not intend to sell prior to the time of
Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Bond Fund Class A 0.47% 0.20% 0.27% 0.94%
(Acquired Fund) Class B 0.47% 0.78% 0.35% 1.60%
PIF Bond & Mortgage Securities Fund* Class A 0.54% 0.20% 0.25% 0.99%
(Acquiring Fund) Class B 0.54% 0.78% 0.33% 1.65%
- ----------------------
<FN>
* The Manager has agreed to contractually cap expenses in order to reduce the
Total Operating Expenses of the Acquiring Fund to not more than 0.94% for
Class A shares and not more than 1.60% for Class B shares. This expense cap
will remain in effect until June 30, 2009.
</FN>
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Bond Fund Class A $566 $760 $970 $1,575
(Acquired Fund) Class B $576 $837 $1,107 $1,641
PIF Bond & Mortgage Securities Fund* Class A $566 $760 $970 $1,575
(Acquiring Fund) Class B $576 $837 $1,107 $1,641
If you do not sell your shares at the end of the period:
Principal Bond Fund Class A $566 $760 $970 $1,575
(Acquired Fund) Class B $163 $505 $871 $1,641
PIF Bond & Mortgage Securities Fund* Class A $566 $760 $970 $1,575
(Acquiring Fund) Class B $163 $505 $871 $1,641
- ---------------
<FN>
* These examples reflect the Manager's agreement to contractually cap
expenses in order to reduce the Total Operating Expenses of the Acquiring
Fund. This expense cap will remain in effect until June 30, 2009.
</FN>
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal Bond Fund PIF Bond & Mortgage Securities Fund
(Acquired Fund) (Acquiring Fund)
0.50% of the first $100 million; 0.55% of the first 500 million;
0.45% of the next $100 million; 0.53% of the next $500 million;
0.40% of the next $100 million; 0.51% of the next $500 million; and
0.35% of the next $100 million; and 0.50% of the excess over $1.5 billion
0.30% of the excess over $400 million of of average daily net assets.
average daily net assets.
The Manager directly manages the Acquired Fund. Principal Global, the
Sub-Advisor to the Acquiring Fund, is an indirect wholly-owned subsidiary of
Principal Life and an affiliate of the Manager. Its principal offices are
located at 801 Grand Avenue, Des Moines, Iowa 50392. For its services to the
Acquiring Fund, the Sub-Advisor is paid a fee by the Manager, and not by the
Fund.
At the PIF Shareholders Meeting, shareholders of the Acquiring Fund
will be asked to approve a proposal that will permit the Manager, pursuant to an
SEC order, to select and contract with Sub-Advisors to the Acquiring Fund (other
than Sub-Advisors affiliated with the Manager) after approval by the PIF Board
of Directors but without shareholder approval. If approved by shareholders of
the Acquiring Fund, the proposal will not be implemented until the PIF Board
determines to manage the Acquiring Fund in reliance on the SEC order. The
shareholders of the Acquired Fund have previously approved granting the Manager
comparable authority to select and contract with Sub-Advisors to the Acquired
Fund (other than Sub-Advisors affiliated with the Manager) after approval by the
Board of Directors of the Acquired Fund but without shareholder approval.
The Board of Directors of PIF has approved proposed sub-sub-advisory
agreements appointing Spectrum and Post as new sub-sub-advisors to the Acquiring
Fund. The proposed agreements will be submitted for approval by shareholders of
the Acquiring Fund at the PIF Shareholders Meeting. Each of Spectrum and Post is
an affiliate of the Manager and a member of the Principal Financial Group.
Spectrum's offices are located at 4 High Ridge Park, Stamford, Connecticut
06905. Post's offices are located at 11755 Wilshire Blvd., Suite 1400, Los
Angeles, California 90025. Personnel from Post have been provided to Principal
Global to provide day-to-day investment management for the Acquiring Fund
pursuant to an Investment Services Agreement among the Acquiring Fund, the
Manager and Principal Life.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek current income by
investing primarily in intermediate fixed-income securities having comparable
debt ratings, they have substantially the same risks. The main risks include:
Duration The average portfolio durations of the Funds normally varies within a three- to six-year
Risks: time frame based on the Manager's (Acquired Fund) or Sub-Advisor's (Acquiring Fund) forecast
for interest rates. Duration is a measure of the expected
life of a fixed-income security that is used to determine
the sensitivity of a security's price to changes in
interest rates. A fund with a longer average portfolio
duration will be more sensitive to changes in interest
rates than a fund with a shorter average portfolio
duration.
U.S. Government The Funds may invest in debt and mortgage-backed securities issued by government-sponsored
Sponsored Securities enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National
Risks: Mortgage Association and the Federal Home Loan Banks. Although the issuing agency,
instrumentality or corporation may be chartered or sponsored by the U.S. government, their
securities are neither issued nor guaranteed by the U.S. Treasury.
Interest Rate When interest rates fall, the price of a debt security rises, and when interest rates rise,
Risk: the price declines. In addition, the value of securities held by the Funds may be affected
by factors such as credit rating of the entity that
issued the security and its maturity. Lower quality and
longer maturity securities will be subject to greater
credit risk and price fluctuations than higher quality
and shorter maturity securities.
Non-Investment Fixed-income securities that are not investment grade are commonly referred to as "junk
Grade Fixed-Income bonds" or high yield securities. These securities offer a potentially higher yield than
Securities Risk: other, higher rated securities, but they carry a greater degree of risk and are considered
speculative by the major credit rating agencies.
Municipal Securities Principal and interest payments on municipal securities may not be guaranteed by the issuing
Risk: body and may be payable only from monies derived from a particular source. If the source
does not perform as expected, principal and income
payments may not be made on time or at all. In addition,
the market for municipal securities is often thin and may
be temporarily affected by large purchases and sales,
including those of the Funds. General conditions in the
financial markets and the size of a particular offering
may also negatively affect the returns of a municipal
security.
Credit Risk: Lower quality and longer maturity bonds will be subject to greater credit risk and price fluctuations
than higher quality and shorter maturity bonds. Bonds
held by the Funds may be affected by unfavorable
political, economic, or government developments that
could affect the repayment of principal or the payment of
interest
Prepayment Risk: Mortgage-backed securities are subject to prepayment risk. When interest rates decline, significant
unscheduled payments may result. These prepayments must
then be reinvested at lower rates. Prepayments may also
shorten the effective maturities of these securities,
especially during periods of declining interest rates. On
the other hand, during periods of rising interest rates,
a reduction in prepayments may increase the effective
maturities of these securities, subjecting them to the
risk of decline in market value in response to rising
interest rates. This may increase the volatility of the
Funds.
Active Portfolio Both Funds may actively trade securities in an attempt to achieve their investment
Trading Risk: objective. High turnover rates may increase the Funds' trading costs and may have an
adverse impact on their performance.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Bond Fund (Acquired Fund)*
Class A (before taxes) 4.66% 6.52% 7.05% N/A 12/18/1987
(after taxes on distributions)** 3.07% 4.43% 4.62% N/A
(after taxes on distributions and sale 3.01% 4.28% 4.52% N/A
of shares)
Class B 4.05% 5.76% 6.50% N/A 12/09/1994
PIF Bond & Mortgage Securities Fund (Acquiring Fund)
Institutional Class (before taxes) 03/01/2001
- --Class A (before taxes) 4.35% N/A N/A 5.45%
(after taxes on distributions)** 2.94% N/A N/A 3.68%
(after taxes on distributions and sale 2.82% N/A N/A 3.57%
of shares)
- --Class B 3.66% N/A N/A 4.75%
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --Although the Acquired Fund, in contrast to the Acquiring Fund, has as part of
its investment objective preservation of capital, the Acquired Fund and the
Acquiring Fund otherwise have substantially the same investment objectives,
policies and risks, and their combination will offer shareholders of the
Acquired Fund continuity of investment objectives and expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --Principal Global, as the Sub-Advisor to the Acquiring Fund, may be expected to
provide at least the same quality of investment advisory services and personnel
(the Funds currently have some of the same portfolio managers) as have been
provided by the Manager as the Advisor to the Acquired Fund;
- --Although the Acquiring Fund has a higher investment management fee and is
expected to have higher overall expenses than the Acquired Fund immediately
after the Reorganization, the Board determined that such level of fees is within
industry norms and that overall expenses may be expected to decrease over time,
and that the impact of the higher management fee was outweighed by the other
benefits of the Combination and the Manager's agreement to contractually cap the
expenses of the Class A and Class B shares of the Acquiring Fund so that they
will not exceed the pre-Combination expenses of the Acquired Fund for a
four-year period after the Effective Time of the Reorganization; further,
although future expense ratios cannot be known, if sales expectations are met,
the expense ratios of the Acquiring Fund are expected to be approximately at or
below the projected expense ratios of the Acquired Fund absent the
Reorganization;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund, but during their common period of existence has somewhat underperformed
the Acquired Fund; the Board did not consider this factor as outweighing the
other benefits of the Combination; and
- --The Combination will result in a combined Fund which will have a larger asset
base and over time may be expected to operate more efficiently and have improved
prospects for growth and attendant reductions in overall expenses.
PROPOSAL 16
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC. INTO THE
PIF GOVERNMENT SECURITIES FUND
(Principal Government Securities Income Fund Only)
Overview
Shareholders of the Principal Government Securities Income Fund, Inc.
(the "Acquired Fund") are being asked to approve the Reorganization providing
for the Combination of that Fund into the PIF Government Securities Fund (the
"Acquiring Fund"). For a summary discussion of the form and consequences of, and
the reasons for, the Reorganization, see "Overview of Proposed Reorganization."
Comparison of Acquired and Acquiring Funds
Principal Government Securities
Income Fund, Inc. PIF Government Securities Fund
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as $328,777,079 $119,246,630
of 10/31/2004:
Investment Principal Global is the Sub-Advisor to both Funds.
Sub-Advisors and
Portfolio The portfolio managers for both Funds are:
Managers: --Mark Karstrom, portfolio manager of mortgage-backed securities; and
--Martin J. Schafer, portfolio manager specializing in managing mortgage-backed
securities and high quality short, intermediate and long duration portfolios.
Investment The Acquired Fund seeks a high level of The Acquiring Fund seeks to provide current
Objectives: current income, liquidity and safety of income.
principal by purchasing obligations issued or
guaranteed by the U.S. government or its
agencies. The guarantees by the U.S.
government extend only to principal and
interest.
Main Investment Both Funds seek to achieve their investment objectives by investing at least 80% of their
Strategies: assets in securities that are issued by the U.S. government, its agencies or
instrumentalities. The Funds may invest in mortgage-backed
securities representing an interest in a pool of mortgage
loans. These securities are rated AAA by Standard & Poor's
Corporation or Aaa by Moody's Investor Services, Inc., or,
if unrated, determined by the Sub-Advisor to be of
equivalent quality.
The Funds rely on the professional judgment of the
Sub-Advisor to make decisions about their portfolio
securities. The basic investment philosophy of the
Sub-Advisor is to seek undervalued securities that
represent good long-term investment opportunities.
Securities may be sold when the Sub-Advisor believes they
no longer represent good long-term value.
The Funds may also hold cash and cash equivalents. The size
of the each Fund's cash position depends on various
factors, including market conditions and purchases and
redemptions of Fund shares. A large cash position could
impact the ability of each Fund to achieve its objectives
but it also would reduce each Fund's exposure in the event
of a market downturn and provide liquidity to make
additional investments or to meet redemptions.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
Although the Acquired Fund, in contrast to the Acquiring Fund, has as
part of its investment objective liquidity and safety of principal, the Acquired
Fund and the Acquiring Fund otherwise have substantially the same investment
objectives and strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
For an explanation of debt securities ratings, see Appendix C to this
Proxy Statement/Prospectus.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal Government PIF Government
Securities Securities Fund
Income Fund (Acquiring Fund)
(Acquired Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 4.75%(1) None 4.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
- ----------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the
Effective Time of Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Government Securities Income Fund Class A 0.44% 0.19% 0.19% 0.82%
(Acquired Fund) Class B 0.44% 0.92% 0.24% 1.60%
PIF Government Securities Fund Class A 0.40% 0.19% 0.18% 0.77%
(Acquiring Fund) Class B 0.40% 0.92% 0.23% 1.55%
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Government Securities Income Fund Class A $555 $724 $908 $1,440
(Acquired Fund) Class B $576 $873 $1,107 $1,593
PIF Government Securities Fund Class A $550 $709 $883 $1,384
(Acquiring Fund) Class B $571 $822 $1,082 $1,537
If you do not sell your shares at the end of the period:
Principal Government Securities Income Fund Class A $555 $724 $908 $1,440
(Acquired Fund) Class B $163 $505 $871 $1,593
PIF Government Securities Fund Class A $550 $709 $883 $1,384
(Acquiring Fund) Class B $158 $490 $845 $1,537
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal Government Securities Income Fund PIF Government Securities Fund
(Acquired Fund) (Acquiring Fund)
0.50% of the first $100 million; 0.40% of the first 500 million;
0.45% of the next $100 million; 0.38% of the next $500 million;
0.40% of the next $100 million; 0.36% of the next $500 million; and
0.35% of the next $100 million; and 0.35% of the excess over $1.5 billion
0.30% of the excess over $400 million of of average daily net assets.
average daily net assets.
Principal Global, the Sub-Advisor to both the Acquired and Acquiring
Funds, is an indirect wholly-owned subsidiary of Principal Life and an affiliate
of the Manager. Its principal offices are located at 801 Grand Avenue, Des
Moines, Iowa 50392. For its services, the Sub-Advisor is paid a fee by the
Manager, and not by either Fund.
At the PIF Shareholders Meeting, shareholders of the Acquiring Fund
will be asked to approve a proposal that will permit the Manager, pursuant to an
SEC order, to select and contract with Sub-Advisors to the Acquiring Fund (other
than Sub-Advisors affiliated with the Manager) after approval by the PIF Board
of Directors but without shareholder approval. If approved by shareholders of
the Acquiring Fund, the proposal will not be implemented until the PIF Board
determines to manage the Acquiring Fund in reliance on the SEC order. The
Manager currently has authority to select and contract with Sub-Advisors to the
Acquired Fund (other than Sub-Advisors affiliated with the Manager) after
approval by the Board of Directors of the Acquired Fund but without shareholder
approval.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek current income by
investing primarily in securities issue by the U.S. government or it agencies or
instrumentalities, they have substantially the same risks. The main risks
include:
U.S. Government U.S. government securities do not involve the degree of credit risk associated with
Securities Risks: investments in lower quality fixed-income securities. As a result, the yields available
from U.S. government securities are generally lower than
the yields available from many other fixed-income
securities. Like other fixed-income securities, the
values of U.S. government securities change as interest
rates fluctuate. Fluctuations in the value of each Fund's
securities do not affect interest income on securities
already held by the Fund but are reflected in the Fund's
price per share. Since the magnitude of these
fluctuations generally is greater at times when the
Funds' average maturity is longer, under certain market
conditions the Funds may invest in short-term investments
yielding lower current income rather than investing in
higher yielding longer term securities.
U.S. Government The Funds may both invest in debt and mortgage-backed securities issued by
Sponsored Securities government-sponsored enterprises such as the Federal Home Loan Mortgage Corporation, the
Risks: Federal National Mortgage Association and the Federal Home Loan Banks. Although the issuing
agency, instrumentality or corporation may be chartered or sponsored by the U.S. government,
their securities are neither issued nor guaranteed by the U.S. Treasury.
Interest Rate Risk: The value of fixed-income securities held by the Funds may be affected by factors such as
changing interest rates. When interest rates rise, the value of fixed-income securities
will generally fall. Conversely, a drop in interest rates will generally cause an increase
in the value of fixed-income securities. Some fixed-income investments give the issuer the
option to call, or redeem, its securities before their maturity date. If an issuer calls
its security during a time of declining interest rates, the Funds may have to reinvest the
proceeds in securities with lower rates. In addition, each Fund's appreciation may be
limited by issuer call options having more value during times of declining interest rates.
Prepayment The Funds may both invest in mortgage backed securities, which are subject to prepayment
Risk: risk. When interest rates decline, significant unscheduled prepayments may result. These
prepayments must be reinvested at lower rates.
Prepayments may also shorten the effective maturities of
these securities, especially during periods of declining
interest rates. On the other hand, during periods of
rising interest rates, a reduction in prepayments may
increase the effective maturities of these securities,
subjecting them to the risk of decline in value in
response to rising interest rates. This may increase the
volatility of the Funds.
In addition, prepayments may cause losses on securities
purchased at a premium (dollar amount by which the price
of the bond exceeds its face value). At times,
mortgage-backed securities may have higher than market
interest rates and are purchased at a premium.
Unscheduled prepayments are made at par and cause the
Funds to experience a loss of some or all of the premium.
Credit Risk: Low quality and longer maturity bonds will be subject to greater credit risk and price fluctuations
than higher quality and shorter maturity bonds. Bonds
held by the Funds may be affected by unfavorable
political, economic, or governmental developments that
could affect the repayment of principal or the payment of
interest.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Government Securities Income Fund (Acquired
Fund)*
Class A (before taxes)** 3.11% 6.02% 6.90% N/A 05/12/1985
(after taxes on distributions) 1.67% 3.97% 4.58% N/A
(after taxes on distributions and sale 2.01% 3.89% 4.47% N/A
of shares)
Class B 2.25% 5.19% 6.35% N/A 12/09/1994
PIF Government Securities Fund (Acquiring Fund)
Institutional Class 03/01/2001
- --Class A (before taxes) 3.17% N/A N/A 4.56%
(after taxes on distributions)** 1.75% N/A N/A 2.76%
(after taxes on distributions and sale 2.04% N/A N/A 2.80%
of shares)
- --Class B 2.37% N/A N/A 3.75%
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --Although the Acquired Fund, in contrast to the Acquiring Fund, has as part of
its investment objective liquidity and safety of principal, the Acquired Fund
and the Acquiring Fund otherwise have substantially the same investment
objectives, policies and risks, and their combination will offer shareholders of
the Acquired Fund continuity of investment objectives and expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --Principal Global is the Sub-Advisor to both the Acquired Fund and the
Acquiring Fund and may be expected to provide continuity in the quality of its
investment advisory services and personnel;
- --The Acquiring Fund has a lower investment management fee and is expected to
have lower overall expense ratios than the Acquired Fund; the Board considered
the higher breakpoints and fees at breakpoints in the Management Agreement with
the Acquiring Fund to be a negative factor but believed that this factor was
outweighed by the slow rate of the Acquired Fund's asset growth, which meant
there was small likelihood of its reaching a breakpoint any time soon, the
prospects of the Acquiring Fund for a higher rate of asset growth and the other
expected benefits of the Combination.
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund and has generally underperformed the Acquired Fund during their common
period of existence; the Acquiring Fund has, however, outperformed the
Acquired Fund for the most recent fiscal year period; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 17
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL TAX-EXEMPT BOND FUND, INC. INTO THE
PIF TAX-EXEMPT BOND FUND
(Principal Tax-Exempt Bond Fund Only)
Overview
Shareholders of the Principal Tax-Exempt Bond Fund, Inc. (the "Acquired
Fund") are being asked to approve the Reorganization providing for the
Combination of that Fund into the PIF Tax-Exempt Bond Fund (the "Acquiring
Fund"). For a summary discussion of the form and consequences of, and the
reasons for, the Reorganization, see "Overview of Proposed Reorganization."
Comparison of Acquired and Acquiring Funds
Principal Tax-Exempt Bond Fund, Inc. PIF Tax-Exempt Bond Fund
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as $177,672,315 None. The Acquiring Fund will commence
of 10/31/2004: operations at the time of the Reorganization.
Investment The Manager directly manages the Acquired Fund. Principal Global is the Sub-Advisor to the
Sub-Advisor Acquiring Fund.
Portfolio Manager: The portfolio manager for both Funds is Thomas V. Catus, CFA, portfolio manager specializing
in municipal bonds.
Investment The Acquired Fund and Acquiring Fund both seek as high a level of current income exempt from
Objectives: federal income tax as is consistent with preservation of capital. The Funds seek to achieve
their objectives primarily through the purchase of
investment grade quality, tax-exempt fixed-income
obligations.
Main Investment The Acquired Fund and the Acquiring Fund both invest in a diversified portfolio of securities
Strategies: issued by or on behalf of state or local governments and other public authorities. In the
opinion of the issuer's bond counsel, interest on these
obligations is exempt from federal income tax. Investment
in either Fund is not appropriate for IRA or other
tax-advantaged accounts.
Under normal market conditions, both Funds invest at least
80% of their assets in municipal obligations. At the time
these securities are purchased, they are:
o municipal bonds which are rated in the four highest grades by Moody's
Investors Service, Inc. ("Moody's");
o municipal notes rated in the highest grade by Moody's;
o municipal commercial paper rated in the highest
grade by Moody's or Standard & Poor's Rating
Service ("S&P"), of if unrated, are of comparable
quality in the opinion of the Manager.
During normal market conditions, both Funds will not invest
more than 20% of their assets in securities that do not
meet the criteria stated above; taxable securities; or
municipal obligations the interest on which is treated as a
tax preference item for purposes of the federal alternative
minimum tax. Both Funds may also invest in taxable
securities that mature one year or less from the time of
purchase. These taxable investments are generally made for
liquidity purposes or as temporary investments of cash
pending investment in municipal obligations.
Up to 20% of each Fund's assets may be invested in
fixed-income securities rated lower than BBB by S&P or Baa
by Moody's. Neither Fund will purchase municipal bonds
rated lower than B by Moody's or S&P. The Funds also will
not buy municipal notes or commercial paper which are
unrated or are not comparable in quality to rated
securities.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
The Acquired Fund and the Acquiring Fund have the same investment
objectives and strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies, the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
For an explanation of debt securities ratings, see Appendix C to this
Proxy Statement/Prospectus.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal Tax-Exempt PIF Tax-Exempt
Bond Fund Bond Fund
(Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 4.75%(1) None 4.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
- ----------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the time
of Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Tax-Exempt Bond Fund Class A 0.48% 0.21% 0.07% 0.76%
(Acquired Fund) Class B 0.48% 0.54% 0.13% 1.15%
PIF Tax-Exempt Bond Fund * Class A 0.50% 0.21% 0.06% 0.77%**
(Acquiring Fund) Class B 0.50% 0.54% 0.12% 1.16%**
<FN>
- ----------------
* The Acquiring Fund will not issue shares prior to the Effective Time of the
Reorganization. The estimated expenses for the fiscal year ending October
31, 2005 shown in the table are based on the fees which will be in effect
and on the other expenses which it is estimated the Acquiring Fund will
incur subsequent to the Closing Date. The fees and expenses shown in the
table are intended to reflect those that will be effect on an ongoing basis
after the Combination. They are likely to be different from the actual
expenses of the Acquiring Fund for fiscal year 2005 because the Acquiring
Fund will carry over the financial statements of the Acquired Fund and
report the historical financial information of that Fund for periods prior
to the Effective Time as its own.
** The Manager has agreed to contractually cap expenses in order to reduce the
Total Operating Expenses of the Acquiring Fund to not more than 0.76% for
Class A shares and not more than 1.15% for Class B shares. This expense cap
will continue in effect until June 30, 2008.
</FN>
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Tax-Exempt Bond Fund Class A $549 $706 $877 $1,372
(Acquired Fund) Class B $533 $701 $875 $1,238
PIF Tax-Exempt Bond Fund* Class A $549 $706 $877 $1,372
(Acquiring Fund) Class B $533 $701 $875 $1,238
If you do not sell your shares at the end of the period:
Principal Tax-Exempt Bond Fund Class A $549 $706 $877 $1,372
(Acquired Fund) Class B $117 $365 $633 $1,238
PIF Tax-Exempt Bond Fund* Class A $549 $706 $874 $1,372
(Acquiring Fund) Class B $117 $365 $633 $1,238
- ------------
<FN>
* These examples reflect the Manager's agreement to contractually cap
expenses in order to reduce the Total Operating Expenses of the Acquiring
Fund. This expense cap will remain in effect until June 30, 2008.
</FN>
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule.
Principal Tax-Exempt Bond Fund (Acquired Fund) PIF Tax-Exempt Bond Fund
(Acquiring Fund)
0.50% of the first $100 million; 0.50% of the first $500 million;
0.45% of the next $100 million; 0.48% of the next $500 million;
0.40% of the next $100 million; 0.46% of the next $500 million; and
0.35% of the next $100 million; and 0.45% of the excess over $1.5 billion
0.30% of the excess over $400 million of of average daily net assets.
average daily net assets.
The Manager directly manages the Acquired Fund. Principal Global, the
Sub-Advisor to the Acquiring Fund, is an indirect wholly-owned subsidiary of
Principal Life and an affiliate of the Manager. Its principal offices are
located at 801 Grand Avenue, Des Moines, Iowa 50392. For its services to the
Acquiring Fund, the Sub-Advisor is paid a fee by the Manager, and not by the
Acquiring Fund.
It is expected that, prior to the Reorganization, the initial
shareholder of the Acquiring Fund will approve a proposal that will permit the
Manager, pursuant to an SEC order, to select and contract with Sub-Advisors to
the Acquiring Fund (other than Sub-Advisors affiliated with the Manager) after
approval by the PIF Board of Directors but without shareholder approval. If
approved by the initial shareholder of the Acquiring Fund, the proposal will not
be implemented until the PIF Board determines to manage the Acquiring Fund in
reliance on the SEC order. The shareholders of the Acquired Fund have previously
approved granting the Manager comparable authority to select and contract with
Sub-Advisors to the Acquired Fund (other than Sub-Advisors affiliated with the
Manager) after approval by the Board of Directors of the Acquired Fund but
without shareholder approval.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds. The
Acquired Fund and the Acquiring Fund have the same risks. The main risks
include:
Municipal Both Funds may not invest more than 5% of assets in the securities of any one issuer (except
Securities the U.S. government), but may invest without limit in obligations of issuers located in the
Risk: same state. They may also invest in debt obligations that are repayable out of revenue from
economically related projects or facilities. This
represents a risk to the Funds since an economic,
business or political development or change affecting one
security could also affect others.
Non-Investment Grade Fixed income securities that are not investment grade are commonly referred to as "high yield"
Fixed Income securities or "junk bonds." These securities offer a potentially higher yield than other, higher
Securities rated securities, but they carry a greater degree of risk and are considered
Risk: speculative by the major credit rating agencies.
Interest Rate Risk: When interest rates fall, the price of a debt security rises and when interest rates rise, the price
declines. In addition, the value of securities held by
the Funds may be affected by factors such as credit
rating of the entity that issued the security and its
maturity. Lower quality and longer maturity securities
will be subject to greater credit risk and price
fluctuations than higher quality and shorter maturity
securities.
Industrial Both Funds may purchase industrial development bonds, which are issued by industrial
Development Risk: development authorities. These bonds may only be backed by the assets and revenues of the
industrial corporation that uses the facility financed by the bonds.
The risks of investing in the Acquiring Fund are more fully described
in PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, the annual total return of the Class A and Class B shares of the Acquired
Fund. The Acquiring Fund has not yet commenced operations. After the
Combination, the Acquiring Fund will assume the historical performance of the
Class A and Class B shares of the Acquired Fund as the historical performance
of, respectively, the Class A and B shares of the Acquiring Fund for periods
prior to the Effective Time of Reorganization.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Tax-Exempt Bond Fund (Acquired Fund)*
Class A (before taxes) 3.56% 6.16% 6.58% N/A 03/20/1986
(after taxes on distributions)** 3.30% 6.06% 6.51% N/A
(after taxes on distributions and sale 3.92% 5.89% 6.38% N/A
of shares)
Class B 3.18% 5.61% 6.13% N/A 12/09/1994
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown.
</FN>
Board Consideration of the Combination
The Board of Directors of the Acquired Fund unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have the same investment objectives,
policies and risks, and their combination will offer shareholders of the
Acquired Fund continuity of investment objectives and expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --Principal Global, as the Sub-Advisor to the Acquiring Fund, may be expected to
provide at least the same quality of investment advisory services and personnel
as the Manager currently provides in directly managing the Acquired Fund;
- --Although the Acquiring Fund has a higher investment management fee and is
expected to have higher overall expenses than the Acquired Fund immediately
after the Reorganization, the Board determined that such level of fees is within
industry norms and that overall expenses may be expected to decrease over time,
and that the impact of the higher management fee was outweighed by the other
benefits of the Combination and the Manager's agreement to contractually cap the
expenses of the Class A and Class B shares of the Acquiring Fund so that they
will not exceed the pre-Combination expenses of the Acquired Fund for a
three-year period after the Effective Time of the Reorganization; further,
although future expense ratios cannot be known, if sales expectations are met,
the expense ratios of the Acquiring Fund are expected to be approximately at or
below the projected expense ratios of the Acquired Fund absent the
Reorganization;
- --Comparative performance of the Acquired Fund and the Acquiring Fund was not
considered a factor since the Acquiring Fund is newly organized, has no
operating history and will assume the historical performance of the Acquired
Fund; and
- --The Combination of the Acquired Fund into the Acquiring Fund, which is part of
the larger PIF Funds, will provide shareholders of the Acquired Fund on an
ongoing basis with greater prospects for growth, efficient management and
attendant reductions in overall expenses that are available from a larger fund
family.
PROPOSAL 18
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF EACH OF THE PRINCIPAL INTERNATIONAL FUND, INC., AND
THE PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC. INTO
THE PIF DIVERSIFIED INTERNATIONAL FUND
(Principal International and International SmallCap Funds Only)
Overview
Shareholders of each of the Principal International Fund, Inc. and the
Principal International SmallCap Fund, Inc. (each, an "Acquired Fund") are being
asked to approve the Reorganization providing for the Combination of those Funds
into the PIF Diversified International Fund (the "Acquiring Fund"). Shareholders
of each Acquired Fund will vote separately on this Proposal, and the Combination
of each Acquired Fund into the Acquiring Fund is not contingent upon the
Combination of the other Acquired Fund into the Acquiring Fund.
For a summary discussion of the form and consequences of, and the
reasons for, the Reorganization, see "Overview of the Proposed Reorganization"
above.
Comparison of Acquired and Acquiring Funds
Principal International Fund, Inc. Principal International SmallCap Fund PIF Diversified International Fund
(Acquired Fund) (Acquired Fund) (Acquiring Fund)
Business:
A separate fund. A separate fund. A separate series of PIF.
Net Assets as of 10/31/04:
$239,533,840 $61,074,590 $104,491,372
Investment Sub-Advisor:
Principal Global is the Sub-Advisor to all three Funds.
Portfolio Managers:
- --Paul H. Blankenhagen, CFA, --Brian W. Pattinson, CFA, --Paul H. Blankenhagen, CFA,
portfolio manager. portfolio manager. portfolio manager.
- --Juliet Cohn, portfolio manager. --Juliet Cohn, portfolio manager.
Investment Objectives:
This Acquired Fund seeks long-term This Acquired Fund seeks long-term The Acquiring Fund seeks long-term
growth of capital by investing in a growth of capital by investing in a growth of capital.
portfolio of equity securities of portfolio of equity securities of
companies domiciled in any of the companies domiciled in any of the
nations of the world. nations of the world.
Main Investment Strategies:
This Acquired Fund invests in a This Acquired Fund invests primarily The Acquiring Fund invests in a
portfolio of equity securities of in equity securities of non-U.S. portfolio of equity securities of
companies domiciled in any of the companies with comparatively smaller companies domiciled in any of the
nations of the world. The Fund market capitalizations. Under normal nations of the world. The Fund
invests in securities of: market conditions, the Fund invests invests in securities of:
o companies with their at least 80% of its assets in o companies with their
principal place of business or securities of companies similar in principal place of business or
principal office outside the U.S.; size to companies included in the principal office outside the
o companies for which the Citigroup Extended Market Index U.S.;
principal securities trading (EMI) World ex U.S. (as of December o companies for which the
market is outside the U.S.; and 31, 2004, this range was between $16 principal securities trading
o companies, regardless of million and $16.7 billion). Market market is outside the U.S.; and
where their securities are capitalization is defined as total o companies, regardless of
traded, that derive 50% or more current market value of a company's where their securities are
of their total revenue from goods outstanding stock. traded, that derive 50% or more
or services produced or sales of their total revenue from
made outside the U.S. The Fund invests in securities of: goods or services produced or
o companies with their sales made outside the U.S.
The Fund has no limitation on the principal place of business or
percentage of assets that are invested principal office outside the The Fund has no limitation on the
in any one country or denominated in U.S.; percentage of assets that are
any one currency. However, under o companies for which the invested in any one country or
normal market conditions, the Fund principal securities trading denominated in any one currency.
intends to have at least 80% of its market is outside the U.S.; and However, under normal market
assets invested in companies in at o companies, regardless of conditions, the Fund intends to have
least three different countries. One where their securities are at least 80% of its assets invested
of those countries may be the U.S., traded, that derive 50% or more in companies in at least three
though currently the Fund does not of their total revenue from different countries. One of those
intend to invest in equity securities goods or services produced or countries may be the U.S., though
of U.S. companies. sales made outside the U.S. currently the Fund does not intend
to invest in equity securities of
Investments may be made anywhere in Principal Global diversifies the U.S. companies.
the world. Primary consideration is Fund's investments geographically.
given to securities of corporations of The Fund has no limitation on the Investments may be made anywhere in
Western Europe, North America and percentage of assets that are the world. Primary consideration is
Australasia (Australia, Japan, and Far invested in any one country or given to securities of corporations
East Asia). Changes in investments denominated in any one currency. of Western Europe, North America and
are made as prospects change for However, under normal market Australasia (Australia, Japan, and
particular countries, industries or conditions, the Fund intends to have Far East Asia). Changes in
companies. at least 65% of its assets in investments are made as prospects
companies in at least three change for particular countries,
In choosing investments for the Fund, different countries. industries or companies.
Principal Global, pays particular
attention to the long-term earnings In choosing investments for the
prospects of the various companies Fund, Principal Global, pays
under consideration. Principal Global particular attention to the
then weighs those prospects relative long-term earnings prospects of the
to the price of the security. various companies under consideration.
Principal Global then weighs those
prospects relative the price of the security.
Fundamental Investment Restrictions:
Each of the Funds is subject to "fundamental" investment restrictions which may
not be changed without the approval of the shareholders of the Fund. These
fundamental restrictions deal with such matters as the issuance of senior
securities, purchasing or selling real estate or commodities, borrowing money,
making loans, underwriting securities of other issuers, diversification or
concentration of investments and short sales of securities. For a comparison of
the fundamental restrictions of the Funds, see Appendix B to this Proxy
Statement/Prospectus. See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary Defensive Investing:
For temporary defensive purposes in times of unusual or adverse market
conditions, all the Funds may invest without limit in cash and cash equivalents
(which include bank notes, bank certificates of deposit, bankers' acceptances,
repurchase agreements, commercial paper and commercial paper master notes that
are floating rate debt instruments without a fixed maturity). In addition, all
the Funds may purchase U.S. government securities, preferred stocks and debt
securities, whether or not convertible into or carrying rights for common stock.
In taking such defensive measures, a Fund may fail to achieve its investment
objective.
Because all of the Acquired Funds and the Acquiring Fund seek long-term
growth of capital by investing primarily in foreign equity securities, they all
have substantially the same investment objectives. Their investment strategies
are substantially similar, except that one of the Acquired Funds, the Principal
International SmallCap Fund, normally invests at least 80% of its assets in
small market capitalization companies whereas the Acquiring Fund (as well as the
other Acquired Fund) does not emphasize any particular size of market
capitalization.
The investment objectives and principal investment policies and
strategies of the Acquired Funds and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you buy
and hold shares of the Funds. These fees and expenses are more fully described
under "Comparative Information About the PMF and PIF Funds - Costs of Investing"
below.
Principal International Principal International PIF Diversified
Fund SmallCap Fund International Fund
(Acquired Fund) (Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B Class A Class B
------- ------- ------- ------- ------- -------
Maximum sales charge imposed on
purchases (as a % of offering price): 5.75%(1) None 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales
Charge (CDSC) (as a % of dollars 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
subject to charge):
Redemption or Exchange Fee (as a % 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
of amount redeemed/exchanged):
- -------------------
- ----------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of each of the Acquired Funds (Class A shares and Class B shares) for the
fiscal year ended October 31, 2004; (b) the estimated expense ratios of the
Acquiring Fund (Class A and Class B shares) for the fiscal year ending October
31, 2005; and (c) the pro forma expense ratios of the Acquiring Fund (Class A
and Class B shares) assuming separately: (i) the Combination of the Principal
International Fund into the Acquiring Fund; (ii) the Principal International
SmallCap Fund into the Acquiring Fund; and (iii) the Combinations of both
Acquired Funds into the Acquiring Fund, in each case as if the Combination(s)
had occurred at the commencement of the fiscal year ended October 31, 2004. The
Class A and Class B shares of the Acquiring Fund are new share classes which the
Acquiring Fund does not intend to sell prior to the Effective Time of the
Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
(1) Principal International Fund Class A 0.85% 0.17% 0.40% 1.42%
(Acquired Fund) Class B 0.85% 0.56% 0.51% 1.92%
(2) Principal International SmallCap Fund Class A 1.20% 0.25% 0.68% 2.13%
(Acquired Fund) Class B 1.20% 0.93% 0.78% 2.91%
(3) PIF Diversified International Fund Class A 0.90% 0.17% 0.34% 1.41%
(Acquiring Fund) Class B 0.90% 0.56% 0.45% 1.91%
(Estimated for fiscal 2005)
(4) PIF Diversified International Fund Class A 0.90% 0.17% 0.30% 1.37%
(Acquiring Fund) (Pro forma assuming Class B 0.90% 0.56% 0.40% 1.86%
Combination of (1) and (3))
(5) PIF Diversified International Fund Class A 0.90% 0.25% 0.54% 1.69%
(Acquiring Fund) ) (Pro forma assuming Class B 0.90% 0.93% 0.64% 2.47%
Combination of (2) and (3))
(6) PIF Diversified International Fund Class A 0.90% 0.17% 0.34% 1.41%
(Acquiring Fund) ) (Pro forma assuming Class B 0.90% 0.56% 0.45% 1.91%
Combination of (1), (2) and (3))
*The Manager voluntarily agreed to limit the Acquired Fund's expenses and, if
necessary, pay expenses normally payable by that Fund through the period ending
February 28, 2006. If such expense limit were reflected in the table, the
Acquired Fund's "Total Fund Operating Expenses" would be 2.07% for Class A
shares and 2.83% for Class B shares.
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
(1) Principal International Fund Class A $711 $998 $1,307 $2,179
(Acquired Fund) Class B $607 $932 $1,269 $2,053
(2) Principal International SmallCap Fund Class A $779 $1,204 $1,653 $2,895
(Acquired Fund) Class B $702 $1,220 $1,755 $2,963
(3) PIF Diversified International Fund Class A $710 $996 $1,302 $2,169
(Acquiring Fund) (Estimated for fiscal 2005) Class B $606 $929 $1,264 $2,042
(4) PIF Diversified International Fund Class A $706 $984 $1,282 $2,127
(Acquiring Fund) (Pro forma assuming Class B $601 $914 $1,239 $1,992
Combination of (1) and (3))
(5) PIF Diversified International Fund Class A $737 $1,077 $1,440 $2,458
(Acquiring Fund) (Pro forma assuming Class B $660 $1,093 $1,542 $2,524
Combination of (2) and (3))
(6) PIF Diversified International Fund Class A $710 $996 $1,302 $2,169
(Acquiring Fund) (Pro forma assuming Class B $606 $929 $1,264 $2,042
Combination of (1), (2) and (3))
If you do not sell your shares at the end of the period:
(1) Principal International Fund Class A $711 $998 $1,307 $2,179
(Acquired Fund) Class B $195 $603 $1,037 $2,053
(2) Principal International SmallCap Fund Class A $779 $1,204 $1,653 $2,895
(Acquired Fund) Class B $294 $901 $1,533 $2,963
(3) PIF Diversified International Fund Class A $710 $996 $1,302 $2,169
(Acquiring Fund) (Estimated for fiscal 2005) Class B $194 $600 $1,032 $2,042
(4) PIF Diversified International Fund Class A $706 $984 $1,282 $2,127
(Acquiring Fund) (Pro forma assuming Class B $189 $585 $1,006 $1,992
Combination of (1) and (3))
(5) PIF Diversified International Fund Class A $737 $984 $1,440 $2,458
(Acquiring Fund) (Pro forma assuming Class B $250 $770 $1,316 $2,524
Combination of (2) and (3))
(6) PIF Diversified International Fund Class A $710 $996 $1,302 $2,169
(Acquiring Fund) (Pro forma assuming Class B $194 $600 $1,032 $2,042
Combination of (1), (2) and (3))
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Funds and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal International Fund Principal International SmallCap Fund PIF Diversified International Fund
(Acquired Fund) (Acquired Fund) (Acquiring Fund)
0.85% of the first $250 million; 1.20% of the first $100 million; 0.90% of the first 500 million;
0.80% of the next $250 million; 1.15% of the next $100 million; 0.88% of the next $500 million;
0.75% of the next $250 million; 1.10% of the next $100 million; 0.86% of the next $500 million; and
0.70% of the next $250 million; and 1.05% of the next $100 million; and 0.85% of the excess over $1.5 billion of
0.65% of the excess over $1 billion of 1.00% of the excess over $400 million of average daily net assets.
average daily net assets. average daily net assets.
Principal Global, the Sub-Advisor to both Acquired Funds and the
Acquiring Fund, is an indirect wholly-owned subsidiary of Principal Life and an
affiliate of the Manager. Its principal offices are located at 801 Grand Avenue,
Des Moines, Iowa 50392. For its services, the Sub-Advisor is paid a fee by the
Manager, and not by any of the Funds.
At the PIF Shareholders Meeting, shareholders of the Acquiring Fund
will be asked to approve a proposal that will permit the Manager, pursuant to an
SEC order, to select and contract with Sub-Advisors to the Acquiring Fund (other
than Sub-Advisors affiliated with the Manager) after approval by the PIF Board
of Directors but without shareholder approval. If approved by shareholders of
the Acquiring Fund, the proposal will not be implemented until the PIF Board
determines to manage the Acquiring Fund in reliance on the SEC order. The
shareholders of the Acquired Funds have previously approved granting the Manager
comparable authority to select and contract with Sub-Advisors to the Acquired
Funds (other than Sub-Advisors affiliated with the Manager) after approval by
the Board of Directors of the Acquired Funds but without shareholder approval.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because all of the Acquired Funds and the Acquiring Fund seek long-term growth
of capital by investing primarily in foreign equity securities, they have
substantially similar risks. The main risks include:
Stock Market Risk: Because the Funds purchase equity securities, the Funds are subject to the risk that stock
prices will fall over short or extended periods of time.
Individual companies may report poor results or be
negatively affected by industry and/or economic trends
and developments. The price of securities issued by such
companies may suffer a decline in response.
Foreign Securities The Funds may invest in foreign securities, which carry risks that are not generally found in
Risk: stocks of U.S. companies. These include risks of loss of value as a result of political,
financial, and economic events in foreign countries. In addition, foreign securities may be
subject to less stringent accounting and disclosure standards than are required of U.S.
companies.
Exchange Rate Risk: Because foreign securities are generally denominated in foreign currencies, the value of the net
assets of the Funds as measured in U.S. dollars will be
affected by changes in exchange rates. To protect against
future uncertainties in foreign currency exchange rates,
the Funds are authorized to enter into certain foreign
currency exchange transactions. In addition, the Funds'
foreign investments may be less liquid and their price
more volatile than comparable investments in U.S.
securities. Settlement periods may be longer for foreign
securities and portfolio liquidity may be affected.
Market Segment Risk: To the extent that the Funds emphasize a particular market segment, such as non-U.S. companies
with small to medium market capitalizations, they have
the risk that such segment may underperform compared to
other market segments or to the equity markets as a
whole.
The primary risks of investing in the Acquired and Acquiring Funds
differ in that one of the Acquired Funds, the Principal International SmallCap
Fund, invests at least 80% of its assets in small capitalization companies
whereas the Acquiring Fund (as well as the other Acquired Fund) does not
emphasize any particular size of market capitalization. The Principal
International SmallCap Fund may thus have greater exposure to market segment
risk and to small company risk. Non-U.S. companies with small to medium market
capitalizations involve significant risk and should be considered speculative in
nature. Historically, securities in these companies fluctuate in price more than
larger companies, especially over the short-term.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds" below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Funds and (ii) the annual total return of the Institutional Class
shares of the Acquiring Fund adjusted to reflect the expenses of the new Class A
and Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal International Fund (Acquired Fund)*
Class A (before taxes) 20.39% -1.92% 6.74% N/A 08/01/1988
(after taxes on distributions)** 20.24% -2.27% 5.54% N/A
(after taxes on distributions and sale 13.45% -1.67% 5.38% N/A
of shares)
Class B 19.76% -2.65% 6.21% N/A 12/09/1994
Principal International SmallCap Fund (Acquired Fund)*
Class A (before taxes) 29.49% 1.53% N/A 11.64% 08/29/1997
(after taxes on distributions)** 29.49% 0.61% N/A 10.48%
(after taxes on distributions and sale 19.17% 0.82% N/A 9.64%
of shares)
Class B 28.55% 0.73% N/A 10.91% 08/29/1997
Diversified International Fund (Acquiring Fund)
Institutional Class 03/01/2001
- --Class A (before taxes) 19.62% N/A N/A 2.62%
(after taxes on distributions)** 19.16% N/A N/A 2.32%
(after taxes on distributions and sale 13.34% N/A N/A 2.13%
of shares)
- --Class B 19.03% N/A N/A 2.11%
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Board of Directors of each Acquired Fund unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by each Acquired Fund's' Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by each Board in approving the
Combination of the respective Acquired Funds into the Acquiring Fund include the
following:
- --Each Acquired Fund and the Acquiring Fund have the same investment objective
and substantially similar investment policies and risks, and their combination
will offer shareholders of the Acquired Fund continuity of investment objectives
and expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The differences between the fundamental investment restrictions of each
Acquired Fund and the Acquiring Fund reflect the Acquired Fund's having adopted
restrictions that reflect state securities law requirements that are no longer
applicable and other differences that the Board does not believe are material in
light of the other benefits of the Combination;
- --Principal Global, the Sub-Advisor to each Acquired Fund, is also the
Sub-Advisor to the Acquiring Fund and may be expected to provide continuity in
the quality of its investment advisory services and personnel;
- --Although the Acquiring Fund's investment management fee is higher than that of
the Principal International Fund, it is lower than that of the Principal
International SmallCap Fund, and the Acquiring Fund is expected to have lower
overall expense ratios than either Acquired Fund;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Funds. During their common period of existence, the Acquiring Fund has performed
somewhat better than the Principal International Fund. During their period of
common existence, the Acquiring Fund has underperformed the Principal
International SmallCap Fund due primarily to the relative better performance of
smallcap stocks during the period; and
- --The Combination of each Acquired Fund, and of both Acquired Funds, into the
Acquiring Fund will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 19
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL LIMITED TERM BOND FUND, INC. INTO THE
PIF HIGH QUALITY SHORT-TERM BOND FUND
(Principal Limited Term Bond Fund Only)
Overview
Shareholders of the Principal Limited Term Bond Fund, Inc. (the
"Acquired Fund") are being asked to approve the Reorganization providing for the
Combination of that Fund into the PIF High Quality Short-Term Bond Fund (the
"Acquiring Fund"). For a summary discussion of the form and consequences of, and
the reasons for, the Reorganization, see "Overview of the Proposed
Reorganization."
At the time of the Reorganization, the Acquired Fund will have
outstanding only Class A shares. Consequently, the Acquiring Fund will issue
only Class A shares in connection with the Reorganization.
Comparison of Acquired and Acquiring Funds
Principal Limited Term Bond Fund, Inc. PIF High Quality Short-Term Bond Fund
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as $139,964,888 $51,750,357
of 10/31/2004:
Investment Principal Global is the Sub-Advisor to both Funds.
Sub-Advisor:
Portfolio Managers: The portfolio manager for the Acquired Fund is The portfolio managers for the Acquiring Fund
Martin J. Schafer, portfolio manager are:
specializing in mortgage-backed securities and --Craig Dawson, portfolio manager
high quality short, intermediate and long specializing in ultra-short, high quality
duration portfolios. short and global strategic income portfolios;
and
-- Martin J. Schafer, portfolio manager
specializing in mortgage-backed securities
and high quality short, intermediate and long
duration portfolios.
Investment Both Funds seek to provide current income and principal stability.
Objectives:
Main Investment Both Funds invest primarily in high quality, short-term fixed-income securities, and the term
Strategies: "bond" is considered to mean any debt security. Under normal market conditions, both Funds
invest at least 80% of their assets in securities issued or guaranteed by the U.S. government,
debt securities of U.S. issuers rated in the three highest grades by Standard and Poor's
Rating Service or Moody's Investors Service, Inc., or, if unrated, in the opinion of the
Sub-Advisor is of comparable quality, and mortgage-backed securities.
The remainder of each Fund's assets may be invested in
securities in the fourth highest rating category or their
equivalents. Although securities in this category are
considered to be "investment grade" and to have adequate
capacity to pay interest and repay principal, they do have
speculative characteristics and changes in economic and
other conditions are more likely to affect the ability of
the issuer to make principal and interest payments. Under
unusual market or economic conditions, both Funds may
invest up to 100% of their assets in cash and cash
equivalents.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
Because both of the Acquired and Acquiring Funds seek to provide
current income and principal stability by investing primarily in high-quality,
short-term fixed-income securities, they have substantially the same investment
objectives and strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
For an explanation of debt security ratings, see Appendix C to this
Proxy Statement/Prospectus.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal Limited Term PIF High Quality
Bond Fund Short-Term Bond Fund
(Acquired Fund) (Acquiring Fund)
Class A Class A
Maximum sales charge imposed on purchases
(as a % of offering price): 1.50%(1) 1.50%(1)
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.25%(2) 0.25%(2)
Redemption or Exchange Fee (as a % of amount 1.00%(3)(4) 1.00%(3)(4)
redeemed/exchanged):
- -------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(4) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A shares) for the fiscal year ended October
31, 2004, and (b) the estimated ratio of expenses to average net assets of the
Acquiring Fund (Class A shares) for the year ending October 31, 2005. The Class
A shares of the Acquiring Fund are a new share class which the Acquiring Fund
does not intend to sell prior to the Effective Time of the Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Limited Term Bond Fund Class A 0.49% 0.15% 0.22% 0.86%
(Acquired Fund)
PIF High Quality Short-Term Bond Fund Class A 0.40% 0.15% 0.20% 0.75%
(Acquiring Fund)
Examples: The following examples are intended to help you compare the costs of
investing in Class A shares of the Acquired and Acquiring Funds. The examples
assume that Fund expenses continue at the rates shown in the table above, that
you invest $10,000 in the particular Fund for the time periods indicated and
that all dividends and distributions are reinvested. The examples also assume
that your investment has a 5% return each year. The examples should not be
considered a representation of future expenses of the Acquired or Acquiring
Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Limited Term Bond Fund Class A $236 $420 $620 $1,195
(Acquired Fund)
PIF High Quality Short-Term Bond Fund Class A $77 $240 $417 $930
(Acquiring Fund)
If you do not sell your shares at the end of the period:
Principal Limited Term Bond Fund Class A $236 $420 $620 $1,195
(Acquired Fund)
PIF High Quality Short-Term Bond Fund Class A $77 $240 $417 $930
(Acquiring Fund)
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
PIF High Quality Short-Term Bond Fund
Principal Limited Term Bond Fund (Acquired Fund) (Acquiring Fund)
0.50% of the first $100 million; 0.40% of the first 500 million;
0.45% of the next $100 million; 0.38% of the next $500 million;
0.40% of the next $100 million; 0.36% of the next $500 million; and
0.35% of the next $100 million; and 0.35% of the excess over $1.5 billion
0.30% of the excess over $400 million of of average daily net assets.
average daily net assets.
Principal Global, the Sub-Advisor to both the Acquired and Acquiring
Funds, is an indirect wholly-owned subsidiary of Principal Life and an affiliate
of the Manager. Its principal offices are located at 801 Grand Avenue, Des
Moines, Iowa 50392. For its services, the Sub-Advisor is paid a fee by the
Manager, and not by either Fund.
At the PIF Shareholders Meeting, shareholders of the Acquiring Fund
will be asked to approve a proposal that will permit the Manager, pursuant to an
SEC order, to select and contract with Sub-Advisors to the Acquiring Fund (other
than Sub-Advisors affiliated with the Manager) after approval by the PIF Board
of Directors but without shareholder approval. If approved by shareholders of
the Acquiring Fund, the proposal will not be implemented until the PIF Board
determines to manage the Acquiring Fund in reliance on the SEC order. The
Manager currently has authority to select and contract with Sub-Advisors to the
Acquired Fund (other than Sub-Advisors affiliated with the Manager) after
approval by the Board of Directors of the Acquired Fund but without shareholder
approval.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek to provide current income
and principal stability by investing primarily in high-quality, short-term
fixed-income securities, they have substantially the same risks. The main risks
include:
Interest Rate The Funds may invest in corporate fixed-income securities. When interest rates rise, the value of
Risk: fixed-income securities will generally fall. Conversely, a drop in interest rates will generally
cause an increase in the value of fixed-income securities.
Markets tend to move in cycles, with periods of rising
prices and periods of falling interest rates. Some
fixed-income investments give the issuer the option to call,
or redeem, its securities before their maturity date. If an
issuer calls its security during a time of declining
interest rates, the Funds may have to reinvest the proceeds
in securities with lower rates. In addition, the Funds'
appreciation may be limited by issuer call options having
more value during times of declining interest rates.
Credit Risk: The value of corporate debt securities may be affected by factors such as credit rating of the entity that
issued the security and its maturity. Lower quality and longer
maturity securities will be subject to greater credit risk
and price fluctuations than higher quality and shorter
maturity securities.
Prepayment The Funds may invest in mortgage backed securities, which are subject to prepayment risk. When
Risk: interest rates decline, significant unscheduled prepayments may result. These prepayments must be
reinvested at lower rates. Prepayments may also shorten the
effective maturities of these securities, especially during
periods of declining interest rates. On the other hand,
during periods of rising interest rates, a reduction in
prepayments may increase the effective maturities of these
securities, subjecting them to the risk of decline in value
in response to rising interest rates. This may increase the
volatility of the Funds.
Portfolio The average portfolio duration for the Funds is normally less than three years and is based on
Duration Risk: forecasted interest rates. The longer a security's duration, the more sensitive it is to changes
in interest rates. A fund with a longer average portfolio
duration will be more sensitive to changes in interest rates
than a fund with a shorter average portfolio duration.
U.S. The Funds may invest in debt and mortgage-backed securities issued by government-sponsored
Government enterprises such as the Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Sponsored Association and the Federal Home Loan Banks. Although the issuing agency, instrumentality or
Securities corporation may be chartered or sponsored by the U.S. government, their securities are neither
Risks: issued nor guaranteed by the U.S. Treasury.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A shares of the Acquired Fund and
(ii) the annual total return of the Institutional Class shares of the Acquiring
Fund adjusted to reflect the expenses of the new Class A share class of the
Acquiring Fund. The adjustments result in lower performance than the historical
performance of the Institutional Class shares. The Class A shares of the
Acquiring Fund will not become operational until the Effective Time of the
Reorganization and will assume for periods prior to that time the historical
performance of the Institutional Class shares adjusted to reflect the expenses
of the new share class.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Limited Term Bond Fund (Acquired Fund)
Class A (before taxes) 0.90% 5.05% N/A 4.98% 02/29/1996
(after taxes on distributions)* -0.55% 3.10% N/A 2.81%
(after taxes on distributions and sale 0.58% 3.12% N/A 2.89%
of shares)
PIF High Quality Short-Term Bond Fund
(Acquiring Fund)
Institutional Class (before taxes) 03/01/2001
- --Class A (before taxes) 0.87% N/A N/A 3.91%
(after taxes on distributions)* -0.24% N/A N/A 2.21%
(after taxes on distributions and sale 0.56% N/A N/A 2.31%
of shares)
- ------------------
<FN>
* After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have substantially the same
investment objectives, policies and risks, and their combination will offer
shareholders of the Acquired Fund continuity of investment objectives and
expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --Principal Global, the Sub-Advisor to the Acquired Fund, is also the
Sub-Advisor to the Acquiring Fund and may be expected to provide continuity in
the quality of its investment advisory services and personnel;
- --The Acquiring Fund has a lower investment management fee and is expected to
have lower overall expense ratios than the Acquired Fund; the Board considered
the higher breakpoints and fees at breakpoints in the Management AGreement with
the Acquiring Fund to be a negative factor but believed that this factor was
outweighed by the slow rate of the Acquired Fund's asset growth, which meant
there was small likelihood of its reaching a breakpoint any time soon, the
prospects of the Acquiring Fund for a higher rate of asset growth and the other
expected benefits of the Combination;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund, but during their common period of existence has performed somewhat better
than the Acquired Fund; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 20
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL CASH MANAGEMENT FUND, INC.,
INTO THE PIF MONEY MARKET FUND
(Principal Cash Management Fund Only)
Overview
Shareholders of the Principal Cash Management Fund, Inc. (the "Acquired
Fund") are being asked to approve the Reorganization providing for the
Combination of that Fund into the PIF Money Market Fund (the "Acquiring Fund").
For a summary discussion of the form and consequences of, and the reasons for,
the Reorganization, see "Overview of Proposed Reorganization."
Comparison of Acquired and Acquiring Funds
Principal Cash Management Fund, Inc. PIF Money Market Fund
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as of $322,411,124 $218,717,812
10/31/2004:
Investment The Manager directly manages the Acquired Fund. Principal Global is the Sub-Advisor to the
Sub-Advisors: Acquiring Fund.
Portfolio
Managers: The portfolio managers for both Funds are:
--Tracy Reeg, Portfolio Manager, specializing in
management and research for the short-term money
market portfolios; and --Alice Robertson, Senior
Trader and money market portfolio manager.
Investment The Acquired Fund seeks as high a level of The Acquiring Fund seeks as high a level of
Objectives: income available from short-term securities as current income as is considered consistent
is considered consistent with preservation of with preservation of principal and
principal and maintenance of liquidity by maintenance of liquidity.
investing in a portfolio of money market
instruments.
Main Investment Both Funds invest in high quality, short-term money market instruments denominated in U.S.
Strategies: dollars which are believed to present minimal credit risks. At the time of purchase, each
security is an "eligible security" as defined in regulations issued under the 1940 Act.
Both Funds maintain a dollar weighted average portfolio
maturity of 90 days or less and generally hold investments
until maturity. However, both Funds may sell a security
before it matures:
o to take advantage of market variations;
o to generate cash to cover sales of shares by fund
shareholders; or
o upon revised credit opinions of the security's issuer.
The sale of a security by either Fund
before maturity may not be in the best interest of the
Fund. The sale of portfolio securities is usually a taxable
event. Both Funds may borrow money to cover the sale of
their shares.
It is the policy of both Funds to be as fully invested as
possible to maximize current income. Securities in which
both Funds invest include:
o securities issued or guaranteed by the U.S. government,
including treasury bills, notes and bonds;
o securities issued or guaranteed by agencies or instrumentalities of the U.S.
government. These are backed either by the full faith and credit of the U.S.
government or by the credit of the particular agency or instrumentality;
o bank obligations, including certificates of
deposit which generally are negotiable
certificates against funds deposited in a
commercial bank or bankers acceptances which are
time drafts drawn on a commercial bank, usually in
connection with international commercial
transactions;
o commercial paper which is short-term promissory notes issued by U.S. or foreign
corporations primarily to finance short-term credit needs;
o corporate debt consisting of notes, bonds or debentures which at the time of purchase
by the Funds has 397 days or less remaining to maturity;
o repurchase agreements under which securities are
purchased with an agreement by the seller to
repurchase the security at the same price plus
interest at a specified rate. Generally these have
a short maturity (less than a week) but may also
have a longer maturity; and
o taxable municipal obligations which are short-term
obligations issued or guaranteed by state and
municipal issuers which generate taxable income.
Among the certificates of deposit typically held by both
Funds are Eurodollar and Yankee obligations, which are
issued in U.S. dollars by foreign banks and foreign
branches of U.S. banks.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
Because both of the Acquired and Acquiring Funds are money market funds
that seek as high a level of current income as is considered consistent with a
preservation of principal and maintenance of liquidity by investing in high
quality, short-term money market instruments, they have substantially the same
investment objectives and strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Manager and the
Sub-Advisor can select for the respective Funds is contained in the PMF SAI and
the Statement of Additional Information. See "Comparative Information About the
PMF and PIF Funds - Location of Further Information About the Funds" below.
For an explanation of debt security ratings, see Appendix C to this
Proxy Statement/Prospectus.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal Cash Management PIF Money Market Fund
Fund (Acquiring Fund)
(Acquired Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): None None None None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(1) 4.00%(2) 0.75%(1) 4.00%(2)
Redemption or Exchange Fee (as a % of amount None None None None
redeemed/exchanged):
- ------------------
<FN>
(1) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(2) CDSCs are reduced after 12 months and eliminated after 6 years.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net assets of
the Acquired Fund (Class A and Class B shares) for the fiscal year ended October
31, 2004, and (b) the estimated ratio of expenses to average net assets of the
Acquiring Fund (Class A and Class B shares) for the year ending October 31,
2005. The Class A and Class B shares of the Acquiring Fund are new share classes
which the Acquiring Fund does not intend to sell prior to the Effective Date.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Cash Management Fund Class A 0.44% None 0.24% 0.68%
(Acquired Fund) Class B 0.44% 0.22% 0.30% 0.96%
PIF Money Market Fund Class A 0.40% None 0.23% 0.63%
(Acquiring Fund) Class B 0.40% 0.22% 0.30% 0.92%
* The Manager voluntarily agreed to limit the Acquired Fund's expenses and, if
necessary, pay expenses normally payable by that Fund through the period ended
October 31, 2004. If such expense limit were reflected in the table, the
Acquired Fund's "Total Fund Operating Expenses" would be 0.89% for Class B
shares.
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Cash Management Fund Class A $69 $218 $379 $847
(Acquired Fund) Class B $514 $644 $775 $1,062
PIF Money Market Fund Class A $64 $202 $351 $786
(Acquiring Fund) Class B $510 $632 $754 $1,010
If you do not sell your shares at the end of the period:
Principal Cash Management Fund Class A $69 $218 $379 $847
(Acquired Fund) Class B $98 $306 $531 $1,062
PIF Money Market Fund Class A $64 $202 $351 $786
(Acquiring Fund) Class B $94 $293 $509 $1,010
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
PIF Money Market Fund
Principal Cash Management Fund (Acquired Fund) (Acquiring Fund)
0.50% of the first $100 million; 0.40% of the first 500 million;
0.45% of the next $100 million; 0.39% of the next $500 million;
0.40% of the next $100 million; 0.38% of the next $500 million; and
0.35% of the next $100 million; and 0.37% of the excess over $1.5 billion
0.30% of the excess over $400 million of of average daily net assets.
average daily net assets.
The Manager directly manages the Acquired Fund. Principal Global, the
Sub-Advisor to the Acquiring Fund, is an indirect wholly-owned subsidiary of
Principal Life and an affiliate of the Manager. Its principal offices are
located at 801 Grand Avenue, Des Moines, Iowa 50392. For its services to the
Acquiring Fund, the Sub-Advisor is paid a fee by the Manager, and not by the
Fund.
At the PIF Shareholders Meeting, shareholders of the Acquiring Fund
will be asked to approve a proposal that will permit the Manager, pursuant to an
SEC order, to select and contract with Sub-Advisors to the Acquiring Fund (other
than Sub-Advisors affiliated with the Manager) after approval by the PIF Board
of Directors but without shareholder approval. If approved by shareholders of
the Acquiring Fund, the proposal will not be implemented until the PIF Board
determines to manage the Acquiring Fund in reliance on the SEC order. The
shareholders of the Acquired Fund have previously approved granting the Manager
comparable authority to select and contract with Sub-Advisors to the Acquired
Fund (other than Sub-Advisors affiliated with the Manager) after approval by the
Board of Directors of the Acquired Fund but without shareholder approval.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds are money market funds that
seek as high a level of current income as is considered consistent with a
preservation of principal and maintenance of liquidity by investing in high
quality, short-term money market instruments, they have substantially the same
risks. The main risks include:
Market As with all mutual funds, the value of each Fund's assets may rise or fall. Although both
Risk: Funds seek to preserve the value of an investment at $1.00 per share, it is possible to lose
money by investing in the Funds. Any investment in the
Funds is not guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Credit Risk: Credit risk pertains to the issuer's ability to make scheduled principal or interest
payments. This may reduce either Fund's stream of income and decrease its yield.
Interest Rate Risk: The value of both Funds' shares are directly impacted by trends in interest rates. If interest rates
rise, the value of debt securities generally will fall.
Repurchase Both Funds may invest in repurchase agreements with commercial banks, brokers and dealers
Agreements Risk: considered by the Manager for the Acquired Fund or the Sub-Advisor for the Acquiring Fund to
be creditworthy. Default or insolvency of the other party is a potential risk to both Funds.
U.S. Government Both Funds may invest in securities issued by government-sponsored enterprises. Although the
Security Risk: issuing agency, instrumentality or corporation may be chartered or sponsored by the U.S.
government, its securities are neither issued nor guaranteed by the U.S. Treasury.
Eurodollar and Eurodollar and Yankee obligations have risks similar to U.S. money market instruments, such
Yankee Obligations as income risk and credit risk. Other risks of Eurodollar and Yankee obligations include the
Risk: possibilities that a foreign government will not let U.S. dollar-denominated assets leave the
country, the banks that issue Eurodollar obligations may
not be subject to the same regulations as U.S. banks, and
adverse political or economic developments will affect
investments in a foreign country.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Cash Management Fund (Acquired Fund)*
Class A 0.74% 2.39% 3.71% N/A 03/02/1983
Class B 0.56% 1.91% 3.18% N/A 12/09/1994
PIF Money Market Fund (Acquiring Fund)
Institutional Class 03/01/2001
- --Class A 0.78% N/A N/A 1.43%
- --Class B 0.49% N/A N/A 1.13%
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have substantially the same
investment objectives, policies and risks, and their combination will offer
shareholders of the Acquired Fund continuity of investment objectives and
expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --Principal Global, as the Sub-Advisor to the Acquiring Fund, may be expected to
provide at least the same quality of investment advisory services and personnel
(the Funds currently have some of the same portfolio managers) as have been
provided by the Manager as the Advisor to the Acquired Fund;
- --The Acquiring Fund has a lower investment management fee and is expected to
have lower overall expense ratios than the Acquired Fund; the Board considered
the higher breakpoints and fees at breakpoints in the Management Agreement with
the Acquiring Fund to be a negative factor but believed that this factor was
outweighed by the slow rate of the Acquired Fund's asset growth, which meant
there was small likelihood of its reaching a breakpoint any time soon, the
prospectus of the Acquiring Fund for a higher rate of asset growth and the other
expected benefits of the Combination;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund, but during their common period of existence has performed somewhat better
than the Acquired Fund; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 21
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL INTERNATIONAL EMERGING MARKETS FUND INC.
INTO THE PIF INTERNATIONAL EMERGING MARKETS FUND
(Principal International Emerging Markets Fund Only)
Overview
Shareholders of the Principal International Emerging Markets Fund, Inc.
(the "Acquired Fund") are being asked to approve the Reorganization providing
for the Combination of that Fund into the PIF International Emerging Markets
Fund (the "Acquiring Fund"). For a summary discussion of the form and
consequences of, and the reasons for, the Reorganization, see "Overview of
Proposed Reorganization."
Comparison of Acquired and Acquiring Funds
Principal International Emerging PIF International Emerging
Markets Fund, Inc. Markets Fund
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as of $43,951,794 $36,042,988
10/31/2004:
Investment Principal Global is the Sub-Advisor to both Funds.
Sub-Advisor and
Portfolio The portfolio managers for both Funds are:
Managers: --Michael A. Marusiak, specializing in the international emerging markets sector; and
--Michael L. Reynal, specializing in emerging markets portfolios.
Investment The Acquired Fund seeks long-term growth of The Acquiring Fund seeks long-term growth of
Objectives: capital by investing primarily in equity capital.
securities of issuers in emerging market
countries.
Main Investment Both Funds invest primarily in common stocks of companies in emerging markets. The term
Strategies: "emerging market country" means any country which is considered to be an emerging country by
the international financial community (including the World
Bank and the International Financial Corporation). These
countries generally include every nation in the world
except the U.S., Canada, Japan, Australia, New Zealand and
most nations in Western Europe. Investing in many emerging
market countries is not feasible or may involve
unacceptable political risk. The Sub-Advisor focuses on
those emerging market countries that it believes have
strongly developing economies and markets which are
becoming more sophisticated.
Under normal market conditions, both Funds invest at least
80% of their assets in emerging market country equity
securities. Both Funds invest in the securities of:
o companies with their principal place of business or principal office in emerging
market countries;
o companies for which the principal securities trading market is an emerging market
country; or
o companies, regardless of where their securities
are traded, that derive 50% or more of their total
revenue from either goods or services produced in
emerging market countries or sales made in
emerging market countries.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the PMF and PIF
Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market conditions, both Funds
Defensive may invest without limit in cash and cash equivalents (which include bank notes, bank
Investing: certificates of deposit, bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
Because both of the Acquired and Acquiring Funds seek long-term growth
of capital by investing primarily in equity securities of issuers in emerging
market countries, they have substantially the same investment objectives and
strategies.
The investment objectives and principal investment policies and
strategies of the Acquired Fund and the Acquiring Fund are more fully described
in the PMF Prospectus and the PIF Prospectus, respectively. Additional
information about such policies and the types of securities the Sub-Advisor can
select for the respective Funds is contained in the PMF SAI and the Statement of
Additional Information. See "Comparative Information About the PMF and PIF Funds
- -- Location of Further Information About the Funds" below.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the PMF and PIF Funds - Costs of
Investing," below.
Principal International PIF International Emerging
Emerging Markets Fund Markets Fund
(Acquired Fund) (Acquiring Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): 5.75%(1) None 5.75%(1) None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(2) 4.00%(3) 0.75%(2) 4.00%(3)
Redemption or Exchange Fee (as a % of amount 1.00%(4)(5) 1.00%(5) 1.00%(4)(5) 1.00%(5)
redeemed/exchanged):
- --------------------
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the time
of Reorganization.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal International Emerging Markets Fund Class A 1.25% 0.25% 0.84% 2.34%
(Acquired Fund) Class B 1.25% 0.83% 0.90% 2.98%
PIF International Emerging Markets Class A 1.35% 0.25% 0.50% 2.10%
Fund
(Acquiring Fund) Class B 1.35% 0.83% 0.59% 2.77%
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal International Emerging Markets Class A $798 $1,263 $1,753 $3,097
Fund
(Acquired Fund) Class B $709 $1,240 $1,788 $3,079
PIF International Emerging Markets Class A $776 $1,195 $1,639 $2,866
Fund
(Acquiring Fund) Class B $689 $1,180 $1,688 $2,864
If you do not sell your shares at the end of the period:
Principal International Emerging Markets Class A $798 $1,263 $1,753 $3,097
Fund
(Acquired Fund) Class B $301 $921 $1,567 $3,079
PIF International Emerging Markets Class A $776 $1,195 $1,639 $2,866
Fund
(Acquiring Fund) Class B $280 $859 $1,464 $2,864
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
Principal International Emerging Markets Fund PIF International Emerging Markets Fund
(Acquired Fund) (Acquiring Fund)
1.25% of the first $100 million; 1.35% of the first 500 million;
1.20% of the next $100 million; 1.33% of the next $500 million;
1.15% of the next $100 million; 1.31% of the next $500 million; and
1.10% of the next $100 million; and 1.30% of the excess over $1.5 billion
1.05% of the excess over $400 million of of average daily net assets.
average daily net assets.
Principal Global, the Sub-Advisor to both the Acquired and Acquiring
Funds, is an indirect wholly-owned subsidiary of Principal Life and an affiliate
of the Manager. Its principal offices are located at 801 Grand Avenue, Des
Moines, Iowa 50392. For its services, the Sub-Advisor is paid a fee by the
Manager, and not by either Fund.
At the PIF Shareholders Meeting, shareholders of the Acquiring Fund
will be asked to approve a proposal that will permit the Manager, pursuant to an
SEC order, to select and contract with Sub-Advisors to the Acquiring Fund (other
than Sub-Advisors affiliated with the Manager) after approval by the PIF Board
of Directors but without shareholder approval. If approved by shareholders of
the Acquiring Fund, the proposal will not be implemented until the PIF Board
determines to manage the Acquiring Fund in reliance on the SEC order. The
shareholders of the Acquired Fund have previously approved granting the Manager
comparable authority to select and contract with Sub-Advisors to the Acquired
Fund (other than Sub-Advisors affiliated with the Manager) after approval by the
Board of Directors of the Acquired Fund but without shareholder approval.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds seek long-term growth of
capital by investing primarily in equity securities of issuers in emerging
market countries, they have substantially the same risks. The main risks
include:
Stock Market Because both Funds purchase equity securities, the Funds are subject to the risk that stock
Risk: prices will fall over short or extended periods of time. Individual companies may report
poor results or be negatively effected by industry and/or
economic trends and developments. In response, the price
of securities issued by such companies may decline. These
factors contribute to price volatility, which is the
principal risk of investing in the Funds. Additionally,
as with all mutual funds, as the value of each Fund's
assets rise or fall, the Fund's share price changes. If
you sell your shares when their value is less than the
price you paid, you will lose money.
Foreign Securities The Funds may invest in foreign securities, which carry risks that are not generally found in
Risk: stocks of U.S. companies. These risks include loss of value as a result of political,
financial, and economic events in foreign countries.
Foreign securities may also be subject to less stringent
accounting and disclosure standards than are required of
U.S. companies. Additionally, dividends and other income
payable on foreign securities may be subject to foreign
taxes, and some investments may be made in currencies
other than the U.S. dollar that will fluctuate in value
as a result of changes in the currency exchange rate.
Exchange Rate Risk: Because foreign securities are generally denominated in foreign currencies, the value of the net
assets of each Fund as measured in U.S. dollars will be
affected by changes in exchange rates. To protect against
this uncertainty, both Funds are authorized to enter into
certain foreign currency exchange transactions. In
addition, foreign investments may be less liquid and
their price more volatile than comparable investments in
U.S. securities. Settlement periods may be longer for
foreign securities and portfolio liquidity may be
affected.
Small and Medium Companies with small capitalizations are often companies with a limited operational history.
Capitalizations Risk: Such companies may have been created in response to cultural, economic, regulatory, or
technological developments. Such developments can have
significant impact or negative effect on smaller
capitalization companies securities which may be more
volatile in price than larger company securities,
especially over the short-term.
Active Trading Risk: Both Funds may actively trade portfolio securities in an attempt to achieve its investment
strategy. Active trading will cause an increased
portfolio turnover rate that increases each Fund's
trading costs and may have an adverse impact on
performance.
Emerging Market Risk: Investments in emerging market countries involve special risks. Certain emerging market countries
have historically experienced, and may continue to
experience, certain economic problems. These may include:
high rates of inflation, high interest rates, exchange
rates fluctuations, large amounts of debt, balance of
payments and trade difficulties, and extreme poverty and
unemployment.
The risks of investing in the Acquiring Fund are more fully described
in the PIF Prospectus and the Statement of Additional Information. The risks of
investing in the Acquired Fund are more fully described in the PMF Prospectus
and the PMF SAI. See "Comparative Information About the PMF and PIF Funds --
Location of Further Information About the Funds," below.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal International Emerging Markets Fund (Acquired
Fund)*
Class A (before taxes) 25.67% 4.27% N/A 5.81% 08/29/1997
(after taxes on distributions)** 24.66% 4.07% N/A 5.67%
(after taxes on distributions and sale 17.94% 3.64% N/A 5.03%
of shares)
Class B 24.76% 3.50% N/A 5.12% 08/29/1997
PIF International Emerging Markets Fund (Acquiring Fund)
Institutional Class 03/01/2001
- --Class A (before taxes) 24.98% N/A N/A 14.97%
(after taxes on distributions)** 23.58% N/A N/A 14.46%
(after taxes on distributions and sale 17.75% N/A N/A 12.90%
of shares)
- --Class B 24.15% N/A N/A 14.20%
- ------------------
<FN>
* After tax performance is shown for Class A only. The after-tax returns for
Class B will vary.
** After-tax returns are calculated using the historical highest individual
federal marginal income tax rates and do not reflect the impact of state
and local taxes. Actual after-tax returns will depend on an investor's tax
situation and may differ from those shown, and after tax returns shown are
not relevant to investors who hold their Fund shares through tax-deferred
arrangements, such as 401(k) plans or individual retirement accounts.
</FN>
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the Reorganization at its February 24, 2005, meeting are
described below under "Information About the Reorganization - Board
Consideration of the Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have substantially the same
investment objectives, policies and risks, and their combination will offer
shareholders of the Acquired Fund continuity of investment objectives and
expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Reorganization.
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --Principal Global, the Sub-Advisor to the Acquired Fund, is also the
Sub-Advisor to the Acquiring Fund and may be expected to provide continuity in
the quality of its investment advisory services and personnel;
- --Although the Acquiring Fund has a higher investment management fee, it is
expected to have lower overall expense ratios, than the Acquired Fund;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund, but during their common period of existence has performed somewhat better
than the Acquired Fund; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 22
ELECTION OF THE BOARD OF DIRECTORS
OF EACH OF THE PRINCIPAL MUTUAL FUNDS
(All Acquired or PMF Funds)
Shareholders of each of the Acquired or PMF Funds are being asked to
elect the Board of Directors of that Fund. The same persons are the current
Directors and the nominees for Directors of each of the Acquired Funds. For
convenience, references under this Proposal to the "Board" and the "Fund" are to
the Board of Directors of each PMF Fund. Shareholders of each Fund will vote
separately on this Proposal.
The Board has set the number of Directors at nine. Each Director will
serve until the next meeting of shareholders or until a successor is elected and
qualified. Unless you do not authorize it, your proxy ballot will be voted in
favor of the nine nominees listed below. All of the nominees currently serve as
Directors.
Each nominee has agreed to be named in this Proxy Statement/Prospectus
and to serve if elected. The Board has no reason to believe that any of the
nominees will become unavailable for election as a Director. However, if that
should occur before the meeting, your proxy ballot will be voted for the
individuals recommended by the Board to fill the vacancies.
The following table presents certain information regarding the current
Directors of the Fund, including their principal occupations which, unless
specific dates are shown, are of more than five years duration. In addition, the
table includes information concerning other directorships held by each Director
in reporting companies under the Securities Exchange Act of 1934 or registered
investment companies under the 1940 Act. Information is listed separately for
those nominees who are "interested persons" (as defined in the 1940 Act) of the
Fund (the "Interested Directors") and those nominees who are not interested
persons of the Fund (the "Independent Directors"). All Directors serve as
directors for each of the 24 investment companies (with a total of 106
portfolios as of December 31, 2004) sponsored by Principal Life: the PMF Funds,
PIF and Principal Variable Contracts Fund, Inc. ("PVC") (collectively, the "Fund
Complex").
Independent Directors
Name, Address Position(s) Held with the Principal Occupation(s) During the Other
and Age Fund Past 5 Years Directorships Held
Elizabeth Ballantine Director (since 2004), Principal, EBA Associates The McClatchy
1113 Basil Road Member of Audit and (consulting and investments) Company
McLean, VA Nominating Committee
Age: 56
James D. Davis Director (since 1993), Retired. Formerly, Vice President, None
4940 Center Court Member of Audit and Deere & Company (machinery and
Bettendorf, IA Nominating Committee equipment)
Age: 71
Richard W. Gilbert Director (since 2000), President, Gilbert Communications, Calamos Asset
5040 Arbor Lane, #302 Member of Audit and Inc. (management advisory services) Management, Inc.
Northfield, IL Nominating Committee
Age: 64
Mark A. Grimmett Director (since 2004), Executive Vice President and CFO, None
6310 Deerfield Avenue Member of Audit and since 2000, and prior thereto, Vice
San Gabriel, CA Nominating Committee President and CFO, Merle Norman
Age: 44 Cosmetics, Inc.
William C. Kimball Director (since 1999), Retired. Formerly, Chairman and Casey's General
3094 104th Member of Audit and CEO, Medicap Pharmacies Inc. Stores, Inc.
Urbandale, IA Nominating Committee
Age: 57
Barbara A. Lukavsky Director (since 1993), President and CEO, Barbican None
100 Market Street Member of Audit and Enterprises, Inc. (holding company
Des Moines, IA 50309 Nominating Committee, for franchises in the cosmetics
Age: 64 Member of Executive industry)
Committee
................... Interested Directors
Name, Address and Age Position(s) Held with the Positions with the Manager and Its Other
Fund Affiliates; Principal Occupation(s) Directorships Held
During the Past 5 Years
John E. Aschenbrenner Director (since 1998) Director, the Manager and Princor None
711 High Street since 1998. President, Insurance
Des Moines, Iowa 50392 and Financial Services, Principal
Age: 55 Financial Group, Inc., since 2003.
Executive Vice President,
2000-2003, and prior thereto,
Senior Vice President, Principal
Life
Ralph C. Eucher Director, President and Director, President and Chief None
711 High Street Chief Executive Officer, Executive Officer, the Manager and
Des Moines, Iowa 50392 Member of Executive Princor since 1999. Senior Vice
Age: 52 Committee (since 1999) President, since 2002, Vice
President, 1999-2002, and prior
thereto, Second Vice President,
Principal Life
Larry D. Zimpleman Director, Chairman of the Chairman and Director, the Manager None
711 High Street Board, Member of and Princor since 2001. President,
Des Moines, Iowa 50392 Executive Committee Retirement and Investor Services,
Age: 53 (since 2001) Principal Financial Group, since
2003. Executive Vice
President, 2001-2003,
and prior thereto,
Senior Vice
President, Principal
Life
During the last fiscal year of the Fund, the Board of Directors held
seven meetings. Each of the Directors of the Fund attended 100% of the meetings
of the Board and of the committees of which the Director was a member, except
for two Directors who attended at least 85% of such meetings.
Correspondence intended for the Board or for an individual Director may
be sent to the attention of the Board or the individual Director at 680 8th
Street, Des Moines, Iowa 50392-0200. All communications addressed to the Board
or to an individual Director received by the Fund are forwarded to the full
Board or to the individual Director.
Officers of the Fund
The following table presents certain information regarding the current
officers of the Fund, including their principal occupations which, unless
specific dates are shown, are of more than five years duration. Officers serve
at the pleasure of the Board of Directors.
Officers
Position(s) Held Principal Occupation(s)
Name, Address with the Fund During the Past 5 Years
and Age
Craig L Bassett Treasurer (since 1993) Vice President and Treasurer, Principal Life
711 High Street
Des Moines, Iowa 50392
Age: 52
Michael J. Beer Executive Vice Executive Vice President and Chief Operating
711 High Street President, Principal Officer, the Manager and Princor
Des Moines, Iowa 50392 Accounting Officer
Age: 44 (since 1993)
David J. Brown Chief Compliance Vice President, Product & Distribution
711 High Street Officer (since 2004) Compliance, Principal Life; Senior Vice
Des Moines, Iowa 50392 President, the Manager, since 2004; Senior Vice
Age: 44 President, Princor, since 2003, and prior
thereto, Vice President, the Manager and
Princor
Jill R. Brown Vice President and Vice President and Chief Financial Officer,
711 High Street Chief Financial Officer Princor, since 2003, and prior thereto,
Des Moines, Iowa 50392 (since 2003) Assistant Financial Controller, Principal Life
Age: 37
Arthur S. Filean Senior Vice President Senior Vice President, since 2000, and prior
711 High Street and Secretary (since thereto, Vice President, the Manager and
Des Moines, Iowa 50392 1993) Princor
Age: 66
Ernest H. Gillum Vice President and Vice President, Chief Compliance Officer, the
711 High Street Assistant Secretary Manager, since 2004, and prior thereto, Vice
Des Moines, Iowa 50392 (since 1993) President, Compliance and Product Development,
Age: 49 the Manager
David W. Miles Senior Vice President Senior Vice President--Product Development, the
711 High Street (since 2005) Manager and Princor, since 2005, and prior
Des Moines, Iowa 50392 thereto, Executive Vice President, Amcore
Age: 47 Financial, Inc. (banking)
Layne A. Rasmussen Controller (since 1993) Controller - Mutual Funds, the Manager
711 High Street
Des Moines, Iowa 50392
Age: 46
Michael D. Roughton Counsel (since 1993) Vice President and Senior Securities Counsel,
711 High Street Principal Life; Counsel, the Manager, Princor
Des Moines, Iowa 50392 and Principal Global
Age: 53
Board Committees
Audit and Nominating Committee. The Fund has an Audit and Nominating
Committee. Its members are identified above. All are Independent Directors.
During the last fiscal year, the Committee met four times.
The audit committee functions of the Committee include: (1) appointing,
compensating, and conducting oversight of the work of the independent auditors;
(2) reviewing the scope and approach of the proposed audit plan and the audit
procedures to be performed; (3) ensuring the objectivity of the internal
auditors and the independence of the independent auditors; and (4) establishing
and maintaining procedures for the handling of complaints received regarding
accounting, internal controls, and auditing. In addition, the Committee meets
with the independent and internal auditors to discuss the results of the audits
and reports to the full Board of the Fund. The Committee also receives reports
about accounting and financial matters affecting the Fund.
The nominating committee functions of the Committee include selecting and
nominating all candidates who are not "interested persons" of the Fund (as
defined in the 1940 Act) for election to the Board. Generally, the Committee
requests director nominee suggestions from the Committee members and management.
In addition, the Committee will consider director candidates recommended by the
Fund shareholders. Recommendations should be submitted in writing to the Fund at
680 8th Street, Des Moines, Iowa 50392-0200. The Committee has not established
any specific minimum qualifications for nominees. When evaluating a person as a
potential nominee to serve as an independent director, the Committee will
generally consider, among other factors: age; education; relevant business
experience; geographical factors; whether the person is "independent" and
otherwise qualified under applicable laws and regulations to serve as a
director; and whether the person is willing to serve, and willing and able to
commit the time necessary for attendance at meetings and the performance of the
duties of an independent director. The Committee also meets personally with the
nominees and conducts a reference check. The final decision is based on a
combination of factors, including the individual strengths and the experience an
individual may bring to the Board. The Board does not use regularly the services
of any professional search firms to identify or evaluate or assist in
identifying or evaluating potential candidates or nominees.
The Board approved the Audit and Nominating Committee Charter on September
13, 2004. The Charter is not available on the Fund website. A copy of the
Charter is attached as Appendix D to this Proxy Statement/Prospectus.
Executive Committee. The Executive Committee is selected by the Board. It
may exercise all the powers of the Board, with certain exceptions, when the
Board is not in session. The Committee must report its actions to the Board.
During the last fiscal year, the Committee did not meet.
Compensation
The Fund does not pay any remuneration to its Directors who are
employed by the Manager or its affiliates or to its officers who are furnished
to the Fund by the Manager and its affiliates pursuant to the Management
Agreement. Each Director who is not an "interested person" received compensation
for service as a member of the Boards of all investment companies sponsored by
Principal Life based on a schedule that takes into account an annual retainer
amount and the number of meetings attended. These fees and expenses are divided
among the funds and portfolios based on their relative net assets.
The following table provides information regarding the compensation
received by the Independent Directors from the PMF Funds and from the Fund
Complex during the fiscal year ended October 31, 2004. The Fund does not provide
retirement benefits to any of the Directors.
Director PMF Funds Fund Complex
-------- --------- ------------
Elizabeth Ballantine* -- --
James D. Davis $20,241 $79,750
Richard W. Gilbert $20,241 $79,750
Mark A. Grimmett $15,255 $64,093
William C. Kimball $20,241 $79,750
Barbara A. Lukavsky $20,241 $79,750
- ---------------
* Ms. Ballantine did not become a Director until December 2004.
** Mr. Grimmett did not become a Director until March 2004.
Share Ownership
The following tables set forth the aggregate dollar range of the equity
securities of the mutual funds within the Fund Complex which were beneficially
owned by the Directors as of March 3, 2005. As indicated above, the Fund Complex
includes the PMF Funds, the PIF Funds and the separate series of PVC. For the
purpose of these tables, beneficial ownership means a direct or indirect
pecuniary interest. Only the Directors who are "interested persons" are eligible
to participate in an employee benefit program which invests in the PIF Funds.
Directors who beneficially owned shares of the series of PVC did so through
variable life insurance and variable annuity contracts issued by Principal Life.
Please note that exact dollar amounts of securities held are not listed. Rather,
ownership is listed based on the following dollar ranges:
Share Ownership
The following tables set forth the aggregate dollar range of the equity
securities of the mutual funds within the Fund Complex which were beneficially
owned by the Directors as of March 3, 2005. As indicated above, the Fund Complex
includes the PMF Funds, the PIF Funds and the separate series of PVC. For the
purpose of these tables, beneficial ownership means a direct or indirect
pecuniary interest. Only the Directors who are "interested persons" are eligible
to participate in an employee benefit program which invests in the PIF Funds.
Directors who beneficially owned shares of the series of PVC did so through
variable life insurance and variable annuity contracts issued by Principal Life.
Please note that exact dollar amounts of securities held are not listed. Rather,
ownership is listed based on the following dollar ranges:
A - $0 D - $50,001 up to and including $100,000
B - $1 up to and including $10,000 E - $100,001 or more
C - $10,001 up to and including $50,000
Independent Directors (Not Considered to Be "Interested Persons")
Principal Mutual Funds Ballantine* Davis Gilbert Grimmett Kimball Lukavsky
Balanced Fund, Inc. A B B A A A
Capital Value Fund, Inc. A C C A A A
Partners LargeCap Value Fund, Inc. C A A A A A
Equity Income Fund, Inc. A E B A E A
Partners Blue Chip Fund, Inc. A D B A A A
Partners LargeCap Blend Fund, Inc. A A A A A A
LargeCap Stock Index Fund, Inc. A A A A A A
Growth Fund, Inc. A C D A A A
Partners Equity Growth Fund, Inc. A A A A A A
MidCap Fund, Inc. A C D A A A
Partners MidCap Growth Fund, Inc. A A A A A A
SmallCap Fund, Inc. A A A A A A
Partners SmallCap Growth Fund, Inc. A A A A A A
Real Estate Securities Fund, Inc. C A A A C A
Bond Fund, Inc. A C D C A E
Government Securities Income Fund, Inc. A B B A A A
Tax-Exempt Bond Fund, Inc. A B A A A A
International Fund, Inc. A B C A A E
International SmallCap Fund, Inc. C C A A A A
Limited Term Bond Fund, Inc. A A A B A E
Cash Management Fund, Inc. A D C C C D
International Emerging Markets Fund, Inc. C C A A A A
TOTAL FUND COMPLEX D E E D E E
- ---------------
<FN>
* Information for Ms. Ballantine, who became a Director in December 2004, is as
of March 4, 2005.
</FN>
Directors Considered to Be "Interested Persons"
Principal Mutual Funds Aschenbrenner Eucher Zimpleman
Balanced Fund, Inc. A A A
Capital Value Fund, Inc. A A A
Partners LargeCap Value Fund, Inc. A D A
Equity Income Fund, Inc. A C A
Partners Blue Chip Fund, Inc. A C A
Partners LargeCap Blend Fund, Inc. A D A
LargeCap Stock Index Fund, Inc. A A A
Growth Fund, Inc. A C A
Partners Equity Growth Fund, Inc. A C A
MidCap Fund, Inc. A D A
Partners MidCap Growth Fund, Inc. A A A
SmallCap Fund, Inc. A A A
Partners SmallCap Growth Fund, Inc. A A A
Real Estate Securities Fund, Inc. A A A
Bond Fund, Inc. A A A
Government Securities Income Fund, Inc. A C A
Tax-Exempt Bond Fund, Inc. A A A
International Fund, Inc. A A A
International SmallCap Fund, Inc. A A A
Limited Term Bond Fund, Inc. A A A
Cash Management Fund, Inc. A B A
International Emerging Markets Fund, Inc. A A A
TOTAL FUND COMPLEX A E A
Directors Considered to Be "Interested Persons"
Principal Investors Fund, Inc.* Aschenbrenner Eucher Zimpleman
Bond & Mortgage Securities Fund C C C
Government Securities Fund A C A
Diversified International Fund E A C
International Emerging Markets Fund C A A
LargeCap Growth Fund C A A
LargeCap S&P 500 Index Fund C D A
Mid Cap Blend Fund C B C
Money Market Fund C A A
Partners LargeCap Blend Fund I B A A
Partners LargeCap Growth Fund I C A A
Partners LargeCap Value Fund B C C
Partners MidCap Growth Fund C A A
Principal LifeTime Strategic Income Fund C A A
Real Estate Securities Fund C A A
SmallCap S&P 600 Index Fund D A A
TOTAL FUND COMPLEX E E D
- --------------
* Through participation in an employee benefit plan.
Independent Directors (Not Considered to Be "Interested Persons")
Principal Variable Contracts Fund, Inc.
* Ballantine Davis Gilbert Grimmett Kimball Lukavsky
Asset Allocation Account A A A A A A
Balanced Account A A A A A A
Bond Account A A A A C A
Capital Value Account A A A A A A
Equity Growth Account A A A A C A
Equity Income Account A A A A A A
Equity Value Account A A A A A A
Government Securities Account A A A A C A
Growth Account A A A A A A
International Account A A A A A A
International Emerging Markets A A A A A A
Account
International SmallCap Account A A A A A A
LargeCap Blend Account A A A A A A
Large Growth Equity Account A A A A A A
LargeCap Stock Index Account A A A A C A
LargeCap Value Account A A A A A A
Limited Term Bond Account A A A A A A
MidCap Account A A A A C A
MidCap Growth Account A A A A A A
MidCap Value Account A A A A C A
Money Market Account A A A A A A
Principal LifeTime 2010 Account A A A A A A
Principal LifeTime 2020 Account A A A A A A
Principal LifeTime 2030 Account A A A A A A
Principal LifeTime 2040 Account A A A A A A
Principal LifeTime 2050 Account A A A A A A
Principal LifeTime Strategic A A A A A A
Income Account
Real Estate Securities Account A A A A C A
SmallCap Account A A A A C A
SmallCap Growth Account A A A A A A
SmallCap Value Account A A A A A A
TOTAL FUND COMPLEX A A A A E A
- -------------
<FN>
* Through variable life insurance and variable annuity contracts issued by
Principal Life.
</FN>
Directors Considered to Be "Interested Persons"
Principal Variable Contracts Fund, Inc. * Aschenbrenner Eucher Zimpleman
Asset Allocation Account B A A
Balanced Account B A A
Bond Account A A A
Capital Value Account C A A
Equity Growth Account B A A
Equity Income Account A A A
Equity Value Account A A A
Government Securities Account A A A
Growth Account B A A
International Account C A A
International Emerging Markets Account A A A
International SmallCap Account B A A
LargeCap Blend Account A A A
Large Growth Equity Account C A A
LargeCap Stock Index Account A A A
LargeCap Value Account A A A
Limited Term Bond Account A A A
MidCap Account B A A
MidCap Growth Account A A A
MidCap Value Account A A A
Money Market Account A A A
Principal LifeTime 2010 Account A A A
Principal LifeTime 2020 Account A A A
Principal LifeTime 2030 Account A A A
Principal LifeTime 2040 Account A A A
Principal LifeTime 2050 Account A A A
Principal LifeTime Strategic Income Account A A A
Real Estate Securities Account A A A
SmallCap Account C A A
SmallCap Growth Account B A A
SmallCap Value Account A A A
TOTAL FUND COMPLEX D A A
- -------------
<FN>
* Through variable life insurance and variable annuity contracts issued by
Principal Life.
</FN>
Required Vote
The shareholders of each Fund will vote separately for the election of
Directors. The affirmative vote of the holders of a plurality of the shares
voted at the meeting of a Fund is required for the election of a Director of the
Fund.
The Board of Directors unanimously recommends that the shareholders of
the Fund vote "For" all the nominees.
INFORMATION ABOUT THE REORGANIZATION
Agreement and Plan of Reorganization
The terms of the Plan are summarized below. The summary is qualified in
its entirety by reference to the Plan, a copy of which is attached as Appendix A
to this Proxy Statement/Prospectus.
Under the Plan, and with respect to each Acquired Fund and its
corresponding Acquiring Fund, the Acquiring Fund will acquire all the assets and
assume all the liabilities of the Acquired Fund and in exchange will issue to
the Acquired Fund Class A and Class B shares of the Acquiring Fund. Subject to
the satisfaction of the conditions set forth below, the acquisition will take
place on June 30, 2005 or on such other date as may be agreed upon by the
Acquired Fund and PIF on behalf of the Acquiring Fund (the "Closing Date"). The
net asset value per share of each class of shares of the Acquired Fund and the
Acquiring Fund will be determined by dividing each Fund's assets, less
liabilities, attributable to that share class, by the total number of
outstanding shares of that class. The assets of each Fund will be valued in
accordance with the valuation practices of that Fund, which practices will be
the same as between the Acquired Fund and the Acquiring Fund.
The number of full and fractional shares of the Acquiring Fund received
by a shareholder of the Acquired Fund will be equal in value to the value of the
shareholder's full and fractional shares of the Acquired Fund as of the close of
regularly scheduled trading on the New York Stock Exchange on the Closing Date
(the "Effective Time"). The Acquired Fund will distribute pro rata to its
shareholders of record as of the Effective Time the Class A and Class B shares
of the Acquiring Fund received by the Acquired Fund in the Reorganization.
Holders of Class A and Class B shares of the Acquired Fund will receive,
respectively, Class A and Class B shares of the Acquiring Fund. Such
distributions will be accomplished by the transfer of the shares of the
Acquiring Fund then credited to the account of the Acquired Fund on the books of
the Acquiring Fund to open accounts on the share records of the Acquiring Fund
in the names of the shareholders of the Acquired Fund, each account representing
the respective pro rata number of shares of the Acquiring Fund due the
shareholder. All issued and outstanding shares of the Acquired Fund will
simultaneously be cancelled on the books of the Acquired Fund. As soon as
practicable after the Closing Date, the Acquired Fund will take all necessary
steps under its Articles of Incorporation, Maryland law and any other applicable
law to effect its complete dissolution.
The Board of Directors of each Acquired Fund has determined that the
interests of the shareholders of the Acquired Fund will not be diluted as a
result of the Reorganization and that participation in the Reorganization is in
the best interests of the Acquired Fund and its shareholders. Similarly, the
Board of Directors of PIF has determined that the Reorganization is in the best
interests of each corresponding Acquiring Fund and its shareholders and that the
interests of such shareholders will not be diluted as a result of the
Reorganization.
The consummation of the Reorganization with respect to each Acquired
Fund and its corresponding Acquiring Fund is subject to the conditions set forth
in the Plan, including the affirmative vote of the holders of at least a
Majority of the Outstanding Voting Securities (as defined under "Voting
Information" below) of the Acquired Fund entitled to vote on the Reorganization.
The Plan may be amended, modified or supplemented in such manner as may be
mutually agreed upon in writing by the Acquired Fund and PIF on behalf of the
corresponding Acquiring Fund. However, following the meeting of the shareholders
of the Acquired Fund, no such amendment may have the effect of changing the
provisions for determining the number of Class A and Class B shares of the
Acquiring Fund to be issued to the shareholders of the Acquired Fund under the
Plan to their detriment, or otherwise have a material adverse effect on the
interests or rights of the Acquired Fund or its shareholders, without the
Acquired Fund obtaining further approval of its shareholders.
The Plan may be terminated and the Reorganization abandoned with
respect to each Acquired Fund and its corresponding Acquiring Fund at any time
prior to the Closing Date by the Acquired Fund and PIF on behalf of the
Acquiring Fund by (i) mutual agreement of the parties, or (ii) by either party
if the closing has not occurred on or before June 30, 2005, unless such date is
extended by mutual agreement of the parties, or (iii) by either party if the
other party has materially breached its obligations under the Plan or made a
material and intentional misrepresentation in or in connection with the Plan.
Additionally, except as otherwise expressly provided in the Plan, each of the
Acquired Fund and PIF on behalf of the Acquiring Fund may at any time prior to
the closing: (i) waive any inaccuracies in the representations and warranties
contained in the Plan and made for its benefit, and (ii) waive compliance with
any of the covenants or conditions contained in the Plan and made for its
benefit, except that any such waiver that would have a material adverse effect
on the interests or rights of the Acquired Fund or its shareholders, or the
Acquiring Fund or its shareholders, may be made only with the consent of the
Board of Directors of, respectively, the Acquired Fund or PIF on behalf of the
Acquiring Fund.
Under the Plan, the first $1,000,000 of the expenses relating to the
proposed Reorganization will be allocated among the Acquired Funds based on the
ratio of the open accounts of each Acquired Fund to the open accounts of all the
Acquired Funds as of the close of business on February 28, 2005. The Manager
will pay 50% of the balance of the expenses relating to the Reorganization, and
the remaining 50% will be allocated among the Acquired Funds in the same manner
as the first $1,000,000 of expenses, except that the Manager will pay 100% of
such expenses allocated to the following Acquired Funds which are not expected
to experience reduced expense ratios as a result of the Reorganization: the
Principal Bond Fund, Principal MidCap Fund, Principal Tax-Exempt Bond Fund,
Principal Partners LargeCap Value Fund, Principal Partners SmallCap Growth Fund,
Principal International Fund and Principal Partners MidCap Growth Fund.
Reasons for the Reorganization
The Board of Directors of each of the Acquired Funds has observed that
the PMF Funds have generally been experiencing declining net assets, due in part
to redemptions and in part to the level of new sales. The PIF Funds, in
contrast, have generally been experiencing asset growth, which tends to result
in decreasing expense ratios and to facilitate more efficient portfolio
management. The purpose of the Reorganization is to combine the PMF and PIF
Funds, which are all sponsored by Principal Life and managed by the Manager,
into a larger fund family that is expected to achieve economies of scale and to
operate with greater efficiency and lower overall costs while enabling
shareholders of each Acquired Fund to continue their investments in an Acquiring
Fund having substantially the same or similar investment objectives and
policies. See "Overview of the Proposed Reorganization - Reasons for the
Reorganization."
Board Consideration of the Reorganization
The Board of Directors of each Acquired Fund, including the Directors
who are not "interested persons" (as defined in the 1940 Act) of each Acquired
Fund (the "Independent Directors"), considered the Reorganization at Board
meetings held on December 13, 2004, February 4, 2005 and February 24, 2005. The
Board of each Acquired Fund considered information about the Reorganization
presented by the Manager, and the Independent Directors of each Acquired Fund
were assisted by independent legal counsel and an independent consultant. At the
February 24, 2005 meeting, the Board of each Acquired Fund unanimously approved
the Reorganization as to the Acquired Fund and its corresponding Acquiring Fund
after concluding that the participation of the Acquired Fund in the
Reorganization is in the best interests of the Acquired Fund, as well as in the
best interest of its shareholders, and that the interests of such existing
shareholders will not be diluted as a result of the Reorganization.
In determining whether to approve the Reorganization and recommend its
approval to shareholders, the Board of each Acquired Fund made inquiry into a
number of matters and considered the following factors, among others: (1) the
compatibility of the investment objectives and policies, and the fundamental and
non-fundamental investment restrictions, of the Acquired Fund and its
corresponding Acquiring Fund and any changes with respect thereto that will
result from the Reorganization; (2) the cost associated with disposing of any
portfolio securities that would not be compatible with the investment objectives
and policies of the Acquiring Fund; (3) expense ratios and available information
regarding the fees and expenses of the Acquired Fund and its corresponding
Acquiring Fund, and the applicability and impact of any voluntary or contractual
fee waivers or expense reimbursements with respect to the Acquiring Fund; (4)
comparative investment performance of the Acquired Fund and its corresponding
Acquiring Fund; (5) the effect on the Acquired Fund's shareholders of investing
in a larger asset pool with potentially greater diversification, and the effect
on the portfolio management of the corresponding Acquiring Fund of such a larger
asset base, where applicable; (6) the prospects for growth, and for achieving
economies of scale, of the Acquired Fund in combination with the corresponding
Acquiring Fund and as combined into PIF; (7) projections with respect to asset
growth or decline based upon distribution activities and market performance and
the likely impact of these factors on expense ratios; (8) the financial
strength, investment experience, personnel and resources of the Sub-Advisor or
Sub-Advisors to the Acquired Fund and its corresponding Acquiring Fund; (9)
where applicable, the continued service of the Sub-Advisor to the Acquired Fund
as the Sub-Advisor to its corresponding Acquiring Fund; (10) the continuity of
or changes in services to be provided to shareholders following the
Reorganization; (11) PIF marketing efforts and distribution arrangements; (12)
any direct or indirect fees or expenses to be incurred by the Acquired Fund or
its shareholders as a result of the Reorganization, and any benefits to be
derived by the Manager and its affiliates from the Reorganization; (13) the
direct or indirect federal income tax consequences of the Reorganization,
including the impact of any federal income tax loss carryforward; (14) the terms
and conditions of the Agreement and Plan of Reorganization and whether its
implementation would result in dilution of shareholder interests; and (15)
possible alternatives to the Reorganization.
Each Acquired Fund Board's decision to recommend approval of the
Reorganization was based on a number of factors. Particular factors considered
by the each Board with respect to the Combination of a particular Acquired Fund
into its corresponding Acquiring Fund are discussed under the Proposal for that
Combination (see "Board Consideration of Combination" under each Proposal). The
following is a general summary of factors which relate to the combinations of
the Acquired Funds into the Acquiring Funds:
1. the PMF Funds, in general, have been experiencing declining assets,
which has a negative impact on shareholders of the Funds, and this trend is
expected to continue;
2. each Acquired Fund in combination with its corresponding Acquiring Fund
may expect to benefit from one or more of the following: (i) an immediately
larger fund asset base to achieve economies of scale and enable greater
flexibility in portfolio management and greater diversification in investments;
(ii) the possibility of similar benefits from future growth of fund assets as a
result of the combined PMF and PIF distribution networks; and (iii) certain
efficiencies on an ongoing basis as a result of PIF's larger overall size,
relative to the Acquired Funds separately and collectively;
3. the investment objectives, policies and risks of the Acquiring Funds are
the same or substantially similar to those of their corresponding Acquired Funds
and will afford shareholders of the Acquired Funds continuity of investment
objectives and expectations.
4. the Manager is the investment advisor for each Acquired and Acquiring
Fund and may be expected to continue to provide to the Acquiring Funds
investment advisory and administrative services and personnel of at least the
same quality as those currently provided to the Acquired Funds;
5. most Combinations involve an Acquiring Fund with expense ratios that
are expected to be the same as or lower than those of the Acquired Fund, as of
the time of the Combination. With respect to each Combination in which the
Acquiring Fund's expense ratios, as a result of a higher management fee, are
expected to be higher as of the time of the Combination, than those of the
Acquired Fund, the Board determined that such level of expenses is within
industry norms and may decrease over time and that the higher management fee was
outweighed by the other benefits of the Combination and the Manager's agreement
to cap the expenses at their pre-Combination level for a three-year period in
the case of the Combinations involving the Principal MidCap, Principal Partners
MidCap Growth, Principal Partners SmallCap Growth and Principal Tax-Exempt Bond
Funds, and for a four-year period in the case of the Combination involving the
Principal Bond Fund; further, although future expense ratios cannot be known, if
sales expectations are met, the expense ratios of the Acquiring Fund are
expected to be approximately at or below the projected expense ratios of the
Acquired Fund absent the Reorganization;
6. the Reorganization will not result in the dilution of the interests of
existing shareholders; and
7. the Reorganization has been structured as a tax-free reorganization
and therefore will not result in shareholders recognizing any gain or loss for
federal income tax purposes.
Description of the Securities to Be Issued
PIF is a Maryland corporation that is authorized to issue its shares of
common stock, par value $.01 per share, in separate series and separate classes
of series. Each Acquiring Fund is a separate series of PIF, and the Class A and
Class B shares of each Acquiring Fund to be issued in connection with the
Reorganization, along with the other classes of shares of an Acquiring Fund,
represent interests in the assets belonging to that series and have identical
dividend, liquidation and other rights, except that expenses allocated to a
particular series or class are borne solely by that series or class and may
cause differences in rights as described herein. Expenses related to the
distribution of, and other identified expenses properly allocated to, the shares
of a particular series or class are charged to and borne solely by that series
or class, and the bearing of expenses by a particular series or class may be
appropriately reflected in the net asset value attributable to, and the dividend
and liquidation rights of, that series or class.
All shares of PIF have equal voting rights and are voted in the
aggregate and not by separate series or class of shares except that shares are
voted by series or class: (i) when expressly required by Maryland law or the
1940 Act and (ii) on any matter submitted to shareholders which the Board of
Directors has determined affects the interests of only a particular series or
class.
Each Acquired Fund is also a Maryland corporation and is authorized to
issue shares, par value $.01 per share, in separate classes. The Class A and
Class B shares of each Acquired Fund represent interests in the assets belonging
to that Fund and have substantially the same dividend, liquidation and other
rights with respect to the Acquired Fund that the Class A and Class B shares of
each Acquiring Fund have with respect to the Acquiring Fund as described above.
Similarly, all shares of each Acquired Fund have equal voting rights and are
voted in the aggregate and not by class of shares except that shares are voted
by class: (i) when expressly required by Maryland law or the 1940 Act and (ii)
on any matter submitted to shareholders which the Board of Directors has
determined affects the interests of only a particular class.
See "Comparative Information About the PMF and PIF Funds - Multiple
Classes of Shares" and "Rule 12b-1 fees" below.
With respect to shares of both the Acquiring and Acquired Funds: there
is no cumulative voting for Directors; shares are fully paid and non-assessable,
have no preemptive or conversion rights and are freely transferable; and each
fractional share has proportionately the same rights as are provided for a full
share.
At the PIF Shareholders Meeting, shareholders of the PIF Funds,
including the Acquiring Funds, will be asked to approve proposed amendments to
the PIF Articles of Incorporation that will permit the PIF Board of Directors,
in each case without shareholder approval of an affected PIF Fund or class of
shares thereof: (i) to approve combinations involving PIF Funds, including
combinations of the PIF Funds (or other affiliated funds) consistent with
recently amended Rule 17a-8 under the 1940 Act; (ii) to liquidate the assets
attributable to a PIF Fund or a class of shares thereof and terminate such Fund
or class of shares; and (iii) to designate a class of shares of a PIF Fund as a
separate series or PIF Fund. Together, these amendments are intended to
facilitate future combinations involving PIF Funds that the PIF Board determines
are in the best interests of the affected shareholders. A combination of
affiliated funds will still require shareholder approval if the combination
would result in a material change in a fundamental investment policy, a material
change to the terms of an advisory agreement or the institution of or an
increase in Rule 12b-1 fees or when the Board of the surviving fund does not
have a majority of independent trustees who were elected by its shareholders.
If PIF shareholders approve the proposed amendments, Acquired Fund
shareholders after the Reorganization will no longer have the rights they
currently have under the Articles of Incorporation of the separate Acquired
Funds and under Maryland law to vote to approve a combination involving, and to
vote with respect to the liquidation of, their Fund.
Federal Income Tax Consequences
Tax Opinion. The Reorganization will be a tax-free "reorganization,"
and no gain or loss will be recognized by either the Acquired Funds or Acquiring
Funds or its shareholders in connection the Combinations. To be considered a
tax-free "reorganization" under Section 368(a) of the Internal Revenue Code, a
reorganization must exhibit a continuity of business enterprise. Each Acquired
Fund and PIF on behalf of each corresponding Acquiring Fund will have received
the opinion of tax counsel, in a form reasonably satisfactory to each,
substantially to the effect that, based upon certain facts, assumptions, and
representations of the Acquired Fund and of PIF on behalf of the corresponding
Acquiring Fund, for federal income tax purposes: (1) the Reorganization will
constitute a reorganization within the meaning of Section 368(a) of the Code
with respect to the Acquired Fund and the Acquiring Fund; (2) no gain or loss
will be recognized by the Acquired Fund or the Acquiring Fund upon the transfer
of all of the assets and liabilities, if any, of the Acquired Fund to the
Acquiring Fund solely in exchange for shares of the Acquiring Fund; (3) no gain
or loss will be recognized by shareholders of the Acquired Fund upon the
exchange of such Acquired Fund's shares solely for shares of the Acquiring Fund;
(4) the holding period and tax basis of the shares of the Acquiring Fund
received by each holder of shares of the Acquired Fund pursuant to the
Reorganization will be the same as the holding period and tax basis of the
shares of the Acquired Fund held by the shareholder (provided the shares of the
Acquired Fund were held as a capital asset on the date of the Reorganization)
immediately prior to the Reorganization; and (5) the holding period and tax
basis of the assets of the Acquired Fund acquired by the Acquiring Fund will be
the same as the holding period and tax basis of those assets to the Acquired
Fund immediately prior to the Reorganization.
Capital Loss Carryforwards. As of October 31, 2004, the following
Acquired Funds, Principal Balanced Fund, Principal Bond Fund, Principal Capital
Value Fund, Principal Equity Income Fund, Principal Government Securities Income
Fund, Principal Growth Fund, Principal International Fund, Principal
International SmallCap Fund, Principal LargeCap Stock Index Fund, Principal
Limited Term Bond Fund, Principal Partners Blue Chip Fund, Principal Partners
Equity Growth Fund, Principal MidCap Growth Fund, Principal Partners SmallCap
Growth Fund and Principal SmallCap Fund, had accumulated capital loss
carryforwards in the approximate amounts of, respectively, $11,458,000,
$10,820,000, $3,598,000, $23,837,000, $7,995,000, $169,367,000, $74,691,000,
$3,440,000, $2,505,000. $2,989,000, $25,542,000, $26,498,000, $11,952,000,
$4,945,000 and $16,844,000. After the Reorganization, these losses will be
available to the corresponding Acquiring Funds to offset their capital gains,
although the amounts of offsetting losses available in any given year may be
limited. As a result of this limitation, it is possible that the corresponding
Acquiring Funds may not be able to use these losses as rapidly as the Acquired
Funds might have, and part of these losses may not be useable at all. The
ability of each Acquiring Fund to utilize the accumulated capital loss
carryforward in the future depends upon a variety of factors that cannot be
known in advance, including the existence of capital gains against which these
losses may be offset. In addition, the benefits of any capital loss carryforward
currently are available only to shareholders of the Acquired Fund. After the
Reorganization, however, these benefits will inure to the benefit of all
shareholders of its corresponding Acquiring Fund.
Distribution of Income and Gains. Prior to the Reorganization, each
Acquired Fund whose taxable year will end as a result of the Reorganization
generally is required to declare to its shareholders of record one or more
distributions of all of its previously undistributed net investment income and
net realized capital gain, including capital gains on any securities disposed of
in connection with the Reorganization. Such distributions will be made to such
shareholders before the Reorganization. An Acquired Fund shareholder will be
required to include any such distributions in such shareholder's taxable income.
This may result in the recognition of income that could have been deferred or
might never have been realized had the Reorganization not occurred.
Moreover, if an Acquiring Fund has realized net investment income or
net capital gains but has not distributed such income or gains prior to the
Reorganization, and you acquire shares of such Acquiring Fund in the
Reorganization, a portion of your subsequent distributions from the Acquiring
Fund will, in effect, be a taxable return of part of your investment. Similarly,
if you acquire Acquiring Fund shares in the Reorganization when it holds
appreciated securities, you will receive a taxable return of part of your
investment if and when the Acquiring Fund sells the appreciated securities and
distributes the realized gain. The Acquiring Funds have built up, or have the
potential to build up, high levels of unrealized appreciation.
The foregoing is only a summary of the principal federal income tax
consequences of the Reorganization and should not be considered to be tax
advice. There can be no assurance that the Internal Revenue Service will concur
on all or any of the issues discussed above. You may wish to consult with your
own tax advisers regarding the federal, state, and local tax consequences with
respect to the foregoing matters and any other considerations which may apply in
your particular circumstances.
CAPITALIZATION
As to each Proposal, the following tables show as of October 31, 2004:
(i) the capitalization of the Acquired Fund; (ii) the capitalization of the
Acquiring Fund; and (iii), the pro forma combined capitalization of the
Acquiring Fund, adjusted to reflect the estimated expenses of the
Reorganization, as if the Reorganization had occurred as of that date. With
respect to Proposal 18, providing for the Combination of each of the Principal
International Fund and the Principal International SmallCap Fund into the PIF
International Fund, the tables also show the pro forma combined capitalization
of the Acquiring Fund (i) as if each Combination had occurred separately and
(ii) as if both Combinations had occurred. As of October 31, 2004, each of the
Acquired Funds had outstanding two classes of shares: Class A and Class B. As of
October 31, 2004, each of the Acquiring Funds (other than the PIF Equity-Income
Fund and PIF Tax-Exempt Bond Fund which will commence operations at the time of
the Reorganization) had outstanding five or more of the following seven classes
of shares: Institutional Class, Select Class, Preferred Class, Advisors Select
Class, Advisors Signature Class, Advisors Preferred Class and Class J. The
Acquiring Funds will first issue Class A and, as applicable, Class B shares in
connection with the Reorganization. See "Comparative Information About the PMF
and PIF Funds - Multiple Classes of Shares" below.
Net Asset Value Shares
Proposal 1 Net Assets Per Share Outstanding
- ---------- ---------- --------- -----------
(1) Principal Balanced Fund, Inc. --Class A $85,881,686 $12.59 6,823,852
(Acquired Fund) --Class B 15,126,443 12.51 1,208,875
(2) PIF Disciplined LargeCap Blend Fund --Class A - - -
(Acquiring Fund) --Class B - - -
--Institutional 247,978,493 12.95 19,149,187
--Select 9,434 12.91 731
--Preferred 9,539 12.93 738
--Advisors Select 10,042 12.87 780
--Advisors Signature - - -
--Advisors Preferred 9,230 12.89 716
Reduction in net assets and decrease in --Class A 43,269 .01 6,823,852
net asset values per share of the --Class B 8,864 .01* 1,208,875
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF Disciplined LargeCap Blend Fund --Class A 85,838,417 12.94* 6,631,790*
(Acquiring Fund) --Class B 15,117,579 12.94* 1,168,065*
(Pro forma assuming combination --Institutional 247,978,493 12.95 731
of (1) and (2)) --Select 9,434 12.91 738
--Preferred 9,539 12.93 780
--Advisors Select 10,042 12.87 -
--Advisors Signature - - 716
--Advisors Preferred 9,230 12.89
Net Asset Value Shares
Proposal 2 Net Assets Per Share Outstanding
- ---------- ---------- --------- -----------
(1) Principal Capital Value Fund, Inc. --Class A $311,582,761 $23.61 13,198,050
(Acquired Fund) --Class B 27,212,969 23.37 1,164,337
(2) PIF LargeCap Value Fund --Class A - - -
(Acquiring Fund) --Class B - - -
--Institutional 97,880,620 10.67 9,169,377
--Select 15,176 10.64 1,426
--Preferred 3,716,277 10.69 347,510
--Advisors Select 1,387,526 10.67 130,030
--Advisors Signature - - -
--Advisors Preferred 911,485 10.65 85,603
--Class J 18,334,328 10.61 1,728,575
Reduction in net assets and decrease in --Class A 95,986 .01 13,198,050
net asset values per share of the --Class B 17,475 .02* 1,164,337
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF LargeCap Value Fund --Class A 311,486,775 10.67* 29,201,758*
(Acquiring Fund) --Class B 27,195,494 10.66* 2,550,419*
(Pro forma assuming combination --Institutional 97,880,620 10.67 9,169,377
of (1) and (2)) --Select 15,176 10.64 1,426
--Preferred 3,716,277 10.69 347,510
--Advisors Select 1,387,526 10.67 130,030
--Advisors Signature - - -
--Advisors Preferred 911,485 10.65 85,603
--Class J 18,334,328 10.61 1,728,575
Net Asset Value Shares
Proposal 3 Net Assets Per Share Outstanding
- ---------- ---------- --------- -----------
(1) Principal Partners LargeCap Value --Class A $43,517,412 $12.14 3,583,449
Fund, Inc. (Acquired Fund) --Class B 17,126,993 11.95 1,433,070*
(2) PIF Partners LargeCap Value Fund --Class A - - -
(Acquiring Fund) --Class B - - -
--Institutional 1,170,225,605 12.67 92,353,201
--Select 13,693,734 12.64 1,083,386
--Preferred 45,728,962 12.68 3,606,918
--Advisors Select 33,241,509 12.59 2,640,717
--Advisors Signature - - -
--Advisors Preferred 34,752,000 12.92 2,690,326
--Class J 41,043,178 12.58 3,262,339
Reduction in net assets and decrease in --Class A 14,746 - 3,583,449
net asset values per share of the --Class B 6,822 - 1,433,070
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF Partners LargeCap Value Fund --Class A 43,502,666 12.67* 3,434,681*
(Acquiring Fund) --Class B 17,120,171 12.66* 1,351,775*
(Pro forma assuming combination --Institutional 1,170,225,605 12.67 92,353,201
of (1) and (2)) --Select 13,693,734 12.64 1,083,386
--Preferred 45,728,962 12.68 3,606,918
--Advisors Select 33,241,509 12.59 2,640,717
--Advisors Signature - - -
--Advisors Preferred 34,752,000 12.92 2,690,326
--Class J 41,043,178 12.58 3,262,339
Net Asset Value Shares
Proposal 4 Net Assets Per Share Outstanding
- ---------- ---------- --------- -----------
(1) Principal Equity Income Fund, --Class A $69,482,241 $10.22 6,800,003
Inc. (Acquired Fund) --Class B 11,414,522 10.18 1,121,344
(2) PIF Equity Income Fund (Acquiring --Class A - - -
Fund) --Class B - - -
Reduction in net assets and decrease in --Class A 32,125 -* 6,800,003
net asset values per share of the --Class B 8,298 .01 1,121,344
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF Equity Income Fund (Acquiring --Class A 69,450,116 10.21 6,800,003
Fund) --Class B 11,406,224 10.17 1,121,344
(Pro forma assuming combination
of (1) and (2))
Net Asset Value Shares
Proposal 5 Net Assets Per Share Outstanding
- ---------- ---------- --------- -----------
(1) Principal Partners Blue Chip Fund, --Class A $123,303,668 $17.57 7,017,035
Inc. (Acquired Fund) --Class B 26,399,217 16.83 1,568,898
(2) PIF Partners LargeCap Blend Fund --Class A - - -
I (Acquiring Fund) --Class B - - -
--Institutional 8,583 7.72 1,112
--Select 347,818 7.76 44,823
--Preferred 2,518,552 7.78 323,853
--Advisors Select 2,271,966 7.74 293,604
--Advisors Signature - - -
--Advisors Preferred 1,325,282 7.76 170,876
--Class J 25,188,745 7.67 3,282,334
Reduction in net assets and decrease in --Class A 76,022 .01 7,017,035
net asset values per share of the --Class B 20,013 .01* 1,568,898
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF Partners LargeCap Blend Fund I --Class A 123,227,646 7.72* 15,971,978*
(Acquiring Fund) --Class B 26,379,204 7.71* 3,419,588*
(Pro forma assuming combination --Institutional 8,583 7.72 1,112
of (1) and (2)) --Select 347,818 7.76 44,823
--Preferred 2,518,552 7.78 323,853
--Advisors Select 2,271,966 7.74 293,604
--Advisors Signature - - -
--Advisors Preferred 1,325,282 7.76 170,876
--Class J 25,188,745 7.67 3,282,334
Net Asset Value Shares
Proposal 6 Net Assets Per Share Outstanding
- ---------- ---------- --------- -----------
(1) Principal Partners LargeCap Blend --Class A $43,209,784 $9.89 4,368,684
Fund, Inc. (Acquired Fund) --Class B 18,437,716 9.62 1,917,403
(2) PIF Partners LargeCap Blend Fund --Class A - - -
(Acquiring Fund) --Class B - - -
--Institutional 464,034,476 10.14 45,741,745
--Select 5,775,880 10.14 569,540
--Preferred 34,283,220 10.11 3,389,896
--Advisors Select 22,390,274 10.06 2,224,860
--Advisors Signature - - -
--Advisors Preferred 23,025,673 10.10 2,279,337
--Class J 43,662,259 9.95 4,386,721
Reduction in net assets and decrease in --Class A 20,203 - 4,368,684
net asset values per share of the --Class B 9,172 -* 1,917,403
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF Partners LargeCap Blend Fund --Class A 43,189,581 10.14* 4,261,320*
(Acquiring Fund) --Class B 18,428,544 10.13* 1,818,315*
(Pro forma assuming combination --Institutional 464,034,476 10.14 45,741,745
of (1) and (2)) --Select 5,775,880 10.14 569,540
--Preferred 34,283,220 10.11 3,389,896
--Advisors Select 22,390,274 10.06 2,224,860
--Advisors Signature - - -
--Advisors Preferred 23,025,673 10.10 2,279,337
--Class J 43,662,259 9.95 4,386,721
Net Asset Value Shares
Proposal 7 Net Assets Per Share Outstanding
- ---------- ---------- --------- -----------
(1) Principal LargeCap Stock Index --Class A $53,384,398 $8.39 6,363,291
Fund, Inc. (Acquired Fund)
(2) PIF LargeCap S&P 500 Index Fund --Class A - - -
(Acquiring Fund) --Institutional 10,203 8.67 1,177
--Select 10,000,198 8.72 1,147,016
--Preferred 122,210,003 8.75 13,960,517
--Advisors Select 50,013,468 8.69 5,755,211
--Advisors Signature - - -
--Advisors Preferred 91,854,400 8.70 10,559,987
--Class J 247,010,310 8.62 28,646,150
Reduction in net assets and decrease in --Class A 25,137 - 6,363,291
net asset values per share of the
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF LargeCap S&P 500 Index Fund --Class A 53,359,261 8.67* 6,157,370*
(Acquiring Fund) --Institutional 10,203 8.67 1,177
(Pro forma assuming combination --Select 10,000,198 8.72 1,147,016
of (1) and (2)) --Preferred 122,210,003 8.75 13,960,517
--Advisors Select 50,013,468 8.69 5,755,211
--Advisors Signature - - -
--Advisors Preferred 91,854,400 8.70 10,559,987
--Class J 247,010,310 8.62 28,646,150
Net Asset Value Shares
Proposal 8 Net Assets Per Share Outstanding
- ---------- ---------- --------- -----------
(1) Principal Growth Fund, Inc. --Class A $252,693,971 $26.31 9,605,221
(Acquired Fund) --Class B 40,469,526 25.12 1,610,993
(2) PIF LargeCap Growth Fund --Class A - - -
(Acquiring Fund) --Class B - - -
--Institutional 121,840,399 6.09 19,998,536
--Select 53,207 6.27 8,482
--Preferred 2,299,446 6.18 372,320
--Advisors Select 71,871 6.09 11,801
--Advisors Signature - - -
--Advisors Preferred 512,899 6.34 80,885
--Class J 15,897,448 5.89 2,696,917
Reduction in net assets and decrease in --Class A 146,012 .02 9,605,221
net asset values per share of the --Class B 31,993 .02 1,610,993
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF LargeCap Growth Fund --Class A 252,547,959 6.09* 41,493,263*
(Acquiring Fund) --Class B 40,437,533 6.09* 6,645,242*
(Pro forma assuming combination --Institutional 121,840,399 6.09 19,998,536
of (1) and (2)) --Select 53,207 6.27 8,482
--Preferred 2,299,446 6.18 372,320
--Advisors Select 71,871 6.09 11,801
--Advisors Signature - - -
--Advisors Preferred 512,899 6.34 80,885
--Class J 15,897,448 5.89 2,696,917
Net Asset Value Shares
Proposal 9 Net Assets Per Share Outstanding
- ---------- ---------- --------- -----------
(1) Principal Partners Equity Growth --Class A $45,099,989 $7.24 6,230,611
Fund, Inc. (Acquired Fund) --Class B 15,066,214 6.97 2,160,150
(2) PIF Partners LargeCap Growth Fund --Class A - - -
I (Acquiring Fund) --Class B - - -
--Institutional 625,707,294 7.28 85,920,794
--Select 4,063,778 7.19 564,830
--Preferred 26,762,804 7.25 3,692,625
--Advisors Select 20,799,850 7.09 2,932,911
--Advisors Signature - - -
--Advisors Preferred 31,356,283 7.25 4,323,034
--Class J 17,673,346 6.91 2,556,988
Reduction in net assets and decrease in --Class A 35,547 .01 6,230,611
net asset values per share of the --Class B 12,571 .01* 2,160,150
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF Partners LargeCap Growth Fund --Class A 45,064,442 7.27* 6,195,053*
I (Acquiring Fund) --Class B 15,053,643 7.27* 2,069,535*
(Pro forma assuming combination --Institutional 625,707,294 7.28 85,920,794
of (1) and (2)) --Select 4,063,778 7.19 564,830
--Preferred 26,762,804 7.25 3,692,625
--Advisors Select 20,799,850 7.09 2,932,911
--Advisors Signature - - -
--Advisors Preferred 31,356,283 7.25 4,323,034
--Class J 17,673,346 6.91 2,556,988
Net Asset Value Shares
Proposal 10 Net Assets Per Share Outstanding
- ----------- ---------- --------- -----------
(1) Principal MidCap Fund, Inc. --Class A $459,207,477 $42.87 10,710,542
(Acquired Fund) --Class B 72,746,014 40.82 1,782,062
(2) PIF MidCap Blend Fund (Acquiring --Class A - - -
Fund) --Class B - - -
--Institutional 11,375 12.90 882
--Select 1,175,600 13.04 90,153
--Preferred 5,514,296 12.92 426,843
--Advisors Select 934,491 12.85 72,719
--Advisors Signature - - -
--Advisors Preferred 3,083,909 12.90 239,052
--Class J 75,489,811 12.75 5,922,441
Reduction in net assets and decrease in --Class A 118,237 .01 10,710,542
net asset values per share of the --Class B 28,101 .02* 1,782,062
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF MidCap Blend Fund (Acquiring --Class A 459,089,240 12.90* 35,597,479*
Fund) --Class B 72,717,913 12.90* 5,639,226
(Pro forma assuming combination --Institutional 11,375 12.90 882
of (1) and (2)) --Select 1,175,600 13.04 90,153
--Preferred 5,514,296 12.92 426,843
--Advisors Select 934,491 12.85 72,719
--Advisors Signature - - -
--Advisors Preferred 3,083,909 12.90 239,052
--Class J 75,489,811 12.75 5,922,441
Net Asset Value Shares
Proposal 11 Net Assets Per Share Outstanding
- ----------- ---------- --------- -----------
(1) Principal Partners MidCap Growth --Class A $22,677,674 $5.15 4,402,514
Fund, Inc. (Acquired Fund) --Class B 9,351,075 5.01 1,864,930
(2) PIF Partners MidCap Growth Fund --Class A - - -
(Acquiring Fund) --Class B - - -
--Institutional 8,754 7.45 1,175
--Select 124,597 7.61 16,372
--Preferred 8,532,644 7.67 1,112,762
--Advisors Select 6,991,117 7.49 932,953
--Advisors Signature - - -
--Advisors Preferred 13,412,816 7.66 1,751,132
--Class J 15,435,946 7.20 2,144,812
Reduction in net assets and decrease in --Class A 11,870 - 4,402,514
net asset values per share of the --Class B 4,795 - 1,864,930
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF Partners MidCap Growth Fund --Class A 22,665,804 $7.45* 4,402,514
(Acquiring Fund) --Class B 9,346,280 7.45* 1,255,178*
(Pro forma assuming combination --Institutional 8,754 7.45 1,175
of (1) and (2)) --Select 124,597 7.61 16,372
--Preferred 8,532,644 7.67 1,112,762
--Advisors Select 6,991,117 7.49 932,953
--Advisors Signature - - -
--Advisors Preferred 13,412,816 7.66 1,751,132
--Class J 15,435,946 7.20 2,144,812
Net Asset Value Shares
Proposal 12 Net Assets Per Share Outstanding
- ----------- ---------- --------- -----------
(1) Principal SmallCap Fund, Inc. --Class A $82,730,657 $9.17 9,018,226
(Acquired Fund) --Class B 24,117,433 8.68 2,777,782
(2) PIF SmallCap Blend Fund (Acquiring --Class A - - -
Fund) --Class B - - -
--Institutional 15,701,438 14.38 1,091,900
--Select 16,162 14.40 1,122
--Preferred 5,455,808 14.51 375,998
--Advisors Select 1,568,048 14.29 109,729
--Advisors Signature - - -
--Advisors Preferred 2,563,339 14.36 178,529
--Class J 77,396,158 14.00 5,530,234
Reduction in net assets and decrease in --Class A 53,002 .01 9,018,226
net asset values per share of the --Class B 16,957 .01 2,777,782
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF SmallCap Blend Fund (Acquiring --Class A 82,677,655 14.37* 5,753,175*
Fund) --Class B 24,100,476 14.37* 1,677,151
(Pro forma assuming combination --Institutional 15,701,438 14.38 1,091,900
of (1) and (2)) --Select 16,162 14.40 1,122
--Preferred 5,455,808 14.51 375,998
--Advisors Select 1,568,048 14.29 109,729
--Advisors Signature - - -
--Advisors Preferred 2,563,339 14.36 178,529
--Class J 77,396,158 14.00 5,530,234
Net Asset Value Shares
Proposal 13 Net Assets Per Share Outstanding
- ----------- ---------- --------- -----------
(1) Principal Partners SmallCap Growth --Class A $13,056,428 $5.54 2,356,308
Fund, Inc. (Acquired Fund) --Class B 6,050,220 5.38 1,124,494
(2) PIF Partners SmallCap Growth Fund --Class A - - -
II (Acquiring Fund) --Class B - - -
--Institutional 264,397,557 8.08 32,722,138
--Select 1,651,784 7.96 207,605
--Preferred 8,356,335 8.01 1,042,902
--Advisors Select 7,044,657 7.81 902,074
--Advisors Signature - - -
--Advisors Preferred 7,429,878 7.93 936,861
--Class J 6,024,722 7.54 798,719
Reduction in net assets and decrease in --Class A 6,360 - 2,356,308
net asset values per share of the --Class B 3,125 - 1,124,494
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF Partners SmallCap Growth Fund --Class A 13,050,068 8.08* 1,615,895*
II (Acquiring Fund) --Class B 6,047,095 8.08* 748,790*
(Pro forma assuming combination --Institutional 264,397,557 8.08 32,722,138
of (1) and (2)) --Select 1,651,784 7.96 207,605
--Preferred 8,356,335 8.01 1,042,902
--Advisors Select 7,044,657 7.81 902,074
--Advisors Signature - - -
--Advisors Preferred 7,429,878 7.93 936,861
--Class J 6,024,722 7.54 798,719
Net Asset Value Shares
Proposal 14 Net Assets Per Share Outstanding
- ----------- ---------- --------- -----------
(1) Principal Real Estate Securities --Class A $62,361,557 $16.48 3,783,350
Fund, Inc. (Acquired Fund) --Class B 19,102,227 16.38 1,166,474
(2) PIF Real Estate Securities Fund --Class A - - -
(Acquiring Fund) --Class B - - -
--Institutional 253,838,212 18.44 13,769,054
--Select 1,394,741 18.21 76,613
--Preferred 30,865,050 18.21 1,694,764
--Advisors Select 12,660,317 18.15 697,424
--Advisors Signature - - -
--Advisors Preferred 24,621,054 18.30 1,345,396
--Class J 95,695,905 18.28 5,236,438
Reduction in net assets and decrease in --Class A 25,433 .01* 3,783,350
net asset values per share of the --Class B 9,625 .01 1,166,474
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF Real Estate Securities Fund --Class A 62,336,124 18.43* 3,381,863*
(Acquiring Fund) --Class B 19,092,602 18.43* 1,035,913*
(Pro forma assuming combination --Institutional 253,838,212 18.44 13,769054
of (1) and (2)) --Select 1,394,741 18.21 76,613
--Preferred 30,865,050 18.21 1,694,764
--Advisors Select 12,660,317 18.15 697,424
--Advisors Signature - - -
--Advisors Preferred 24,621,054 18.30 1,345,396
--Class J 95,695,905 18.28 5,236,438
Net Asset Value Shares
Proposal 15 Net Assets Per Share Outstanding
- ----------- ---------- --------- -----------
(1) Principal Bond Fund, Inc. --Class A $178,911,422 $11.15 16,051,354
(Acquired Fund) --Class B 31,325,668 11.15 2,810,736
(2) PIF Bond & Mortgage Securities --Class A - - -
Fund (Acquiring Fund) --Class B - - -
--Institutional 373,879,935 10.90 34,288,456
--Select 2,274,254 10.99 206,902
--Preferred 43,419,981 10.87 3,993,860
--Advisors Select 31,801,128 10.84 2,934,881
--Advisors Signature - - -
--Advisors Preferred 28,547,207 10.86 2,628,019
--Class J 159,801,323 10.94 14,603,315
Reduction in net assets and decrease in --Class A 37,953 -* 16,051,354
net asset values per share of the --Class B 11,148 -* 2,810,736
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF Bond & Mortgage Securities --Class A 178,873,469 10.90* 16,413,892*
Fund (Acquiring Fund) --Class B 31,314,520 10.90* 2,873,914*
(Pro forma assuming combination --Institutional 373,879,935 10.90 34,288,456
of (1) and (2)) --Select 2,274,254 10.99 206,902
--Preferred 43,419,981 10.87 3,993,860
--Advisors Select 31,801,128 10.84 2,934,881
--Advisors Signature - - -
--Advisors Preferred 28,547,207 10.86 2,628,019
--Class J 159,801,323 10.94 14,603,315
Net Asset Value Shares
Proposal 16 Net Assets Per Share Outstanding
- ----------- ---------- --------- -----------
(1) Principal Government Securities --Class A $274,875,978 $11.37 24,173,959
Income Fund, Inc. (Acquired Fund) --Class B 53,901,101 11.30 4,768,574
(2) PIF Government Securities Fund --Class A - - -
(Acquiring Fund) --Class B - - -
--Institutional 10,119 10.37 976
--Select 1,140,370 10.35 110,187
--Preferred 7,084,334 10.35 684,413
--Advisors Select 6,095,759 10.33 590,247
--Advisors Signature - - -
--Advisors Preferred 2,979,374 10.33 288,431
--Class J 101,936,674 10.40 9,800,360
Reduction in net assets and decrease in --Class A 62,563 - 24,173,959
net asset values per share of the --Class B 18,815 - 4,768,574
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF Government Securities Fund --Class A 274,813,415 10.37* 26,506,845*
(Acquiring Fund) --Class B 53,882,286 10.37* 5,197,792*
(Pro forma assuming combination --Institutional 10,119 10.37 976
of (1) and (2)) --Select 1,140,370 10.35 110,187
--Preferred 7,084,334 10.35 684,413
--Advisors Select 6,095,759 10.33 590,247
--Advisors Signature - - -
--Advisors Preferred 2,979,374 10.33 288,431
--Class J 101,936,674 10.40 9,800,360
Net Asset Value Shares
Proposal 17 Net Assets Per Share Outstanding
- ----------- ---------- --------- -----------
(1) Principal Tax-Exempt Bond Fund, --Class A $166,929,851 $12.48 13,380,399
Inc. (Acquired Fund) --Class B 10,742,464 12.55 856,296
(2) PIF Tax-Exempt Bond Fund --Class A - - -
(Acquiring Fund) --Class B - - -
Reduction in net assets and decrease in --Class A 7,204 - 13,380,399
net asset values per share of the --Class B 647 -** 856,296
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF Tax-Exempt Bond Fund --Class A 166,922,647 12.48 13,380,399
(Acquiring Fund) --Class B 10,741,817 12.54 856,296
(Pro forma assuming combination
of (1) and (2))
Net Asset Value Shares
Proposal 18 Net Assets Per Share Outstanding
- ----------- ---------- --------- -----------
(1) Principal International Fund, Inc. --Class A $212,752,278 $7.18 29,623,397
(Acquired Fund) --Class B 26,781,562 7.04 3,804,914
(2) Principal International SmallCap --Class A 47,716,565 14.90 3,202,418
Fund, Inc. (Acquired Fund) --Class B 13,358,025 14.13 945,417
(3) PIF Diversified International Fund --Class A - - -
(Acquiring Fund) --Class B - - -
--Institutional 15,830,592 9.32 1,698,991
--Select 1,430,732 9.43 151,769
--Preferred 10,120,430 9.32 1,085,412
--Advisors Select 5,572,585 9.25 602,167
--Advisors Signature - - -
--Advisors Preferred 8,156,551 9.31 876,205
--Class J 63,380,482 9.27 6,837,443
Reduction in net assets and decrease in --Class A 68,231 - 29,623,397
net asset values per share of the --Class B 13,665 - 3,804,914
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(4) PIF Diversified International Fund --Class A 212,684,047 7.18 29,623,397
(Acquiring Fund) --Class B 26,767,897 7.04 3,804,914
(Pro forma assuming combination --Institutional 15,830,592 9.32 1,698,991
of (1) and (3)) --Select 1,430,732 9.43 151,769
--Preferred 10,120,430 9.32 1,085,412
--Advisors Select 5,572,585 9.25 602,167
--Advisors Signature - - -
--Advisors Preferred 8,156,551 9.31 876,205
--Class J 63,380,482 9.27 6,837,443
Reduction in net assets and decrease in --Class A 47,040 .01 3,202,418
net asset values per share of the --Class B 16,583 .02 945,417
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(5) PIF Diversified International Fund --Class A 47,669,525 14.89 3,202,418
(Acquiring Fund) --Class B 13,341,442 14.11 945,417
(Pro forma assuming combination --Institutional 15,830,592 9.32 1,698,991
of (2) and (3)) --Select 1,430,732 9.43 151,769
--Preferred 10,120,430 9.32 1,085,412
--Advisors Select 5,572,585 9.25 602,167
--Advisors Signature - - -
--Advisors Preferred 8,156,551 9.31 876,205
--Class J 63,380,482 9.27 6,837,443
Reduction in net assets and decrease in --Class A 115,271 - 27,947,301**
net asset values per share of the --Class B 30,248 .01 4,306,822**
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(6) PIF Diversified International Fund --Class A 260,353,572 9.32* 27,947,301*
(Acquiring Fund) --Class B 40,109,339 9.31* 4,306,822*
(Pro forma assuming combination --Institutional 15,830,592 9.32 1,698,991
of (1), (2) and (3)) --Select 1,430,732 9.43 151,769
--Preferred 10,120,430 9.32 1,085,412
--Advisors Select 5,572,585 9.25 602,167
--Advisors Signature - - -
--Advisors Preferred 8,156,551 9.31 876,205
--Class J 63,380,482 9.27 6,837,443
Net Asset Value Shares
Proposal 19 Net Assets Per Share Outstanding
- ----------- ---------- --------- -----------
(1) Principal Limited Term Bond Fund, --Class A $122,451,392 9.50 12,888,188
Inc. (Acquired Fund)
(2) PIF High Quality Short-Term Bond --Class A - - -
Fund (Acquiring Fund) --Institutional 9,996 10.23 977
--Select 1,1193 10.14 1,104
--Preferred 5,387,114 10.22 527,077
--Advisors Select 88,757 10.20 8,700
--Advisors Signature - - -
--Advisors Preferred 959,506 10.28 93,320
--Class J 45,293,791 10.24 4,423,841
Reduction in net assets and decrease in --Class A 16,766 - 12,888,188
net asset values per share of the
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF High Quality Short-Term Bond --Class A 122,434,626 10.23* 11,969,833*
Fund (Acquiring Fund) --Institutional 9,996 10.23 977
(Pro forma assuming combination --Select 1,1193 10.14 1,104
of (1) and (2)) --Preferred 5,387,114 10.22 527,077
--Advisors Select 88,757 10.20 8,700
--Advisors Signature - - -
--Advisors Preferred 959,506 10.28 93,320
--Class J 45,293,791 10.24 4,423,841
Net Asset Value Shares
Proposal 20 Net Assets Per Share Outstanding
- ----------- ---------- --------- -----------
(1) Principal Cash Management Fund, --Class A $317,339,972 $1.00 317,339,972
Inc. (Acquired Fund) --Class B 5,071,152 1.00 5,071,152
(2) PIF Money Market Fund (Acquiring --Class A - - -
Fund) --Class B - - -
--Institutional 56,277,419 1.00 56,277,419
--Select 1,483,964 1.00 1,483,964
--Preferred 14,598,771 1.00 14,598,771
--Advisors Select 6,393,823 1.00 6,393,823
--Advisors Signature - 1.00 -
--Advisors Preferred 7,413,337 1.00 7,413,337
--Class J 132,550,498 1.00 132,550,498
Reduction in net assets and decrease in --Class A 84,527 - 317,339,972
net asset values per share of the --Class B 1,260 - 5,071,152
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF Money Market Fund (Acquiring --Class A 317,255,445 1.00 317,339,972
Fund) --Class B 5,069,892 1.00 5,071,152
(Pro forma assuming combination --Institutional 56,277,419 1.00 56,277,419
of (1) and (2)) --Select 1,483,964 1.00 1,483,964
--Preferred 14,598,771 1.00 14,598,771
--Advisors Select 6,393,823 1.00 6,393,823
--Advisors Signature - 1.00 -
--Advisors Preferred 7,413,337 1.00 7,413,337
--Class J 132,550,498 1.00 132,550,498
Net Asset Value Shares
Proposal 21 Net Assets Per Share Outstanding
- ----------- ---------- --------- -----------
(1) Principal International Emerging --Class A $37,803,721 11.91 3,173,817
Markets Fund, Inc. (Acquired Fund) --Class B 6,148,074 11.36 541,202
(2) PIF International Emerging Markets --Class A - - -
Fund (Acquiring Fund) --Class B - - -
--Institutional 14,646 15.16 966
--Select 1,896,146 15.16 125,109
--Preferred 226,056 15.17 226,056
--Advisors Select 1,928,447 15.05 128,165
--Advisors Signature - - -
--Advisors Preferred 3,142,557 15.09 208,213
--Class J 25,631,162 14.90 1,719,930
Reduction in net assets and decrease in --Class A 35,765 .01 3,173,817
net asset values per share of the --Class B 11,409 .02 541,202
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF International Emerging Markets --Class A 37,767,956 15.15* 2,493,649*
Fund (Acquiring Fund) --Class B 6,136,665 15.13* 405,546*
(Pro forma assuming combination --Institutional 14,646 15.16 966
of (1) and (2)) --Select 1,896,146 15.16 125,109
--Preferred 226,056 15.17 226,056
--Advisors Select 1,928,447 15.05 128,165
--Advisors Signature - - -
--Advisors Preferred 3,142,557 15.09 208,213
--Class J 25,631,162 14.90 1,719,930
<FN>
* Shares outstanding and net asset value per share reflect Institutional
shares net asset value as of October 31, 2004.
** Rounded decrease in net asset value per share may not equal change in pre
acquisition net asset value and post acquisition net asset value per share.
</FN>
COMPARATIVE INFORMATION ABOUT THE PMF AND PIF FUNDS
Multiple Classes of Shares
The Board of Directors of each Acquired Fund has adopted a multiple
class plan for the Fund pursuant to Rule 18f-3 (an "18f-3 Plan") under the 1940
Act. Under these plans, each Acquired Fund (except Principal Limited Term Bond
Fund and Principal LargeCap Stock Index Fund, which offer only Class A shares)
offers two classes of shares: Class A and Class B. The Class A and Class B
shares are the same except for differences in class expenses, including Rule
12b-1 fees, and any applicable sales charges and redemption and other fees. See
"Rule 12b-1 Fees" and "Costs of Investing" below.
The Board of Directors of PIF has adopted an 18f-3 Plan for each of the
Acquiring Funds. Under these plans, each of the Acquiring Funds may offer two or
more of the following nine classes of shares: Institutional Class, Select Class,
Preferred Class, Advisors Select Class, Advisors Signature Class, Advisors
Preferred Class, Class J, Class A and Class B. The Acquiring Funds will first
issue Class A and Class B shares in connection with the Reorganization. Not all
Acquiring Funds issue all current classes of shares. See Appendix D
("Outstanding Shares and Share Ownership"). The Institutional Class, Select
Class, Preferred Class, Advisors Select Class, Advisors Signature Class,
Advisors Preferred Class, Class J, Class A and Class B shares are the same
except for differences in class expenses, including any 12b-1 fees, and any
applicable sales charges and redemption and other fees. With respect to Class A
and Class B shares, see "Rule 12b-1 fees" and "Costs of Investing" below.
The Class A shares of the Acquired and Acquiring Funds are generally
sold with a sales charge that is a variable percentage based on the amount of
purchase, and the Class B shares of the Acquired and Acquiring Funds, which are
not subject to a sales charge at the time of purchase, are subject to a
contingent deferred sales charge ("CDSC") on shares redeemed within six years of
purchase. See "Costs of Investing" below.
The PIF Advisors Select, Advisors Signature, Advisors Preferred,
Institutional, Select and Preferred Classes:
o are available without any front-end sales charge or contingent deferred
sales charge;
o currently have all of their operating expenses absorbed by the Manager; and
o are available through employer-sponsored retirement plans which may impose
fees in addition to those charged by the Funds.
The PIF Advisors Select, Advisors Signature, Advisors Preferred and
Select share classes are subject to 12b-1 fees, which are paid to Princor, as
well as service fees and administrative service fees which are paid to the
Manager.
The PIF Class J shares are sold without any front-end sales charge and
under certain circumstances may be subject to a contingent deferred sales charge
("CDSC") if redeemed within 18 months of purchase.
See also "Information About the Reorganization - Description of the
Securities to be Issued" above.
Rule 12b-1 Fees
Each of the Acquired Funds has adopted a Distribution Plan under Rule
12b-1 under the 1940 Act (each, a "12b-1 Plan") for the Class A (except the
Principal Cash Management Fund) and Class B (except the Principal Limited Term
Bond Fund and Principal LargeCap Stock Index Fund) shares of the Fund. PIF has
adopted a 12b-1 Plan for the Class A (except for the PIF Money Market Fund) and
Class B (except the PIF LargeCap S&P 500 Index Fund and PIF High Quality
Short-Term Bond Fund) shares of each of the Acquiring Funds.
For each of the Acquired and Acquiring Funds, the 12b-1 plan for Class
A shares provides that the Fund makes payments from its assets to Princor
pursuant to the plan to compensate Princor and other selling dealers for
providing shareholder services to existing Fund shareholders and rendering
assistance in the distribution and promotion of the Class A shares to the
public. Each Fund pays Princor a fee after the end of each month at an annual
rate no greater than 0.25% of the Fund's average net assets attributable to
Class A shares. Princor retains such amounts as are appropriate to compensate
for actual expenses incurred in distributing and promoting the sale of the Fund
shares to the public but may remit on a continuous basis up to 0.25% to
registered representatives and other selected dealers (including for this
purpose, certain financial institutions) as a trail fee in recognition of their
services and assistance.
For each of the Acquired and Acquiring Funds, the 12b-1 plan for Class
B shares provides for payments by the Fund to Princor at the annual rate of up
to 1.00% (0.25% for the PIF Money Market Fund) of the Fund's average net assets
attributable to Class B shares. Princor also receives the proceeds of any CDSC
imposed on redemptions of Class B shares.
Although Class B shares are sold without an initial sales charge,
Princor pays a sales commission equal to 4.00% (3.00% for certain sponsored
plans) of the amount invested to dealers who sell such shares. These commissions
are not paid on exchanges between PMF Funds or between PIF Funds. In addition,
Princor may remit on a continuous basis up to 0.25% to the registered
representatives and other selected dealers (including for this purpose, certain
financial institutions) as a trail fee in recognition of their services and
assistance.
For each of the Acquiring Funds, the 12b-1 Plans for Class A and Class
B shares authorize Princor to enter into service agreements with other selling
dealers and with banks and other financial institutions to provide shareholder
services to existing Class A and Class B shareholders, including services such
as furnishing information as to the status of shareholder accounts, responding
to shareholder written and telephone inquiries and assisting shareholders with
tax information.
Costs of Investing
This section describes the sales charges, contingent deferred sales
charges ("CDSCs"), and redemption and exchange fees that apply variously to the
Class A and Class B shares of the Acquired and Acquiring Funds. Except as
otherwise stated below, such charges and fees are the same for the Class A
shares of both the Acquired and Acquiring Funds and for the Class B shares of
both the Acquired and Acquiring Funds.
For purposes of the following description, the Acquired and Acquiring
Funds are grouped into "Growth-Oriented," "Income-Oriented" and "Money Market"
Funds as follows:
Acquired Funds Corresponding Acquiring Funds
Growth-Oriented Funds
Principal Balanced Fund -- PIF Disciplined LargeCap Blend Fund
Principal Capital Value Fund -- PIF LargeCap Value Fund
Principal Partners LargeCap Value Fund -- PIF Partners LargeCap Value Fund
Principal Equity Income Fund -- PIF Equity Income Fund
Principal Partners Blue Chip Fund -- PIF Partners LargeCap Blend Fund I
Principal Partners LargeCap Blend Fund -- PIF Partners Large Cap Blend Fund
Principal LargeCap Stock Index Fund -- PIF LargeCap S&P 500 Index Fund
Principal Growth Fund -- PIF LargeCap Growth Fund
Principal Partners Equity Growth Fund -- PIF Partners LargeCap Growth Fund I
Principal MidCap Fund -- PIF MidCap Blend Fund
Principal Partners MidCap Growth fund -- PIF Partners MidCap Growth Fund
Principal SmallCap Fund -- PIF SmallCap Blend Fund
Principal Partners SmallCap Growth Fund -- PIF Partners Small Cap Growth Fund II
Principal Real Estate Securities Fund -- PIF Real Estate Securities Fund
Principal International Fund -- PIF Diversified International Fund
Principal International Small Cap Fund -- PIF Diversified International Fund
Principal International Emerging Markets Fund -- PIF International Emerging Markets Fund
Income-Oriented Funds
Principal Bond Fund, Inc. -- PIF Bond & Mortgage Securities Fund
Principal Government Securities Income Fund, Inc. -- PIF Government Securities Fund
Principal Tax-Exempt Bond Fund, Inc. -- PIF Tax-Exempt Bond Fund
Principal Limited Term Bond Fund, Inc. -- PIF High Quality Short-Term Bond Fund
Money Market Funds
Principal Cash Management Fund, Inc. -- PIF Money Market Fund
Shareholder Fees (fees paid directly from your investment)
The following table describes the fees and expenses you may pay if you
buy and hold shares of the Acquired and Acquiring Funds.
Acquired and Acquiring Funds
Class A Class B
Maximum sales charge imposed on purchases (as a % of offering price):
All Growth-Oriented Funds except PMF LargeCap Stock Index Fund and PIF 5.75%(1) None
LargeCap S&P 500 Index Fund
All Income-Oriented Funds except PMF Limited Term Bond Fund and PIF High 4.75%(1) None
Quality Short-Term Bond Fund
PMF LargeCap Stock Index and Limited Term Bond Funds, and PIF LargeCap S&P 1.50%(1) None
500 Index and High Quality Short-Term Bond Funds
Money Market Funds None None
Maximum Contingent Deferred Sales Charge (CDSC) (as a % of dollars subject to
charge):
All Funds except PMF LargeCap Stock Index and Limited Term Bond Funds, and 0.75%(2) 4.00%(3)
PIF LargeCap S&P 500 Index and High Quality Short-Term Bond Funds
PMF LargeCap Stock Index and Limited Term Bond Funds, and PIF LargeCap S&P 0.25%(2) N/A
500 Index and High Quality Short-Term Bond Funds
Redemption or Exchange Fee (as a % of amount redeemed/exchanged):
All Funds except Money Market Funds 1.00%(4)(5) 1.00%(5)
Money Market Funds None None
<FN>
(1) Sales charges are reduced or eliminated for purchases of $50,000 or more.
See "Front-end Sales Charge - Class A shares."
(2) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(3) CDSCs are reduced after 12 months and eliminated after 6 years.
(4) Redemption fees are charged when $30,000 or more of shares are redeemed
within 30 days after they are purchased.
(5) Exchange fees are charged when $30,000 or more of shares are exchanged from
one Fund to another Fund within 30 days after they are purchased.
</FN>
Fees and expenses are important because they lower your earnings.
However, low costs do not guarantee higher earnings. For example, a fund with no
front-end sales charge may have higher ongoing expenses than a fund with such a
sales charge.
One -Time Fees
o You may pay a one-time sales charge for each purchase (Class A shares) or
redemption (Class B shares).
o Class A shares may be purchased at a price equal to the share price
plus an initial sales charge. Investments of $1 million or more of
Class A shares are sold without an initial sales charge but may be
subject to a CDSC at the time of redemption.
o Class B shares have no initial sales charge but may be subject to a
CDSC. If you sell (redeem) shares and the CDSC is imposed, it will
reduce the amount of sales proceeds.
o A redemption fee of 1.00% is charged on redemptions of Class A shares of
$30,000 or more if the shares were purchased within 30 days of the
redemption. The fee does not apply to redemptions made: through a periodic
withdrawal plan; due to a shareholder's death or disability (as defined in
the Internal Revenue Code); or to satisfy minimum distribution rules
imposed by the Internal Revenue Code. The fee is calculated as a percentage
of market value of the shares redeemed at the time of redemption.
o An exchange fee of 1.00% is charged on exchanges among the Acquired Funds
and exchanges among the Acquiring Funds of $30,000 or more and if the
shares were purchased within 30 days of the exchange. The fee is calculated
as a percentage of market value of the shares exchanged at the time of the
exchange.
Neither the redemption nor the exchange fee applies to shares redeemed/exchanged
from the Money Market Funds.
Choosing a Share Class
You may purchase Class A or Class B shares of each Fund with certain
limitations.* Your decision to purchase a particular class depends on a number
of factors including:
o the dollar amount you are investing;
o the amount of time you plan to hold the investment; and
o any plans to make additional investments in the Principal Investors Funds.
*--If you are making an initial purchase of the Funds of $100,000 or more and
have selected Class B shares, the purchase will be of Class A shares of the
Fund(s) you have selected.
--If you are making subsequent purchases into your existing Class B share
accounts and the new balance (existing account balance(s) plus new purchase) is
$100,000 or more, the subsequent purchases will be of Class A shares of the
Fund(s) you have selected.
In addition, you might consider:
o Class A shares if you are making an investment that qualifies for
a reduced sales charge; or
o Class B shares if you prefer not to pay an initial sales charge
and you plan to hold your investment for at least six years.
Class A Shares
o You generally pay a sales charge on an investment in Class A shares.
o Class A shares generally have lower annual operating expenses than
Class B shares.
o If you invest $50,000 or more, the sales charge is reduced.
o You are not assessed a sales charge on purchases of Class A shares of
$1 million or more. A deferred sales charge may be imposed if you sell
those shares within 18 months of purchase.
Class B Shares
o You do not pay a sales charge on an investment in Class B shares.
o If you sell your Class B shares within six years from the date of
purchase, you may pay a deferred sales charge.
o If you keep your Class B shares for seven years, your Class B shares
automatically convert to Class A shares without a charge.
o Class B shares generally have higher annual operating expenses than
Class A shares.
Front-End Sales Charge: Class A Shares
There is no sales charge on purchases of Class A shares of the Money
Market Funds. Class A shares of the other Funds are purchased with a sales
charge that is a variable percentage based on the amount of the purchase. There
is no sales charge on shares of a Fund purchased with reinvested dividends or
other distributions. Your sales charge may be reduced for larger purchases as
indicated below.
All Growth-Oriented Funds Except PMF LargeCap Stock Index Fund
and PIF LargeCap S&P 500 Index Fund
Sales Charge as % of
Offering Amount Dealer Allowance
Amount of Purchase Price Invested as % of Offering Price
Less than $50,000 5.75% 6.10% 5.00%
$50,000 but less than $100,000 4.75% 4.99% 4.00%
$100,000 but less than $250,000 3.75% 3.90% 3.00%
$250,000 but less than $500,000 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000 2.00% 2.04% 1.50%
$1,000,000 or more 0.00% 0.00% 0.75%
All Income-Oriented Funds Except PMF Limited Term Bond Fund
and PIF High Quality Short-Term Bond Fund
Sales Charge as % of
Offering Amount Dealer Allowance
Amount of Purchase Price Invested as % of Offering Price
Less than $50,000 4.75% 4.99% 4.00%
$50,000 but less than $100,000 4.25% 4.44% 3.75%
$100,000 but less than $250,000 3.75% 3.90% 3.25%
$250,000 but less than $500,000 2.50% 2.56% 2.00%
$500,000 but less than $1,000,000 1.50% 1.52% 1.25%
$1,000,000 or more 0.00% 0.00% 0.75%
PMF LargeCap Stock Index and Limited Term Bond Funds,
and PIF LargeCap S&P 500 Index and High Quality Short-Term Bond Funds
Sales Charge as % of
Offering Amount Dealer Allowance
Amount of Purchase Price Invested as % of Offering Price
Less than $50,000 1.50% 1.52% 1.25%
$50,000 but less than $100,000 1.25% 1.27% 1.00%
$100,000 but less than $250,000 1.00% 1.10% 0.75%
$250,000 but less than $500,000 0.75% 0.76% 0.50%
$500,000 but less than $1,000,000 0.50% 0.50% 0.25%
$1,000,000 or more 0.00% 0.00% 0.25%
The front-end sales charge is waived on an investment of $1 million or
more in Class A shares. There may be a CDSC on shares sold within 18 months of
the purchase date. The CDSC does not apply to shares purchased with reinvested
dividends or other distributions. The CDSC is calculated as 0.75% of the lesser
of the market value at the time of the redemption or the initial purchase price
of the shares sold. The CDSC is waived on shares sold to fund a PMF or PIF
401(a) or PMF or PIF 401(k) retirement plan, except redemptions which are the
result of termination of the plan or transfer of all plan assets. The CDSC is
also waived on shares sold:
o to satisfy IRS minimum distribution rules; and
o using a periodic withdrawal plan. (You may sell up to 10% of the value
of the shares (as of December 31 of the prior year) subject to a CDSC
without paying the CDSC.)
In the case of selling some, but not all, of the shares in an account,
the shares not subject to a CDSC are redeemed first. Other shares are redeemed
in the order purchased (first in, first out). Shares subject to the CDSC which
are exchanged from one PMF Fund to another PMF Fund, or from one PIF Fund to
another PIF Fund, continue to be subject to the CDSC until the CDSC expires.
Broker-dealers that sell PMF or PIF Fund shares are paid a certain
percentage of the sales charge in exchange for their services. At the option of
Princor, the amount paid to a dealer may be more or less than that shown in the
chart above. The amount paid depends on the services provided. Amounts paid to
dealers on purchases without a front-end sales charge are determined by and paid
for by Princor. Dealers may charge their customers a processing or service fee
in connection with the purchase or redemption of Fund shares. The amount and
applicability of such a fee is determined and disclosed to its customers by each
individual dealer. Processing or service fees typically are fixed, nominal
dollar amounts and are in addition to the sales and other charges described
herein.
Sales Charge Waiver Or Reduction (Class A Shares)
Class A shares of the Funds may be purchased without a sales charge or
at a reduced sales charge. The Funds reserve the right to change or stop
offering shares in this manner at any time for new accounts and with a 60-day
notice to shareholders of existing accounts.
Waiver of sales charge (Class A shares)
A Fund's Class A shares may be purchased without a sales charge:
o by its Directors, member companies of the Principal Financial Group,
and their employees, officers, directors (active or retired), brokers
or agents. This also includes their immediate family members (spouse,
surviving spouse, children (regardless of age) and parents) and trusts
for the benefit of these individuals;
o by the Premier Credit Union;
o by non-ERISA clients of Principal Global;
o by any employee or registered representative (and their employees) of
an authorized broker-dealer;
o through a "wrap account" offered by Princor or through broker-dealers,
investment advisors and other financial institutions that have entered
into an agreement with Princor which includes a requirement that such
shares be sold for the benefit of clients participating in a "wrap
account" or similar program under which clients pay a fee to the
broker-dealer, investment advisor or financial institution;
o by unit investment trusts sponsored by any member company of the
Principal Financial Group;
o to fund non-qualified plans administered by a member company of the
Principal Financial Group pursuant to a written service agreement;
o to the extent that the purchase proceeds represent a distribution from
a terminating 401(a) plan, if (1) such purchase is made through a
representative of Princor, the terminating plan is not administered by
a member company of the Principal Financial Group, and the employer or
plan trustee has entered into a written agreement with Princor
permitting the group solicitation of active employees and/or plan
participants, or (2) such purchase is made through registered
representative of a broker-dealer other than Princor, the purchase
proceeds represent a distribution from any terminating 401(a) plan and
the employer or plan trustee has entered into a written agreement with
Princor permitting the group solicitation of active employees and/or
plan participants. Such purchases are subject to the CDSC which
applies to purchases of $1 million or more as described above; and
o by any investor who buys Class A shares through an omnibus account
with certain financial intermediaries, such as a bank or other
financial institution, that does not accept or charge the initial
sales charges. In addition, the CDSC will not be imposed on
redemptions of shares purchased through such omnibus accounts to the
extent that no sales charge payments were advanced for purchases made
through these entities.
Reduction of sales charge (Class A shares)
(1) Dollar amount of purchase. The sales charge varies with the size of your
purchase. Reduced charges apply to the total of PMF or PIF Funds' (excluding the
Money Market Funds) shares purchased at one time by any
"Qualified Purchaser." A Qualified Purchaser includes an individual and his/her
spouse and their children under the age of 25, a trust primarily for such
persons, and a trustee or other fiduciary purchasing for a single trust estate
or single fiduciary account. If the total amount being invested in the PMF or
PIF Funds is near a sales charge breakpoint, you should consider increasing
amount invested to take advantage of a lower sales charge. A purchase made by or
through an employer on behalf of an employee or employees (including independent
contractors) is also considered a purchase by a Qualified Purchaser.
(2) Statement of Intention ("SOI"). Qualified Purchasers may obtain reduced
sales charges by signing an SOI. The SOI is a nonbinding obligation on the
Qualified Purchaser to purchase the full amount indicated in the SOI. The sales
charge is based on the total amount to be invested in a 13 month period (24
months if the intended investment is $1 million or more). Upon your request, we
will set up a 90-day look-back period to include earlier purchases - the 13 (24)
month period then begins on the date of your first purchase during the 90-day
period. If the intended investment is not made, sufficient shares will be sold
to pay the additional sales charge due. A 401(a) plan trustee must submit the
SOI at the time of the first plan purchase. The 90-day look-back period is not
available to a 401(a) plan trustee.
(3) Rights of accumulation. The Class A and Class B accounts already owned by a
Qualified Purchaser are added to the amount of the new purchase to determine the
applicable sales charge percentage. The balance of the existing accounts as of
the date of the subsequent purchase(s) is used in this calculation. Class A
shares of the Money Market Funds are not included in the calculation unless they
were acquired in exchange for other PMF or PIF Fund shares.
(4) Death benefit. The sales charge table below applies to purchases of Class A
shares that result from the investment of death benefit proceeds from a life
insurance policy or certain annuity contracts issued by Principal Life (or its
subsidiaries or affiliates) within one year of the insured's death.
Sales Charge as % of
Offering Net Amount Dealer Allowance
Amount of Purchase Price Invested as % of Offering Price
Less than $500,000 2.50% 2.56% 2.10%
$500,000 but less than $1,000,000 1.50% 1.52% 1.25%
$1,000,000 or more no sales charge
(5) Employer sponsored plans opened prior to March 1, 2002. Retirement plans
meeting the requirements of Section 401 of the Internal Revenue Code (401(k),
Profit Sharing and Money Purchase Pension Plans) for which administrative
services are provided by GWFS Equities, Inc., and other employer sponsored
retirement plans (including 403(b), SIMPLE IRAs, SEPs, SAR-SEPs, non-qualified
deferred compensation plans, and Payroll Deduction Plan accounts) opened prior
to March 1, 2002.
o If Class A shares are used:
o all plan investments are treated as made by a single investor to
determine the applicable sales charge;
o the sales charge for investments of less than $250,000 is 3.75% as a
percentage of offering price; and
o if the investment is $250,000 or more, the regular sales charge table
is used.
o If Class B shares are used, contributions into the plan after the plan
assets are $100,000 or more are used to buy Class A shares.
o Investments outside of a plan are not included with plan assets to
determine the applicable sales charge.
Contingent Deferred Sales Charge: Class B Shares
o The CDSC does not apply to shares purchased with reinvested dividends or
other distributions.
o The amount of the CDSC is a percentage based on the number of years you own
the shares multiplied by the lesser of the market value at the time of the
redemption or the initial purchase price of the shares sold.
o In the case of selling some but not all of the shares in an account, the
shares not subject to a sales charge are redeemed first. Other Class B
shares are redeemed in the order purchased (first in, first out). Using a
periodic withdrawal plan, you may sell up to 10% of the value of the shares
(as of the last business day of December of the prior year) subject to a
CDSC without paying the CDSC.
o Shares subject to the CDSC that are exchanged into another PMF or PIF Fund
continue to be subject to the CDSC until the CDSC expires.
o Princor receives the proceeds of any CDSC.
Class B shares
A CDSC may be imposed on Class B shares sold within six years of
purchase (five years for certain sponsored plans). Class B shares automatically
convert into Class A shares (based on share prices, not number of shares) seven
years (five years for certain sponsored plans) after purchase. Class B shares
provide you the benefit of putting all your dollars to work from the time of
investment, but (until conversion) have higher ongoing fees and lower dividends
than Class A shares.
The Class B share CDSC, if any, is determined by multiplying the lesser
of the market value at the time of redemption or the initial purchase price of
the shares sold by the appropriate percentage from the table below:
CDSC as a % of Dollar Amount
Years Since Purchase Payments Made All Funds
2 years or less 4.00%
More than 2 years, up to 4 years 3.00%
More than 4 years, up to 5 years 2.00%
More than 5 years, up to 6 years 1.00%
More than 6 years None
The CDSC is not charged on exchanges. However, the purchase date of the
exchanged shares is used to determine if the newly acquired shares are subject
to the CDSC when sold. The Fund from which the shares are sold is used to
determine the percentage of CDSC, if any.
The following table applies to PMF or PIF Fund shares purchased through
employer sponsored plans making initial plan contributions into PMF or PIF Funds
after February 1, 1998 but before March 1, 2002 only. The CDSC table above
applies to purchases made by plans making initial contributions into the Funds
after March 1, 2002.
CDSC as a % of Dollar Amount
Years Since Purchase Payments Made All Funds
2 years or less 3.00%
More than 2 years, up to 4 years 2.00%
More than 4 years, up to 5 years 1.00%
More than 5 years, up to 6 years None
More than 6 years None
Waiver of the Sales Charge (Class B shares)
The CDSC is waived on Class B shares which are sold:
o due to a shareholder's death;
o due to the shareholder's disability, as defined in the Internal Revenue
Code;
o from retirement plans to satisfy minimum distribution rules under the Code;
o to pay surrender charges;
o to pay retirement plan fees;
o involuntarily from small balance accounts;
o through a systematic withdrawal plan (certain limits apply);
o from a retirement plan to assure the plan complies with Sections 401(k),
401(m), 408(k) or 415 of the Code;
o from retirement plans qualified under Section 401(a) of the Code due to the
plan participant's death, disability, retirement or separation from service
after attaining age 55;
o from a retirement plan meeting the requirements of Section 401 of the Code
(401(k), Profit Sharing and Money Purchase Pension Plans) that has provided
us with its notice of intent (on or before November 30, 2002) to transfer
its assets to a group annuity contract distributed by Principal Life; or
o from an account in a qualified plan administered by GWFS Equities, Inc.
unless the sale is associated with the termination of the plan.
Purchases, Redemptions and Exchanges of Shares
The purchase, redemption and exchange procedures with respect to shares
of the Acquired and Acquiring Funds are substantially the same.
Purchases. Shares of the Acquired and Acquiring Funds are offered for
sale through Princor, a broker-dealer that is also the principal underwriter for
PMF and PIF, or other dealers which Princor selects.
As described above under "Costs of Investing," Class A shares of the
Funds are generally sold with a sales charge that is a variable percentage based
on the amount of purchase, and Class B shares, which are not subject to a sales
charge at the time of purchase, are subject to a contingent deferred sales
charge ("CDSC") on shares redeemed within six years of purchase.
Each Fund's shares are bought and sold at the current share price. The
share price of each class of each Fund is calculated each day the New York Stock
Exchange ("NYSE") is open (shares are not priced on the days on which the NYSE
is closed for trading). The share price is determined at the close of business
of the NYSE (normally 3:00 p.m. Central Daylight Time). When an order to buy or
sell shares is received, the share price used to fill the order is the next
price calculated after the order is received.
For all Funds, except the two money market funds - the Principal Cash
Management Fund and the PIF Money Market Fund -- the share price is calculated
by:
o taking the current market value of the total assets of the Fund
o subtracting liabilities of the Fund
o dividing the remainder proportionately into the classes of the Fund
o subtracting the liability of each class
o dividing the remainder by the total number of shares owned in that
class.
If current market values are not readily available for a security owned
by a Fund, its fair value is determined in good faith under procedures
established by and under the supervision of the Fund's Board of Directors.
Trading in securities on foreign securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the NYSE is open). In
addition, foreign securities trading generally or in a particular country or
countries may not take place on all business days in New York. Furthermore,
trading may take place in various foreign markets on days which are not business
days in New York and on which a Fund's NAV is not calculated. A Fund calculates
its NAV per Class per share, and therefore effects sales, redemptions and
repurchases of its shares as of the close of the NYSE once on each day on which
the NYSE is open. Such calculation may not take place contemporaneously with the
determination of the prices of the foreign portfolio securities used in such
calculation.
Certain securities issued by companies in emerging market countries may
have more than one quoted valuation at any point in time. These may be referred
to as local price and premium price. The premium price is often a negotiated
price that may not consistently represent a price at which a specific
transaction can be effected. Each of the Funds has a policy to value such
securities at prices at which it is expected those shares may be sold, and the
Manager or any Sub-Advisor is authorized to make such determinations subject to
the oversight of the Fund's Board as may from time to time be necessary.
Money Market Funds. The share price of each Class of shares of the two
money market funds -- the Principal Cash Management Fund and the PIF Money
Market Fund -- is determined at the same time and on the same days as the Funds
as described above. The share price is computed by dividing the total value of
each Fund's securities and other assets, less liabilities, by the number each
Fund's shares outstanding.
All securities held by the money market funds are valued on an
amortized cost basis. Under this method of valuation, a security is initially
valued at cost; thereafter, each 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 requires each 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, each Fund invests only in obligations determined by its Board of
Directors to be of high quality with minimal credit risks.
Redemptions. Shares of the Acquired and Acquiring Funds may be redeemed
at a price equal to the net asset value of the shares next computed following
the receipt of a request for redemption in proper form. The amount you receive
will be reduced by any applicable CDSC or redemption fee. See "Costs of
Investing" above. Generally, the sale proceeds are sent out on the next business
day after the sell order has been placed.
Payment for shares tendered for redemption is ordinarily made in cash.
The Board of Directors of each Acquired Fund or of PIF may determine, however,
that it would be detrimental to the remaining shareholders to make payment of a
redemption order wholly or partly in cash. Each of the Funds may, therefore, pay
the redemption proceeds in whole or in part by a distribution "in kind" of
securities from the Fund's portfolio in lieu of cash. If the Fund pays the
redemption proceeds in kind, the redeeming shareholder might incur brokerage or
other costs in selling the securities for cash. Each Fund will value securities
used to pay redemptions in kind using the same method the Fund uses to value its
portfolio securities as described above.
The right to require the Funds to redeem their shares may be suspended,
or the date of payment may be postponed, whenever: (1) trading on the NYSE is
restricted, as determined by the SEC, or the NYSE is closed except for holidays
and weekends; (2) the SEC permits such suspension and so orders; or (3) an
emergency exists as determined by the SEC so that disposal of securities or
determination of NAV is not reasonably practicable.
Exchanges. Shares of the Acquired and Acquiring Funds may be exchanged,
without payment of a sales charge or a CDSC, for shares of the same class of,
respectively, other Acquired Funds or other PIF Funds. If Class B shares are
exchanged for Class B shares of an Acquired Fund or an Acquiring Fund are
exchanged for Class B shares of, respectively, another Acquired Fund or another
PIF Fund, the shares acquired will be subject to the applicable CDSC imposed by
the new Fund; however, the holding period of the Class B shares exchanged is
added to the holding period of the Class B shares acquired for purposes of
determining the applicable charge. See "Costs of Investing" above.
Information regarding the policies of each Acquired Fund and of PIF
with respect to frequent trading and "market-timing" is set forth in,
respectively, the PMF Prospectus and the PIF Prospectus. All such policies are
substantially the same.
Dividends and Distributions
The dividends and distributions procedures with respect to the Acquired
and Acquiring Funds are substantially similar.
The Principal Bond Fund, Principal Government Securities Income Fund,
Principal Limited Term Bond Fund and Principal Tax-Exempt Bond Fund, and the PIF
Bond & Mortgage Securities Fund, PIF Government Securities Income Fund, PIF High
Quality Short-Term Bond Fund and PIF Tax-Exempt Bond Fund, pay their net
investment income on a monthly basis. Payments are made to shareholders of
record on the business day prior to the payment date. The payment date is the
last business day of each month.
The Principal Balanced Fund, Principal Equity Income Fund and Principal
Real Estate Securities Fund, and the PIF Equity Income Fund and PIF Real Estate
Securities Fund, pay their net investment income on a quarterly basis. Payments
are made to shareholders of record on the business day prior to the payment
date. The payment date is the last business day of March, June, September and
December.
The other Acquired and Acquiring Funds (except the money market funds)
pay their net investment income once each year. Payments are made to
shareholders of record on the business day prior to the payment date. The
payment date is the last business day of December. Payments are made to
shareholders of record on the business day prior to the payment date.
The two money market funds - the Principal Cash Management Fund and the
PIF Money Market Fund - each declare dividends on all its daily net investment
income each day its shares are priced. The dividends are paid daily and are
automatically reinvested back into additional shares of the Fund. For both
Funds, you may ask to have your dividends paid to you monthly in cash. These
cash payments are made on the 20th of each month (or preceding business day).
Immediately prior to the Reorganization, each of the Acquired Funds
will pay a dividend or dividends which, together with all previous dividends,
will have the effect of distributing to its shareholders all of its investment
company taxable income for taxable years ending on or prior to the Effective
Time of the Reorganization (computed without regard to any deduction for
dividends paid) and all of its net capital gains, if any, realized in taxable
years ending on or prior to the Effective Time of the Reorganization (after
reduction for any available capital loss carryforward). Such dividends will be
included in the taxable income of each Acquired Fund's respective shareholders.
Fundamental Investment Restrictions
Each of the Acquired Funds and PIF on behalf of each of the Acquiring
Funds have adopted "fundamental" investment restrictions regarding the
investments of the respective Funds. A fundamental investment restriction may
not be changed for any Fund without the approval of a Majority of the
Outstanding Voting Securities (as defined under "Voting Information - Required
Vote" ) of that Fund. These fundamental restrictions deal with such matters as
the issuance of senior securities, purchasing or selling real estate or
commodities, borrowing money, making loans, underwriting securities of other
issuers, diversification or concentration of investments and short sales of
securities.
Substantially the same fundamental restrictions apply to all the
Acquiring Funds. Fundamental restrictions dealing with the same matters apply to
most of the Acquired Funds, but with a number of variations among the different
Acquiring Funds. In addition, there are certain fundamental restrictions that
only apply to certain of the Acquired Funds and not to any of the Acquiring
Funds. A comparison of the fundamental restrictions of the Acquired and
Acquiring Funds is set forth in Appendix B to this Proxy Statement/Prospectus.
The Acquired Funds (and in some cases their predecessor funds) adopted
fundamental restrictions from time to time over a period of several years to
reflect legal and regulatory requirements - particularly state securities law
requirements -- that applied at that time but no longer do, as well as business
and industry conditions that then prevailed. With changes in legal requirements
and prevailing conditions, some of these fundamental investment restrictions are
no longer necessary and others are more appropriately "non-fundamental"
investment restrictions which may be changed by the Board of Directors of a Fund
without shareholder approval. The fundamental restrictions of the Acquiring
Funds and their substantial uniformity for all Acquiring Funds reflect updating
changes that are intended to provide the Manager and the respective Sub-Advisors
to the Acquiring Funds with greater flexibility in managing the Funds while
continuing to meet fully the requirements of the 1940 Act and the rules and
regulations thereunder. Aside from such greater flexibility and the expanded
borrowing authority described below, the differences in fundamental restrictions
between an Acquired Fund and its corresponding Acquiring Fund as set forth in
Appendix D are not expected to result in any material difference in the manner
in which the Acquiring Fund is managed as compared to its corresponding Acquired
Fund.
The PIF Board of Directors has approved a proposal to amend the
fundamental restriction of each Acquiring Fund with respect to borrowing and has
directed that the proposal be submitted to shareholders of the Acquiring Funds
for approval at the PIF Shareholders Meeting. If approved by shareholders, the
amended fundamental restriction with respect to borrowing will permit each of
the Acquiring Funds to borrow money to the maximum extent permitted by the 1940
Act.
Location of Further Information About the Funds
The following table shows where in the PMF Prospectus and PMF SAI, and
in the PIF Prospectus and the Statement of Additional Information, further
information about, respectively, the Acquired Funds and the Acquiring Funds may
be found. Headings or captions listed that appear under individual Fund
descriptions in a prospectus are marked by an asterisk (*).
Heading or Caption in:
SAI and
Type of Information PMF and PIF Prospectuses Statement of Additional Information
-------------------------- -----------------------------------
Investment Main Strategies*; Certain Investment Descriptions of the Funds' Investments
Objectives Strategies and Related Risks. and Risks - Investment Strategies and
and Policies: Risks.
Portfolio Management, Organization and Capital Investment Advisory and Other Services.
Management: Structures - The Manager; -- The
Sub-Advisors.
Fees and Expenses: Fees and Expenses*; The Costs of Investing.
Risks: Main Risks*; Certain Investment Strategies Descriptions of the Funds' Investments
and Related Risks. and Risks - Investment Strategies and
Risks.
Fundamental and Descriptions of the Funds' Investments
Non-Fundamental and Risks - Fundamental Restrictions; --
Investment Non-Fundamental Restrictions.
Restrictions:
Taxes: Taxation of the Funds.
Dividends and Dividends and Distributions.
Distributions:
Purchases, Pricing of Fund Shares; How to Buy Shares; Pricing of Fund Shares; Purchase,
Redemptions and How to Redeem (Sell) Shares; How to Redemption and Pricing of Shares.
Exchanges of Shares: Exchange Shares Among [PMF or PIF] Funds.
Frequent Trading Frequent Trading and Market-Timing (Abusive
and Market-Timing Trading Practices)
Financial Highlights: Financial Highlights. Financial Highlights.
VOTING INFORMATION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of each of the Acquired Funds of proxies
to be used at the Meeting.
Voting procedures. If you complete and return the enclosed proxy
ballot, the persons named as proxies will vote your shares as you indicate or
for approval of each matter for which there is no indication. You may revoke
your proxy at any time prior to the proxy's exercise; (i) by sending written
notice to the Secretary of the Principal Mutual Funds at Principal Financial
Group, Des Moines, Iowa 50392-0200 prior to the meeting; (ii) by subsequent
execution and return of another proxy prior to the Meeting; or (iii) by being
present and voting in person at the Meeting after giving oral notice of the
revocation to the Chairman of the Meeting.
Voting rights. Only shareholders of record at the close of business on
March 23, 2005 (the "Record Date") are entitled to vote. The shareholders of the
Class A and Class B shares of each Fund will vote together on each Proposal
submitted to the shareholders of that Fund. You are entitled to one vote on each
Proposal submitted to the shareholders of a Fund for each share of the Fund
which you hold. The shareholders of each Fund will vote separately for the
election of Directors. The affirmative vote of the holders of a plurality of the
shares voted at the meeting of a Fund is required for the election of a Director
of the Fund. All other proposals require for approval the vote of a "majority of
the outstanding voting securities," which is a term defined in the 1940 Act to
mean with respect to a Fund, the affirmative vote of the lesser of (1) 67% or
more of the voting securities of the Fund present at the meeting of the Fund, if
the holders of more than 50% of the outstanding voting securities of the Fund
are present in person or by proxy, or (2) more than 50% of the outstanding
voting securities of the Fund (a "Majority of the Outstanding Voting
Securities").
The number of votes eligible to be cast at the meeting as of the Record
Date with respect to each Fund and other share ownership information are set
forth in Appendix E to this Proxy Statement/Prospectus.
Quorum requirements. A quorum must be present at the meeting for the
transaction of business. The presence in person or by proxy of one-third of the
shares of each of the Funds outstanding at the close of business on the Record
Date constitutes a quorum for a meeting of that Fund. Abstentions and broker
non-votes (proxies from brokers or nominees indicating that they have not
received instructions from the beneficial owners on an item for which the broker
or nominee does not have discretionary power) are counted toward a quorum but do
not represent votes cast for any issue. Under the 1940 Act, the affirmative vote
necessary to approve the Proposals may be determined with reference to a
percentage of votes present at the meeting, which would have the effect of
counting abstentions as if they were votes against a proposal.
In the event the necessary quorum to transact business or the vote
required to approve a Proposal is not obtained at the Meeting, the persons names
as proxies or any shareholder present at the meeting may propose one or more
adjournments of the Meeting in accordance with applicable law to permit further
solicitation of proxies. Any such adjournment as to a Proposal will require the
affirmative vote of the holders of a majority of the shares of the affected
Acquired Fund (or class) cast at the Meeting. The persons named as proxies and
any shareholder present at the meeting will vote for or against any adjournment
in their discretion.
Solicitation procedures. We intend to solicit proxies by mail. Officers
or employees of a Fund, the Manager or their affiliates may make additional
solicitations by telephone, internet, facsimile or personal contact. They will
not be specially compensated for these services. Brokerage houses, banks and
other fiduciaries may be requested to forward soliciting materials to their
principals and to obtain authorization for the execution of proxies. For those
services, they will be reimbursed by the Fund for their out-of-pocket expenses.
The Acquired Funds have retained the services of a professional proxy soliciting
firm, __________, to assist in soliciting proxies and estimate that the cost of
such services will be approximately $__________ .
Expenses of the meetings. The expenses of the Meeting for each Acquired
Fund will be treated as an expense related to the Reorganization and will be
allocated between the Fund and the Manager in the manner described above under
"Information Regarding the Reorganization -- Agreement and Plan of
Reorganization."
FINANCIAL STATEMENTS
The financial highlights of each Acquired Funds for the fiscal year
ended October 31, 2004 incorporated by reference into this Proxy
Statement/Prospectus, and the financial statements of each Acquired Fund for the
fiscal year ended October 31, 2004 incorporated by reference into the related
Statement of Additional Information, have been so incorporated by reference in
reliance on the report of Ernst & Young LLP, Independent Registered Public
Accounting Firm.
The financial highlights of each of the Acquiring Funds for the fiscal
year ended October 31, 2004 incorporated by reference into this Proxy
Statement/Prospectus, and the financial statements of PIF for the fiscal year
ended October 31, 2004 incorporated by reference into the related Statement of
Additional Information, have been so incorporated by reference in reliance on
the report of Ernst & Young LLP, Independent Registered Public Accounting Firm.
LEGAL MATTERS
Certain matters concerning the issuance of shares of the Acquiring
Portfolios will be passed upon by Michael D. Roughton, Esq., Counsel to the
Funds. Certain tax consequences of the Reorganization will be passed upon for
PIF by Randy Lee Bergstrom, Esq., Assistant Tax Counsel to the Funds, and for
each of the Acquired Funds by Carolyn Kolks, Esq., Assistant Tax Counsel to the
Funds.
OTHER MATTERS
We do not know of any matters to be presented at the Meeting other than
those mentioned in this Proxy Statement/Prospectus. If any other matters
properly come before the Meeting, the shares represented by proxies will be
voted in accordance with the best judgment of the person or persons voting the
proxies.
Shareholder proposals to be presented at any future meeting of
shareholders of any Acquired Fund must be received by the Acquired Fund a
reasonable time before its solicitation of proxies for that meeting in order for
such proposals to be considered for inclusion in the proxy materials related to
that meeting.
BY ORDER OF THE BOARD OF DIRECTORS OF EACH ACQUIRED FUND
April __, 2005
Des Moines, Iowa
It is important that proxies be returned promptly. Therefore, shareholders who
do not expect to attend the meeting in person are urged to complete, sign, date
and return the proxy ballot in the enclosed envelope.
A-3
Appendix A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this [ ] day of March, 2005, severally, by and among: each Acquired Fund
listed below, each a Maryland corporation having its principal place of business
at 680 8th Street, Des Moines, Iowa 50392-0200; Principal Investors Fund, Inc.
("PIF"), a Maryland corporation having its principal place of business at 680
8th Street, Des Moines, Iowa 50392-0200, on behalf of each corresponding
Acquiring Fund listed below, each a separate series of PIF; and Principal
Management Corporation, investment adviser for each Acquired Fund and its
corresponding Acquiring Fund (for purposes of section 9.2 of this Agreement
only):
Corresponding
Acquired Fund PIF Acquiring Fund
------------- ------------------
Principal Balanced Fund, Inc. -- PIF Disciplined LargeCap Blend Fund
Principal Capital Value Fund, Inc. -- PIF LargeCap Value Fund
Principal Partners LargeCap Value Fund, Inc. -- PIF Partners LargeCap Value Fund
Principal Equity Income Fund, Inc. -- PIF Equity Income Fund
Principal Partners Blue Chip Fund, Inc. -- PIF Partners LargeCap Blend Fund I
Principal Partners LargeCap Blend Fund, Inc. -- PIF Partners LargeCap Blend Fund
Principal LargeCap Stock Index Fund, Inc. -- PIF LargeCap S&P 500 Index Fund
Principal Growth Fund, Inc. -- PIF LargeCap Growth Fund
Principal Partners Equity Growth Fund, Inc. -- PIF Partners LargeCap Growth Fund I
Principal MidCap Fund, Inc. -- PIF MidCap Blend Fund
Principal Partners MidCap Growth Fund, Inc. -- PIF Partners MidCap Growth Fund
Principal SmallCap Fund, Inc. -- PIF SmallCap Blend Fund
Principal Partners SmallCap Growth Fund, Inc. -- PIF Partners SmallCap Growth Fund II
Principal Real Estate Securities Fund, Inc. -- PIF Real Estate Securities Fund
Principal Bond Fund, Inc. -- PIF Bond & Mortgage Securities Fund
Principal Government Securities Income Fund, Inc. -- PIF Government Securities Fund
Principal Tax-Exempt Bond Fund, Inc. -- PIF Tax-Exempt Bond Fund
Principal International Fund, Inc. -- PIF Diversified International Fund
Principal International SmallCap Fund, Inc. -- PIF Diversified International Fund
Principal Limited Term Bond Fund, Inc. -- PIF High Quality Short-Term Bond Fund
Principal Cash Management Fund, Inc. -- PIF Money Market Fund
Principal International Emerging Markets Fund, Inc. -- PIF International Emerging Markets Fund
This Agreement shall be deemed to be a separate agreement between each
Acquired Fund and PIF on behalf of the corresponding Acquiring Fund. As used
herein, unless the context otherwise requires, each Acquired Fund and its
corresponding Acquiring Funding are, respectively, the "Acquired Fund" and the
"Acquiring Fund."
This Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization will consist of: (i) the transfer of all or substantially all of
the assets of the Acquired Fund to the Acquiring Fund and the assumption by the
Acquiring Fund of all of the liabilities of the Acquired Fund in exchange solely
for Class A and Class B voting shares of beneficial interest of the Acquiring
Fund (the "Acquiring Fund Shares"); (ii) the distribution of the Acquiring Fund
Shares to the shareholders of the Acquired Fund according to their respective
interests in complete liquidation of the Acquired Fund; and (iii) the
dissolution of the Acquired Fund as soon as practicable thereafter, all upon the
terms and conditions hereinafter set forth (the Reorganization").
WHEREAS, the Acquired Fund is, and the Acquiring Fund is a separate
series of, an open-end, management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the Acquired
Fund owns securities which generally are assets of the character in which the
Acquiring Fund is permitted to invest;
WHEREAS, the Board of Directors of PIF has determined that the exchange
of all of the assets of the Acquired Fund for Acquiring Fund Shares and the
assumption of all liabilities of the Acquired Fund by the Acquiring Fund is in
the best interests of the Acquiring Fund and its shareholders and that the
interests of the existing shareholders of the Acquiring Fund would not be
diluted as a result of this transaction; and
WHEREAS, the Board of Directors of the Acquired Fund has determined
that the exchange of all of the assets of the Acquired Fund for Acquiring Fund
Shares and the assumption of all liabilities of the Acquired Fund by the
Acquiring Fund is in the best interests of the Acquired Fund and its
shareholders and that the interests of the existing shareholders of the Acquired
Fund would not be diluted as a result of this transaction;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES, THE ASSUMPTION OF ALL ACQUIRED FUND LIABILITIES AND
THE LIQUIDATION AND DISSOLUTION OF THE ACQUIRED FUND
1.1. Subject to the requisite approval of the shareholders of the
Acquired Fund and the other terms and conditions herein set forth and on the
basis of the representations and warranties contained herein, the Acquired Fund
shall transfer all or substantially all of its assets, as set forth in section
1.2, to the Acquiring Fund, and the Acquiring Fund in exchange therefore shall:
(i) deliver to the Acquired Fund the number of full and fractional Class A and
Class B Acquiring Fund Shares determined by dividing the value of the Acquired
Fund's net assets with respect to Class A and Class B Acquired Fund Shares,
computed in the manner and as of the time and date set forth in section 2.1, by
the net asset value of one Acquiring Fund Class A Share or Class B Share,
respectively, computed in the manner and as of the time and date set forth in
section 2.2; and (ii) assume all of the liabilities of the Acquired Fund as set
forth in section 1.3. Such transactions shall take place at the closing provided
for in section 3.1 (the "Closing").
1.2. The assets of the Acquired Fund to be acquired by the Acquiring
Fund shall consist of all assets and property, including, without limitation,
all cash, securities, commodities and futures interests and dividends or
interests receivable that are owned by the Acquired Fund, and any deferred or
prepaid expenses shown as an asset on the books of the Acquired Fund, on the
closing date provided for in section 3.1 (the "Closing Date") (collectively,
"Assets").
1.3. The Acquired Fund will endeavor to discharge all of its known
liabilities and obligations prior to the Closing Date. The Acquiring Fund shall
also assume all of the liabilities of the Acquired Fund, whether accrued or
contingent, known or unknown, existing at the Valuation Date, as defined in
section 2.1 (collectively, "Liabilities"). On or as soon as practicable prior to
the Closing Date, the Acquired Fund will declare and pay to its shareholders of
record one or more dividends and/or other distributions so that it will have
distributed substantially all (and in no event less than 98%) of its investment
company taxable income (computed without regard to any deduction for dividends
paid) and realized net capital gain, if any, for the current taxable year
through the Closing Date.
1.4. Immediately after the transfer of Assets provided for in section
1.1, the Acquired Fund will distribute to the shareholders of record of the
Class A and Class B Acquired Fund Shares, determined as of the close of regular
trading on the New York Stock Exchange ("NYSE") on the Closing Date (the
"Acquired Fund Shareholders"), on a pro rata basis, the Acquiring Fund Shares of
the same class received by the Acquired Fund pursuant to section 1.1, and will
completely liquidate. Such distribution and liquidation will be accomplished,
with respect to the Acquired Fund's shares, by the transfer of the Acquiring
Fund Shares then credited to the account of the Acquired Fund on the books of
the Acquiring Fund to open accounts on the share records of the Acquiring Fund
in the names of the Acquired Fund Shareholders. The aggregate net asset value of
Class A and Class B Acquiring Fund Shares to be so credited to Class A and Class
B Acquired Fund Shareholders shall be equal to the aggregate net asset value of
the Acquired Fund shares of that same class owned by such shareholders on the
Closing Date. All issued and outstanding shares of the Acquired Fund will
simultaneously be canceled on the books of the Acquired Fund. The Acquiring Fund
shall not issue certificates representing Class A and Class B Acquiring Fund
Shares in connection with such exchange.
1.5. Ownership of Acquiring Fund Shares will be shown on the books of
the Acquiring Fund's transfer agent.
1.6. As soon as practicable after the Closing Date, the Acquired Fund
shall take all necessary steps under its Articles of Incorporation, Maryland law
and any other applicable law to effect its complete dissolution. Any reporting
responsibility of the Acquired Fund, including, but not limited to, the
responsibility for filing of regulatory reports, tax returns, or other documents
with the U.S. Securities and Exchange Commission (the "Commission"), any state
securities commission, and any federal, state or local tax authorities or any
other relevant regulatory authority, is and shall remain the responsibility of
the Acquired Fund.
1.7 All books and records of the Acquired Fund, including all books and
records required to be maintained under the 1940 Act and the rules and
regulations thereunder, shall be available to PIF on behalf of the Acquiring
Fund from and after the Closing Date and shall be turned over to PIF as soon as
practicable after the Closing Date.
2. VALUATION
2.1. The value of the Assets to be transferred to the Acquiring Fund
shall be computed as of the close of regular trading on the NYSE and after the
declaration of any dividends on the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures in the
then-current prospectus and statement of additional information with respect to
the Acquiring Fund, and valuation procedures established by the Acquiring Fund's
Board of Directors.
2.2. The net asset value of a Class A and Class B Acquiring Fund Share
shall be the net asset value per share computed with respect to that class as of
the Valuation Date, using the valuation procedures set forth in the Acquiring
Fund's then-current prospectus and statement of additional information and
valuation procedures established by the PIF Board of Directors.
2.3. The number of the Class A and Class B Acquiring Fund Shares to be
issued (including fractional shares, if any) in exchange for the Acquired Fund's
Assets shall be determined with respect to each such class by dividing the value
of the net assets with respect to the Class A and Class B shares of the Acquired
Fund, as the case may be, determined using the same valuation procedures
referred to in section 2.1, by the net asset value of an Acquiring Fund Share,
determined in accordance with section 2.2.
2.4. All computations of value hereunder shall be made by or under the
direction of each Fund's respective accounting agent, if applicable, in
accordance with its regular practice and the requirements of the 1940 Act.
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be June 30, 2005, or such other date as the
parties may agree to in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of 3:00 p.m., Central Daylight Time on
the Closing Date. The Closing shall be held at the offices of Principal
Management Corporation, 680 8th Street, Des Moines, Iowa 50392 or at such other
time and/or place as the parties may agree.
3.2 The Acquired Fund shall deliver to PIF, on behalf of the Acquiring
Fund, on the Closing Date a schedule of Assets.
3.3. The Acquired Fund shall direct the custodian for the Acquired Fund
to deliver, at the Closing, a certificate of an authorized officer stating that
(i) the Assets shall have been delivered in proper form to the custodian for the
Acquiring Fund, prior to or on the Closing Date, and (ii) all necessary taxes in
connection with the delivery of the Assets, including all applicable federal and
state stock transfer stamps, if any, have been paid or provision for payment has
been made. The Acquired Fund's portfolio securities represented by a certificate
or other written instrument shall be presented by the custodian for the Acquired
Fund to the custodian for the Acquiring Fund for examination no later than five
business days preceding the Closing Date, and shall be transferred and delivered
by the Acquired Fund as of the Closing Date for the account of the Acquiring
Fund duly endorsed in proper form for transfer in such condition as to
constitute good delivery thereof. The Acquired Fund's portfolio securities and
instruments deposited with a securities depository, as defined in Rule 17f-4
under the 1940 Act, shall be delivered as of the Closing Date by book entry, in
accordance with the customary practices of such depositories and the custodian
for the Acquiring Fund. The cash to be transferred by the Acquired Fund shall be
delivered by wire transfer of federal funds on the Closing Date.
3.4. The Acquired Fund shall direct its transfer agent to deliver at
the Closing a certificate of an authorized officer stating that its records
contain the names and addresses of the Acquired Fund Shareholders and the number
and percentage ownership of outstanding Class A and Class B shares owned by each
such shareholder immediately prior to the Closing. The Acquiring Fund shall
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Acquired Fund, or provide evidence
satisfactory to the Acquired Fund that such Acquiring Fund Shares have been
credited to the Acquired Fund's account on the books of the Acquiring Fund. At
the Closing each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, if any, receipts or other documents as such
other party or its counsel may reasonably request.
3.5. In the event that on the Valuation Date (a) the NYSE or another
primary trading market for portfolio securities of the Acquiring Fund or the
Acquired Fund shall be closed to trading or trading thereupon shall be
restricted, or (b) trading or the reporting of trading on such Exchange or
elsewhere shall be disrupted so that, in the judgment of the Board of Directors
of the Acquired Fund or the Acquiring Fund, accurate appraisal of the value of
the net assets of the Acquiring Fund or the Acquired Fund, respectively, is
impracticable, the Closing Date shall be postponed until the first business day
after the day when trading shall have been fully resumed and reporting shall
have been restored.
4. REPRESENTATIONS AND WARRANTIES
4.1. The Acquired Fund represents and warrants as follows:
(a) The Acquired Fund is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland with power and
authority under its Articles of Incorporation, as amended, to own all of its
Assets and to carry on its business as it is now being conducted;
(b) The Acquired Fund is a registered investment company classified as
a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act, and the registration of
shares of the Acquired Fund under the Securities Act of 1933, as amended ("1933
Act"), are in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired Fund of
the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act")
and the 1940 Act and such as may be required by state securities laws;
(d) The current prospectus and statement of additional information of
the Acquired Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations of
the Commission thereunder and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not materially misleading;
(e) On the Closing Date, the Acquired Fund will have good and
marketable title to the Assets and full right, power, and authority to sell,
assign, transfer and deliver such Assets hereunder free of any liens or other
encumbrances, and upon delivery and payment for such Assets, the Acquiring Fund
will acquire good and marketable title thereto, subject to no restrictions on
the full transfer thereof, including such restrictions as might arise under the
1933 Act, other than as disclosed to the Acquiring Fund;
(f) The Acquired Fund is not currently engaged, and the execution,
delivery and performance of this Agreement will not result, in (i) a material
violation of Maryland law or the Acquired Fund's Articles of Incorporation or
By-Laws or of any agreement, indenture, instrument, contract, lease or other
undertaking to which the Acquired Fund is a party or by which it is bound, or
(ii) the acceleration of any obligation, or the imposition of any penalty, under
any agreement, indenture, instrument, contract, lease, judgment or decree to
which the Acquired Fund is a party or by which it is bound;
(g) All material contracts or other commitments of the Acquired Fund
(other than this Agreement and certain investment contracts, including options,
futures, and forward contracts) will terminate without liability to the Acquired
Fund on or prior to the Closing Date;
(h) Except as otherwise disclosed in writing to and accepted by PIF on
behalf of the Acquiring Fund, no litigation or administrative proceeding or
investigation of or before any court or governmental body is presently pending
or, to its knowledge, threatened against the Acquired Fund, or any of its
properties or assets that, if adversely determined, would materially and
adversely affect the Acquired Fund's financial condition or the conduct of its
business. The Acquired Fund knows of no facts which might form the basis for the
institution of such proceedings and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental body
which materially and adversely affects the Acquired Fund's business or the
Acquired Fund's ability to consummate the transactions herein contemplated;
(i) The Statement of Assets and Liabilities, Statements of Operations
and Changes in Net Assets, and Schedule of Investments of the Acquired Fund as
of October 31, 2004 have been audited by Ernst & Young LLP, independent
auditors, and are in accordance with generally accepted accounting principles in
the United States ("GAAP") consistently applied, and such statements (copies of
which have been furnished to PIF on behalf of the Acquiring Fund) present
fairly, in all material respects, the financial condition of the Acquired Fund
as of such date in accordance with GAAP, and there are no known contingent
liabilities of the Acquired Fund required to be reflected on a balance sheet
(including the notes thereto) in accordance with GAAP as of such date not
disclosed therein;
(j) Since October 31, 2004, there has not been any material adverse
change in the Acquired Fund's financial condition, assets, liabilities or
business, other than changes occurring in the ordinary course of business, or
any incurrence by the Acquired Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by PIF on behalf of the Acquiring Fund. For the purposes of this
subsection (j), a decline in net asset value per share of the Acquired Fund due
to declines in market values of portfolio securities of the Acquired Fund, the
discharge of Acquired Fund liabilities as reflected in its Statement of Assets
and Liabilities as of October 31, 2004 (including the notes thereto), or the
redemption of Acquired Fund Shares by shareholders of the Acquired Fund shall
not constitute a material adverse change;
(k) On the Closing Date, all federal and other tax returns, dividend
reporting forms, and other tax-related reports of the Acquired Fund required by
law to have been filed by such date (including any extensions) shall have been
filed and are or will be correct in all material respects, and all federal and
other taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the payment
thereof, and to the best of the Acquired Fund's knowledge, no such return is
currently under audit and no assessment has been asserted with respect to such
returns;
(l) For each taxable year of its operation (including the taxable year
ending on the Closing Date), the Acquired Fund has met (or will meet) the
requirements of Subchapter M of the Code for qualification as a regulated
investment company, has complied (or will comply) with the applicable
diversification requirements imposed by Subchapter L of the Code, has been (or
will be) eligible to and has computed (or will compute) its federal income tax
under Section 852 of the Code, and will have distributed all of its investment
company taxable income and net capital gain (as defined in the Code) that has
accrued through the Closing Date, and before the Closing Date will have declared
dividends sufficient to distribute substantially all (and in no event less than
98%) of its investment company taxable income and net capital gain for the
period ending on the Closing Date;
(m) All issued and outstanding shares of the Acquired Fund (i) have
been offered and sold in every state and the District of Columbia in compliance
in all material respects with applicable registration requirements of the 1933
Act and state securities laws, and in other jurisdictions in compliance with
applicable laws, (ii) are, and on the Closing Date will be, duly and validly
issued and outstanding, fully paid and non-assessable and not subject to
preemptive or dissenter's rights, and (iii) will, at the time of Closing, be
held by the persons and in the amounts set forth in the records of the transfer
Agent for the Acquired Fund on its behalf, as provided in section 3.4. The
Acquired Fund does not have outstanding any options, warrants or other rights to
subscribe for or purchase any of the shares of the Acquired Fund, nor is there
outstanding any security convertible into any of the Acquired Fund shares;
(n) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on the
part of the Board of Directors of the Acquired Fund, and, subject to the
approval of the shareholders of the Acquired Fund, this Agreement will
constitute a valid and binding obligation of the Acquired Fund, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization, moratorium and other laws relating to or affecting
creditors' rights and to general equity principles;
(o) The information to be furnished by the Acquired Fund for use in
registration statements, proxy materials and other documents filed or to be
filed with any federal, state or local regulatory authority (including the
National Association of Securities Dealers, Inc. (the "NASD")), which may be
necessary in connection with the transactions contemplated hereby, shall be
accurate and complete in all material respects and shall comply in all material
respects with federal securities and other laws and regulations applicable
thereto; and
(p) The proxy statement of the Acquired Fund (the "Proxy Statement") to
be included in the Registration Statement referred to in section 5.5 (including
any amendment or supplement thereto), insofar as it relates to the Acquired
Fund, will, on the effective date of the Registration Statement and on the
Closing Date (i) not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such statements
were made, not materially misleading provided, however, that the representations
and warranties in this subsection (p) shall not apply to statements in or
omissions from the Proxy Statement and the Registration Statement made in
reliance upon and in conformity with information that was furnished by the
Acquiring Fund for use therein, and (ii) comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder.
4.2. PIF, on behalf of the Acquiring Fund, represents and warrants as
follows:
(a) The Acquiring Fund is duly organized as a series of PIF, which is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Maryland with power and authority under its Articles of
Incorporation, as amended, to own all of its properties and assets and to carry
on its business as it is now being conducted;
(b) PIF is a registered investment company classified as a management
company of the open-end type, and its registration with the Commission as an
investment company under the 1940 Act and the registration of shares of the
Acquiring Fund under the 1933 Act are in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring Fund of
the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the 1940 Act and such as may be required by state
securities laws;
(d) The current prospectus and statement of additional information of
the Acquiring Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations of
the Commission thereunder and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not materially misleading;
(e) On the Closing Date, the Acquiring Fund will have good and
marketable title to the Acquiring Fund's assets, free of any liens of other
encumbrances, except those liens or encumbrances as to which the Acquired Fund
has received notice and necessary documentation at or prior to the Closing;
(f) PIF is not currently engaged, and the execution, delivery and
performance of this Agreement will not result, in (i) a material violation of
PIF's Articles of Incorporation or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which PIF, on behalf of the
Acquiring Fund, is a party or by which it is bound, or (ii) the acceleration of
any obligation, or the imposition of any penalty, under any agreement,
indenture, instrument, contract, lease, judgment or decree to which PIF on
behalf of the Acquiring Fund, is a party or by which it is bound;
(g) Except as otherwise disclosed in writing to and accepted by the
Acquired Fund, no litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to the knowledge
of PIF, threatened against PIF, on behalf of the Acquiring Fund, or any of the
Acquiring Fund's properties or assets that, if adversely determined, would
materially and adversely affect the Acquiring Fund's financial condition or the
conduct of its business. PIF, on behalf of the Acquiring Fund, knows of no facts
which might form the basis for the institution of such proceedings and is not a
party to or subject to the provisions of any order, decree or judgment of any
court or governmental body which materially and adversely affects the Acquiring
Fund's business or the Acquiring Fund's ability to consummate the transactions
herein contemplated;
(h) The Statement of Assets and Liabilities, Statements of Operations
and Changes in Net Assets and Schedule of Investments of the Acquiring Fund as
of October 31, 2004 have been audited by Ernst & Young LLP, independent
auditors, and are in accordance with GAAP consistently applied, and such
statements (copies of which have been furnished to the Acquired Fund) present
fairly, in all material respects, the financial condition of the Acquiring Fund
as of such date in accordance with GAAP, and there are no known contingent
liabilities of the Acquiring Fund required to be reflected on a balance sheet
(including the notes thereto) in accordance with GAAP as of such date not
disclosed therein;
(i) Since October 31, 2004, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities or
business, other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquired Fund. For purposes of this subsection (i), a
decline in net asset value per share of the Acquiring Fund due to declines in
market values of portfolio securities of the Acquiring Fund, the discharge of
Acquiring Fund liabilities as reflected in its Statement of Assets and
Liabilities as of October 31, 2004 (including the notes thereto), or the
redemption of Acquiring Fund Shares by shareholders of the Acquiring Fund, shall
not constitute a material adverse change;
(j) On the Closing Date, all federal and other tax returns, dividend
reporting forms, and other tax-related reports of the Acquiring Fund required by
law to have been filed by such date (including any extensions) shall have been
filed and are or will be correct in all material respects, and all federal and
other taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the payment
thereof, and to the best of the knowledge of PIF, on behalf of the Acquiring
Fund, no such return is currently under audit and no assessment has been
asserted with respect to such returns;
(k) For each taxable year of its operation (including the taxable year
that includes the Closing Date), the Acquiring Fund has met (or will meet) the
requirements of Subchapter M of the Code for qualification as a regulated
investment company, has complied (or will comply) with the applicable
diversification requirements imposed by Subchapter L of the Code, has been
eligible to (or will be eligible to) and has computed (or will compute) its
federal income tax under Section 852 of the Code;
(l) All issued and outstanding Acquiring Fund Shares (i) have been
offered and sold in every state and the District of Columbia in compliance in
all material respects with applicable registration requirements of the 1933 Act
and state securities laws, and in other jurisdictions in compliance with
applicable laws, and (ii) are, and on the Closing Date will be, duly and validly
issued and outstanding, fully paid and non-assessable and not subject to
preemptive or dissenter's rights. The Acquiring Fund does not have outstanding
any options, warrants or other rights to subscribe for or purchase any Acquiring
Fund Shares, nor is there outstanding any security convertible into any
Acquiring Fund Shares;
(m) The execution, delivery and performance of this Agreement will have
been fully authorized prior to the Closing Date by all necessary action on the
part of the Board of Directors of PIF on behalf of the Acquiring Fund, and this
Agreement will constitute a valid and binding obligation of PIF, on behalf of
the Acquiring Fund, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and other
laws relating to or affecting creditors' rights and to general equity
principles;
(n) The Acquiring Fund Shares to be issued and delivered to the
Acquired Fund, for the account of the Acquired Fund Shareholders, pursuant to
the terms of this Agreement, will on the Closing Date have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable;
(o) The information to be furnished by PIF, on behalf of the Acquiring
Fund, for use in registration statements, proxy materials and other documents
filed or to be filed with any federal, state or local regulatory authority
(including the NASD), which may be necessary in connection with the transactions
contemplated hereby, shall be accurate and complete in all material respects and
shall comply in all material respects with federal securities and other laws and
regulations applicable thereto; and
(p) The Proxy Statement to be included in the Registration Statement
(including and any amendment or supplement thereto), insofar as it relates to
the Acquiring Fund, will, on the effective date of the Registration Statement
and on the Closing Date (i) not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which such
statements were made, not misleading provided, however, that the representations
and warranties in this subsection (p) shall not apply to statements in or
omissions from the Registration Statement made in reliance upon and in
conformity with information that was furnished by the Acquired Fund for use
therein, and (ii) comply in all material respects with the provisions of the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder.
5. COVENANTS OF PIF, ON BEHALF OF THE ACQUIRING FUND, AND THE ACQUIRED FUND
5.1. PIF, on behalf of the Acquiring Fund, and the Acquired Fund each
will operate its business in the ordinary course between the date hereof and the
Closing Date, it being understood that such ordinary course of business will
include the declaration and payment of customary dividends and distributions and
such changes as are contemplated by the Funds' normal operations.
5.2. The Acquired Fund will call a meeting of the shareholders of the
Acquired Fund to consider and act upon this Agreement and will take all other
reasonable action necessary to obtain approval of the transactions contemplated
herein.
5.3. The Acquired Fund covenants that the Class A and Class B Acquiring
Fund Shares to be issued hereunder are not being acquired for the purpose of
making any distribution thereof, other than in accordance with the terms of this
Agreement.
5.4. Subject to the provisions of this Agreement, PIF, on behalf of the
Acquiring Fund, and the Acquired Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement.
5.5. PIF, on behalf of the Acquiring Fund, and the Acquired Fund each
covenants to prepare the Registration Statement on Form N-14 (the "Registration
Statement"), in compliance with the 1933 Act, the 1934 Act and the 1940 Act in
connection with the meeting of the Acquired Fund Shareholders to consider and
act upon this Agreement and the transactions contemplated herein. PIF, on behalf
of the Acquiring Fund, will file the Registration Statement, including the Proxy
Statement, with the Commission. The Acquired Fund will provide PIF, on behalf of
the Acquiring Fund, with the information reasonably necessary for preparation of
a prospectus, which will include the Proxy Statement referred to in section
4.1(p), all to be included in the Registration Statement, in compliance in all
material respects with the 1933 Act, the 1934 Act and the 1940 Act.
5.6. As soon as is reasonably practicable after the Closing, the
Acquired Fund will make a liquidating distribution to its shareholders
consisting of the Class A and Class B Acquiring Fund Shares received at the
Closing.
5.7. PIF, on behalf of the Acquiring Fund, and the Acquired Fund will
each use its reasonable best efforts to fulfill or obtain the fulfillment of the
conditions precedent to effect the transactions contemplated by this Agreement
as promptly as practicable.
5.8. The Acquired Fund covenants that it will, from time to time, as
and when reasonably requested by PIF on behalf of the Acquiring Fund, execute
and deliver or cause to be executed and delivered all such assignments and other
instruments, and will take or cause to be taken such further action as PIF, on
behalf of the Acquiring Fund, may reasonably deem necessary or desirable in
order to vest in and confirm the Acquiring Fund's title to and possession of all
the Assets and otherwise to carry out the intent and purpose of this Agreement.
5.9. PIF, on behalf of the Acquiring Fund, covenants that it will, from
time to time, as and when reasonably requested by the Acquired Fund, execute and
deliver or cause to be executed and delivered all such assignments, assumption
agreements, releases and other instruments, and will take or cause to be taken
such further action, as the Acquired Fund may reasonably deem necessary or
desirable in order to (i) vest in and confirm to the Acquired Fund title to and
possession of all Acquiring Fund shares to be transferred to the Acquired Fund
pursuant to this Agreement and (ii) assume the liabilities of the Acquired Fund.
5.10. PIF, on behalf of the Acquiring Fund, will use all reasonable
efforts to obtain the approvals and authorizations required by the 1933 Act, the
1940 Act and such of the state securities laws as it deems appropriate in order
to continue its operations after the Closing Date and to consummate the
transactions contemplated herein.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by
PIF, on behalf of the Acquiring Fund, of all the obligations to be performed by
it hereunder on or before the Closing Date, and, in addition thereto, the
following further conditions:
6.1. All representations and warranties of PIF, on behalf of the
Acquiring Fund, contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date;
6.2. PIF, on behalf of the Acquiring Fund, shall have delivered to the
Acquired Fund on the Closing Date a certificate executed in PIF's name by its
President or a Vice President, in a form reasonably satisfactory to the Acquired
Fund and dated as of the Closing Date, to the effect that the representations
and warranties of the Acquiring Fund made in this Agreement are true and correct
on and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters as the
Acquired Fund shall reasonably request;
6.3. PIF, on behalf of the Acquiring Fund, shall have performed all of
the covenants and complied with all of the provisions required by this Agreement
to be performed or complied with by PIF on behalf of the Acquiring Fund on or
before the Closing Date; and
6.4. The Acquired Fund and PIF, on behalf of the Acquiring Fund, shall
have agreed on the number of full and fractional Acquiring Fund Shares of Class
A and Class B to be issued in connection with the Reorganization after such
number has been calculated in accordance with section 1.1.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of PIF, on behalf of the Acquiring Fund, to complete
the transactions provided for herein shall be subject, at PIF's election, to the
performance by the Acquired Fund of all of the obligations to be performed by it
hereunder on or before the Closing Date and, in addition thereto, the following
conditions:
7.1. All representations and warranties of the Acquired Fund contained
in this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of the Closing Date, with the same force and effect as if
made on and as of the Closing Date;
7.2. The Acquired Fund shall have delivered to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities, as of the Closing Date,
certified by the Treasurer of the Acquired Fund;
7.3 The Acquired Fund shall have delivered to PIF, on behalf of the
Acquiring Fund, a certificate executed in the Acquired Fund's name by its
President or a Vice President, in a form reasonably satisfactory to the
Acquiring Fund and dated as of the Closing Date, to the effect that the
representations and warranties of the Acquired Fund made in this Agreement are
true and correct on and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement, and as to such other matters
as the Acquiring Fund shall reasonably request;
7.4. The Acquired Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by it on or before the Closing Date;
7.5. The Acquired Fund and PIF, on behalf of the Acquiring Fund, shall
have agreed on the number of full and fractional Acquiring Fund Shares of Class
A and Class B to be issued in connection with the Reorganization after such
number has been calculated in accordance with section 1.1; and
7.6. The Acquired Fund shall have declared and paid a distribution or
distributions prior to the Closing that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i)
substantially all (and in no event less than 98%) of its investment company
taxable income and realized net capital gain, if any, for the period from the
close of its last fiscal year through the Closing Date; and (ii) any
undistributed investment company taxable income and net realized capital gains
from any period to the extent not otherwise already distributed.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF PIF, ON BEHALF OF THE
ACQUIRING FUND, AND THE ACQUIRED FUND
If any of the conditions set forth below has not been satisfied on or
before the Closing Date with respect to the Acquired Fund or PIF, on behalf of
the Acquiring Fund, either party to this Agreement may choose, at its option,
not to consummate the transactions contemplated by this Agreement:
8.1. The Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Acquired Fund in accordance with the provisions of the Acquired Fund's
Articles of Incorporation, By-Laws, applicable Maryland law and the 1940 Act,
and certified copies of the resolutions evidencing such approval shall have been
delivered to PIF, on behalf of the Acquiring Fund. Notwithstanding anything
herein to the contrary, neither the Acquired Fund nor PIF, on behalf of the
Acquiring Fund, may waive the conditions set forth in this section 8.1;
8.2. On the Closing Date no action, suit or other proceeding shall be
pending or, to the knowledge of the Acquired Fund or of PIF, on behalf of the
Acquiring Fund, threatened, before any court or governmental agency in which it
is sought to restrain or prohibit, or obtain material damages or other relief in
connection with, this Agreement or the transactions contemplated herein;
8.3. All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities deemed necessary by
the Acquired Fund or PIF, on behalf of the Acquiring Fund, to permit
consummation, in all material respects, of the transactions contemplated hereby
shall have been obtained, except where failure to obtain any such consent, order
or permit would not involve a risk of a material adverse effect on the assets or
properties of the Acquired Fund or the Acquiring Fund, provided that either
party hereto may for itself waive any of such conditions;
8.4. The Registration Statement shall have become effective under the
1933 Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act; and
8.5. The parties shall have received the opinion of tax counsel
satisfactory to each party, addressed to each of the Acquired Fund and PIF, in a
form reasonably satisfactory to each such party to this Agreement, substantially
to the effect that, based upon certain facts, assumptions, and representations
of the parties, for federal income tax purposes: (1) the Reorganization will
constitute a reorganization within the meaning of Section 368(a) of the Code
with respect to the Acquired Fund and the Acquiring Fund; (2) no gain or loss
will be recognized by the Acquired Fund or the Acquiring Fund upon the transfer
of all of the assets and liabilities, if any, of the Acquired Fund to the
Acquiring Fund solely in exchange for shares of the Acquiring Fund; (3) no gain
or loss will be recognized by shareholders of the Acquired Fund upon the
exchange of such Acquired Fund's shares solely for shares of the Acquiring Fund;
(4) the holding period and tax basis of the shares of the Acquiring Fund
received by each holder of shares of the Acquired Fund pursuant to the
Reorganization will be the same as the holding period and tax basis of the
shares of the Acquired Fund held by the shareholder (provided the shares of the
Acquired Fund were held as a capital asset on the date of the Reorganization)
immediately prior to the Reorganization; and (5) the holding period and tax
basis of the assets of the Acquired Fund acquired by the Acquiring Fund will be
the same as the holding period and tax basis of those assets to the Acquired
Fund immediately prior to the Reorganization. The delivery of such opinion is
conditioned upon receipt by tax counsel of representations it shall request from
each of the Acquired Fund and PIF. Notwithstanding anything herein to the
contrary, neither the Acquired Fund nor PIF, on behalf of the Acquiring Fund,
may waive the conditions set forth in this section 8.5.
9. FEES AND EXPENSES
9.1. Each of PIF, on behalf of the Acquiring Fund, and the Acquired
Fund represents and warrants to the other that it has no obligations to pay any
brokers' or finders' fees in connection with the transactions provided for
herein.
9.2. The first $1,000,000 of the expenses relating to the
Reorganization will be allocated among the Acquired Funds based on the ratio of
the open accounts of each Acquired Fund to the open accounts of all the Acquired
Funds as of the close of business on February 28, 2005. The Manager will pay 50%
of the balance of the expenses relating to the Reorganization, and the remaining
50% will be allocated among the Acquired Funds in the same manner as the first
$1,000,000 of expenses, except that the Manager will pay 100% of such expenses
allocated to the following Acquired Funds which are not expected to experience
reduced expense ratios as a result of the Reorganization: the Principal Bond
Fund, Principal MidCap Fund, Principal Tax-Exempt Bond Fund, Principal Partners
LargeCap Value Fund, Principal Partners SmallCap Growth Fund, Principal
International Fund and Principal Partners MidCap Growth Fund. In addition, with
respect to each other Acquired Fund, the Manager will pay any portion of the
remaining 50% of the balance of the expenses allocated to the Acquired Fund that
exceeds an amount equal to the sum of (A) and (B), where (A) equals the result
determined by multiplying the net assets attributable to the Class A shares of
the Acquired Fund by the remainder of the Total Fund Operating Expense Ratio of
the Class A shares of the Acquired Fund minus the Total Fund Operating Expense
Ratio of the Class A shares of the Acquiring Fund and (B) equals the result
determined by multiplying the net assets attributable to the Class B shares of
the Acquired Fund by the remainder of the Total Fund Operating Expense Ratio of
the Class B shares of the Acquired Fund minus the Total Fund Operating Expense
Ratio of the Class B shares of the Acquiring Fund. For purposes of the preceding
sentence, the net assets attributable to the Class A shares and the Class B
shares of the Acquired Fund shall be determined as of the Effective Time or such
other time to which the Manager and the Acquired Fund may agree, the Total Fund
Operating Expense Ratios for the Class A shares and the Class B shares of the
Acquired Fund shall be those for the fiscal year ended October 31, 2004 and the
Total Fund Operating Expense Ratios for the Class A shares and the Class B
shares of the Acquiring Fund shall be determined for the period beginning on
November 1, 2004 and ending at the Effective Time or at such other time to which
the Manager and the Acquired Fund may agree. The costs of the Reorganization
shall include, but not be limited to, costs associated with preparation of the
Registration Statement, printing and distribution of the Acquiring Fund's
prospectus and the Acquired Fund's proxy materials, legal fees, accounting fees,
securities registration fees, and expenses of holding the Acquired Fund
Shareholders meeting. Notwithstanding any of the foregoing, expenses will in any
event be paid by the party directly incurring such expenses if and to the extent
that the payment by another person of such expenses would result in the
disqualification of such party as a "regulated investment company" within the
meaning of Section 851 of the Code.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1. The Acquired Fund and PIF, on behalf of the Acquiring Fund, agree
that neither has made any representation, warranty or covenant not set forth
herein and that this Agreement constitutes the entire agreement between the
parties.
10.2. Except as specified in the next sentence, the representations,
warranties and covenants contained in this Agreement or in any document
delivered pursuant hereto or in connection herewith shall not survive the
consummation of the transactions contemplated hereunder. The covenants to be
performed after the Closing shall survive the Closing.
11. TERMINATION
This Agreement may be terminated and the transactions contemplated
hereby may be abandoned by either party by (i) mutual agreement of the parties,
or (ii) by either party if the Closing shall not have occurred on or before June
30, 2005, unless such date is extended by mutual agreement of the parties, or
(iii) by either party if the other party shall have materially breached its
obligations under this Agreement or made a material and intentional
misrepresentation herein or in connection herewith. In the event of any such
termination, this Agreement shall become void and there shall be no liability
hereunder on the part of any of the parties or their respective Board members or
officers, except for any such material breach or intentional misrepresentation,
as to each of which all remedies at law or in equity of the party adversely
affected shall survive.
12. AMENDMENTS; WAIVERS
12.1 This Agreement may be amended, modified or supplemented in such
manner as may be mutually agreed upon in writing by any authorized officer of
the Acquired Fund and any authorized officer of PIF, on behalf of the Acquiring
Fund; provided, however, that, following the meeting of the shareholders of the
Acquired Fund called by the Acquired Fund pursuant to section 5.2 of this
Agreement, no such amendment may have the effect of changing the provisions for
determining the number of the Class A and Class B Acquiring Fund Shares to be
issued to the Acquired Fund Shareholders under this Agreement to the detriment
of such shareholders, or otherwise have a material adverse effect on the
interests or rights of the Acquired Fund or the Acquired Fund Shareholders,
without the Acquired Fund obtaining further approval of the Acquired Fund
Shareholders.
12.2. Except as otherwise expressly provided in this Agreement, each of
the Acquired Fund and PIF, on behalf of the Acquiring Fund, may at any time
prior to the Closing by written instrument signed by it: (i) waive any
inaccuracies in the representations and warranties contained herein and made for
its benefit; and (ii) waive compliance with any of the covenants or conditions
contained herein and made for its benefit, except that any such waiver that
would have a material adverse effect on the interests or rights of the Acquired
Fund or the Acquired Fund Shareholders, or the Acquiring Fund or the Acquiring
Fund Shareholders, shall be made only with the consent of the Board of Directors
of, respectively, the Acquired Fund or the Acquiring Fund.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be deemed given upon
receipt if delivered by hand (including by Federal Express or similar express
courier) or transmitted by facsimile or three days after being mailed by prepaid
registered or certified mail addressed to the Acquired Fund, 680 8th Street, Des
Moines, Iowa 50392-0200, attn: Arthur S. Filean, or to PIF, on behalf of the
Acquiring Fund, 680 8th Street, Des Moines, Iowa 50392-0200, attn: Arthur S.
Filean; or to Principal Management Corporation, Principal Financial Group, Des
Moines, Iowa 50392, attn: Arthur S. Filean.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF LIABILITY
14.1. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original.
14.3. This Agreement shall be governed by and construed in accordance
with the laws of the State of Maryland without regard to its principles of
conflicts of laws.
14.4. This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by its President or Vice President as of the date first
written above.
..................
PRINCIPAL BALANCED FUND, INC. PRINCIPAL INVESTORS FUND, INC.
PRINCIPAL CAPITAL VALUE FUND, INC. on behalf of each of the following Acquiring Funds:
PRINCIPAL PARTNERS LARGECAP VALUE FUND, INC. Disciplined LargeCap Blend Fund
PRINCIPAL EQUITY INCOME FUND, INC. LargeCap Value Fund
PRINCIPAL PARTNERS BLUE CHIP FUND, INC. Partners LargeCap Value Fund
PRINCIPAL PARTNERS LARGECAP BLEND FUND, INC. Equity Income Fund
PRINCIPAL LARGECAP STOCK INDEX FUND, INC. Partners LargeCap Blend Fund I
PRINCIPAL GROWTH FUND, INC. Partners LargeCap Blend Fund
PRINCIPAL PARTNERS EQUITY GROWTH FUND, INC. LargeCap S&P 500 Index Fund
PRINCIPAL MIDCAP FUND, INC. LargeCap Growth Fund
PRINCIPAL PARTNERS MIDCAP GROWTH FUND, INC. Partners LargeCap Growth Fund I
PRINCIPAL SMALLCAP FUND, INC. MidCap Blend Fund
PRINCIPAL PARTNERS SMALLCAP GROWTH Partners MidCap Growth Fund
FUND, INC. SmallCap Blend Fund
PRINCIPAL REAL ESTATE SECURITIES FUND, INC. Partners SmallCap Growth Fund II
PRINCIPAL BOND FUND, INC. Real Estate Securities Fund
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC. Bond & Mortgage Securities Fund
PRINCIPAL TAX-EXEMPT BOND FUND, INC. Government Securities Fund
PRINCIPAL INTERNATIONAL FUND, INC. Tax-Exempt Bond Fund
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC. Diversified International Fund
PRINCIPAL LIMITED TERM BOND FUND, INC. High Quality Short-Term Bond Fund
PRINCIPAL CASH MANAGEMENT FUND, INC. Money Market Fund
PRINCIPAL INTERNATIONAL EMERGING International Emerging Markets Fund
MARKETS FUND, INC.
By: ___________________________ By: _____________________________
Ralph C. Eucher Michael J. Beer
President Executive Vice President
PRINCIPAL MANAGEMENT CORPORATION
By: ______________________________
Ralph C. Eucher
President
B-2
Appendix B
COMPARISON OF FUNDAMENTAL INVESTMENT RESTRICTIONS
Each of the Acquired Funds and PIF on behalf of each of the Acquiring
Funds have adopted "fundamental" investment restrictions that may not be changed
for any Fund without the approval of a "majority of the outstanding voting
securities" (as defined under "Voting Information - Voting Rights") of the
affected Fund. These fundamental restrictions deal with such matters as the
issuance of senior securities, purchasing or selling real estate or commodities,
borrowing money, making loans, underwriting securities of other issuers,
diversification or concentration of investments and short sales of securities.
The table below compares the principal fundamental restrictions that
apply to the Acquired and Acquiring Funds. As indicated in the table, the
fundamental investment restrictions of the Acquiring Funds are substantially the
same for each Acquiring Fund (exceptions are noted), while there are variations
in the principal fundamental investment restrictions that apply to the different
Acquired Funds.
Additional fundamental investment restrictions that apply only to
certain of the Acquired Funds and not to any Acquiring Funds are set forth
following the table.
Comparison of Principal Fundamental Investment Restrictions
- ----------------------------------------------------------------- ---------------------------------------------------------------
Applicable to Acquired Funds Indicated Applicable to All Acquiring Funds
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Senior Securities: Senior Securities:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Each Fund may not issue any senior securities as defined in the Each Fund may not issue any senior securities as defined
1940 Act. Purchasing and selling securities and futures in the 1940 Act. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in accordance contracts and options thereon and borrowing money in
with restrictions described below do not involve the issuance accordance with restrictions described below do not involve
of a senior security. the issuance of a senior security.
--LargeCap Stock Index Fund, Partners Equity Growth
Fund, Partners LargeCap Blend Fund, Partners LargeCap
Value Fund, Partners MidCap Growth Fund, Partners
SmallCap Growth Fund, Balanced Fund, Equity Income Fund,
International Emerging Markets Fund, International Fund,
International SmallCap Fund, MidCap Fund, Partners Blue
Chip Fund, Real Estate Securities Fund, SmallCap Fund,
Bond Fund and Limited Term Bond Fund
Each Fund may not issue any senior securities.
--Government Securities Income Fund
Each Fund may not issue any senior securities as defined
in the 1940 Act except insofar as the Fund may be deemed to
have issued a senior security by reason of: a) purchasing any
securities on a when-issued or delayed delivery basis; or b)
borrowing money in accordance with restrictions described below.
--Tax-Exempt Bond Fund
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Commodities: Commodities:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Each Fund may not invest in physical commodities or commodity Each Fund may not invest in physical commodities or
contracts (other than foreign currencies), but it may purchase commodity contracts (other than foreign currencies), but it
and sell financial futures contracts, options on such may purchase and sell financial futures contracts, options
contracts, swaps and securities backed by physical commodities. on such contracts, swaps and securities backed by physical
--LargeCap Stock Index Fund, Partners Equity Growth Fund, commodities.
Partners LargeCap Blend Fund, Partners LargeCap Value Fund,
Partners MidCap Growth Fund, Partners SmallCap Growth Fund,
Balanced Fund, Equity Income Fund, International Emerging
Markets Fund, International Fund, International SmallCap
Fund, MidCap Fund, Partners Blue Chip Fund, Real Estate
Securities Fund, SmallCap Fund, Bond Fund and Limited Term
Bond Fund, Capital Value Fund, Growth Fund, Bond Fund and
Limited Term Bond Fund
Each Fund may not invest in commodities or commodity
contracts, but it may purchase and sell financial futures
contracts and options on such contracts.
-- Balanced Fund, Equity Income Fund, International
Emerging Markets Fund, International Fund, International
SmallCap Fund, MidCap Fund, Partners Blue Chip Fund, Real
Estate Securities Fund and SmallCap Fund
Each Fund may not invest in commodities or commodity futures
contracts
--Tax-Exempt Bond Fund
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Real Estate: Real Estate:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Each Fund may not invest in real estate, although it may invest Each Fund may not invest in real estate, although it may
in securities that are secured by real estate and securities of invest in securities that are secured by real estate and
issuers that invest or deal in real estate. securities of issuers that invest or deal in real estate.
--LargeCap Stock Index Fund, Partners Equity Growth
Fund, Partners LargeCap Blend Fund, Partners LargeCap
Value Fund, Partners MidCap Growth Fund, Partners
SmallCap Growth Fund, Balanced Fund, Equity Income Fund,
International Emerging Markets Fund, International Fund,
International SmallCap Fund, MidCap Fund, Partners Blue
Chip Fund, Real Estate Securities Fund, SmallCap Fund,
Bond Fund and Limited Term Bond Fund, Tax-Exempt Bond
Fund
Each Fund may not 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.
--Capital Value Fund and Growth Fund
Each Fund may not 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.
--Government Securities Income Fund
Each Fund may not 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.
--Cash Management Fund
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Borrowing: Borrowing:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Each Fund may not borrow money, except that it may a) borrow Each Fund may not borrow money, except that it may a)
from banks (as defined in the 1940 Act, as amended) or other borrow from banks (as defined in the 1940 Act) or other
financial institutions or through reverse repurchase agreements financial institutions or through reverse repurchase
in amounts up to 33 1/3% of its total assets (including the agreements in amounts up to 33 1/3% of its total assets
amount borrowed); b) to the extent permitted by applicable law, (including the amount borrowed); b) to the extent
borrow up to an additional 5% of its total assets for temporary permitted by applicable law, borrow up to an additional 5% of
purposes; c) obtain short-term credits as may be necessary for its total assets for temporary purposes; c) obtain
the clearance of purchases and sales of portfolio securities; short-term credits as may be necessary for the clearance of
and d) purchase securities on margin to the extent permitted by purchases and sales of portfolio securities; and d) purchase
applicable law (the deposit or payment of margin in connection securities on margin to the extent permitted by
with transactions in options and financial futures contracts is applicable law (the deposit or payment of margin in
not considered purchase of securities on margin). connection with transactions in options and financial
--LargeCap Stock Index Fund, Partners Equity Growth Fund, futures contracts is not considered purchase of securities on
Partners LargeCap Blend Fund, Partners LargeCap Value Fund, margin).*
Partners MidCap Growth Fund and Partners SmallCap Growth
Fund
* The PIF Board of Directors has approved a proposal to
Each Fund may not borrow money, except for temporary or amend this fundamental restriction and has directed that the
emergency purposes, in an amount not to exceed 5% of the value proposal be submitted to shareholders of the Acquiring Funds
of the Fund's total assets at the time of the borrowing. for approval at the PIF Shareholders Meeting. If approved by
--Balanced Fund, Equity Income Fund, International shareholders, the amended fundamental restriction with
Emerging Markets Fund, International Fund, International respect to borrowing will provide as follows:
SmallCap Fund MidCap Fund, Partners Blue Chip Fund,
Real Estate Securities Fund, SmallCap Fund, Bond Fund, Each Fund may not borrow money, except as permitted under the
Limited Term Bond Fund, Government Securities Income Fund Investment Company Act of 1940, as amended, and as interpreted,
and Tax-Exempt Bond Fund modified or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
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 a) 5% of the value of the Fund's assets, less
liabilities other than such borrowings, or b) 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. 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.
--Capital Value Fund and Growth Fund
Each Fund may not 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 a) 5% of the value of the Fund's assets, or b) 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.
--Cash Management Fund
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Making Loans: Making Loans:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Each Fund may not make loans, except that the Fund may a) Each Fund may not make loans, except that the Fund may a)
purchase and hold debt obligations in accordance with its purchase and hold debt obligations in accordance with its
investment objective and policies; b) enter into repurchase investment objectives and policies; b) enter into
agreements; and c) lend its portfolio securities without repurchase agreements; and c) lend its portfolio
limitation against collateral (consisting of cash or securities securities without limitation against collateral
issued or guaranteed by the U.S. Government or its agencies or (consisting of cash or liquid assets) equal at all times to
instrumentalities) equal at all times to not less than 100% of not less than 100% of the value of the securities loaned.
the value of the securities loaned. This limit does not apply This limit does not apply to purchases of debt securities or
to purchases of debt securities or commercial paper. commercial paper.
--LargeCap Stock Index Fund, Partners Equity Growth Fund,
Partners LargeCap Blend Fund, Partners LargeCap Value Fund,
Partners MidCap Growth Fund and Partners SmallCap Growth
Fund
Each Fund may not make loans, except that the Fund may a)
purchase and hold debt obligations in accordance with its
investment objective and policies, b) enter into repurchase
agreements, and c) lend its portfolio securities without
limitation against collateral (consisting of cash or securities
issued or guaranteed by the U.S. Government or its agencies
or instrumentalities) equal at all times to not less than 100%
of the value of the securities loaned.
--Balanced Fund, Equity Income Fund, International
Emerging Markets Fund, International Fund, International
SmallCap Fund, MidCap Fund, Partners Blue Chip Fund,
Real Estate Securities Fund, SmallCap Fund, Capital Value Fund,
Growth Fund, Bond Fund, Limited Term Bond Fund, Tax-Exempt Bond
Fund and Cash Management Fund.
Each Fund may not make loans, except that the Fund may
purchase or hold debt obligations (i.e., debt obligations issued
by the U.S. Government or its agencies or instrumentalities)
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 U.S. Government or its agencies or instrumentalities,
which is equal at all times to 100% of the value of the
securities loaned.
--Government Securities Income Fund
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Diversification: Diversification:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Each Fund may not invest more than 5% of its total assets in Each Fund may not invest more than 5% of its total assets in
the securities of any one issuer (other than obligations issued the securities of any one issuer (other than obligations
or guaranteed by the U.S. Government or its agencies or issued or guaranteed by the U.S. government or its agencies
instrumentalities) or purchase more than 10% of the outstanding or instrumentalities) or purchase more than 10% of the
voting securities of any one issuer, except that this outstanding voting securities of any one issuer, except
limitation shall apply only with respect to 75% of the total that this limitation shall apply only with respect to 75%
assets of the Fund. of the total assets of the Fund.
--LargeCap Stock Index Fund, Partners Equity Growth
Fund, Partners LargeCap Blend Fund, Partners LargeCap
Value Fund, Partners MidCap Growth Fund, Partners
SmallCap Growth Fund, Balanced Fund, Equity Income Fund,
International Emerging Markets Fund, International Fund,
International SmallCap Fund, MidCap Fund, Partners Blue
Chip Fund, Real Estate Securities Fund, SmallCap Fund,
Capital Value Fund, Growth Fund, Bond Fund and Limited
Term Bond Fund and Tax-Exempt Bond Fund
Each Fund may not invest more than 5% of its total assets in
the securities of any one issuer (other than obligations issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities) or purchase more than 10% of the
outstanding voting securities of any one issuer, except that
these limitations shall apply only with respect to 75% of the
Fund's total assets.
--Capital Value Fund and Growth Fund
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Underwriting: Underwriting:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Each Fund may not act as an underwriter of securities, except Each Fund may not act as an underwriter of securities, except
to the extent that the Fund may be deemed to be an underwriter to the extent that the Fund may be deemed to be an
in connection with the sale of securities held in its portfolio. underwriter in connection with the sale of securities held
--LargeCap Stock Index Fund, Partners Equity Growth Fund, in its portfolio.
Partners LargeCap Blend Fund, Partners LargeCap Value Fund,
Partners MidCap Growth Fund, Partners SmallCap Growth Fund,
Balanced Fund, Equity Income Fund, International Emerging
Markets Fund, International Fund, International SmallCap
Fund, MidCap Fund, Partners Blue Chip Fund, Real Estate
Securities Fund, SmallCap Fund, Bond Fund and Limited Term
Bond Fund, Tax-Exempt Bond Fund
Each Fund may not 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.
--Capital Value Fund and Growth Fund
Each Fund may not 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.
--Government Securities Income Fund
Each Fund may not 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.
--Cash Management Fund
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Concentration: Concentration:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Each Fund may not concentrate its investments in any particular Each Fund may not concentrate its investments in any
industry, except that the Fund may invest up to 25% of the particular industry, except that the Fund may invest up
value of its total assets in a single industry, provided that, to 25% of the value of its total assets in a single
when the Fund has adopted a temporary defensive posture, there industry, provided that, when the Fund has adopted a
shall be no limitation on the purchase of obligations issued or temporary defensive posture, there shall be no limitation
guaranteed by the U.S. Government or its agencies or on the purchase of obligations issued or guaranteed by the
instrumentalities. This restriction applies to the LargeCap U.S. government or its agencies or instrumentalities.
Stock Index Fund except to the extent that the Standard & This restriction applies to the LargeCap S&P 500 Index
Poor's 500 Index also is so concentrated. Fund except to the extent that the related Index also is
--LargeCap Stock Index Fund, Partners Equity Growth Fund, so concentrated. This restriction does not apply to the
Partners LargeCap Blend Fund, Partners LargeCap Value Fund, Real Estate Securities Fund.
Partners MidCap Growth Fund and Partners SmallCap Growth
Fund
Each Fund may not concentrate its investments in any
particular industry or industries, except that: a) the Equity
Income Fund may not invest less than 25% of its total assets
in securities of companies in the public utilities industry;
b) the Balanced Fund, International Emerging Markets Fund,
International Fund, International SmallCap Fund, MidCap Fund,
Partners Blue Chip Fund, and SmallCap Fund each may invest
not more than 25% of the value of its total assets in a
single industry, and c) the Real Estate Securities Fund may not
invest less than 25% of its total assets in securities of
companies in the real estate industry.
-- Balanced Fund, Equity Income Fund, International
Emerging Markets Fund, International Fund, International
SmallCap Fund, MidCap Fund, Partners Blue Chip Fund, Real
Estate Securities Fund and SmallCap Fund
Each Fund may not 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.
--Capital Value Fund and Growth Fund
Each Fund may not 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.
--Bond Fund and Limited Term Bond Fund
Each Fund may not 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.
--Cash Management Fund
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Short Sales: Short Sales:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Each Fund may not sell securities short (except where the Fund Each Fund may not sell securities short (except where the
holds or has the right to obtain at no added cost a long Fund holds or has the right to obtain at no added cost a
position in the securities sold that equals or exceeds the long position in the securities sold that equals or exceeds
securities sold short). the securities sold short).
--LargeCap Stock Index Fund, Partners Equity Growth Fund,
Partners LargeCap Blend Fund, Partners LargeCap Value Fund,
Partners MidCap Growth Fund and Partners SmallCap Growth
Fund
Each Fund may not 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.
-- Balanced Fund, Equity Income Fund, International
Emerging Markets Fund, International Fund, International
SmallCap Fund, MidCap Fund, Partners Blue Chip Fund, Real
Estate Securities Fund and SmallCap Fund, Bond Fund and
Limited Term Bond Fund
Each Fund may not purchase securities on margin, except it
may obtain such short-term credits as are necessary for the
clearance of transactions. The Fund may not 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). 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. The Fund will not issue or acquire put
and call options.
--Capital Value Fund and Growth Fund
Each Fund may not 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.
--Government Securities Income Fund
Each Fund may not purchase securities on margin, except it
may obtain such short-term credits as are necessary for the
clearance of transactions. The Fund will not 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.
--Cash Management Fund
- ----------------------------------------------------------------- ---------------------------------------------------------------
Additional Fundamental Investment
Restrictions Applicable To Certain Acquired Funds
Each of the Balanced Fund, Equity Income Fund, International Emerging Markets
Fund, International Fund, International SmallCap Fund, MidCap Fund, Partners
Blue Chip Fund, Real Estate Securities Fund and SmallCap Fund may not:
o 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.
o 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 the Capital Value Fund and Growth Fund may not:
o 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.
o 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.
o 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).
o invest more than 20% of its total assets in securities of foreign issuers.
Each of the Bond Fund and Limited Term Bond Fund may not:
o 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.
o 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.
The Government Securities Income Fund may not:
o purchase any securities other than obligations issued or guaranteed by the
U.S. Government or its agencies or instrumentalities, except that the Fund
may maintain reasonable amounts in cash or commercial paper or purchase
short-term debt securities not issued or guaranteed by the U.S. Government
or its agencies or instrumentalities for daily cash management purposes or
pending selection of particular long-term investments. There is no limit on
the amount of its assets which may be invested in the securities of any one
issuer of obligations issued by the U.S. Government or its agencies or
instrumentalities.
o 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.
o invest in companies for the purpose of exercising control or management.
o enter into repurchase agreements maturing in more than seven days if, as a
result, thereof, more than 10% of the Fund's total assets would be invested
in such repurchase agreements and other assets without readily available
market quotations.
o 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.
o invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
The Tax-Exempt Bond Fund may not:
o purchase any securities other than Municipal Obligations and Taxable
Investments as defined in the Prospectus and Statement of Additional
Information.
o 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.
o purchase or retain in its portfolio securities of any issuer if those
officers and directors of the Fund or its Manager owning more than one-half
of 1% (0.5%) of the securities of the issuer together own beneficially more
than 5% of such securities.
o invest in companies for the purpose of exercising control or management.
o invest more than 15% of its total assets in securities that are not readily
marketable and in repurchase agreements maturing in more than seven days.
o invest in interests in oil, gas or other mineral exploration or development
programs, although it may invest in securities of issuers which invest in
or sponsor such programs.
o purchase any securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions.
o pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings.
The Tax-Exempt Bond Fund has also adopted the fundamental restriction which
requires it, under normal circumstances, to invest at least 80% of its net
assets in investments, the income from which is exempt from federal income tax
or so that at least 80% of the income the Fund distributes will be exempt from
federal income tax.
The Cash Management Fund may not:
o 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).
o purchase the securities of any issuer if the purchase will cause more than
10% of the outstanding voting securities of the issuer to be held by the
Fund (other than securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities).
o 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.
o purchase securities of other investment companies except in connection with
a merger, consolidation, or plan of reorganization.
o 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.
o invest in companies for the purpose of exercising control or management.
o invest in time deposits maturing in more than seven days; time deposits
maturing from two business days through seven calendar days may not exceed
10% of the value of the Fund's total assets.
o invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven days.
C-2
Appendix C
DEBT SECURITY RATINGS
Standard & Poor's Ratings Group ("S&P")
Commercial Paper:
A-1 The rating A-1 is the highest rating assigned by S&P to
commercial paper. This designation indicates that the degree
of safety regarding timely payment is either overwhelming or
very strong. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high
for issuers designated "A-1."
Bonds:
AAA Debt rated AAA has the highest rating assigned by S&P.
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 higher
rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is 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 in higher rated categories.
BB-B-CCC
-CC Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance
with the terms of the obligations. BB indicates the lowest
degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D Bonds rated D are in default. The D category is used when
interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired.
The D rating is also used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus
or minus to show relative standing within the major rating categories.
Moody's Investors Service, Inc. ("Moody's")
Commercial Paper:
P-1 The rating P-1 is the highest commercial paper rating
assigned by Moody's. Issuers rated P-1 (or related
supporting institutions)have a superior capacity for repayment
of short-term promissory obligations. P-1
repayment capacity will normally be evidenced by the following
characteristics: (1) leading market positions
in established industries; (2)high rates of return on funds
employed; (3) conservative capitalization
structures with moderate reliance on debt and ample asset
protection; (4) broad margins in earnings coverage
of fixed financial charges and high internal cash generation;
and (5) well established access to a range of
financial markets and assured sources of alternate liquidity.
P-2 Issuers rated P-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
Bonds:
Aaa Bonds which are rated Aaa by Moody's 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 by Moody's 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 by Moody's 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 by Moody's are considered as medium
grade obligations, that is, 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.
B Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance and 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 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.
Moody's applies numerical modifiers "1," "2" and "3" to certain of its
rating classifications. 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 the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
D-3
Appendix D
PRINCIPAL MUTUAL FUNDS
AUDIT AND NOMINATING COMMITTEE CHARTER
Organization
The Audit and Nominating Committee of the Board of Directors ("Board") shall be
composed of directors who are not interested persons as defined in the
Investment Company Act of 1940.
Statement of Policy
The function of the Audit and Nominating Committee is oversight; it is
management's responsibility to maintain appropriate systems for accounting and
internal control over financial reporting, and the auditor's responsibility to
plan and carry out a proper audit. Specifically, Fund management is responsible
for: (1) the preparation, presentation and integrity of the Fund's financial
statements; (2) the maintenance of appropriate accounting and financial
reporting principles and policies; and (3) the maintenance of internal control
over financial reporting and other procedures designed to assure compliance with
accounting standards and related laws and regulations. The independent auditors
are responsible for planning and carrying out an audit consistent with
applicable legal and professional standards and the terms of their engagement
letter. Nothing in this Charter shall be construed to reduce the
responsibilities or liabilities of the Fund's service providers, including the
auditors.
Although the Committee is expected to take a detached and questioning approach
to the matters that come before it, the review of a Fund's financial statements
by the Committee is not an audit, nor does the Committee's review substitute for
the responsibilities of the Funds management for preparing; or the independent
auditors for auditing, the financial statements. Members of the Committee are
not full-time employees of the Fund and, in serving on this Committee, are not,
and do not hold themselves out to be, acting as accountants or auditors. As
such, it is not the duty or responsibility of the Committee or its members to
conduct "field work" or other types of auditing or accounting reviews or
procedures.
In discharging their duties the members of the Committee are entitled to rely on
information, opinions, reports, or statements, including financial statements
and other financial data, if prepared or presented by: (1) one or more officers
of the Fund whom the director reasonably believes to be reliable and competent
in the matters presented; (2) legal counsel, public accountants, or other
persons as to matters the director reasonably believes are within the persons
professional or expert competence; or (3) a Board committee of which the
director is not a member.
The Committee shall assist the directors in fulfilling their responsibilities to
the shareholders, potential shareholders, and investment community relating to
monitoring the integrity of the financial reporting processes and systems of
internal accounting and financial controls, the compliance with legal and
regulatory requirements, the independence and performance of internal and
external auditors, and the effectiveness and efficiency of operations. The
auditors for the Fund shall report directly to the Committee. Further, the
Committee shall be responsible for maintaining free and open communication among
the directors, the independent auditors, the internal auditors, and the
management of the Fund.
Responsibilities
In carrying out its responsibilities, the Committee should be flexible so that
it can best react to changing conditions to provide the directors and
shareholders with reasonable assurance that the Fund accounting and reporting
practices are in accordance with all requirements and are of the highest
quality.
The Committee shall have the authority to retain outside counsel or other
consultants to advise the Committee as it deems appropriate to its duties. The
Committee may request any officer or employee of the Fund or management company
or the company's outside counsel or independent auditors to attend a meeting of
the Committee or to meet with any members of, or consultants to the Committee.
No member of the Committee shall receive any compensation from the Fund except
for service as a member of the Fund's Board or a committee of the Board.
The Committee shall meet not less than twice per year to
review the Fund's financial statements and shall make regular
reports to the Board addressing such matters as the quality
and integrity of the Company's financial statements, the
Company's compliance with legal and regulatory requirements
and the performance of the independent and internal auditors.
The chair of the Committee may call additional meetings as
necessary.
The Committee shall:
1. Appoint, compensate, and conduct oversight of the work of the
independent auditors.
2. Meet with the independent auditors to review the scope and approach of
the proposed audit plan and the audit procedures to be performed.
3. Confirm and ensure the objectivity of the internal auditors and the
independence of the independent auditors. Pre-approve all engagements
and compensation to be paid to the auditor consistent with the Fund's
Policy on Auditor Independence and discuss independence issues with the
independent auditor on an annual basis. If so determined by the
Committee, recommend that the Board take appropriate action to satisfy
itself of the independence of the auditor.
No engagement of the independent auditor should:
(a) create a mutual or conflicting interest between the audit firm
and the Fund
(b) place the audit firm in the position of auditing its own work
(c) result in the audit firm acting in a management role for the
Fund, or
(d) place the audit firm in a position of being an advocate for the
Fund.
Annually, the independent auditor shall report all
relationships that may bear on independence between the
auditor and the Fund with respect to any services provided by
the auditor, its subsidiaries or affiliates.
4. Review the adequacy and effectiveness of the Fund's internal controls,
with the independent auditors, the organization's internal auditors,
and its financial and accounting personnel, and consider their
recommendations for improving the internal controls or particular areas
where new or more detailed controls or procedures are desirable.
Particular emphasis should be given to the adequacy of internal
controls in exposing any payments, transactions, or procedures that
might be deemed illegal or otherwise improper. Consider major changes
to the Fund's auditing and accounting principles and practices as
suggested by the independent auditors, internal auditor or management.
5. Request that management inform the Committee of all new or changed
accounting principles and disclosure practices on a timely basis.
Inquire of the auditors regarding their judgments and reasoning
regarding the appropriateness of the changes or proposed changes, as
well as the appropriateness of the accounting principles and disclosure
practices management employs for new transactions or events.
6. Review legal and regulatory matters that may have a material effect on
the financial statements, the Fund's compliance policies and ethical
business practices programs, and any material related to regulatory
examinations or reports received from regulators or government
agencies.
7. Inquire of management, the internal auditors, and the independent
auditors regarding significant risks or exposures, and assess the steps
management has taken to minimize such risks and exposures to the
organization.
8. Review the results of the Fund's monitoring of compliance with its Code
of Ethics.
9. Review the Fund's policies and procedures with respect to officers' and
directors' expense accounts and perquisites, including their use of the
organization's assets, and consider the results of the internal or
independent auditors' reviews of those areas. (Expenses of individuals
serving in the role of a Fund officer are not charged to the Fund and
there are no related perquisites. Fees and reimbursable expenses of the
independent directors are the only expenses of Fund directors charged
to the Fund).
10. Review the Fund's internal audit function, including its audit plans,
staffing, explanations for any deviations from plans, and the
coordination of such plans with those of the independent auditors.
11. Review the significant issues reported to management prepared by the
internal auditor and management's responses. Receive a summary of
findings from completed internal audits. Review with the internal
auditors any difficulties encountered in the course of the audit work,
including any restrictions on the scope of activities or access to
required information.
12. Meet with the independent auditors, at the conclusion of the audit, to
review the results of the audit, including any comments or
recommendations of the independent auditors. In addition, review with
the independent auditors any major issues regarding accounting and
auditing principles, practices and judgments as well as the adequacy of
internal controls that could significantly affect the financial
statements. Further, report the results of the annual audit to the
Board of Directors.
13. Review the financial statements contained in the annual report to
shareholders with management and the independent auditors. Inquire of
the independent auditors regarding their qualitative judgments about
the appropriateness, not just the acceptability, of the accounting
principles and the clarity of the financial disclosures. Also, inquire
of the independent auditors regarding their reasoning in accepting or
questioning management's significant estimates.
14. Inquire of the independent auditors regarding their judgments about
whether management's accounting principles and estimates are
conservative, moderate, or extreme from the perspective of income,
asset, and liability recognition, and whether those principles are
common practices or minority practices. Also, discuss with the
independent auditors how the Fund's choices of accounting principles
and disclosure practices may affect shareholders' and the public's
views and attitudes about the organization.
15. Discuss with the independent auditors other matters, if any, required
to be discussed by Statements on Auditing Standards relating to the
conduct of the audit such as audit adjustments, fraud and illegal acts,
auditor retention issues, consultation with other auditors,
disagreements with management and resolve any such disagreements,
access to information, other difficulties encountered during the audit,
etc.
16. Meet separately with the independent auditors and internal auditors
without management. Among the items to be discussed in these meetings
are the independent auditors' evaluation of the Fund's financial,
accounting, and auditing personnel, and the cooperation that the
independent auditors received during the audit.
17. Establish and maintain procedures for the handling of complaints
received regarding accounting, internal controls, and auditing.
18. Submit the minutes of all the Committee's meetings to, or discuss the
matters considered at each Committee meeting with, the Board of
Directors. Review and reassess the adequacy of this Charter annually
and recommend any proposed changes to the Board for approval.
19. Select, review and nominate for consideration by the Board candidates
for directors who are not interested persons as defined in the
Investment Company Act of 1940.
(adopted by the Board of Directors of each of the Principal funds on September
13, 2004)
E-2
Appendix E
OUTSTANDING SHARES AND SHARE OWNERSHIP
This Appendix sets forth information as to the number of shares
outstanding and entitled to vote of each class of shares of the Acquired Funds,
the number of outstanding shares of each class of shares of the Acquiring Funds
and the percentage ownership by certain shareholders of shares of the Acquired
and Acquiring Funds.
Acquired Funds
The following table shows as of the Record Date the number of Class A
and Class B shares of each Acquired Fund outstanding and entitled to vote.
Number of Shares
Acquired Fund Share Class Outstanding
Principal Balanced Fund, Inc. Class A
Class B
Principal Capital Value Fund, Inc. Class A
Class B
Principal Partners LargeCap Value Fund, Inc. Class A
Class B
Principal Equity Income Fund, Inc. Class A
Class B
Principal Partners Blue Chip Fund, Inc. Class A
Class B
Principal Partners LargeCap Blend Fund, Inc. Class A
Class B
Principal LargeCap Stock Index Fund, Inc. Class A
Principal Growth Fund, Inc. Class A
Class B
Principal Partners Equity Growth Fund, Inc. Class A
Class B
Principal MidCap Fund, Inc. Class A
Class B
Principal Partners MidCap Growth Fund, Inc. Class A
Class B
Principal SmallCap Fund, Inc. Class A
Class B
Principal Partners SmallCap Growth Fund, Inc. Class A
Class B
Principal Real Estate Securities Fund, Inc. Class A
Class B
Principal Bond Fund, Inc. Class A
Class B
Principal Government Securities Income Fund, Class A
Inc. Class B
Principal Tax-Exempt Bond Fund, Inc. Class A
Class B
Principal International Fund, Inc. Class A
Class B
Principal International SmallCap Fund, Inc. Class A
Class B
Principal Limited Term Bond Fund, Inc. Class A
Principal Cash Management Fund, Inc. Class A
Class B
Principal International Emerging Markets Class A
Fund, Inc. Class B
The following table shows as of March 3, 2005 the percentage of the
outstanding Class A and Class B shares of each Acquired Fund owned of record or
beneficially by Principal Life, either directly or through subsidiaries.
Principal Life and its subsidiaries own all of these shares both of record and
beneficially, except as otherwise indicated. The ultimate parent of Principal
Life is Principal Financial Group, Inc.
Percentage Owned
Acquired Fund Share Class by Principal Life
Principal Balanced Fund, Inc. Class A 0.00%
Class B 0.00%
Principal Capital Value Fund, Inc. Class A 14.64%
Class B 0.00%
Principal Partners LargeCap Value Fund, Inc. Class A 0.00%
Class B 0.00%
Principal Equity Income Fund, Inc. Class A 0.00%
Class B 0.00%
Principal Partners Blue Chip Fund, Inc. Class A 0.00%
Class B 0.00%
Principal Partners LargeCap Blend Fund, Inc. Class A 0.00%
Class B 0.00%
Principal LargeCap Stock Index Fund, Inc. Class A 0.00%
Principal Growth Fund, Inc. Class A 0.00%
Class B 0.00%
Principal Partners Equity Growth Fund, Inc. Class A 0.00%
Class B 0.00%
Principal MidCap Fund, Inc. Class A 0.00%
Class B 0.00%
Principal Partners MidCap Growth Fund, Inc. Class A 0.00%
Class B 0.00%
Principal SmallCap Fund, Inc. Class A 0.00%
Class B 0.00%
Principal Partners SmallCap Growth Fund, Inc. Class A 16.77%
Class B 8.23%
Principal Real Estate Securities Fund, Inc. Class A 0.00%
Class B 0.00%
Principal Bond Fund, Inc. Class A 0.00%
Class B 0.00%
Principal Government Securities Income Fund, Class A 0.00%
Inc. Class B 0.00%
Principal Tax-Exempt Bond Fund, Inc. Class A 0.00%
Class B 0.00%
Principal International Fund, Inc. Class A 0.00%
Class B 0.00%
Principal International SmallCap Fund, Inc. Class A 28.74%
Class B 0.00%
Principal Limited Term Bond Fund, Inc. Class A 2.66%
Principal Cash Management Fund, Inc. Class A 0.49%
Class B 0.00%
Principal International Emerging Markets Class A 12.13%
Fund, Inc. Class B 0.00%
As of March 3, 2005, the Directors and officers of each Acquired Fund
together owned less than 1% of its outstanding shares.
As of March 3, 2005, the following persons owned of record, or were
known by the Acquired Fund or its corresponding Acquiring Fund to own
beneficially, 5% or more of the outstanding shares of any Class of the Acquired
Funds:
- ------------------------------- --------------------------------------------- ----------------- ---------------------
Percentage
Share of Ownership
Acquired Fund Name/Address of Shareholder
Class
- ------------------------------- --------------------------------------------- ----------------- ---------------------
- ----------------------------------------------------------------------------- ----------------- ---------------------
- ----------------------------------------------------------------------------- ----------------- ---------------------
- ----------------------------------------------------------------------------- ----------------- ---------------------
Principal Capital Value Fund, Inc.
- ----------------------------------------------------------------------------- ----------------- ---------------------
- ------------------------------- --------------------------------------------- ----------------- ---------------------
The Principal Trust for Post-Retirement Class A 8.1%
Medical Benefits
Retired EE 5072
Attn: Crystal Morris S-003-S60
Principal Financial Group
Des Moines, IA 50392-0480
- ------------------------------- --------------------------------------------- ----------------- ---------------------
- ----------------------------------------------------------------------------- ----------------- ---------------------
Principal Cash Management Fund, Inc.
- ----------------------------------------------------------------------------- ----------------- ---------------------
- ------------------------------- --------------------------------------------- ----------------- ---------------------
Princor Financial Services Corporation Class A 5.0%
Principal Financial Group
Attn: Valorie Hammen, N003-E20
Des Moines, IA 50392-0200
- ------------------------------- --------------------------------------------- ----------------- ---------------------
- ----------------------------------------------------------------------------- ----------------- ---------------------
Principal Cash Management Fund, Inc.
- ----------------------------------------------------------------------------- ----------------- ---------------------
- ------------------------------- --------------------------------------------- ----------------- ---------------------
Delaware Charter Guarantee & Trust Co. Class A 9.5%
Attn: Lori N. Richards
P.O. Box 8738 Wilmington, DE 19899-8738
- ------------------------------- --------------------------------------------- ----------------- ---------------------
- ----------------------------------------------------------------------------- ----------------- ---------------------
Principal International Fund, Inc.
- ----------------------------------------------------------------------------- ----------------- ---------------------
- ------------------------------- --------------------------------------------- ----------------- ---------------------
The Principal Trust for Post-Retirement Class A 7.2%
Medical Benefits
Retired EE 5072
Attn: Crystal Morris, S-003-S60
Principal Financial Group
Des Moines, IA 50392-0480
- ------------------------------- --------------------------------------------- ----------------- ---------------------
- ----------------------------------------------------------------------------- ----------------- ---------------------
Principal Tax-Exempt Bond Fund, Inc.
- ----------------------------------------------------------------------------- ----------------- ---------------------
- ------------------------------- --------------------------------------------- ----------------- ---------------------
Leone H. Penrod & Evelyn M. Adams Class B 5.6%
4471 Sheffield Place, Apt. 102
Bay City, MI 48706-2564
- ------------------------------- --------------------------------------------- ----------------- ---------------------
- ----------------------------------------------------------------------------- ----------------- ---------------------
Principal Tax-Exempt Bond Fund, Inc.
- ----------------------------------------------------------------------------- ----------------- ---------------------
- ------------------------------- --------------------------------------------- ----------------- ---------------------
Allan S. Noddle Class B 10.3%
1306 South 157th Plaza, Apt. 110
Omaha, NE 68130-2573
- ------------------------------- --------------------------------------------- ----------------- ---------------------
Acquiring Funds
The following table shows the number of shares outstanding of each
Class of shares of each Acquiring Fund as of the Record Date.
Number of Shares
Acquiring Fund Share Class Outstanding
PIF Equity Income Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF LargeCap Value Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF Partners LargeCap Value Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF Partners LargeCap Blend Fund I Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF Partners LargeCap Blend Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF LargeCap S&P 500 Index Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF LargeCap Growth Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF Partners LargeCap Growth Fund I Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF MidCap Blend Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF Partners MidCap Growth Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF SmallCap Blend Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
PIF Partners SmallCap Growth Fund II Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF Real Estate Securities Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF Bond & Mortgage Securities Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF Government Securities Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF Tax-Exempt Bond Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF Diversified International Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF High Quality Short-Term Bond Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF Money Market Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF International Emerging Markets Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
PIF Disciplined LargeCap Blend Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
The following table shows as of March 3, 2005 the percentage of the
outstanding shares of each class of each Acquiring Fund owned of record or
beneficially by Principal Life, either directly or through subsidiaries.
Principal Life and its subsidiaries own all of these shares both of record and
beneficially, except as otherwise indicated. The ultimate parent of Principal
Life is Principal Financial Group, Inc.
Percentage Owned
Acquiring Fund Share Class by Principal Life
PIF Equity Income Fund Institutional N/A
Select N/A
Preferred N/A
Advisors Select N/A
Advisors Signature N/A
Advisors Preferred N/A
Class J N/A
PIF LargeCap Value Fund Institutional 30.00%
Select 67.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 100.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF Partners LargeCap Value Fund Institutional 0.00%
Select 0.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 100.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF Partners LargeCap Blend Fund I Institutional 100.00%
Select 1.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 100.00%
Advisors Preferred 0.00%
Class J 0.30%
PIF Partners LargeCap Blend Fund Institutional 0.00%
Select 0.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 100.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF LargeCap S&P 500 Index Fund Institutional 39.00%
Select 0.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 100.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF LargeCap Growth Fund Institutional 23.00%
Select 0.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 100.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF Partners LargeCap Growth Fund I Institutional 0.00%
Select 0.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 100.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF MidCap Blend Fund Institutional 100.00%
Select 0.39%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 9.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF Partners MidCap Growth Fund Institutional 100.00%
Select 5.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 100.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF SmallCap Blend Fund Institutional 100.00%
Select 81.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 100.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF Partners SmallCap Growth Fund II Institutional 0.00%
Select 0.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 100.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF Real Estate Securities Fund Institutional 0.00%
Select 0.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 100.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF Bond & Mortgage Securities Fund Institutional 0.34%
Select 0.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 6.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF Government Securities Fund Institutional 100.00%
Select 0.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 15.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF Tax-Exempt Bond Fund Institutional N/A
Select N/A
Preferred N/A
Advisors Select N/A
Advisors Signature N/A
Advisors Preferred N/A
Class J N/A
PIF Diversified International Fund Institutional 0.00%
Select 0.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 14.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF High Quality Short-Term Bond Fund Institutional 18.00%
Select 100.00%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 100.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF Money Market Fund Institutional 0.00%
Select 0.29%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 100.00%
Advisors Preferred 0.00%
Class J 0.00%
PIF International Emerging Markets Fund Institutional 80.00%
Select 100.00%
Preferred 48.00%
Advisors Select 96.00%
Advisors Signature 100.00%
Advisors Preferred 52.00%
Class J 0.41%
PIF Disciplined LargeCap Blend Fund Institutional 0.00%
Select 100.00%
Preferred 100.00%
Advisors Select 17.00%
Advisors Signature 100.00%
Advisors Preferred 47.00%
Class J N/A
As of March 3, 2005, the Directors and officers of PIF together owned
less than 1% of the outstanding shares of any Acquiring Fund.
As of March 3, 2005, the persons identified below the Fund/Shares Class
Table, if any for a particular number in the Table, owned of record, or were
known by the Acquiring Fund or its corresponding Acquired Fund to own
beneficially, 5% or more of the outstanding shares of the Class of the Acquiring
Funds indicated.
Fund/Share Class Table
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Institutional Advisors Advisors Advisors
PIF Acquiring Fund Select Preferred Select Signature Preferred Class J
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Equity Income Fund
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
LargeCap Value Fund 724 721 723 720 627 722 514
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Partners LargeCap Value Fund 854 851 853 850 655 852 530
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Partners LargeCap Blend Fund I 694 691 693 690 651 692 511
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Partners Large Cap Blend Fund 824 821 823 820 650 822 527
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
LargeCap S&P 500 Index Fund 714 711 713 710 626 712 513
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
LargeCap Growth Fund 704 701 703 700 625 702 512
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Partners LargeCap Growth Fund I 834 831 833 830 653 832 528
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
MidCap Blend Fund 749 741 743 740 639 742 521
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Partners MidCap Growth Fund 874 871 873 870 658 872 532
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
SmallCap Blend Fund 944 941 943 940 686 942 538
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Partners Small Cap Growth Fund II 915 912 914 911 669 913 535
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Real Estate Securities Fund 934 931 933 930 685 932 537
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Bond & Mortgage Securities Fund 594 591 593 590 605 592 501
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Government Securities Fund 614 611 613 610 607 612 503
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Tax-Exempt Bond Fund
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Diversified International Fund 674 671 673 670 617 672 508
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
High Quality Short-Term Bond Fund 644 641 643 640 615 642 506
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Disciplined LargeCap Blend Fund 699 696 698 695 619 697 N/A
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Money Market Fund 784 781 783 780 648 782 525
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
International Emerging Markets Fund 664 661 663 660 616 662 507
- ---------------------------------------- ---------- ---------- ----------- -------- ----------- ----------- --------
Fund/Share Percentage
Class Name and of
Number Address Ownership
590 Delaware Charter Guarantee & Trust 23.2
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
590 Delaware Charter Guarantee & Trust 76.3
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
591 Delaware Charter Guarantee & Trust 96.7
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
592 Delaware Charter Guarantee & Trust 19.2
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
592 Delaware Charter Guarantee & Trust 80.1
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
593 Trustar 24.4
F B O Southwire Balanced Fund (Retirement
Plan) P.O. Box 8963 Wilmington, DE 19899
593 Delaware Charter Guarantee & Trust 61.7
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
594 LIFETIME 2010 FUND 24.9
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
594 LIFETIME 2020 FUND 32.1
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
594 LIFETIME 2040 FUND 5.2
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
594 LIFETIME STRATEGIC INCOME FUND 14.8
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
594 LIFETIME 2030 FUND 21.2
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
605 Delaware Charter Guarantee & Trust 93.6
FBO Various Qualified Plans
711 High Street
Des Moines, IA
50303
607 Delaware Charter Guarantee & Trust 85.1
FBO Various Qualified Plans
711 High Street
Des Moines, IA
50303
610 Delaware Charter Guarantee & Trust 5.9
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
610 Delaware Charter Guarantee & Trust 94.0
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
611 Delaware Charter Guarantee & Trust 17.9
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
611 Delaware Charter Guarantee & Trust 77.4
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
612 Delaware Charter Guarantee & Trust 53.1
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
612 Delaware Charter Guarantee & Trust 42.5
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
613 DELAWARE CHARTER GUAR & TRUST 17.3
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA
50392
613 BANKERS TRUST COMPANY TRUSTEE 10.6
FBO PARTNER RE RESTURATION
SALARY DEFERRED PLAN
665 LOCUST ST # HAYEK
DES MOINES, IA
50309-3702
613 WELLS FARGO TRUST COMPANY TRUSTEE 6.3
FBO WORLD INSURANCE EXECUTIVE SERP
PLN ATTN DEANNA SWERTZIC
1919 DOUGLAS ST
OMAHA, NE
68102-1317
613 Delaware Charter Guarantee & Trust 35.0
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
613 Delaware Charter Guarantee & Trust 19.2
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
617 Delaware Charter Guarantee & Trust 84.6
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
639 Delaware Charter Guarantee & Trust 91.1
FBO Various Qualified Plans
711 High Street
Des Moines, IA
50303
640 Delaware Charter Guarantee & Trust 54.4
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
640 Delaware Charter Guarantee & Trust 45.5
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
642 Delaware Charter Guarantee & Trust 87.5
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
643 Delaware Charter Guarantee & Trust 78.1
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
643 Delaware Charter Guarantee & Trust 15.5
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
644 PERSHING LLC 56.8
P. O. BOX 2052
JERSEY CITY, NJ
07303-9998
644 PERSHING LLC 23.6
P. O. BOX 2052
JERSEY CITY, NJ
07303-9998
662 Delaware Charter Guarantee & Trust 42.3
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
663 DELAWARE CHARTER GUARANTEE & TRUST 43.9
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA
50392
664 PERSHING LLC 14.8
P. O. BOX 2052
JERSEY CITY, NJ
07303-9998
670 Delaware Charter Guarantee & Trust 10.1
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
670 Delaware Charter Guarantee & Trust 89.8
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
671 Delaware Charter Guarantee & Trust 97.0
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
672 Delaware Charter Guarantee & Trust 19.7
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
672 Delaware Charter Guarantee & Trust 79.8
FBO Various Qualified Plans
711 High Street
Des Moines, IA
50303
673 DELAWARE CHARTER GUAR & TRUST 35.8
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA
50392
673 Delaware Charter Guarantee & Trust 5.9
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
673 Delaware Charter Guarantee & Trust 52.6
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
674 THE PRINCIPAL TRUST FOR POST- 12.2
RETIREMENT MEDICAL BENEFITS
RETIRED IND FIELD 5073
ATTN CRYSTAL MORRIS S-003-S60
PRINCIPAL FINANCIAL GROUP
DES MOINES, IA 50392-0480
674 PRINCIPAL TRUST FOR LIFE INS 6.3
BENEFITS FOR EE'S - RETIRED 5016
ATTN CRYSTAL MORRIS S-003-S60
PRINCIPAL FINANCIAL GROUP
DES MOINES, IA 50392-0480
674 PRINCIPAL TRUST FOR HEALTH 9.9
BENEFITS FOR IND FIELD - RETIRED 5025
ATTN CRYSTAL MORRIS S-003-S60
PRINCIPAL FINANCIAL GROUP
DES MOINES, IA 50392-0480
674 THE PRINCIPAL TRUST FOR POST- 62.2
RETIREMENT MEDICAL BENEFITS
RETIRED EE 5072
ATTN CRYSTAL MORRIS S-003-S60
PRINCIPAL FINANCIAL GROUP
DES MOINES, IA 50392-0480
690 Delaware Charter Guarantee & Trust 17.6
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
690 Delaware Charter Guarantee & Trust 82.3
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
691 Delaware Charter Guarantee & Trust 99.4
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
692 Delaware Charter Guarantee & Trust 99.4
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
693 DELAWARE CHARTER GUAR & TRUST 51.8
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA
50392
693 Delaware Charter Guarantee & Trust 18.7
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
693 Delaware Charter Guarantee & Trust 12.5
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
693 J Moorhouse & R Stine TTEE 10.1
FBO Bakersfield Californian NQ Pl . Trustees
PO Box 81075
Bakersfield, CA
93380
693 BANKERS TRUST COMPANY E675 6.1
FBO NQ EXCESS PLAN OF HICKORY FARMS
ANJI RAINEY
665 LOCUST ST
DES MOINES, IA
50304-0897
697 Delaware Charter Guarantee & Trust 23.4
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
697 Delta Dental Plan of Oklahoma 25.3
FBO Stephanie Elliot
16 NW 63rd ST
Oklahoma City, OK
73116
699 LIFETIME 2010 FUND 13.1
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
699 LIFETIME 2020 FUND 30.5
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
699 LIFETIME 2040 FUND 13.7
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
699 LIFETIME 2050 FUND 6.9
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
699 LIFETIME 2030 FUND 31.4
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
700 Delaware Charter Guarantee & Trust 99.9
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
701 Delaware Charter Guarantee & Trust 100.0
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
702 Delaware Charter Guarantee & Trust 12.2
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
702 Delaware Charter Guarantee & Trust 86.6
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
703 DELAWARE CHARTER GUAR & TRUST 50.3
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA
50392
703 Delaware Charter Guarantee & Trust 40.6
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
704 LIFETIME 2010 FUND 10.7
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
704 LIFETIME 2020 FUND 23.4
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
704 LIFETIME 2040 FUND 10.6
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
704 LIFETIME 2050 FUND
ATTN JAMIE SCRIGNOLI N-002-E20 5.3
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
704 LIFETIME 2030 FUND 23.6
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
704 THE PRINCIPAL TRUST FOR POST- 14.6
RETIREMENT MEDICAL BENEFITS
RETIRED EE 5072
ATTN CRYSTAL MORRIS S-003-S60
PRINCIPAL FINANCIAL GROUP
DES MOINES, IA 50392-0480
710 Delaware Charter Guarantee & Trust 16.2
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
710 Delaware Charter Guarantee & Trust 83.6
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
711 Delaware Charter Guarantee & Trust 10.9
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
711 Delaware Charter Guarantee & Trust 68.9
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
711 Bankers Trust Company NA 6.8
FBO Delora Williams
665 Locust
Des Moines, IA 50304
711 Principal Trust Company 5.9
FBO Susan Saggione
1013 Centre Rd
Wilmington, DE 19805
712 Trustar 12.6
FBO The Church Of God
403(b) Pension Plan --
Growth & Income
P.O. Box 8963
Wilmington, DE 19899
712 Delaware Charter Guarantee & Trust 9.4
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
712 Delaware Charter Guarantee & Trust 69.9
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
713 DELAWARE CHARTER GUAR & TRUST 6.2
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
713 Delaware Charter Guarantee & Trust 16.3
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
713 Delaware Charter Guarantee & Trust 72.1
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
714 PERSHING LLC 23.0
P. O. BOX 2052
JERSEY CITY, NJ
07303-9998
714 PERSHING LLC 33.9
P. O. BOX 2052
JERSEY CITY, NJ
07303-9998
720 Delaware Charter Guarantee & Trust 14.4
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
720 Delaware Charter Guarantee & Trust 85.5
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
721 Delaware Charter Guarantee & Trust 32.4
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
722 Delaware Charter Guarantee & Trust 24.2
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
722 Delaware Charter Guarantee & Trust 66.2
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
723 DELAWARE CHARTER GUAR & TRUST 22.9
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA
50392
723 WELLS FARGO TRUST COMPANY TRUSTEE 20.1
FBO WORLD INSURANCE EXECUTIVE SERP
PLN ATTN DEANNA SWERTZIC
1919 DOUGLAS ST
OMAHA, NE
68102-1317
723 Delaware Charter Guarantee & Trust 49.1
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
724 LIFETIME 2010 FUND 9.8
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
724 LIFETIME 2020 FUND 21.3
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
724 LIFETIME 2040 FUND 9.4
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA
50392-0200
724 LIFETIME 2030 FUND 21.5
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA 50392-0200
724 THE PRINCIPAL TRUST FOR POST- 19.1
RETIREMENT MEDICAL BENEFITS
RETIRED EE 5072
ATTN CRYSTAL MORRIS S-003-S60
PRINCIPAL FINANCIAL GROUP
DES MOINES, IA 50392-0480
740 Delaware Charter Guarantee & Trust 97.8
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
741 Delaware Charter Guarantee & Trust 75.9
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
741 Bankers Trust Company NA 22.1
FBO Delora Williams
665 Locust
Des Moines, IA 50304
742 Delaware Charter Guarantee & Trust 94.2
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
743 DELAWARE CHARTER GUAR & TRUST 29.7
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
743 Delaware Charter Guarantee & Trust 56.6
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
780 Delaware Charter Guarantee & Trust 94.9
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
781 Bankers Trust Company NA 69.3
FBO Delora Williams
665 Locust
Des Moines, IA 50304
781 Wachovia Bank NA 23.3
FBO Kewaunee Scientific Corp Exec Def
Plan
Tanya Whitaker One West Fourth Stre
Winston-Salem, NC 27150
782 DELAWARE CHARTER GUAR & TRUST 22.4
FBO PRINCIPAL ADVANTAGE TRUST
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
782 Delaware Charter Guarantee & Trust 57.1
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
783 DELAWARE CHARTER GUAR & TRUST 9.1
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
783 INSURANCE SERVICES OFFICE, INC TTEE 7.9
ISO SUPPLEMENTAL EXEC SAVING PLAN
545 WASHINGTON BLVD
JERSEY CITY, NJ 07310-1607
783 Trustar 10.0
FBO SOUTHWIRE BALANCED FUND
RETIREMENT PLAN
PO BOX 8963
WILMINGTON, DE 19899-8963
783 Delaware Charter Guarantee & Trust 40.4
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
783 PRINCIPAL TRUST COMPANY NA TTEE 7.3
ATTN SUSAN SAGGIONE
FBO PRIORITY HLTH SUPPL EX DEF PLN
C/O DEBORAH PHILLIPS
1231 E BELTLINE AVE NE
GRAND RAPIDS, MI 49525-7024
784 LIFETIME 2010 FUND 47.2
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA 50392-0200
784 LIFETIME STRATEGIC INCOME FUND 52.7
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA 50392-0200
820 Delaware Charter Guarantee & Trust 94.2
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
821 Delaware Charter Guarantee & Trust 96.6
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
822 Delaware Charter Guarantee & Trust 6.3
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
822 Delaware Charter Guarantee & Trust 93.4
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
823 Delaware Charter Guarantee & Trust 95.3
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
824 PRINCIPAL LIFE INSURANCE CO 99.9
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA
50392
830 Delaware Charter Guarantee & Trust 6.7
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
830 Delaware Charter Guarantee & Trust 92.3
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
831 Delaware Charter Guarantee & Trust 7.6
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
831 Delaware Charter Guarantee & Trust 87.2
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
832 Delaware Charter Guarantee & Trust 12.8
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
832 Delaware Charter Guarantee & Trust 86.6
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
833 Delaware Charter Guarantee & Trust 12.1
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
833 Delaware Charter Guarantee & Trust 84.4
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
834 PRINCIPAL LIFE INSURANCE CO 100.0
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
850 Delaware Charter Guarantee & Trust 5.4
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
850 Delaware Charter Guarantee & Trust 94.0
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
851 Delaware Charter Guarantee & Trust 95.2
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
852 Delaware Charter Guarantee & Trust 11.9
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
852 Delaware Charter Guarantee & Trust 87.8
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
853 Delaware Charter Guarantee & Trust 11.1
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
853 Delaware Charter Guarantee & Trust 81.9
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
854 PRINCIPAL LIFE INSURANCE CO 87.5
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
870 Delaware Charter Guarantee & Trust 9.0
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
870 Delaware Charter Guarantee & Trust 89.7
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
871 Delaware Charter Guarantee & Trust 5.3
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
871 Delaware Charter Guarantee & Trust 89.4
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
872 Delaware Charter Guarantee & Trust 10.6
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
872 Delaware Charter Guarantee & Trust 89.2
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
873 DELAWARE CHARTER GUAR & TRUST 18.1
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
873 Delaware Charter Guarantee & Trust 75.7
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
911 Delaware Charter Guarantee & Trust 13.7
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
911 Delaware Charter Guarantee & Trust 86.0
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
912 Delaware Charter Guarantee & Trust 5.0
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
912 Delaware Charter Guarantee & Trust 92.8
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
913 Delaware Charter Guarantee & Trust 11.8
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
913 Delaware Charter Guarantee & Trust 84.2
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
914 Delaware Charter Guarantee & Trust 94.7
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
915 PRINCIPAL LIFE INSURANCE CO 90.8
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
930 Delaware Charter Guarantee & Trust 16.6
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
930 Delaware Charter Guarantee & Trust 83.3
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
931 Delaware Charter Guarantee & Trust 41.7
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
931 Delaware Charter Guarantee & Trust 56.7
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
932 Trustar 6.1
FBO The Church Of God 403(b) Pension Plan --
Agressive Growth
P.O. Box 8963 Wilmington, DE 19899
932 Trustar 15.5
FBO The Church Of God 403(b) Pension Plan --
Growth & Income
P.O. Box 8963 Wilmington, DE 19899
932 Delaware Charter Guarantee & Trust 11.4
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
932 Delaware Charter Guarantee & Trust 58.0
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
933 DELAWARE CHARTER GUAR & TRUST 7.3
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
933 Delaware Charter Guarantee & Trust 30.4
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
933 Delaware Charter Guarantee & Trust 51.3
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
934 LIFETIME 2010 FUND 17.0
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA 50392-0200
934 LIFETIME 2020 FUND 18.5
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA 50392-0200
934 LIFETIME STRATEGIC INCOME FUND 11.0
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA 50392-0200
934 LIFETIME 2030 FUND 13.4
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA 50392-0200
934 PRINCIPAL LIFE INSURANCE CO 34.4
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
940 Delaware Charter Guarantee & Trust 95.5
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
941 Delaware Charter Guarantee & Trust 18.8
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
942 Delaware Charter Guarantee & Trust 6.5
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
942 Delaware Charter Guarantee & Trust 92.8
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
943 Delaware Charter Guarantee & Trust 10.4
FBO Various Non-Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
943 Delaware Charter Guarantee & Trust 77.3
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
944 THE PRINCIPAL TRUST FOR POST- 12.3
RETIREMENT MEDICAL BENEFITS
RETIRED IND FIELD 5073
ATTN CRYSTAL MORRIS S-003-S60
PRINCIPAL FINANCIAL GROUP
DES MOINES, IA 50392-0480
944 PRINCIPAL TRUST FOR LIFE INS 6.2
BENEFITS FOR EE'S - RETIRED 5016
ATTN CRYSTAL MORRIS S-003-S60
PRINCIPAL FINANCIAL GROUP
DES MOINES, IA 50392-0480
944 PRINCIPAL TRUST FOR HEALTH 9.8
BENEFITS FOR IND FIELD - RETIRED 5025
ATTN CRYSTAL MORRIS S-003-S60
PRINCIPAL FINANCIAL GROUP
DES MOINES, IA 50392-0480
944 THE PRINCIPAL TRUST FOR POST- 62.3
RETIREMENT MEDICAL BENEFITS
RETIRED EE 5072
ATTN CRYSTAL MORRIS S-003-S60
PRINCIPAL FINANCIAL GROUP
DES MOINES, IA 50392-0480
PRINCIPAL CASH MANAGEMENT FUND, INC.
680 8th Street
Des Moines, Iowa 50392-0200
April 18, 2005
Dear Shareholder:
A special meeting of shareholders of the Principal Cash Management
Fund, Inc. will be held at 2:00 p.m., Central Daylight Time, on June 16, 2005,
at the offices of Principal Management Corporation, 680 8th Street, Des Moines,
Iowa 50392-0200, to consider a proposed reorganization providing for the
combination of the Principal Cash Management Fund, Inc. (the "Acquired Fund"),
one of the separate funds commonly and collectively known as the Principal
Mutual Funds ("PMF"), into the Money Market Fund (the "Acquiring Fund"), a
separate series of Principal Investors Fund, Inc. ("PIF") (the "Combination").
The Combination is described in detail in the enclosed Proxy
Statement/Prospectus.
The Combination is part of a larger proposed reorganization providing
for the combination of each of the PMF funds into corresponding separate series
of PIF (the "Reorganization"). The Board of Directors of each of the PMF funds
has unanimously approved the Reorganization. All the PMF and PIF funds are
sponsored by Principal Life Insurance Company and have the same investment
advisor, Principal Management Corporation. The Board of each of the PMF funds
believes the Reorganization will address the persistent distribution issues of
the PMF funds by combining them into the PIF funds, which are experiencing
significant net sales. Combining the PMF funds into PIF is intended to create a
larger fund family that is expected to achieve economies of scale and operate
with greater efficiency and lower overall costs.
The Board of the Acquired Fund believes that the Combination of the
Acquired and Acquiring Funds will also benefit you for other reasons. Both Funds
are money market funds that have substantially similar investment objectives and
strategies. The Acquiring Fund has a lower management fee and is expected to
have lower overall expenses than the Acquired Fund, and the Acquiring Fund has
generally performed better than the Acquired Fund during the period in which
both have been operational. Combining the Funds will not result in any dilution
of the interests of existing shareholders of the Acquired Fund.
Enclosed you will find a Notice of Special Meeting of Shareholders, a
Proxy Statement/Prospectus, and a proxy ballot for the shares of the Acquired
Fund owned by you as of March 23, 2005, the record date for the meeting. Please
read these materials carefully. In order for your shares to be voted at the
meeting, you are urged promptly to complete and mail your proxy ballot(s) in the
enclosed postage-paid envelope, allowing sufficient time for its receipt by June
15, 2005.
We appreciate your taking the time to respond to this important matter.
Your vote is important. If you have any questions regarding the Combination or
need additional information, please call us toll-free at 1-800-________.
Sincerely,
/s/ RALPH C. EUCHER
Ralph C. Eucher
President and Chief Executive Officer
PRINCIPAL CASH MANAGEMENT FUND, INC.
680 8th Street
Des Moines, Iowa 50392-0200
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 16, 2005
To the Shareholders of the Principal Cash Management Fund, Inc.:
Notice is hereby given that a Special Meeting of the Shareholders (the
"Meeting") of the Principal Cash Management Fund, Inc. will be held at 2:00
p.m., Central Daylight Time, on June 16, 2005, at the offices of Principal
Management Corporation, 680 8th Street, Des Moines, Iowa 50392-0200. The Meeting
is being held to consider and vote on the following proposals as well as any
other business that may properly come before the meeting or any adjournment
thereof:
Proposal 1 Approval of Agreement and Plan of Reorganization providing for
the combination of the Principal Cash Management Fund, Inc. (the
"Acquired Fund") into the Money Market Fund (the "Acquiring
Fund"), a separate series of Principal Investors Fund, Inc.
Proposal 2 Election of the Board of Directors of the Principal Cash
Management Fund, Inc. The Board of Directors of the Principal
Cash Management Fund, Inc. recommends that shareholders vote FOR
Proposal 1 and FOR the election of all nominees for Director.
Approval of the Proposal 1 will require the affirmative vote of the
holders of at least a "Majority of the Outstanding Voting Securities" (as
defined in the accompanying Proxy Statement/Prospectus) of the Acquired Fund. To
be elected a Director of the Principal Cash Management Fund, Inc., a nominee
must receive the affirmative vote of the holders of a plurality of the shares of
the Fund voted in the election of Directors at the meeting.
Each shareholder of record at the close of business on March 23, 2005
is entitled to receive notice of and to vote at the meeting.
Please read the attached Proxy Statement/Prospectus.
By order of the Boards of Directors
/s/ A. S. FILEAN
A. S. Filean
Senior Vice President and Secretary
April 18, 2005
Des Moines, Iowa.
Principal Cash Management Fund, Inc. Principal Investors Fund, Inc.
680 8th Street 680 8th Street
Des Moines, Iowa 50392-0200 Des Moines, Iowa 50392-0200
-------------------------
PROXY STATEMENT/PROSPECTUS
Relating to the Acquisition of All the Assets, Subject to All the Liabilities,
of the Principal Cash Management Fund, Inc., by and in Exchange for
Class A and Class B Shares of the Money Market Fund, a Separate Series
of Principal Investors Fund, Inc.
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of the Principal Cash Management Fund,
Inc. (the "Acquired Fund"), of proxies to be used at a Special Meeting of
Shareholders of the Acquired Fund to be held at 2:00 p.m., Central Daylight Time
on June 16, 2005 at the offices of Principal Management Corporation, 680 8th
Street, Des Moines, Iowa 50392-0200 (the "Meeting"). This Proxy
Statement/Prospectus is first being mailed to shareholders on or about April 18,
2005.
At the Meeting, shareholders of the Acquired Fund will be asked to
consider and approve a proposed Agreement and Plan of Reorganization (the
"Plan") providing for the combination of the Acquired Fund, one of the separate
funds commonly and collectively known as the Principal Mutual Funds ("PMF"),
into the Money Market Fund (the "Acquiring Fund"), a separate series of
Principal Investors Fund, Inc. ("PIF") (the "Combination"). Under the Plan, (i)
all the assets, subject to all of the liabilities, of the Acquired Fund will be
transferred to the Acquiring Fund in exchange for Class A and Class B shares of
the Acquiring Fund; (ii) holders of Class A shares of the Acquired Fund will
receive that number of Class A shares of the Acquiring Fund equal in value at
the time of the exchange to the value of the holder's Class A shares of the
Acquired Fund at such time; (iii) holders of Class B shares of the Acquired Fund
will receive that number of Class B shares of the Acquiring Fund equal in value
at the time of the exchange to the value of the holder's Class B shares of the
Acquired Fund at such time; and (iv) the Acquired Fund will be liquidated and
dissolved. If approved by the shareholders, the Combination is expected to
become effective as of the close of regularly scheduled trading on the New York
Stock Exchange on June 30, 2005. The terms and conditions of the Combination are
more fully described in this Proxy Statement/Prospectus and in the Agreement and
Plan of Reorganization attached hereto as Appendix A.
This Proxy Statement/Prospectus sets forth concisely the information
you should know before voting on the proposed Combination. You should retain it
for future reference. The Annual and Semi-Annual Reports to Shareholders of the
Acquired Fund and PIF contain additional information about the investments of,
respectively, the Acquired Fund and the Acquiring Fund. Copies of these reports,
which contain discussions of the market conditions and investment strategies
that significantly affected such Funds during their fiscal years ended October
31, 2004, may be obtained at no charge by calling the respective toll free
numbers listed below for the Acquired Fund and PIF.
The following documents have been filed with the Securities and
Exchange Commission ("SEC") and are incorporated by reference into this Proxy
Statement/Prospectus:
- -- The Statement of Additional Information dated April __, Copies of the Statement of Additional Information
2005 relating to this Proxy Statement/Prospectus (the are available at no charge by writing to PIF at the
"Statement of Additional Information"). above address or by calling toll free at 1-800-247-4123.
- --The Prospectus of the Acquired Fund dated March 1, 2005
(the "PMF Prospectus"). Copies of the PMF Prospectus and the PMF SAI are
available at no charge by writing to PMF at the
- --The Statement of Additional Information of the Acquired Fund above address or by calling toll free at
dated March 1, 2005 (the "PMF SAI"). 1-800-247-4123.
Shareholders who have questions about the Combination or this Proxy
Statement/Prospectus may call toll-free at 1-800-_______.
The Acquired Fund and PIF are subject to the informational requirements
of the Securities Exchange Act of 1934 and the Investment Company Act of 1940
and file reports, proxy materials and other information with the SEC. Such
reports, proxy materials and other information may be inspected and copied at
the Public Reference Room of the SEC at 450 Fifth Street, N.W. Washington, D.C.
20549-0102 (information on the operation of the Public Reference Room may be
obtained by calling the SEC at 1-202-942-8090). Such materials are also
available on the SEC's EDGAR Database on its Internet site at www.sec.gov, and
copies may be obtained, after paying a duplicating fee, by email request
addressed to public info@sec.gov or by writing to the SEC's Public Reference
Room.
The SEC has not approved or disapproved these securities or passed upon
the accuracy or adequacy of this Proxy Statement/Prospectus. Any representation
to the contrary is a criminal offense.
The date of this Proxy Statement/Prospectus is April 18, 2005.
PROXY STATEMENT/PROSPECTUS
Table of Contents
Page
Introduction....................................................................
Proposal 1 Approval of Agreement and Plan of Reorganization providing for the
Combination of the Principal Cash Management Fund, Inc. into the PIF
Money Market Fund...................................................
Proposal 2 Election of the Board of Directors of the Principal Cash Management
Fund, Inc...........................................................
Information About the Reorganization and the Combination........................
Agreement and Plan of Reorganization.......................................
Reasons for the Reorganization and the Combination.........................
Board Consideration of the Reorganization..................................
Description of Securities to Be Issued.....................................
Federal Income Tax Consequences............................................
Capitalization..................................................................
Comparative Information About the Acquired and Acquiring Funds..................
Multiple Classes of Shares.................................................
Rule 12b-1 Fees............................................................
Costs of Investing.........................................................
Purchases, Redemptions and Exchanges of Shares.............................
Frequent Trading and Market Timing (Abusive Trading Practices) ............
Dividends and Distributions................................................
Fundamental Investment Restrictions........................................
Voting Information..............................................................
Legal Matters...................................................................
Financial Statements............................................................
Other...........................................................................
Appendix A - Agreement and Plan of Reorganization..............................
Appendix B - Comparison of Fundamental Investment Restrictions.................
Appendix C - Certain Investment Strategies and Related Risks...................
Appendix D - Debt Security Ratings.............................................
Appendix E - Audit and Nominating Committee Charter............................
Appendix F - Outstanding Shares and Share Ownership............................
Appendix G - Additional Performance Information................................
INTRODUCTION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of the Principal Cash Management Fund,
Inc. of proxies to be used at a Special Meeting of Shareholders of the Acquired
Fund to be held at 2:00 p.m., Central Daylight Time on June 16, 2005 at the
offices of Principal Management Corporation, 680 8th Street, Des Moines, Iowa
50392-0200. The purpose of the Meeting is for the shareholders of the Acquired
Fund to consider the proposed reorganization providing for the Combination of
the Acquired Fund into the Acquiring Fund, a separate series of PIF. Each
shareholder of record of the Acquired Fund at the close of business on March 23,
2005 (the "Record Date") is entitled to one vote at the Meeting for each share
(and fractional votes for fractional shares) of the Acquired Fund held.
Principal Cash Management Fund, Inc. and PIF. The Acquired Fund is a
Maryland corporation and an open-end management investment company, commonly
known as a mutual fund, registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). As stated above, it is one of the separate funds
commonly and collectively known as the Principal Mutual Funds ("PMF" or the "PMF
Funds"). The shares of the Acquired Fund are offered to the public in two
classes: Class A shares and Class B shares. PIF is also a Maryland corporation
and an open-end management investment company registered under the 1940 Act. PIF
is a "series" mutual fund and currently offers 54 separate series, or
portfolios, including the Acquiring Fund (the "PIF Funds"). The shares of the
Acquiring Fund are currently offered mainly to retirement plans and individual
retirement accounts. In connection with the Combination, the Acquiring Fund will
issue two new classes of shares, Class A shares and Class B shares, and after
the Combination, will offer these new shares to the public as well as continuing
to sell its current classes of shares to retirement plans and individual
retirement accounts. See "Comparative Information About the Acquired and
Acquiring Funds - Multiple Classes of Shares" below.
The sponsor of the PMF Funds and of PIF is Principal Life Insurance
Company ("Principal Life"), the investment advisor to the PMF Funds and PIF is
Principal Management Corporation (the "Manager") and the principal underwriter
for the PMF Funds and for PIF is Princor Financial Services Corporation
("Princor"). Principal Global Investors LLC ("Principal Global") is the
Sub-Advisor for the Acquiring Fund. Principal Life, an insurance company
organized in 1879 under the laws of Iowa, the Manager, Princor and Principal
Global are indirect, wholly-owned subsidiaries of Principal Financial Group,
Inc. Their address is the Principal Financial Group, Des Moines, Iowa
50392-0200.
Investment Management. The Manager has entered into a Management
Agreement with the Acquired Fund and with PIF with respect to the Acquiring
Fund. In the Management Agreement, the Manager agrees to provide investment
advisory services and certain corporate administrative services to the Funds. As
permitted by the Management Agreement, the Manager has entered into a
Sub-Advisory Agreement with Principal Global with respect to the Acquiring Fund.
Under the Sub-Advisory Agreement, the Sub-Advisor agrees to assume the
obligations of the Manager to provide investment advisory services for the Fund.
The Sub-Advisor is compensated by the Manager, not by the Fund. Each of the
Manager and Principal Global is registered as an investment adviser under the
Investment Advisers Act of 1940.
The Combination and the Reorganization. At a meeting held on February
24, 2005, the Board of Directors of the Acquired Fund, including all the
Directors who are not "interested persons" (as defined in the 1940 Act) of the
Acquired Fund (the "Independent Directors"), unanimously approved an Agreement
and Plan of Reorganization (the "Plan") providing for the Combination of the
Acquired Fund into the Acquiring Fund. The Combination is part of a larger
reorganization unanimously approved by the Board of Directors of each of the PMF
Funds providing for the combination of all of the PMF Funds into corresponding
PIF Funds (the "Reorganization"). Combining the PMF Funds into PIF is intended
to address persistent distribution issues of the PMF Funds by combining them
into PIF Funds, which are experiencing significant net sales, and to create a
larger family of funds sponsored by Principal Life and managed by the Manager
that is expected to achieve economies of scale and operate with greater
efficiency and lower overall costs. The PMF Funds and the corresponding PIF
Funds into which they are proposed to be combined are identified in the Plan
which is attached hereto as Appendix A. Because you are one of many shareholders
who invest in the Acquired Fund but not in other PMF Funds, you are receiving
this Proxy Statement/Prospectus which relates only to the Combination of the
Acquired into the Acquiring Fund and not also to the combinations of other PMF
Funds into other PIF Funds.
With respect to the Combination, the Board of Directors believes that
the expected advantages to shareholders outweigh any disadvantages, that the
Combination will be in the best interests of shareholders, and that the
interests of existing shareholders of the Acquired Fund will not be diluted as a
result of the Combination. Particular factors that the Board considered in
approving the Combination are discussed in Proposal 1 below under "Board
Consideration of the Combination." Factors that the Board considered in deciding
to approve the Reorganization generally are discussed below under "Information
About the Reorganization and the Combination - Board Consideration of the
Reorganization."
Election of Board of Directors of Acquired Fund. Although the
Reorganization contemplates that the Acquired Fund will be combined into PIF and
will thereafter no longer operate as a separate fund, it is possible that
shareholders of the Acquired Fund will not approve the Reorganization and that
it will consequently continue as a separate fund pending further action by its
Board of Directors. The Board of Directors of the Acquired Fund has determined
that, in view of such possibility and to avoid the expense of having another
proxy solicitation and shareholders meeting following the Combination, the
shareholders of the Acquired Fund will also be asked at the Meeting to elect the
Board of Directors of the Fund. Each person who is a current Director and
nominee for election to the Board of Directors of the Acquired Fund is also a
Director of the other PMF Funds and of PIF. See Proposal 2 ("Election of the
Board of Directors of the Principal Cash Management Fund, Inc.").
PIF Shareholders Meeting. The Board of Directors of PIF, at a meeting
held on February 24, 2005, called a meeting of shareholders of PIF for May 26,
2005 at which the shareholders of PIF will be asked to approve a number of
matters (the "PIF Shareholders Meeting"). The matters relating to the Acquiring
Fund include proposals to:
(i) reclassify the investment objective of the Acquiring Fund from a
"fundamental" investment policy, which may not be changed without shareholder
approval, to a "non-fundamental" investment policy which may be changed by the
Board without shareholder approval;
(ii) amend the PIF Articles of Incorporation to permit the PIF Board of
Directors, without shareholder approval: (a) to approve combinations involving
the PIF Funds; (b) to liquidate the assets attributable to a PIF Fund or a class
of shares thereof and terminate such Fund or class of shares; and (c) to
designate a class of shares of a PIF Fund as a separate series or PIF Fund, all
for purposes of facilitating future combinations of PIF Funds that the PIF Board
determines are in the best interests of the affected shareholders (see
"Information About the Reorganization and the Combination - Description of
Securities to Be Issued");
(iii) amend the fundamental investment restriction of the Acquiring Fund with
respect to borrowing to authorize the Acquiring Fund to borrow to the maximum
extent permitted by the 1940 Act (see "Comparative Information About the
Acquired and Acquiring Funds - Fundamental Investment Restrictions"); and
(iv) permit the Manager to select and contract with Sub-Advisors (other than
Sub-Advisors affiliated with the Manager), after approval by the PIF Board but
without shareholder approval, for the Acquiring Fund (the shareholders of the
Acquired Fund have previously authorized such procedures with respect to the
Acquired Fund).
The impact of certain of these proposals on the Combination is
discussed under Proposal 1 below. The impact of other proposals is discussed as
indicated above under "Information About the Reorganization and the Combination"
and "Comparative Information About the Acquired and Acquiring Funds."
PROPOSAL 1
APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION PROVIDING FOR THE
COMBINATION OF THE PRINCIPAL CASH MANAGEMENT FUND, INC.,
INTO THE PIF MONEY MARKET FUND
Shareholders of the Principal Cash Management Fund, Inc. (the "Acquired
Fund") are being asked to approve the Combination of that Fund into the PIF
Money Market Fund (the "Acquiring Fund").
Overview
At a meeting held on February 24, 2005, the Board of Directors of the
Acquired Fund, including all the Directors who are not "interested persons" (as
defined in the 1940 Act) of the Acquired Fund (the "Independent Directors"),
unanimously approved an Agreement and Plan of Reorganization (the "Plan")
providing for the Combination of the Acquired Fund into the Acquiring Fund.
Under the Plan, (i) all the assets, subject to all the liabilities, of the
Acquired Fund will be transferred to the Acquiring Fund in exchange for Class A
and Class B shares of the Acquiring Fund; (ii) holders of Class A shares of the
Acquired Fund will receive that number of Class A shares of the Acquiring Fund
equal in value at the time of the exchange to the value of the holder's Class A
shares of the Acquired Fund at such time; (iii) holders of Class B shares of the
Acquired Fund will receive that number of Class B shares of the Acquiring Fund
equal in value at the time of the exchange to the value of the holder's Class B
shares of the Acquired Fund at such time; and (iv) the Acquired Fund will be
liquidated and dissolved. As a result of the Reorganization, shareholders of the
Acquired Fund will become shareholders of the Acquiring Fund. If the Combination
is approved by the shareholders of the Acquired Fund, the Combination is
expected to become effective as of the close of trading on the New York Stock
Exchange on the closing date of the Reorganization (the "Effective Time"). The
closing date of the Reorganization is currently expected to be June 30, 2005
(the "Closing Date").
No gain or loss will be recognized by the Acquired Fund, Acquiring Fund
or shareholders of the Acquired Fund for federal income tax purposes as a result
of the Combination. See "Information About the Combination -- Federal Income Tax
Consequences."
The Combination will not result in any material change in the purchase,
redemption and exchange procedures followed with respect to shares. See
"Comparative Information About the Acquired and Acquiring Funds - Purchases,
Redemptions and Exchanges of Shares."
The expenses of the Combination are expenses of the larger
Reorganization involving all the PMF Funds. Under the Plan, the first $1,000,000
of the expenses relating to the proposed Reorganization will be allocated among
the PMF Funds, including the Acquired Fund, based on the ratio of the open
accounts of each PMF Fund to the open accounts of all the PMF Funds as of the
close of business on February 28, 2005. With certain variations not affecting
the Acquired Fund, the Manager will pay 50% of the balance of the expenses
relating to the Reorganization, and the remaining 50% will be allocated among
the Acquired Funds in the same manner as the first $1,000,000 of expenses. See
"Information About the Reorganization and the Combination - Agreement and Plan
of Reorganization."
The impact of the Combination on the Acquiring Fund is reflected in the
information provided under "Capitalization" below. Completion of the Combination
is not contingent on approval by shareholders of the Acquiring Fund.
Comparison of Acquired and Acquiring Funds
Principal Cash Management Fund, Inc. PIF Money Market Fund
(Acquired Fund) (Acquiring Fund)
Business A separate fund. A separate series of PIF.
Net assets as of $322,411,124 $218,717,812
10/31/2004:
Investment The Manager directly manages the Acquired Fund. Principal Global is the Sub-Advisor to the
Sub-Advisors: Acquiring Fund.
Portfolio
Managers: The portfolio managers for both Funds are:
--Tracy Reeg, Portfolio Manager, specializing in
management and research for the short-term money
market portfolios; and --Alice Robertson, Senior
Trader and money market portfolio manager.
Investment The Acquired Fund seeks as high a level of The Acquiring Fund seeks as high a level of
Objectives: income available from short-term securities as current income as is considered consistent
is considered consistent with preservation of with preservation of principal and
principal and maintenance of liquidity by maintenance of liquidity.
investing in a portfolio of money market
instruments.
Main Investment Both Funds invest in high quality, short-term money market instruments denominated in U.S.
Strategies: dollars which are believed to present minimal credit risks. At the time of purchase, each
security is an "eligible security" as defined in regulations issued under the 1940 Act.
Both Funds maintain a dollar weighted average portfolio
maturity of 90 days or less and generally hold investments
until maturity. However, both Funds may sell a security
before it matures:
o to take advantage of market variations;
o to generate cash to cover sales of shares by fund
shareholders; or
o upon revised credit opinions of the security's issuer.
The sale of a security by either Fund before maturity may
not be in the best interest of the Fund. The sale of
portfolio securities is usually a taxable event. Both Funds
may borrow money to cover the sale of their shares.
It is the policy of both Funds to be as fully invested as
possible to maximize current income. Securities in which
both Funds invest include:
o securities issued or guaranteed by the U.S. government,
including treasury bills, notes and bonds;
o securities issued or guaranteed by agencies or
instrumentalities of the U.S. government. These are
backed either by the full faith and credit of the U.S.
government or by the credit of the particular agency or
instrumentality;
o bank obligations, including certificates of deposit
which generally are negotiable certificates against
funds deposited in a commercial bank or bankers
acceptances which are time drafts drawn on a commercial
bank, usually in connection with international
commercial transactions;
o commercial paper which is short-term promissory notes
issued by U.S. or foreign corporations primarily to
finance short-term credit needs;
o corporate debt consisting of notes, bonds or debentures
which at the time of purchase by the Funds has 397 days
or less remaining to maturity;
o repurchase agreements under which securities are
purchased with an agreement by the seller to repurchase
the security at the same price plus interest at a
specified rate. Generally these have a short maturity
(less than a week) but may also have a longer maturity;
and
o taxable municipal obligations which are short-term
obligations issued or guaranteed by state and municipal
issuers which generate taxable income.
Among the certificates of deposit typically held by both
Funds are Eurodollar and Yankee obligations, which are
issued in U.S. dollars by foreign banks and foreign
branches of U.S. banks.
Fundamental Each of the Funds is subject to "fundamental" investment restrictions which may not be
Investment changed without the approval of the shareholders of the Fund. These fundamental restrictions
Restrictions: deal with such matters as the issuance of senior securities, purchasing or selling real estate
or commodities, borrowing money, making loans, underwriting
securities of other issuers, diversification or
concentration of investments and short sales of securities.
For a comparison of the fundamental restrictions of the
Funds, see Appendix B to this Proxy Statement/Prospectus.
See also "Comparative Information About the Acquired and
Acquiring Funds - Fundamental Investment Restrictions."
Temporary For temporary defensive purposes in times of unusual or adverse market
Defensive conditions, both Funds may invest without limit in cash and cash
Investing: equivalents (which include bank notes, bank certificates of deposit,
bankers' acceptances, repurchase agreements, commercial paper and
commercial paper master notes that are floating rate debt
instruments without a fixed maturity). In addition, both
Funds may purchase U.S. government securities, preferred
stocks and debt securities, whether or not convertible into
or carrying rights for common stock. In taking such
defensive measures, either Fund may fail to achieve its
investment objective.
Because both of the Acquired and Acquiring Funds are money market funds
that seek as high a level of current income as is considered consistent with a
preservation of principal and maintenance of liquidity by investing in high
quality, short-term money market instruments, they have substantially the same
investment objectives and strategies.
Additional information about the investment policies and strategies of
the Funds and the types of securities in which they can invest is set forth in
Appendix C to this Proxy Statement/Prospectus and, with respect to the Acquired
and Acquiring Funds, respectively, in the PMF SAI and the Statement of
Additional Information.
For an explanation of debt security ratings, see Appendix D to this
Proxy Statement/Prospectus.
The investment objectives of the Acquired and Acquiring Funds are
fundamental investment restrictions which may not be changed without shareholder
approval. However, the Board of Directors of PIF has approved a proposal to
reclassify the investment objectives of all the PIF Funds as non-fundamental
investment restrictions which may be changed by the Board of Directors without
shareholder approval. This proposal will be submitted for approval by the
shareholders of the Acquiring Fund at the PIF Shareholders Meeting.
For a comparison of the principal risks of investing in the Acquired
and Acquiring Funds, see "Comparison of Principal Investment Risks" below.
Fees and Expenses of the Funds
Shareholder Fees (fees paid directly from your investment)
The following is a summary of the fees and expenses you may pay if you
buy and hold shares of the Funds. These fees and expenses are more fully
described under "Comparative Information About the Acquired and Acquiring Funds
- - Costs of Investing," below.
Principal Cash Management PIF Money Market Fund
Fund (Acquiring Fund)
(Acquired Fund)
Class A Class B Class A Class B
------- ------- ------- -------
Maximum sales charge imposed on purchases
(as a % of offering price): None None None None
Maximum Contingent Deferred Sales Charge (CDSC)
(as a % of dollars subject to charge): 0.75%(1) 4.00%(2) 0.75%(1) 4.00%(2)
Redemption or Exchange Fee (as a % of amount None None None None
redeemed/exchanged):
<FN>
- ------------------
(1) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(2) CDSCs are reduced after 12 months and eliminated after 6 years.
</FN>
Fees and Expenses as a % of average daily net assets
The following table shows: (a) the ratio of expenses to average net
assets of the Acquired Fund (Class A and Class B shares) for the fiscal year
ended October 31, 2004, and (b) the estimated ratio of expenses to average net
assets of the Acquiring Fund (Class A and Class B shares) for the year ending
October 31, 2005. The Class A and Class B shares of the Acquiring Fund are new
share classes which the Acquiring Fund does not intend to sell prior to the
Effective Date.
Annual Fund Operating Expenses
Management 12b-1 Other Total Fund
Fees Fees Expenses Operating
Expenses
Principal Cash Management Fund Class A 0.44% None 0.24% 0.68%
(Acquired Fund) Class B 0.44% 0.22% 0.30% 0.96%*
PIF Money Market Fund Class A 0.40% None 0.23% 0.63%
(Acquiring Fund) Class B 0.40% 0.22% 0.30% 0.92%
<FN>
- -------------
* The Manager voluntarily agreed to limit the Acquired Fund's expenses and, if
necessary, pay expenses normally payable by that Fund through the period ended
October 31, 2004. If such expense limit were reflected in the table, the
Acquired Fund's "Total Fund Operating Expenses" would be 0.89% for Class B
shares.
</FN>
Examples: The following examples are intended to help you compare the costs of
investing in Class A or Class B shares of the Acquired and Acquiring Funds. The
examples assume that Fund expenses continue at the rates shown in the table
above, that you invest $10,000 in the particular Fund for the time periods
indicated and that all dividends and distributions are reinvested. The examples
also assume that your investment has a 5% return each year. The examples should
not be considered a representation of future expenses of the Acquired or
Acquiring Fund. Actual expenses may be greater or less than those shown.
1 Year 3 Years 5 Years 10 Years
If you sell your shares at the end of the period:
Principal Cash Management Fund Class A $69 $218 $379 $847
(Acquired Fund) Class B $514 $644 $775 $1,062
PIF Money Market Fund Class A $64 $202 $351 $786
(Acquiring Fund) Class B $510 $632 $754 $1,010
If you do not sell your shares at the end of the period:
Principal Cash Management Fund Class A $69 $218 $379 $847
(Acquired Fund) Class B $98 $306 $531 $1,062
PIF Money Market Fund Class A $64 $202 $351 $786
(Acquiring Fund) Class B $94 $293 $509 $1,010
Investment Management Fees/Sub-Advisory Arrangements
Each of the Acquired Fund and the Acquiring Fund pays the Manager an
investment management fee which is calculated as a percentage of each Fund's
average daily net assets pursuant to the following fee schedule:
PIF Money Market Fund
Principal Cash Management Fund (Acquired Fund) (Acquiring Fund)
0.50% of the first $100 million; 0.40% of the first 500 million;
0.45% of the next $100 million; 0.39% of the next $500 million;
0.40% of the next $100 million; 0.38% of the next $500 million; and
0.35% of the next $100 million; and 0.37% of the excess over $1.5 billion
0.30% of the excess over $400 million of of average daily net assets.
average daily net assets.
The Manager directly manages the Acquired Fund. Principal Global, the
Sub-Advisor to the Acquiring Fund, is an indirect wholly-owned subsidiary of
Principal Life and an affiliate of the Manager. Its principal offices are
located at 801 Grand Avenue, Des Moines, Iowa 50392. For its services to the
Acquiring Fund, the Sub-Advisor is paid a fee by the Manager, and not by the
Fund.
At the PIF Shareholders Meeting, shareholders of the Acquiring Fund
will be asked to approve a proposal that will permit the Manager, pursuant to an
SEC order, to select and contract with Sub-Advisors to the Acquiring Fund (other
than Sub-Advisors affiliated with the Manager) after approval by the PIF Board
of Directors but without shareholder approval. If approved by shareholders of
the Acquiring Fund, the proposal will not be implemented until the PIF Board
determines to manage the Acquiring Fund in reliance on the SEC order. The
shareholders of the Acquired Fund have previously approved granting the Manager
comparable authority to select and contract with Sub-Advisors to the Acquired
Fund (other than Sub-Advisors affiliated with the Manager) after approval by the
Board of Directors of the Acquired Fund but without shareholder approval.
Comparison of Principal Investment Risks
In deciding whether to approve the Reorganization, shareholders should
consider the amount and character of investment risk involved in the respective
investment objectives and strategies of the Acquired and Acquiring Funds.
Because both of the Acquired and Acquiring Funds are money market funds that
seek as high a level of current income as is considered consistent with a
preservation of principal and maintenance of liquidity by investing in high
quality, short-term money market instruments, they have substantially the same
risks. The main risks include:
Market As with all mutual funds, the value of each Fund's assets may rise or fall. Although both
Risk: Funds seek to preserve the value of an investment at $1.00 per share, it is possible to lose
money by investing in the Funds. Any investment in the
Funds is not guaranteed by the Federal Deposit Insurance
Corporation or any other government agency.
Credit Risk: Credit risk pertains to the issuer's ability to make scheduled principal or interest
payments. This may reduce either Fund's stream of income and decrease its yield.
Interest The value of both Funds' shares are directly
Risk Rate: impacted by trends in interest rates. If interest rates
rise, the value of debt securities generally will fall.
Repurchase Both Funds may invest in repurchase agreements with commercial banks,
Agreements brokers and dealers considered by the Manager for the Acquired
Risk: Fund or the Sub-Advisor for the Acquiring Fund to
be creditworthy. Default or insolvency of the other party
is a potential risk to both Funds.
U.S. Both Funds may invest in securities issued by
Government government-sponsored enterprises. Although the issuing agency,
Security Risk: instrumentality or corporation may be chartered or sponsored by the U.S.
government, its securities are neither issued nor guaranteed by the U.S. Treasury.
Eurodollar and Eurodollar and Yankee obligations have risks similar to U.S. money market instruments, such
Yankee Obligations as income risk and credit risk. Other risks of Eurodollar and Yankee obligations include the
Risk: possibilities that a foreign government will not let U.S. dollar-denominated assets leave the
country, the banks that issue Eurodollar obligations may
not be subject to the same regulations as U.S. banks, and
adverse political or economic developments will affect
investments in a foreign country.
The risks of investing in the Acquiring Fund are more fully described
in the Statement of Additional Information. The risks of investing in the
Acquired Fund are more fully described in the PMF Prospectus and the PMF SAI.
Performance
The following table shows, for the indicated periods ended December 31,
2004, (i) the annual total return of the Class A and Class B shares of the
Acquired Fund and (ii) the annual total return of the Institutional Class shares
of the Acquiring Fund adjusted to reflect the expenses of the new Class A and
Class B share classes of the Acquiring Fund. The adjustments result in lower
performance than the historical performance of the Institutional Class shares.
The Class A and Class B shares of the Acquiring Fund will not become operational
until the Effective Time of the Reorganization and will assume for periods prior
to that time the historical performance of the Institutional Class shares
adjusted to reflect the expenses of the new share classes.
Average Annual Total Returns (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
Principal Cash Management Fund (Acquired Fund)
Class A 0.74% 2.39% 3.71% N/A 03/02/1983
Class B 0.56% 1.91% 3.18% N/A 12/09/1994
PIF Money Market Fund (Acquiring Fund)
Institutional Class 03/01/2001
- --Class A 0.78% N/A N/A 1.43%
- --Class B 0.49% N/A N/A 1.13%
Board Consideration of the Combination
The Acquired Fund's Board of Directors unanimously recommends the
proposed Combination as being in the best interests of shareholders of the
Acquired Fund. Various factors considered by the Acquired Fund's Board of
Directors in approving the larger Reorganization of all the PMF Funds into PIF
at its February 24, 2005, meeting are described below under "Information About
the Reorganization and the Combination - Board Consideration of the
Reorganization."
Particular factors considered by the Board in approving the Combination
of the Acquired Fund into the Acquiring Fund include the following:
- --The Acquired Fund and the Acquiring Fund have substantially the same
investment objectives, policies and risks, and their combination will offer
shareholders of the Acquired Fund continuity of investment objectives and
expectations;
- --It is in the best interests of the Acquired Fund to be a part of a fund
family, and shareholders would likely be harmed if the Acquired Fund did not
participate in the Combination (and the Reorganization);
- --The differences between the fundamental investment restrictions of the two
Funds reflect the Acquired Fund's having adopted restrictions that reflect state
securities law requirements that are no longer applicable and other differences
that the Board does not believe are material in light of the other benefits of
the Combination;
- --Principal Global, as the Sub-Advisor to the Acquiring Fund, may be expected to
provide at least the same quality of investment advisory services and personnel
(the Funds currently have some of the same portfolio managers) as have been
provided by the Manager as the Advisor to the Acquired Fund;
- --The Acquiring Fund has a lower investment management fee and is expected to
have lower overall expense ratios than the Acquired Fund; the Board considered
the higher breakpoints and fees at breakpoints in the Management Agreement with
the Acquiring Fund to be a negative factor but believed that this factor was
outweighed by the slow rate of the Acquired Fund's asset growth, which meant
there was small likelihood of its reaching a breakpoint any time soon, the
prospects of the Acquiring Fund for a higher rate of asset growth and the other
expected benefits of the Combination;
- --The Acquiring Fund has been operational for a shorter period than the Acquired
Fund, but during their common period of existence has performed somewhat better
than the Acquired Fund; and
- --The Combination will result in a combined Fund which will have a larger asset
base and may be expected to operate more efficiently and have improved prospects
for growth and attendant reductions in overall expenses.
PROPOSAL 2
ELECTION OF THE BOARD OF DIRECTORS
OF THE PRINCIPAL CASH MANAGEMENT FUND, INC.
Shareholders of the Principal Cash Management Fund, Inc. are being ask
to elect its Board of Directors. For convenience, references under this Proposal
to the "Fund" are to the Principal Cash Management Fund, Inc.
The Board has set the number of Directors at nine. Each Director will
serve until the next meeting of shareholders or until a successor is elected and
qualified. Unless you do not authorize it, your proxy ballot will be voted in
favor of the nine nominees listed below. All of the nominees currently serve as
Directors.
Each nominee has agreed to be named in this Proxy Statement/Prospectus
and to serve if elected. The Board has no reason to believe that any of the
nominees will become unavailable for election as a Director. However, if that
should occur before the meeting, your proxy ballot will be voted for the
individuals recommended by the Board to fill the vacancies. The following table
presents certain information regarding the current Directors of the Fund,
including their principal occupations which, unless specific dates are shown,
are of more than five years duration. In addition, the table includes
information concerning other directorships held by each Director in reporting
companies under the Securities Exchange Act of 1934 or registered investment
companies under the 1940 Act. Information is listed separately for those
nominees who are "interested persons" (as defined in the 1940 Act) of the Fund
(the "Interested Directors") and those nominees who are not interested persons
of the Fund (the "Independent Directors"). All Directors serve as directors for
each of the 24 investment companies (with a total of 106 portfolios as of
December 31, 2004) sponsored by Principal Life: the PMF Funds, including the
Fund, PIF and Principal Variable Contracts Fund, Inc. ("PVC") (collectively, the
"Fund Complex").
Independent Directors
Name, Address Position(s) Held with the Principal Occupation(s) During the Other
and Age Fund Past 5 Years Directorships Held
Elizabeth Ballantine Director (since 2004), Principal, EBA Associates The McClatchy
1113 Basil Road Member of Audit and (consulting and investments) Company
McLean, VA Nominating Committee
Age: 56
James D. Davis Director (since 1993), Retired. Formerly, Vice President, None
4940 Center Court Member of Audit and Deere & Company (machinery and
Bettendorf, IA Nominating Committee equipment)
Age: 71
Richard W. Gilbert Director (since 2000), President, Gilbert Communications, Calamos Asset
5040 Arbor Lane, #302 Member of Audit and Inc. (management advisory services) Management, Inc.
Northfield, IL Nominating Committee
Age: 64
Mark A. Grimmett Director (since 2004), Executive Vice President and CFO, None
6310 Deerfield Avenue Member of Audit and since 2000, and prior thereto, Vice
San Gabriel, CA Nominating Committee President and CFO, Merle Norman
Age: 44 Cosmetics, Inc. (manufactures and
distributes skin care and color
cosmetic products)
William C. Kimball Director (since 1999), Retired. Formerly, Chairman and Casey's General
3094 104th Member of Audit and CEO, Medicap Pharmacies Inc. (chain Stores, Inc.
Urbandale, IA Nominating Committee of retail pharmacies)
Age: 57
Barbara A. Lukavsky Director (since 1993), President and CEO, Barbican None
100 Market Street Member of Audit and Enterprises, Inc. (holding company
Des Moines, IA 50309 Nominating Committee, for franchises in the cosmetics
Age: 64 Member of Executive industry)
Committee
Interested Directors
Name, Address and Age Position(s) Held with the Positions with the Manager and Its Other
Fund Affiliates; Principal Occupation(s) Directorships Held
During the Past 5 Years
John E. Aschenbrenner Director (since 1998) Director, the Manager and Princor None
711 High Street since 1998. President, Insurance
Des Moines, Iowa 50392 and Financial Services, Principal
Age: 55 Financial Group, Inc., since 2003.
Executive Vice President,
2000-2003, and prior thereto,
Senior Vice President, Principal
Life
Ralph C. Eucher Director, President and Director, President and Chief None
711 High Street Chief Executive Officer, Executive Officer, the Manager and
Des Moines, Iowa 50392 Member of Executive Princor since 1999. Senior Vice
Age: 52 Committee (since 1999) President, since 2002, Vice
President, 1999-2002, and prior
thereto, Second Vice President,
Principal Life
Larry D. Zimpleman Director, Chairman of the Chairman and Director, the Manager None
711 High Street Board, Member of and Princor since 2001. President,
Des Moines, Iowa 50392 Executive Committee Retirement and Investor Services,
Age: 53 (since 2001) Principal Financial Group, since
2003. Executive Vice
President, 2001-2003,
and prior thereto,
Senior Vice
President, Principal
Life
During the last fiscal year of the Fund, the Board of Directors held
seven meetings. Each of the Directors of the Fund attended 100% of the meetings
of the Board and of the committees of which the Director was a member, except
for two Directors who attended at least 85% of such meetings.
Correspondence intended for the Board or for an individual Director may
be sent to the attention of the Board or the individual Director at 680 8th
Street, Des Moines, Iowa 50392-0200. All communications addressed to the Board
or to an individual Director received by the Fund are forwarded to the full
Board or to the individual Director.
Officers of the Fund
The following table presents certain information regarding the current
officers of the Fund, including their principal occupations which, unless
specific dates are shown, are of more than five years duration. Officers serve
at the pleasure of the Board of Directors.
Officers
Position(s) Held Principal Occupation(s)
Name, Address with the Fund During the Past 5 Years
and Age
Craig L Bassett Treasurer (since 1993) Vice President and Treasurer, Principal Life
711 High Street
Des Moines, Iowa 50392
Age: 52
Michael J. Beer Executive Vice Executive Vice President and Chief Operating
711 High Street President, Principal Officer, the Manager and Princor
Des Moines, Iowa 50392 Accounting Officer
Age: 44 (since 1993)
David J. Brown Chief Compliance Vice President, Product & Distribution
711 High Street Officer (since 2004) Compliance, Principal Life; Senior Vice
Des Moines, Iowa 50392 President, the Manager, since 2004; Senior Vice
Age: 44 President, Princor, since 2003, and prior
thereto, Vice President, the Manager and
Princor
Jill R. Brown Vice President and Vice President and Chief Financial Officer,
711 High Street Chief Financial Officer Princor, since 2003, and prior thereto,
Des Moines, Iowa 50392 (since 2003) Assistant Financial Controller, Principal Life
Age: 37
Arthur S. Filean Senior Vice President Senior Vice President, since 2000, and prior
711 High Street and Secretary (since thereto, Vice President, the Manager and
Des Moines, Iowa 50392 1993) Princor
Age: 66
Ernest H. Gillum Vice President and Vice President, Chief Compliance Officer, the
711 High Street Assistant Secretary Manager, since 2004, and prior thereto, Vice
Des Moines, Iowa 50392 (since 1993) President, Compliance and Product Development,
Age: 49 the Manager
David W. Miles Senior Vice President Senior Vice President--Product Development, the
711 High Street (since 2005) Manager and Princor, since 2005, and prior
Des Moines, Iowa 50392 thereto, Executive Vice President, Amcore
Age: 47 Financial, Inc. (banking)
Layne A. Rasmussen Controller (since 1993) Controller - Mutual Funds, the Manager
711 High Street
Des Moines, Iowa 50392
Age: 46
Michael D. Roughton Counsel (since 1993) Vice President and Senior Securities Counsel,
711 High Street Principal Life; Counsel, the Manager, Princor
Des Moines, Iowa 50392 and Principal Global
Age: 53
Board Committees
Audit and Nominating Committee. The Fund has an Audit and Nominating
Committee. Its members are identified above. All are Independent Directors.
During the last fiscal year, the Committee met four times.
The audit committee functions of the Committee include: (1) appointing,
compensating, and conducting oversight of the work of the independent auditors;
(2) reviewing the scope and approach of the proposed audit plan and the audit
procedures to be performed; (3) ensuring the objectivity of the internal
auditors and the independence of the independent auditors; and (4) establishing
and maintaining procedures for the handling of complaints received regarding
accounting, internal controls, and auditing. In addition, the Committee meets
with the independent and internal auditors to discuss the results of the audits
and reports to the full Board of the Fund. The Committee also receives reports
about accounting and financial matters affecting the Fund.
The nominating committee functions of the Committee include selecting
and nominating all candidates who are not "interested persons" of the Fund (as
defined in the 1940 Act) for election to the Board. Generally, the Committee
requests director nominee suggestions from the Committee members and management.
In addition, the Committee will consider director candidates recommended by the
Fund shareholders. Recommendations should be submitted in writing to the Fund at
680 8th Street, Des Moines, Iowa 50392-0200. The Committee has not established
any specific minimum qualifications for nominees. When evaluating a person as a
potential nominee to serve as an independent director, the Committee will
generally consider, among other factors: age; education; relevant business
experience; geographical factors; whether the person is "independent" and
otherwise qualified under applicable laws and regulations to serve as a
director; and whether the person is willing to serve, and willing and able to
commit the time necessary for attendance at meetings and the performance of the
duties of an independent director. The Committee also meets personally with the
nominees and conducts a reference check. The final decision is based on a
combination of factors, including the individual strengths and the experience an
individual may bring to the Board. The Board does not use regularly the services
of any professional search firms to identify or evaluate or assist in
identifying or evaluating potential candidates or nominees.
The Board approved the Audit and Nominating Committee Charter on
September 13, 2004. The Charter is not available on the Fund website. A copy of
the Charter is attached as Appendix E to this Proxy Statement/Prospectus.
Executive Committee. The Executive Committee is selected by the Board.
It may exercise all the powers of the Board, with certain exceptions, when the
Board is not in session. The Committee must report its actions to the Board.
During the last fiscal year, the Committee did not meet.
Compensation
The Fund does not pay any remuneration to its Directors who are
employed by the Manager or its affiliates or to its officers who are furnished
to the Fund by the Manager and its affiliates pursuant to the Management
Agreement. Each Director who is not an "interested person" received compensation
for service as a member of the Boards of all investment companies sponsored by
Principal Life based on a schedule that takes into account an annual retainer
amount and the number of meetings attended. These fees and expenses are divided
among the funds and portfolios based on their relative net assets.
The following table provides information regarding the compensation
received by the Independent Directors from the PMF Funds, including the Fund,
and from the Fund Complex during the fiscal year ended October 31, 2004. The
Fund does not provide retirement benefits to any of the Directors.
Director PMF Funds Fund Complex
-------- --------- ------------
Elizabeth Ballantine* -- --
James D. Davis $20,241 $79,750
Richard W. Gilbert $20,241 $79,750
Mark A. Grimmett** $15,255 $64,093
William C. Kimball $20,241 $79,750
Barbara A. Lukavsky $20,241 $79,750
- ---------------
* Ms. Ballantine did not become a Director until December 2004.
** Mr. Grimmett did not become a Director until March 2004.
Share Ownership
The following tables set forth the aggregate dollar range of the equity
securities of the mutual funds within the Fund Complex which were beneficially
owned by the Directors as of March 3, 2005. As indicated above, the Fund Complex
includes the PMF Funds, the PIF Funds and the separate series of PVC. For the
purpose of these tables, beneficial ownership means a direct or indirect
pecuniary interest. Only the Directors who are "interested persons" are eligible
to participate in an employee benefit program which invests in the PIF Funds.
Directors who beneficially owned shares of the series of PVC did so through
variable life insurance and variable annuity contracts issued by Principal Life.
Please note that exact dollar amounts of securities held are not listed. Rather,
ownership is listed based on the following dollar ranges:
A - $0 D - $50,001 up to and including
$100,000
B - $1 up to and including $10,000 E - $100,001 or more
C - $10,001 up to and including
$50,000
Independent Directors (Not Considered to Be "Interested Persons")
Principal Mutual Funds Ballantine* Davis Gilbert Grimmett Kimball Lukavsky
Balanced Fund, Inc. A B B A A A
Capital Value Fund, Inc. A C C A A A
Partners LargeCap Value Fund, Inc. C A A A A A
Equity Income Fund, Inc. A E B A E A
Partners Blue Chip Fund, Inc. A D B A A A
Partners LargeCap Blend Fund, Inc. A A A A A A
LargeCap Stock Index Fund, Inc. A A A A A A
Growth Fund, Inc. A C D A A A
Partners Equity Growth Fund, Inc. A A A A A A
MidCap Fund, Inc. A C D A A A
Partners MidCap Growth Fund, Inc. A A A A A A
SmallCap Fund, Inc. A A A A A A
Partners SmallCap Growth Fund, Inc. A A A A A A
Real Estate Securities Fund, Inc. C A A A C A
Bond Fund, Inc. A C D C A E
Government Securities Income Fund, Inc. A B B A A A
Tax-Exempt Bond Fund, Inc. A B A A A A
International Fund, Inc. A B C A A E
International SmallCap Fund, Inc. C C A A A A
Limited Term Bond Fund, Inc. A A A B A E
Cash Management Fund, Inc. A D C C C D
International Emerging Markets Fund, Inc. C C A A A A
TOTAL FUND COMPLEX D E E D E E
- ---------------
<FN>
* Information for Ms. Ballantine, who became a Director in December 2004, is as
of March 4, 2005.
</FN>
Directors Considered to Be "Interested Persons"
Principal Mutual Funds Aschenbrenner Eucher Zimpleman
Balanced Fund, Inc. A A A
Capital Value Fund, Inc. A A A
Partners LargeCap Value Fund, Inc. A D A
Equity Income Fund, Inc. A C A
Partners Blue Chip Fund, Inc. A C A
Partners LargeCap Blend Fund, Inc. A D A
LargeCap Stock Index Fund, Inc. A A A
Growth Fund, Inc. A C A
Partners Equity Growth Fund, Inc. A C A
MidCap Fund, Inc. A D A
Partners MidCap Growth Fund, Inc. A A A
SmallCap Fund, Inc. A A A
Partners SmallCap Growth Fund, Inc. A A A
Real Estate Securities Fund, Inc. A A A
Bond Fund, Inc. A A A
Government Securities Income Fund, Inc. A C A
Tax-Exempt Bond Fund, Inc. A A A
International Fund, Inc. A A A
International SmallCap Fund, Inc. A A A
Limited Term Bond Fund, Inc. A A A
Cash Management Fund, Inc. A B A
International Emerging Markets Fund, Inc. A A A
TOTAL FUND COMPLEX A E A
Directors Considered to Be "Interested Persons"
Principal Investors Fund, Inc.* Aschenbrenner Eucher Zimpleman
Bond & Mortgage Securities Fund C C C
Government Securities Fund A C A
Diversified International Fund E A C
International Emerging Markets Fund C A A
LargeCap Growth Fund C A A
LargeCap S&P 500 Index Fund C D A
Mid Cap Blend Fund C B C
Money Market Fund C A A
Partners LargeCap Blend Fund I B A A
Partners LargeCap Growth Fund I C A A
Partners LargeCap Value Fund B C C
Partners MidCap Growth Fund C A A
Principal LifeTime Strategic Income Fund C A A
Real Estate Securities Fund C A A
SmallCap S&P 600 Index Fund D A A
TOTAL FUND COMPLEX E E D
- --------------
<FN>
* Through participation in an employee benefit plan.
</FN>
Independent Directors (Not Considered to Be "Interested Persons")
Principal Variable Contracts Fund, Inc.
* Ballantine Davis Gilbert Grimmett Kimball Lukavsky
Asset Allocation Account A A A A A A
Balanced Account A A A A A A
Bond Account A A A A C A
Capital Value Account A A A A A A
Equity Growth Account A A A A C A
Equity Income Account A A A A A A
Equity Value Account A A A A A A
Government Securities Account A A A A C A
Growth Account A A A A A A
International Account A A A A A A
International Emerging Markets A A A A A A
Account
International SmallCap Account A A A A A A
LargeCap Blend Account A A A A A A
Large Growth Equity Account A A A A A A
LargeCap Stock Index Account A A A A C A
LargeCap Value Account A A A A A A
Limited Term Bond Account A A A A A A
MidCap Account A A A A C A
MidCap Growth Account A A A A A A
MidCap Value Account A A A A C A
Money Market Account A A A A A A
Principal LifeTime 2010 Account A A A A A A
Principal LifeTime 2020 Account A A A A A A
Principal LifeTime 2030 Account A A A A A A
Principal LifeTime 2040 Account A A A A A A
Principal LifeTime 2050 Account A A A A A A
Principal LifeTime Strategic A A A A A A
Income Account
Real Estate Securities Account A A A A C A
SmallCap Account A A A A C A
SmallCap Growth Account A A A A A A
SmallCap Value Account A A A A A A
TOTAL FUND COMPLEX A A A A E A
- -------------
<FN>
* Through variable life insurance and variable annuity contracts issued by
Principal Life.
</FN>
Directors Considered to Be "Interested Persons"
Principal Variable Contracts Fund, Inc. * Aschenbrenner Eucher Zimpleman
Asset Allocation Account B A A
Balanced Account B A A
Bond Account A A A
Capital Value Account C A A
Equity Growth Account B A A
Equity Income Account A A A
Equity Value Account A A A
Government Securities Account A A A
Growth Account B A A
International Account C A A
International Emerging Markets Account A A A
International SmallCap Account B A A
LargeCap Blend Account A A A
Large Growth Equity Account C A A
LargeCap Stock Index Account A A A
LargeCap Value Account A A A
Limited Term Bond Account A A A
MidCap Account B A A
MidCap Growth Account A A A
MidCap Value Account A A A
Money Market Account A A A
Principal LifeTime 2010 Account A A A
Principal LifeTime 2020 Account A A A
Principal LifeTime 2030 Account A A A
Principal LifeTime 2040 Account A A A
Principal LifeTime 2050 Account A A A
Principal LifeTime Strategic Income Account A A A
Real Estate Securities Account A A A
SmallCap Account C A A
SmallCap Growth Account B A A
SmallCap Value Account A A A
TOTAL FUND COMPLEX D A A
- -------------
<FN>
* Through variable life insurance and variable annuity contracts issued by
Principal Life.
</FN>
Required Vote
The affirmative vote of the holders of a plurality of the shares voted
at the meeting of the Fund is required for the election of a Director of the
Fund.
The Board of Directors unanimously recommends that the shareholders of
the Fund vote "For" all the nominees.
INFORMATION ABOUT THE REORGANIZATION AND THE COMBINATION
Agreement and Plan of Reorganization
The terms of the Plan are summarized below. The summary is qualified in
its entirety by reference to the Plan, a copy of which is attached as Appendix A
to this Proxy Statement/Prospectus.
As described above, the Combination is part of the Reorganization
providing for the combinations of all of the PMF Funds into corresponding PIF
Funds. The description below of the Combination of the Acquired Fund into the
Acquiring Fund applies as well to the other combinations of PMF Funds into PIF
Funds.
Under the Plan, the Acquiring Fund will acquire all the assets and
assume all the liabilities of the Acquired Fund and in exchange will issue to
the Acquired Fund Class A and Class B shares of the Acquiring Fund. Subject to
the satisfaction of the conditions set forth below, the acquisition will take
place on June 30, 2005 or on such other date as may be agreed upon by the
Acquired Fund and PIF on behalf of the Acquiring Fund (the "Closing Date"). The
net asset value per share of each class of shares of the Acquired Fund and the
Acquiring Fund will be determined by dividing each Fund's assets, less
liabilities, attributable to that share class, by the total number of
outstanding shares of that class. The assets of each Fund will be valued in
accordance with the valuation practices of that Fund, which practices will be
the same as between the Acquired Fund and the Acquiring Fund.
The number of full and fractional shares of the Acquiring Fund received
by a shareholder of the Acquired Fund will be equal in value to the value of the
shareholder's full and fractional shares of the Acquired Fund as of the close of
regularly scheduled trading on the New York Stock Exchange on the Closing Date
(the "Effective Time"). The Acquired Fund will distribute pro rata to its
shareholders of record as of the Effective Time the Class A and Class B shares
of the Acquiring Fund received by the Acquired Fund in the Reorganization.
Holders of Class A and Class B shares of the Acquired Fund will receive,
respectively, Class A and Class B shares of the Acquiring Fund. Such
distributions will be accomplished by the transfer of the shares of the
Acquiring Fund then credited to the account of the Acquired Fund on the books of
the Acquiring Fund to open accounts on the share records of the Acquiring Fund
in the names of the shareholders of the Acquired Fund, each account representing
the respective pro rata number of shares of the Acquiring Fund due the
shareholder. All issued and outstanding shares of the Acquired Fund will
simultaneously be cancelled on the books of the Acquired Fund. As soon as
practicable after the Closing Date, the Acquired Fund will take all necessary
steps under its Articles of Incorporation, Maryland law and any other applicable
law to effect its complete dissolution.
The Board of Directors of the Acquired Fund has determined that the
interests of the shareholders of the Acquired Fund will not be diluted as a
result of the Combination and that participation in the Combination is in the
best interests of the Acquired Fund and its shareholders. Similarly, the Board
of Directors of PIF has determined that the Combination is in the best interests
of the Acquiring Fund and its shareholders and that the interests of such
shareholders will not be diluted as a result of the Combination.
The consummation of the Combination is subject to the conditions set
forth in the Plan, including that the affirmative vote of the holders of at
least a Majority of the Outstanding Voting Securities (as defined under "Voting
Information" below) of the Acquired Fund entitled to vote on the Combination.
The Plan may be amended, modified or supplemented in such manner as may be
mutually agreed upon in writing by the Acquired Fund and PIF on behalf of the
Acquiring Fund. However, following the meeting of the shareholders of the
Acquired Fund, no such amendment may have the effect of changing the provisions
for determining the number of Class A and Class B shares of the Acquiring Fund
to be issued to the shareholders of the Acquired Fund under the Plan to their
detriment, or otherwise have a material adverse effect on the interests or
rights of the Acquired Fund or its shareholders, without the Acquired Fund
obtaining further approval of its shareholders.
The Plan may be terminated and the Combination abandoned at any time
prior to the Closing Date by the Acquired Fund and PIF on behalf of the
Acquiring Fund by (i) mutual agreement of the parties, or (ii) by either party
if the closing has not occurred on or before June 30, 2005, unless such date is
extended by mutual agreement of the parties, or (iii) by either party if the
other party has materially breached its obligations under the Plan or made a
material and intentional misrepresentation in or in connection with the Plan.
Additionally, except as otherwise expressly provided in the Plan, the Acquired
Fund and PIF on behalf of the Acquiring Fund may at any time prior to the
closing: (i) waive any inaccuracies in the representations and warranties
contained in the Plan and made for its benefit, and (ii) waive compliance with
any of the covenants or conditions contained in the Plan and made for its
benefit, except that any such waiver that would have a material adverse effect
on the interests or rights of the Acquired Fund or its shareholders, or the
Acquiring Fund or its shareholders, may be made only with the consent of the
Board of Directors of, respectively, the Acquired Fund or PIF on behalf of the
Acquiring Fund.
The expenses of the Combination of the Acquired and Acquiring Funds are
part of the expenses of the larger Reorganization. Under the Plan, the first
$1,000,000 of the expenses relating to the Reorganization will be allocated
among the PMF Funds, including the Acquired Fund, based on the ratio of the open
accounts of each PMF Fund to the open accounts of all the PMF Funds as of the
close of business on February 28, 2005. The Manager will pay 50% of the balance
of the expenses relating to the Reorganization, and the remaining 50% will be
allocated among the Acquired Funds in the same manner as the first $1,000,000 of
expenses, except that the Manager will pay 100% of such expenses allocated to
the certain PMF Funds, not including the Acquired Fund, which are not expected
to experience reduced expense ratios as a result of the Reorganization. See
Appendix A hereto.
Reasons for the Reorganization and the Combination
The Board of Directors of each the PMF Funds, including the Acquired
Fund, has observed that the PMF Funds have generally been experiencing declining
net assets, due in part to redemptions and in part to the level of new sales.
The PIF Funds, in contrast, have generally been experiencing asset growth, which
tends to result in decreasing expense ratios and to facilitate more efficient
portfolio management. The purpose of the Reorganization is to combine the PMF
and PIF Funds, which are all sponsored by Principal Life and managed by the
Manager, into a larger fund family that is expected to achieve economies of
scale and to operate with greater efficiency and lower overall costs while
enabling shareholders of each Acquired Fund to continue their investments in an
Acquiring Fund having substantially the same or similar investment objectives
and policies. With respect to the Combination, the Acquired and Acquiring Funds
are both money market funds that have substantially similar investment
objectives and strategies. The Acquiring Fund has a lower management fee and is
expected to have lower overall expenses than the Acquired Fund, and the
Acquiring Fund has generally performed better than the Acquired Fund during the
period in which both have been operational. Combining the Funds will not result
in any dilution of the interests of existing shareholders of the Acquired Fund.
Board Consideration of the Reorganization
The Board of Directors of each PMF Fund (including the Acquired Fund),
including the Directors who are not "interested persons" (as defined in the 1940
Act) of each PMF Fund (the "Independent Directors"), considered the
Reorganization at Board meetings held on December 13, 2004, February 4, 2005 and
February 24, 2005. The Board of each PMF Fund considered information about the
Reorganization presented by the Manager, and the Independent Directors were
assisted by independent legal counsel and an independent consultant. At the
February 24, 2005 meeting, the Board of each PMF Fund unanimously approved the
Reorganization as to each PMF Fund and its corresponding PIF Fund after
concluding that the participation of the PMF Fund in the Reorganization is in
the best interests of the PMF Fund, as well as in the best interest of its
shareholders, and that the interests of such existing shareholders will not be
diluted as a result of the Reorganization.
In determining whether to approve the Reorganization and recommend its
approval to shareholders, the Board of each PMF Fund made inquiry into a number
of matters and considered the following factors, among others: (1) the
compatibility of the investment objectives and policies, and the fundamental and
non-fundamental investment restrictions, of the PMF Fund and its corresponding
PIF Fund and any changes with respect thereto that will result from the
Reorganization; (2) the cost associated with disposing of any portfolio
securities that would not be compatible with the investment objectives and
policies of the PIF Fund; (3) expense ratios and available information regarding
the fees and expenses of the PMF Fund and its corresponding PIF Fund, and the
applicability and impact of any voluntary or contractual fee waivers or expense
reimbursements with respect to the PIF Fund; (4) comparative investment
performance of the PMF Fund and its corresponding PIF Fund; (5) the effect on
the PMF Fund's shareholders of investing in a larger asset pool with potentially
greater diversification, and the effect on the portfolio management of the
corresponding PIF Fund of such a larger asset base, where applicable; (6) the
prospects for growth, and for achieving economies of scale, of the PMF Fund in
combination with the corresponding PIF Fund and as combined into PIF; (7)
projections with respect to asset growth or decline based upon distribution
activities and market performance and the likely impact of these factors on
expense ratios; (8) the financial strength, investment experience, personnel and
resources of the Sub-Advisor or Sub-Advisors to the PMF Fund and its
corresponding PIF Fund; (9) where applicable, the continued service of the
Sub-Advisor to the PMF Fund as the Sub-Advisor to its corresponding PIF Fund;
(10) the continuity of or changes in services to be provided to shareholders
following the Reorganization; (11) PIF marketing efforts and distribution
arrangements; (12) any direct or indirect fees or expenses to be incurred by the
PMF Fund or its shareholders as a result of the Reorganization, and any benefits
to be derived by the Manager and its affiliates from the Reorganization; (13)
the direct or indirect federal income tax consequences of the Reorganization,
including the impact of any federal income tax loss carryforward; (14) the terms
and conditions of the Agreement and Plan of Reorganization and whether its
implementation would result in dilution of shareholder interests; and (15)
possible alternatives to the Reorganization.
Each PMF Fund Board's decision to recommend approval of the
Reorganization was based on a number of factors. Particular factors considered
by the Acquired Fund's Board with respect to the Combination of the Acquired
Fund into the Acquiring Fund are discussed under Proposal 1 (see "Board
Consideration of the Combination"). The following is a general summary of
factors which relate to the combinations of all the PMF Funds into their
corresponding PIF Funds:
1. the PMF Funds, in general, have been experiencing declining assets,
which has a negative impact on shareholders of the Funds, and this trend is
expected to continue;
2. each PMF Fund in combination with its corresponding PIF Fund may expect
to benefit from one or more of the following: (i) an immediately larger fund
asset base to achieve economies of scale and enable greater flexibility in
portfolio management and greater diversification in investments; (ii) the
possibility of similar benefits from future growth of fund assets as a result of
the combined PMF and PIF distribution networks; and (iii) certain efficiencies
on an ongoing basis as a result of PIF's larger overall size, relative to the
PMF Funds separately and collectively;
3. the investment objectives, policies and risks of the PIF Funds are the
same or substantially similar to those of their corresponding PMF Funds and will
afford shareholders of the PMF Funds continuity of investment objectives and
expectations.
4. the Manager is the investment advisor for each PMF and PIF Fund and may
be expected to continue to provide to the PIF Funds investment advisory and
administrative services and personnel of at least the same quality as those
currently provided to the PMF Funds;
5. most combinations (with certain exceptions not applicable to the
Combination) involve a PIF Fund with expense ratios that are expected to be the
same as or lower than those of the PMF Fund, as of the time of the
Reorganization;
6. the Reorganization will not result in the dilution of the interests of
existing shareholders; and
7. the Reorganization has been structured as a tax-free reorganization
and therefore will not result in shareholders recognizing any gain or loss for
federal income tax purposes.
Description of the Securities to Be Issued
PIF is a Maryland corporation that is authorized to issue its shares of
common stock, par value $.01 per share, in separate series and separate classes
of series. The Acquiring Fund is a separate series of PIF, and the Class A and
Class B shares of the Acquiring Fund to be issued in connection with the
Combination, along with the other classes of shares of the Acquiring Fund,
represent interests in the assets belonging to that series and have identical
dividend, liquidation and other rights, except that expenses allocated to the
series or class are borne solely by that series or class and may cause
differences in rights as described herein. Expenses related to the distribution
of, and other identified expenses properly allocated to, the shares of the
series or class are charged to and borne solely by that series or class, and the
bearing of expenses by the series or class may be appropriately reflected in the
net asset value attributable to, and the dividend and liquidation rights of,
that series or class.
All shares of PIF have equal voting rights and are voted in the
aggregate and not by separate series or class of shares except that shares are
voted by series or class: (i) when expressly required by Maryland law or the
1940 Act and (ii) on any matter submitted to shareholders which the Board of
Directors has determined affects the interests of only a particular series or
class.
The Acquired Fund is also a Maryland corporation and is authorized to
issue shares, par value $.01 per share, in separate classes. The Class A and
Class B shares of the Acquired Fund represent interests in the assets belonging
to the Fund and have substantially the same dividend, liquidation and other
rights with respect to the Acquired Fund that the Class A and Class B shares of
the Acquiring Fund have with respect to the Acquiring Fund as described above.
Similarly, all shares of the Acquired Fund have equal voting rights and are
voted in the aggregate and not by class of shares except that shares are voted
by class: (i) when expressly required by Maryland law or the 1940 Act and (ii)
on any matter submitted to shareholders which the Board of Directors has
determined affects the interests of only a particular class.
See "Comparative Information About the Acquired and Acquiring Funds -
Multiple Classes of Shares" and "Rule 12b-1 fees" below.
With respect to shares of both the Acquiring and Acquired Funds: there
is no cumulative voting for Directors; shares are fully paid and non-assessable,
have no preemptive or conversion rights and are freely transferable; and each
fractional share has proportionately the same rights as are provided for a full
share.
At the PIF Shareholders Meeting, shareholders of the PIF Funds,
including the Acquiring Fund, will be asked to approve proposed amendments to
the PIF Articles of Incorporation that will permit the PIF Board of Directors,
in each case without shareholder approval of an affected PIF Fund or class of
shares thereof: (i) to approve combinations involving PIF Funds, including
combinations of the PIF Funds (or other affiliated funds) consistent with
recently amended Rule 17a-8 under the 1940 Act; (ii) to liquidate the assets
attributable to a PIF Fund or a class of shares thereof and terminate such Fund
or class of shares; and (iii) to designate a class of shares of a PIF Fund as a
separate series or PIF Fund. Together, these amendments are intended to
facilitate future combinations involving PIF Funds that the PIF Board determines
are in the best interests of the affected shareholders. A combination of
affiliated funds will still require shareholder approval if the combination
would result in a material change in a fundamental investment policy, a material
change to the terms of an advisory agreement or the institution of or an
increase in Rule 12b-1 fees or when the Board of the surviving fund does not
have a majority of independent trustees who were elected by its shareholders.
If shareholders of the Acquiring Fund approve the proposed amendments,
Acquired Fund shareholders after the Combination will no longer have the rights
they currently have under the Articles of Incorporation of the Acquired Fund and
under Maryland law to vote to approve a combination involving, and to vote with
respect to the liquidation of, their Fund.
Federal Income Tax Consequences
The Reorganization will be a tax-free "reorganization," and no gain or
loss will be recognized by either the Acquired Fund or Acquiring Fund or its
shareholders in connection with the Combination. To be considered a tax-free
"reorganization" under Section 368(a) of the Internal Revenue Code, a
reorganization must exhibit a continuity of business enterprise. The Acquired
Fund and PIF on behalf of the Acquiring Fund will have received opinions of tax
counsel, in forms reasonably satisfactory to each, substantially to the effect
that, based upon certain facts, assumptions, and representations of the Acquired
Fund and of PIF on behalf of the Acquiring Fund, for federal income tax
purposes: (1) the Reorganization will constitute a reorganization within the
meaning of Section 368(a) of the Code with respect to the Acquired Fund and the
Acquiring Fund; (2) no gain or loss will be recognized by the Acquired Fund or
the Acquiring Fund upon the transfer of all of the assets and liabilities, if
any, of the Acquired Fund to the Acquiring Fund solely in exchange for shares of
the Acquiring Fund; (3) no gain or loss will be recognized by shareholders of
the Acquired Fund upon the exchange of such Acquired Fund's shares solely for
shares of the Acquiring Fund; (4) the holding period and tax basis of the shares
of the Acquiring Fund received by each holder of shares of the Acquired Fund
pursuant to the Reorganization will be the same as the holding period and tax
basis of the shares of the Acquired Fund held by the shareholder (provided the
shares of the Acquired Fund were held as a capital asset on the date of the
Reorganization) immediately prior to the Reorganization; and (5) the holding
period and tax basis of the assets of the Acquired Fund acquired by the
Acquiring Fund will be the same as the holding period and tax basis of those
assets to the Acquired Fund immediately prior to the Reorganization.
The foregoing is only a summary of the principal federal income tax
consequences of the Reorganization and should not be considered to be tax
advice. There can be no assurance that the Internal Revenue Service will concur
on all or any of the issues discussed above. You may wish to consult with your
own tax advisers regarding the federal, state, and local tax consequences with
respect to the foregoing matters and any other considerations which may apply in
your particular circumstances.
CAPITALIZATION
The following table shows as of October 31, 2004: (i) the
capitalization of the Acquired Fund; (ii) the capitalization of the Acquiring
Fund; and (iii), the pro forma combined capitalization of the Acquiring Fund,
adjusted to reflect the estimated expenses of the Reorganization, as if the
Reorganization had occurred as of that date. As of October 31, 2004, the
Acquired Fund had outstanding two classes of shares: Class A and Class B. As of
October 31, 2004, the Acquiring Fund had outstanding the following six classes
of shares: Institutional Class, Select Class, Preferred Class, Advisors Select
Class, Advisors Preferred Class and Class J. The Acquiring Fund will first issue
Class A and Class B shares in connection with the Reorganization. See
"Comparative Information About the Acquired and Acquiring Funds - Multiple
Classes of Shares" below.
Net Asset Value Shares
Net Assets Per Share Outstanding
(1) Principal Cash Management Fund, --Class A $317,339,972 $1.00 317,339,972
Inc. (Acquired Fund) --Class B 5,071,152 1.00 5,071,152
(2) PIF Money Market Fund (Acquiring --Class A - - -
Fund) --Class B - - -
--Institutional 56,277,419 1.00 56,277,419
--Select 1,483,964 1.00 1,483,964
--Preferred 14,598,771 1.00 14,598,771
--Advisors Select 6,393,823 1.00 6,393,823
--Advisors Signature - 1.00 -
--Advisors Preferred 7,413,337 1.00 7,413,337
--Class J 132,550,498 1.00 132,550,498
Reduction in net assets and decrease in --Class A 84,527 - 317,339,972
net asset values per share of the --Class B 1,260 - 5,071,152
Acquired Fund to reflect the estimated
expenses of the Reorganization.
(3) PIF Money Market Fund (Acquiring --Class A 317,255,445 1.00 317,339,972
Fund) --Class B 5,069,892 1.00 5,071,152
(Pro forma assuming combination --Institutional 56,277,419 1.00 56,277,419
of (1) and (2)) --Select 1,483,964 1.00 1,483,964
--Preferred 14,598,771 1.00 14,598,771
--Advisors Select 6,393,823 1.00 6,393,823
--Advisors Signature - 1.00 -
--Advisors Preferred 7,413,337 1.00 7,413,337
--Class J 132,550,498 1.00 132,550,498
COMPARATIVE INFORMATION ABOUT THE ACQUIRED AND ACQUIRING FUNDS
Multiple Classes of Shares
The Board of Directors of the Acquired Fund has adopted a multiple
class plan for the Fund pursuant to Rule 18f-3 (an "18f-3 Plan") under the 1940
Act. Under the plan, the Acquired Fund offers two classes of shares: Class A and
Class B. The Class A and Class B shares are the same except for differences in
class expenses, including Rule 12b-1 fees for Class B shares, and any applicable
sales charges. See "Rule 12b-1 Fees" and "Costs of Investing" below.
The Board of Directors of PIF has adopted an 18f-3 Plan for the
Acquiring Fund. Under the plan, the Acquiring Fund may offer the following nine
classes of shares: Institutional Class, Select Class, Preferred Class, Advisors
Select Class, Advisors Signature Class, Advisors Preferred Class, Class J, Class
A and Class B. The Acquiring Fund will first issue Class A and Class B shares in
connection with the Reorganization. The Institutional Class, Select Class,
Preferred Class, Advisors Select Class, Advisors Signature Class, Advisors
Preferred Class, Class J, Class A and Class B shares are the same except for
differences in class expenses, including any 12b-1 fees, and any applicable
sales charges and redemption and other fees. With respect to Class A and Class B
shares, see "Rule 12b-1 fees" and "Costs of Investing" below.
The Class A and Class B shares of the Acquired and Acquiring Funds are
generally sold without a sales charge. However, the Class A and Class B shares
may be subject to a contingent deferred sales charge ("CDSC") on shares
redeemed. See "Costs of Investing" below.
The PIF Advisors Select, Advisors Signature, Advisors Preferred,
Institutional, Select and Preferred Classes: o are available without any
front-end sales charge or contingent deferred sales charge; o currently have all
of their operating expenses absorbed by the Manager; and o are available through
employer-sponsored retirement plans which may impose fees in addition to those
charged by the Funds.
The PIF Advisors Select, Advisors Signature, Advisors Preferred Select
and J share classes are subject to 12b-1 fees, which are paid to Princor, as
well as service fees and administrative service fees which are paid to the
Manager.
The PIF Class J shares are sold without any front-end sales charge and
under certain circumstances may be subject to a contingent deferred sales charge
("CDSC") if redeemed within 18 months of purchase.
See also "Information About the Reorganization and the Combination -
Description of the Securities to be Issued" above.
Rule 12b-1 Fees
The Acquired Fund has adopted a Distribution Plan under Rule 12b-1
under the 1940 Act (a "12b-1 Plan") for the Class B shares of the Acquired Fund,
and PIF has adopted a 12b-1 Plan for the Class B shares of the Acquiring Fund.
The 12b-1 Plans for the Class B shares provide for payments by the
Funds to Princor at the annual rate of up to 1.00% for the Acquired Fund and
0.25% for the Acquiring Fund of the respective Fund's average net assets
attributable to Class B shares. Princor also receives the proceeds of any CDSC
imposed on redemptions of Class B shares.
Although Class B shares are sold without an initial sales charge,
Princor pays a sales commission equal to 4.00% of the amount invested to dealers
who sell such shares. These commissions are not paid on exchanges between PMF
Funds or between PIF Funds. In addition, Princor may remit on a continuous basis
up to 0.25% to the registered representatives and other selected dealers
(including for this purpose, certain financial institutions) as a trail fee in
recognition of their services and assistance.
The 12b-1 Plan for Class B shares of the Acquiring Fund authorizes
Princor to enter into service agreements with other selling dealers and with
banks and other financial institutions to provide shareholder services to
existing Class B shareholders, including services such as furnishing information
as to the status of shareholder accounts, responding to shareholder written and
telephone inquiries and assisting shareholders with tax information.
Costs of Investing
This section describes the contingent deferred sales charges ("CDSCs")
that apply to the Class A and Class B shares of the Acquired and Acquiring
Funds. Except as otherwise stated below, such charges are the same for the Class
A shares of both the Acquired and Acquiring Funds and for the Class B shares of
both the Acquired and Acquiring Funds.
For purposes of the following description, the Acquired and Acquiring
Funds are considered "Money Market Funds."
Shareholder Fees (fees paid directly from your investment)
The following table describes the fees and expenses you may pay if you
buy and hold shares of the Acquired and Acquiring Funds:
Acquired and Acquiring Funds
Class A Class B
Maximum sales charge imposed on purchases (as a % of offering price):
Money Market Funds None None
Maximum Contingent Deferred Sales Charge (CDSC) (as a % of dollars subject to
charge):
Money Market Funds 0.75%(1) 4.00%(2)
Redemption or Exchange Fee (as a % of amount redeemed/exchanged):
Money Market Funds None None
<FN>
(1) A CDSC applies on certain redemptions made within 18 months following
purchases of $1 million or more made without a sales charge.
(2) CDSCs are reduced after 12 months and eliminated after 6 years.
</FN>
Fees and expenses are important because they lower your earnings.
However, low costs do not guarantee higher earnings. For example, a fund with no
front-end sales charge may have higher ongoing expenses than a fund with such a
sales charge.
One -Time Fees
o Class A and Class B shares of the Acquired and Acquiring Funds are not
subject to an initial sales charge. However, a CDSC may apply.
o Investments of $1 million or more of Class A shares of other Principal
sponsored mutual funds are sold without an initial sales charge but
may be subject to a CDSC at the time of redemption. Redemption of
Class A shares of the Acquired and Acquiring Funds purchased through
an exchange from Class A shares of other Principal sponsored mutual
funds will be subject to a CDSC to the same extent as those shares
from which the exchange was made.
o Class B shares may be purchased only through an exchange and,
therefore, have no initial sales charge but may be subject to a CDSC.
If you sell (redeem) shares and the CDSC is imposed, it will reduce
the amount of sales proceeds.
Choosing a Share Class
Class A shares of the Acquired and Acquiring Funds are available by
either direct investment or by exchange from Class A shares of another Principal
sponsored mutual fund. Class B shares of the Acquired and Acquiring Funds are
available only by exchange from Class B shares of other Principal sponsored
mutual funds.
Class A Shares Sales Charge
There is no sales charge on purchases of Class A shares of the Acquired
and Acquiring Funds. However, there may be a CDSC on shares sold within 18
months of the purchase date if such shares were acquired as a result of an
exchange from Class A shares of other Principal sponsored mutual funds. The CDSC
does not apply to shares purchased with reinvested dividends or other
distributions. The CDSC is calculated as 0.75% of the lesser of the market value
at the time of the redemption or the initial purchase price of the shares sold.
The CDSC is waived on shares sold to fund a PMF or PIF 401(a) or PMF or PIF
401(k) retirement plan, except redemptions which are the result of termination
of the plan or transfer of all plan assets. The CDSC is also waived on shares
sold:
o to satisfy IRS minimum distribution rules; and
o using a periodic withdrawal plan. (You may sell up to 10% of the value
of the shares (as of December 31 of the prior year) subject to a CDSC
without paying the CDSC.)
Shares subject to the CDSC which are exchanged from one PMF Fund to
another PMF Fund, or from one PIF Fund to another PIF Fund, continue to be
subject to the CDSC until the CDSC expires.
Class B shares Sales Charges
There is no front end sales charge on purchases of Class B shares of
the Acquired and Acquiring Funds. A CDSC may be imposed on Class B shares sold
within six years of purchase. Class B shares automatically convert into Class A
shares (based on share prices, not number of shares) seven years after purchase.
Class B shares provide you the benefit of putting all your dollars to work from
the time of investment, but (until conversion) have higher ongoing fees and
lower dividends than Class A shares.
The Class B share CDSC, if any, is determined by multiplying the lesser
of the market value at the time of redemption or the initial purchase price of
the shares sold by the appropriate percentage from the table below:
CDSC as a % of Dollar Amount
Years Since Purchase Payments Made Acquired and Acquiring Funds
2 years or less 4.00%
More than 2 years, up to 4 years 3.00%
More than 4 years, up to 5 years 2.00%
More than 5 years, up to 6 years 1.00%
More than 6 years None
The CDSC is not charged on exchanges. However, the purchase date of the
exchanged shares is used to determine if the newly acquired shares are subject
to the CDSC when sold. The Fund from which the shares are sold is used to
determine the percentage of CDSC, if any.
The following table applies to Acquired or Acquiring Fund shares
purchased through employer sponsored plans making initial plan contributions
into the Acquired or Acquiring Funds after February 1, 1998 but before March 1,
2002 only. The CDSC table above applies to purchases made by plans making
initial contributions into the Funds after March 1, 2002.
CDSC as a % of Dollar Amount
Years Since Purchase Payments Made Acquired and Acquiring Funds
2 years or less 3.00%
More than 2 years, up to 4 years 2.00%
More than 4 years, up to 5 years 1.00%
More than 5 years, up to 6 years None
More than 6 years None
o The CDSC does not apply to shares purchased with reinvested dividends or
other distributions.
o The amount of the CDSC is a percentage based on the number of years you own
the shares multiplied by the lesser of the market value at the time of the
redemption or the initial purchase price of the shares sold.
o In the case of selling some but not all of the shares in an account, the
shares not subject to a sales charge are redeemed first. Other Class B
shares are redeemed in the order purchased (first in, first out). Using a
periodic withdrawal plan, you may sell up to 10% of the value of the shares
(as of the last business day of December of the prior year) subject to a
CDSC without paying the CDSC.
o Shares subject to the CDSC that are exchanged into another PMF or PIF Fund
continue to be subject to the CDSC until the CDSC expires.
o Princor receives the proceeds of any CDSC.
Waiver of the Sales Charge (Class B shares)
The CDSC is waived on Class B shares which are sold:
o due to a shareholder's death;
o due to the shareholder's disability, as defined in the Internal Revenue
Code;
o from retirement plans to satisfy minimum distribution rules under the Code;
o to pay surrender charges;
o to pay retirement plan fees;
o involuntarily from small balance accounts;
o through a systematic withdrawal plan (certain limits apply);
o from a retirement plan to assure the plan complies with Sections 401(k),
401(m), 408(k) or 415 of the Code;
o from retirement plans qualified under Section 401(a) of the Code due to the
plan participant's death, disability, retirement or separation from service
after attaining age 55;
o from a retirement plan meeting the requirements of Section 401 of the Code
(401(k), Profit Sharing and Money Purchase Pension Plans) that has provided
us with its notice of intent (on or before November 30, 2002) to transfer
its assets to a group annuity contract distributed by Principal Life; or
Purchases, Redemptions and Exchanges of Shares
The purchase, redemption and exchange procedures with respect to shares
of the Acquired and Acquiring Funds are substantially the same.
Purchases. Shares of the Acquired and Acquiring Funds are offered for
sale through Princor, a broker-dealer that is also the principal underwriter for
the Principal Cash Management Fund, Inc. and PIF, or other dealers which Princor
selects.
As described above under "Costs of Investing," Class A and Class B
shares of the Funds are sold without a sales charge. However, the Class A and
Class B shares of the Funds may be subject to a CDSC.
Each Fund's shares are bought and sold at the current share price. The
share price of each class of each Fund is calculated each day the New York Stock
Exchange ("NYSE") is open (shares are not priced on the days on which the NYSE
is closed for trading). The share price is determined at the close of business
of the NYSE (normally 3:00 p.m. Central Daylight Time). When an order to buy or
sell shares is received, the share price used to fill the order is the next
price calculated after the order is received.
The share price of each Class of shares of the Acquired and Acquiring
Funds is computed by dividing the total value of each Fund's securities and
other assets, less liabilities, by the number each Fund's shares outstanding.
All securities held by the Acquired and Acquiring Funds are valued on an
amortized cost basis. Under this method of valuation, a security is initially
valued at cost; thereafter, each 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 requires each 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, each Fund invests only in obligations determined by its Board of
Directors to be of high quality with minimal credit risks.
Redemptions. Shares of the Acquired and Acquiring Funds may be redeemed
at a price equal to the net asset value of the shares next computed following
the receipt of a request for redemption in proper form. The amount you receive
will be reduced by any applicable CDSC or redemption fee. See "Costs of
Investing" above. Generally, the sale proceeds are sent out on the next business
day after the sell order has been placed.
Payment for shares tendered for redemption is ordinarily made in cash.
The Board of Directors of the Acquired Fund or of PIF may determine, however,
that it would be detrimental to the remaining shareholders to make payment of a
redemption order wholly or partly in cash. Each of the Funds may, therefore, pay
the redemption proceeds in whole or in part by a distribution "in kind" of
securities from the Fund's portfolio in lieu of cash. If the Fund pays the
redemption proceeds in kind, the redeeming shareholder might incur brokerage or
other costs in selling the securities for cash. Each Fund will value securities
used to pay redemptions in kind using the same method the Fund uses to value its
portfolio securities as described above.
The right to require the Funds to redeem their shares may be suspended,
or the date of payment may be postponed, whenever: (1) trading on the NYSE is
restricted, as determined by the SEC, or the NYSE is closed except for holidays
and weekends; (2) the SEC permits such suspension and so orders; or (3) an
emergency exists as determined by the SEC so that disposal of securities or
determination of NAV is not reasonably practicable.
Exchanges. Shares of the Acquired and Acquiring Funds may be exchanged,
without payment of a sales charge or a CDSC, for shares of the same class of,
respectively, other PMF Funds or other PIF Funds. If Class B shares of the
Acquired or Acquiring Fund are exchanged for Class B shares of, respectively,
another PMF or another PIF Fund, the shares acquired will be subject to the
applicable CDSC imposed by the new Fund; however, the holding period of the
Class B shares exchanged is added to the holding period of the Class B shares
acquired for purposes of determining the applicable charge. See "Costs of
Investing" above.
Frequent Trading and Market Timing (Abusive Trading Practices)
The Acquired and Acquiring Funds are not designed for frequent trading
or market timing activity. The Funds do not knowingly accommodate frequent
purchases and redemptions of Fund shares by investors. If you intend to trade
frequently and/or use market timing investment strategies, you should not
purchase these Funds.
The Funds consider frequent trading and market timing activities to be
abusive trading practices because they:
o Disrupt the management of the Funds by: (i) forcing the Fund to hold
short-term (liquid) assets rather than investing for long term growth,
which results in lost investment opportunities for the Fund; and (ii)
causing unplanned portfolio turnover;
o Hurt the portfolio performance of the Fund; and
o Increase expenses of the Fund due to (i) increased broker-dealer
commissions and (ii) increased recordkeeping and related costs.
Certain Funds may be at greater risk for abusive trading practices. For
example, those Funds that invest in foreign securities may appeal to investors
attempting to take advantage of time-zone arbitrage. If the Funds are not able
to identify such abusive trading practices, the abuses described above will
negatively impact the Funds.
Both the Acquired Fund and PIF with respect to the Acquiring Fund have
adopted policies and procedures to help identify and prevent abusive trading
practices. In addition, the Funds monitor trading activity to identify and take
action against abuses. While these policies and procedures are designed to
identify and protect against abusive trading practices, there can be no
certainty that the Funds will identify and prevent abusive trading in all
instances. When the Funds do identify abusive trading, they will apply their
policies and procedures in a fair and uniform manner.
If either Fund deems abusive trading practices to be occurring, it will
take action that may include, but is not limited to:
1. Rejecting exchange instructions from shareholder or other person authorized
by the shareholder to direct exchanges;
2. Restricting submission of exchange requests by, for example, allowing
exchange requests to be submitted by 1st class U.S. mail only and
disallowing requests made via the internet, by facsimile, by overnight
courier or by telephone;
3. Limiting the dollar amount of an exchange and/or the number of exchanges
during a year;
4. Requiring a holding period of a minimum of 30 days before permitting
exchanges among the Funds where there is evidence of at least one
round-trip exchange (exchange or redemption of shares that were purchased
within 30 days of the exchange/redemption); and
5. Taking such other action as directed by the Fund.
Both of the Funds have reserved the right to accept or reject, without
prior written notice, any exchange requests. In some instances, an exchange may
be completed prior to a determination of abusive trading. In those instances,
the Funds will reverse exchange and return the account holdings to the positions
held prior to the exchange. The Funds will give you notice in writing in this
instance.
Dividends and Distributions
The dividends and distributions procedures with respect to the Acquired
and Acquiring Funds are substantially the same. Each of the Acquired and
Acquiring Funds declares dividends on all its daily net investment income each
day its shares are priced. The dividends are paid daily and are automatically
reinvested back into additional shares of the Fund. For both Funds, you may ask
to have your dividends paid to you monthly in cash. These cash payments are made
on the 20th of each month (or preceding business day).
Immediately prior to the Combination, the Acquired Fund will pay a
dividend or dividends which, together with all previous dividends, will have the
effect of distributing to its shareholders all of its investment company taxable
income for taxable years ending on or prior to the Effective Time of the
Combination (computed without regard to any deduction for dividends paid) and
all of its net capital gains, if any, realized in taxable years ending on or
prior to the Effective Time of the Combination (after reduction for any
available capital loss carryforward). Such dividends will be included in the
taxable income of the Acquired Fund's respective shareholders.
Fundamental Investment Restrictions
The Acquired Fund and PIF on behalf of the Acquiring Fund have adopted
"fundamental" investment restrictions regarding the investments of the
respective Funds. A fundamental investment restriction may not be changed for
either Fund without the approval of a Majority of the Outstanding Voting
Securities (as defined under "Voting Information - Required Vote" ) of that
Fund. These fundamental restrictions deal with such matters as the issuance of
senior securities, purchasing or selling real estate or commodities, borrowing
money, making loans, underwriting securities of other issuers, diversification
or concentration of investments and short sales of securities. A comparison of
the fundamental restrictions of the Acquired and Acquiring Funds is set forth in
Appendix B to this Proxy Statement/Prospectus.
The Acquired Fund adopted fundamental restrictions from time to time
over a period of several years to reflect legal and regulatory requirements -
particularly state securities law requirements -- that applied at that time but
no longer do, as well as business and industry conditions that then prevailed.
With changes in legal requirements and prevailing conditions, some of these
fundamental investment restrictions are no longer necessary and others are more
appropriately "non-fundamental" investment restrictions which may be changed by
the Board of Directors without shareholder approval. The fundamental
restrictions of the Acquiring Fund reflect updating changes that are intended to
provide the Manager and the Sub-Advisor to the Acquiring Fund with greater
flexibility in managing the Acquiring Fund while continuing to meet fully the
requirements of the 1940 Act and the rules and regulations thereunder. Aside
from such greater flexibility and the expanded borrowing authority described
below, the differences in fundamental restrictions between the Acquired Fund and
the Acquiring Fund as set forth in Appendix B are not expected to result in any
material difference in the manner in which the Acquiring Fund is managed as
compared to the Acquired Fund.
The PIF Board of Directors has approved a proposal to amend the
fundamental restriction of the Acquiring Fund with respect to borrowing and has
directed that the proposal be submitted to shareholders of the Acquiring Fund
for approval at the PIF Shareholders Meeting. If approved by shareholders, the
amended fundamental restriction with respect to borrowing will permit the
Acquiring Fund to borrow money to the maximum extent permitted by the 1940 Act.
VOTING INFORMATION
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by the Board of Directors of the Acquired Fund of proxies to be
used at the Meeting.
Voting procedures. If you complete and return the enclosed proxy
ballot, the persons named as proxies will vote your shares as you indicate or
for approval of each matter for which there is no indication. You may revoke
your proxy at any time prior to the proxy's exercise; (i) by sending written
notice to the Secretary of the Principal Mutual Funds at Principal Financial
Group, Des Moines, Iowa 50392-0200 prior to the meeting; (ii) by subsequent
execution and return of another proxy prior to the Meeting; or (iii) by being
present and voting in person at the Meeting after giving oral notice of the
revocation to the Chairman of the Meeting.
Voting rights. Only shareholders of record at the close of business on
March 23, 2005 (the "Record Date") are entitled to vote. The shareholders of the
Class A and Class B shares of the Acquired Fund will vote together on each
Proposal submitted to the shareholders of the Fund. You are entitled to one vote
on each Proposal submitted to the shareholders of the Fund for each share of the
Fund which you hold. The affirmative vote of the holders of a plurality of the
shares of the Acquired Fund voted at the Meeting is required for the election of
a Director of the Fund. All other proposals require for approval the vote of a
"majority of the outstanding voting securities," which is a term defined in the
1940 Act to mean with respect to a Fund, the affirmative vote of the lesser of
(1) 67% or more of the voting securities of the Fund present at the meeting of
the Fund, if the holders of more than 50% of the outstanding voting securities
of the Fund are present in person or by proxy, or (2) more than 50% of the
outstanding voting securities of the Fund (a "Majority of the Outstanding Voting
Securities").
The number of votes eligible to be cast at the Meeting as of the Record
Date with respect to the Acquired Fund and other share ownership information are
set forth in Appendix F to this Proxy Statement/Prospectus.
Quorum requirements. A quorum must be present at the meeting for the
transaction of business. The presence in person or by proxy of one-third of the
shares of the Fund outstanding at the close of business on the Record Date
constitutes a quorum for a meeting of the Fund. Abstentions and broker non-votes
(proxies from brokers or nominees indicating that they have not received
instructions from the beneficial owners on an item for which the broker or
nominee does not have discretionary power) are counted toward a quorum but do
not represent votes cast for any issue. Under the 1940 Act, the affirmative vote
necessary to approve the Proposals may be determined with reference to a
percentage of votes present at the meeting, which would have the effect of
counting abstentions as if they were votes against a proposal.
In the event the necessary quorum to transact business or the vote
required to approve a Proposal is not obtained at the Meeting, the persons names
as proxies or any shareholder present at the meeting may propose one or more
adjournments of the Meeting in accordance with applicable law to permit further
solicitation of proxies. Any such adjournment as to a Proposal will require the
affirmative vote of the holders of a majority of the shares of the Fund cast at
the Meeting. The persons named as proxies and any shareholder present at the
meeting will vote for or against any adjournment in their discretion.
Solicitation procedures. We intend to solicit proxies by mail. Officers
or employees of the Acquired Fund, the Manager or their affiliates may make
additional solicitations by telephone, internet, facsimile or personal contact.
They will not be specially compensated for these services. Brokerage houses,
banks and other fiduciaries may be requested to forward soliciting materials to
their principals and to obtain authorization for the execution of proxies. For
those services, they will be reimbursed by the Acquired Fund for their
out-of-pocket expenses. The Acquired Fund and the other PMF Funds have retained
the services of a professional proxy soliciting firm, Georgeson Shareholder
Communications, Inc., to assist in soliciting proxies in connection with the
Reorganization and estimate that the cost of such services will be approximately
$750,000. The cost of such services will be treated as an expense related to the
Reorganization and will be allocated between the PMF Funds, including the
Acquired Fund, and the Manager in the manner described above under "Information
About the Reorganization and the Combination -- Agreement and Plan of
Reorganization."
Expenses of the meetings. The expenses of the Meeting for the Acquired
Fund (and the shareholders meeting for the other PMF Funds) will be treated as
an expense related to the Reorganization and will be allocated between the PMF
Funds, including the Acquired Fund, and the Manager in the manner described
above under "Information About the Reorganization and the Combination --
Agreement and Plan of Reorganization."
FINANCIAL STATEMENTS
The financial highlights of the Acquired Fund for the fiscal year ended
October 31, 2004 incorporated by reference into this Proxy Statement/Prospectus,
and the financial statements of the Acquired Fund for the fiscal year ended
October 31, 2004 incorporated by reference into the related Statement of
Additional Information, have been so incorporated by reference in reliance on
the report of Ernst & Young LLP, Independent Registered Public Accounting Firm.
The financial statements of PIF with respect to the Acquiring Fund for
the fiscal year ended October 31, 2004 incorporated by reference into the
related Statement of Additional Information, have been so incorporated by
reference in reliance on the report of Ernst & Young LLP, Independent Registered
Public Accounting Firm.
LEGAL MATTERS
Certain matters concerning the issuance of shares of the Acquiring Fund
will be passed upon by Michael D. Roughton, Esq., Counsel to the Funds. Certain
tax consequences of the Combination will be passed upon for PIF by Randy Lee
Bergstrom, Esq., Assistant Tax Counsel to the Funds, and for the Acquired Fund
by Carolyn Kolks, Esq., Assistant Tax Counsel to the Funds.
OTHER MATTERS
We do not know of any matters to be presented at the Meeting other than
those mentioned in this Proxy Statement/Prospectus. If any other matters
properly come before the Meeting, the shares represented by proxies will be
voted in accordance with the best judgment of the person or persons voting the
proxies.
Shareholder proposals to be presented at any future meeting of
shareholders of the Acquired Fund must be received by the Acquired Fund a
reasonable time before its solicitation of proxies for that meeting in order for
such proposals to be considered for inclusion in the proxy materials related to
that meeting.
BY ORDER OF THE BOARD OF DIRECTORS OF THE ACQUIRED FUND
April 18, 2005
Des Moines, Iowa
It is important that proxies be returned promptly. Therefore, shareholders who
do not expect to attend the Meeting in person are urged to complete, sign, date
and return the proxy ballot in the enclosed envelope.
Appendix A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as
of this [ ] day of March, 2005, severally, by and among: each Acquired Fund
listed below, each a Maryland corporation having its principal place of business
at 680 8th Street, Des Moines, Iowa 50392-0200; Principal Investors Fund, Inc.
("PIF"), a Maryland corporation having its principal place of business at 680
8th Street, Des Moines, Iowa 50392-0200, on behalf of each corresponding
Acquiring Fund listed below, each a separate series of PIF; and Principal
Management Corporation, investment adviser for each Acquired Fund and its
corresponding Acquiring Fund (for purposes of section 9.2 of this Agreement
only):
Corresponding
Acquired Fund PIF Acquiring Fund
------------- ------------------
Principal Balanced Fund, Inc. -- PIF Disciplined LargeCap Blend Fund
Principal Capital Value Fund, Inc. -- PIF LargeCap Value Fund
Principal Partners LargeCap Value Fund, Inc. -- PIF Partners LargeCap Value Fund
Principal Equity Income Fund, Inc. -- PIF Equity Income Fund
Principal Partners Blue Chip Fund, Inc. -- PIF Partners LargeCap Blend Fund I
Principal Partners LargeCap Blend Fund, Inc. -- PIF Partners LargeCap Blend Fund
Principal LargeCap Stock Index Fund, Inc. -- PIF LargeCap S&P 500 Index Fund
Principal Growth Fund, Inc. -- PIF LargeCap Growth Fund
Principal Partners Equity Growth Fund, Inc. -- PIF Partners LargeCap Growth Fund I
Principal MidCap Fund, Inc. -- PIF MidCap Blend Fund
Principal Partners MidCap Growth Fund, Inc. -- PIF Partners MidCap Growth Fund
Principal SmallCap Fund, Inc. -- PIF SmallCap Blend Fund
Principal Partners SmallCap Growth Fund, Inc. -- PIF Partners SmallCap Growth Fund II
Principal Real Estate Securities Fund, Inc. -- PIF Real Estate Securities Fund
Principal Bond Fund, Inc. -- PIF Bond & Mortgage Securities Fund
Principal Government Securities Income Fund, Inc. -- PIF Government Securities Fund
Principal Tax-Exempt Bond Fund, Inc. -- PIF Tax-Exempt Bond Fund
Principal International Fund, Inc. -- PIF Diversified International Fund
Principal International SmallCap Fund, Inc. -- PIF Diversified International Fund
Principal Limited Term Bond Fund, Inc. -- PIF High Quality Short-Term Bond Fund
Principal Cash Management Fund, Inc. -- PIF Money Market Fund
Principal International Emerging Markets Fund, Inc. -- PIF International Emerging Markets Fund
This Agreement shall be deemed to be a separate agreement between each
Acquired Fund and PIF on behalf of the corresponding Acquiring Fund. As used
herein, unless the context otherwise requires, each Acquired Fund and its
corresponding Acquiring Funding are, respectively, the "Acquired Fund" and the
"Acquiring Fund."
This Agreement is intended to be and is adopted as a plan of
reorganization and liquidation within the meaning of Section 368(a) of the
United States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization will consist of: (i) the transfer of all or substantially all of
the assets of the Acquired Fund to the Acquiring Fund and the assumption by the
Acquiring Fund of all of the liabilities of the Acquired Fund in exchange solely
for Class A and Class B voting shares of beneficial interest of the Acquiring
Fund (the "Acquiring Fund Shares"); (ii) the distribution of the Acquiring Fund
Shares to the shareholders of the Acquired Fund according to their respective
interests in complete liquidation of the Acquired Fund; and (iii) the
dissolution of the Acquired Fund as soon as practicable thereafter, all upon the
terms and conditions hereinafter set forth (the Reorganization").
WHEREAS, the Acquired Fund is, and the Acquiring Fund is a separate
series of, an open-end, management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), and the Acquired
Fund owns securities which generally are assets of the character in which the
Acquiring Fund is permitted to invest;
WHEREAS, the Board of Directors of PIF has determined that the exchange
of all of the assets of the Acquired Fund for Acquiring Fund Shares and the
assumption of all liabilities of the Acquired Fund by the Acquiring Fund is in
the best interests of the Acquiring Fund and its shareholders and that the
interests of the existing shareholders of the Acquiring Fund would not be
diluted as a result of this transaction; and
WHEREAS, the Board of Directors of the Acquired Fund has determined
that the exchange of all of the assets of the Acquired Fund for Acquiring Fund
Shares and the assumption of all liabilities of the Acquired Fund by the
Acquiring Fund is in the best interests of the Acquired Fund and its
shareholders and that the interests of the existing shareholders of the Acquired
Fund would not be diluted as a result of this transaction;
NOW, THEREFORE, in consideration of the premises and of the covenants
and agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND TO THE ACQUIRING FUND IN EXCHANGE FOR
THE ACQUIRING FUND SHARES, THE ASSUMPTION OF ALL ACQUIRED FUND LIABILITIES AND
THE LIQUIDATION AND DISSOLUTION OF THE ACQUIRED FUND
1.1. Subject to the requisite approval of the shareholders of the
Acquired Fund and the other terms and conditions herein set forth and on the
basis of the representations and warranties contained herein, the Acquired Fund
shall transfer all or substantially all of its assets, as set forth in section
1.2, to the Acquiring Fund, and the Acquiring Fund in exchange therefore shall:
(i) deliver to the Acquired Fund the number of full and fractional Class A and
Class B Acquiring Fund Shares determined by dividing the value of the Acquired
Fund's net assets with respect to Class A and Class B Acquired Fund Shares,
computed in the manner and as of the time and date set forth in section 2.1, by
the net asset value of one Acquiring Fund Class A Share or Class B Share,
respectively, computed in the manner and as of the time and date set forth in
section 2.2; and (ii) assume all of the liabilities of the Acquired Fund as set
forth in section 1.3. Such transactions shall take place at the closing provided
for in section 3.1 (the "Closing").
1.2. The assets of the Acquired Fund to be acquired by the Acquiring
Fund shall consist of all assets and property, including, without limitation,
all cash, securities, commodities and futures interests and dividends or
interests receivable that are owned by the Acquired Fund, and any deferred or
prepaid expenses shown as an asset on the books of the Acquired Fund, on the
closing date provided for in section 3.1 (the "Closing Date") (collectively,
"Assets").
1.3. The Acquired Fund will endeavor to discharge all of its known
liabilities and obligations prior to the Closing Date. The Acquiring Fund shall
also assume all of the liabilities of the Acquired Fund, whether accrued or
contingent, known or unknown, existing at the Valuation Date, as defined in
section 2.1 (collectively, "Liabilities"). On or as soon as practicable prior to
the Closing Date, the Acquired Fund will declare and pay to its shareholders of
record one or more dividends and/or other distributions so that it will have
distributed substantially all (and in no event less than 98%) of its investment
company taxable income (computed without regard to any deduction for dividends
paid) and realized net capital gain, if any, for the current taxable year
through the Closing Date.
1.4. Immediately after the transfer of Assets provided for in section
1.1, the Acquired Fund will distribute to the shareholders of record of the
Class A and Class B Acquired Fund Shares, determined as of the close of regular
trading on the New York Stock Exchange ("NYSE") on the Closing Date (the
"Acquired Fund Shareholders"), on a pro rata basis, the Acquiring Fund Shares of
the same class received by the Acquired Fund pursuant to section 1.1, and will
completely liquidate. Such distribution and liquidation will be accomplished,
with respect to the Acquired Fund's shares, by the transfer of the Acquiring
Fund Shares then credited to the account of the Acquired Fund on the books of
the Acquiring Fund to open accounts on the share records of the Acquiring Fund
in the names of the Acquired Fund Shareholders. The aggregate net asset value of
Class A and Class B Acquiring Fund Shares to be so credited to Class A and Class
B Acquired Fund Shareholders shall be equal to the aggregate net asset value of
the Acquired Fund shares of that same class owned by such shareholders on the
Closing Date. All issued and outstanding shares of the Acquired Fund will
simultaneously be canceled on the books of the Acquired Fund. The Acquiring Fund
shall not issue certificates representing Class A and Class B Acquiring Fund
Shares in connection with such exchange.
1.5. Ownership of Acquiring Fund Shares will be shown on the books of
the Acquiring Fund's transfer agent.
1.6. As soon as practicable after the Closing Date, the Acquired Fund
shall take all necessary steps under its Articles of Incorporation, Maryland law
and any other applicable law to effect its complete dissolution. Any reporting
responsibility of the Acquired Fund, including, but not limited to, the
responsibility for filing of regulatory reports, tax returns, or other documents
with the U.S. Securities and Exchange Commission (the "Commission"), any state
securities commission, and any federal, state or local tax authorities or any
other relevant regulatory authority, is and shall remain the responsibility of
the Acquired Fund.
1.7 All books and records of the Acquired Fund, including all books and
records required to be maintained under the 1940 Act and the rules and
regulations thereunder, shall be available to PIF on behalf of the Acquiring
Fund from and after the Closing Date and shall be turned over to PIF as soon as
practicable after the Closing Date.
2. VALUATION
2.1. The value of the Assets to be transferred to the Acquiring Fund
shall be computed as of the close of regular trading on the NYSE and after the
declaration of any dividends on the Closing Date (such time and date being
hereinafter called the "Valuation Date"), using the valuation procedures in the
then-current prospectus and statement of additional information with respect to
the Acquiring Fund, and valuation procedures established by the Acquiring Fund's
Board of Directors.
2.2. The net asset value of a Class A and Class B Acquiring Fund Share
shall be the net asset value per share computed with respect to that class as of
the Valuation Date, using the valuation procedures set forth in the Acquiring
Fund's then-current prospectus and statement of additional information and
valuation procedures established by the PIF Board of Directors.
2.3. The number of the Class A and Class B Acquiring Fund Shares to be
issued (including fractional shares, if any) in exchange for the Acquired Fund's
Assets shall be determined with respect to each such class by dividing the value
of the net assets with respect to the Class A and Class B shares of the Acquired
Fund, as the case may be, determined using the same valuation procedures
referred to in section 2.1, by the net asset value of an Acquiring Fund Share,
determined in accordance with section 2.2.
2.4. All computations of value hereunder shall be made by or under the
direction of each Fund's respective accounting agent, if applicable, in
accordance with its regular practice and the requirements of the 1940 Act.
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be June 30, 2005, or such other date as the
parties may agree to in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of 3:00 p.m., Central Daylight Time on
the Closing Date. The Closing shall be held at the offices of Principal
Management Corporation, 680 8th Street, Des Moines, Iowa 50392 or at such other
time and/or place as the parties may agree.
3.2 The Acquired Fund shall deliver to PIF, on behalf of the Acquiring
Fund, on the Closing Date a schedule of Assets.
3.3. The Acquired Fund shall direct the custodian for the Acquired Fund
to deliver, at the Closing, a certificate of an authorized officer stating that
(i) the Assets shall have been delivered in proper form to the custodian for the
Acquiring Fund, prior to or on the Closing Date, and (ii) all necessary taxes in
connection with the delivery of the Assets, including all applicable federal and
state stock transfer stamps, if any, have been paid or provision for payment has
been made. The Acquired Fund's portfolio securities represented by a certificate
or other written instrument shall be presented by the custodian for the Acquired
Fund to the custodian for the Acquiring Fund for examination no later than five
business days preceding the Closing Date, and shall be transferred and delivered
by the Acquired Fund as of the Closing Date for the account of the Acquiring
Fund duly endorsed in proper form for transfer in such condition as to
constitute good delivery thereof. The Acquired Fund's portfolio securities and
instruments deposited with a securities depository, as defined in Rule 17f-4
under the 1940 Act, shall be delivered as of the Closing Date by book entry, in
accordance with the customary practices of such depositories and the custodian
for the Acquiring Fund. The cash to be transferred by the Acquired Fund shall be
delivered by wire transfer of federal funds on the Closing Date.
3.4. The Acquired Fund shall direct its transfer agent to deliver at
the Closing a certificate of an authorized officer stating that its records
contain the names and addresses of the Acquired Fund Shareholders and the number
and percentage ownership of outstanding Class A and Class B shares owned by each
such shareholder immediately prior to the Closing. The Acquiring Fund shall
issue and deliver a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date to the Acquired Fund, or provide evidence
satisfactory to the Acquired Fund that such Acquiring Fund Shares have been
credited to the Acquired Fund's account on the books of the Acquiring Fund. At
the Closing each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, if any, receipts or other documents as such
other party or its counsel may reasonably request.
3.5. In the event that on the Valuation Date (a) the NYSE or another
primary trading market for portfolio securities of the Acquiring Fund or the
Acquired Fund shall be closed to trading or trading thereupon shall be
restricted, or (b) trading or the reporting of trading on such Exchange or
elsewhere shall be disrupted so that, in the judgment of the Board of Directors
of the Acquired Fund or the Acquiring Fund, accurate appraisal of the value of
the net assets of the Acquiring Fund or the Acquired Fund, respectively, is
impracticable, the Closing Date shall be postponed until the first business day
after the day when trading shall have been fully resumed and reporting shall
have been restored.
4. REPRESENTATIONS AND WARRANTIES
4.1. The Acquired Fund represents and warrants as follows:
(a) The Acquired Fund is a corporation duly organized, validly existing
and in good standing under the laws of the State of Maryland with power and
authority under its Articles of Incorporation, as amended, to own all of its
Assets and to carry on its business as it is now being conducted;
(b) The Acquired Fund is a registered investment company classified as
a management company of the open-end type, and its registration with the
Commission as an investment company under the 1940 Act, and the registration of
shares of the Acquired Fund under the Securities Act of 1933, as amended ("1933
Act"), are in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired Fund of
the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act")
and the 1940 Act and such as may be required by state securities laws;
(d) The current prospectus and statement of additional information of
the Acquired Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations of
the Commission thereunder and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not materially misleading;
(e) On the Closing Date, the Acquired Fund will have good and
marketable title to the Assets and full right, power, and authority to sell,
assign, transfer and deliver such Assets hereunder free of any liens or other
encumbrances, and upon delivery and payment for such Assets, the Acquiring Fund
will acquire good and marketable title thereto, subject to no restrictions on
the full transfer thereof, including such restrictions as might arise under the
1933 Act, other than as disclosed to the Acquiring Fund;
(f) The Acquired Fund is not currently engaged, and the execution,
delivery and performance of this Agreement will not result, in (i) a material
violation of Maryland law or the Acquired Fund's Articles of Incorporation or
By-Laws or of any agreement, indenture, instrument, contract, lease or other
undertaking to which the Acquired Fund is a party or by which it is bound, or
(ii) the acceleration of any obligation, or the imposition of any penalty, under
any agreement, indenture, instrument, contract, lease, judgment or decree to
which the Acquired Fund is a party or by which it is bound;
(g) All material contracts or other commitments of the Acquired Fund
(other than this Agreement and certain investment contracts, including options,
futures, and forward contracts) will terminate without liability to the Acquired
Fund on or prior to the Closing Date;
(h) Except as otherwise disclosed in writing to and accepted by PIF on
behalf of the Acquiring Fund, no litigation or administrative proceeding or
investigation of or before any court or governmental body is presently pending
or, to its knowledge, threatened against the Acquired Fund, or any of its
properties or assets that, if adversely determined, would materially and
adversely affect the Acquired Fund's financial condition or the conduct of its
business. The Acquired Fund knows of no facts which might form the basis for the
institution of such proceedings and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental body
which materially and adversely affects the Acquired Fund's business or the
Acquired Fund's ability to consummate the transactions herein contemplated;
(i) The Statement of Assets and Liabilities, Statements of Operations
and Changes in Net Assets, and Schedule of Investments of the Acquired Fund as
of October 31, 2004 have been audited by Ernst & Young LLP, independent
auditors, and are in accordance with generally accepted accounting principles in
the United States ("GAAP") consistently applied, and such statements (copies of
which have been furnished to PIF on behalf of the Acquiring Fund) present
fairly, in all material respects, the financial condition of the Acquired Fund
as of such date in accordance with GAAP, and there are no known contingent
liabilities of the Acquired Fund required to be reflected on a balance sheet
(including the notes thereto) in accordance with GAAP as of such date not
disclosed therein;
(j) Since October 31, 2004, there has not been any material adverse
change in the Acquired Fund's financial condition, assets, liabilities or
business, other than changes occurring in the ordinary course of business, or
any incurrence by the Acquired Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by PIF on behalf of the Acquiring Fund. For the purposes of this
subsection (j), a decline in net asset value per share of the Acquired Fund due
to declines in market values of portfolio securities of the Acquired Fund, the
discharge of Acquired Fund liabilities as reflected in its Statement of Assets
and Liabilities as of October 31, 2004 (including the notes thereto), or the
redemption of Acquired Fund Shares by shareholders of the Acquired Fund shall
not constitute a material adverse change;
(k) On the Closing Date, all federal and other tax returns, dividend
reporting forms, and other tax-related reports of the Acquired Fund required by
law to have been filed by such date (including any extensions) shall have been
filed and are or will be correct in all material respects, and all federal and
other taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the payment
thereof, and to the best of the Acquired Fund's knowledge, no such return is
currently under audit and no assessment has been asserted with respect to such
returns;
(l) For each taxable year of its operation (including the taxable year
ending on the Closing Date), the Acquired Fund has met (or will meet) the
requirements of Subchapter M of the Code for qualification as a regulated
investment company, has complied (or will comply) with the applicable
diversification requirements imposed by Subchapter L of the Code, has been (or
will be) eligible to and has computed (or will compute) its federal income tax
under Section 852 of the Code, and will have distributed all of its investment
company taxable income and net capital gain (as defined in the Code) that has
accrued through the Closing Date, and before the Closing Date will have declared
dividends sufficient to distribute substantially all (and in no event less than
98%) of its investment company taxable income and net capital gain for the
period ending on the Closing Date;
(m) All issued and outstanding shares of the Acquired Fund (i) have
been offered and sold in every state and the District of Columbia in compliance
in all material respects with applicable registration requirements of the 1933
Act and state securities laws, and in other jurisdictions in compliance with
applicable laws, (ii) are, and on the Closing Date will be, duly and validly
issued and outstanding, fully paid and non-assessable and not subject to
preemptive or dissenter's rights, and (iii) will, at the time of Closing, be
held by the persons and in the amounts set forth in the records of the transfer
Agent for the Acquired Fund on its behalf, as provided in section 3.4. The
Acquired Fund does not have outstanding any options, warrants or other rights to
subscribe for or purchase any of the shares of the Acquired Fund, nor is there
outstanding any security convertible into any of the Acquired Fund shares;
(n) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on the
part of the Board of Directors of the Acquired Fund, and, subject to the
approval of the shareholders of the Acquired Fund, this Agreement will
constitute a valid and binding obligation of the Acquired Fund, enforceable in
accordance with its terms, subject, as to enforcement, to bankruptcy,
insolvency, reorganization, moratorium and other laws relating to or affecting
creditors' rights and to general equity principles;
(o) The information to be furnished by the Acquired Fund for use in
registration statements, proxy materials and other documents filed or to be
filed with any federal, state or local regulatory authority (including the
National Association of Securities Dealers, Inc. (the "NASD")), which may be
necessary in connection with the transactions contemplated hereby, shall be
accurate and complete in all material respects and shall comply in all material
respects with federal securities and other laws and regulations applicable
thereto; and
(p) The proxy statement of the Acquired Fund (the "Proxy Statement") to
be included in the Registration Statement referred to in section 5.5 (including
any amendment or supplement thereto), insofar as it relates to the Acquired
Fund, will, on the effective date of the Registration Statement and on the
Closing Date (i) not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such statements
were made, not materially misleading provided, however, that the representations
and warranties in this subsection (p) shall not apply to statements in or
omissions from the Proxy Statement and the Registration Statement made in
reliance upon and in conformity with information that was furnished by the
Acquiring Fund for use therein, and (ii) comply in all material respects with
the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and
regulations thereunder.
4.2. PIF, on behalf of the Acquiring Fund, represents and warrants as
follows:
(a) The Acquiring Fund is duly organized as a series of PIF, which is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Maryland with power and authority under its Articles of
Incorporation, as amended, to own all of its properties and assets and to carry
on its business as it is now being conducted;
(b) PIF is a registered investment company classified as a management
company of the open-end type, and its registration with the Commission as an
investment company under the 1940 Act and the registration of shares of the
Acquiring Fund under the 1933 Act are in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring Fund of
the transactions contemplated herein, except such as have been obtained under
the 1933 Act, the 1934 Act and the 1940 Act and such as may be required by state
securities laws;
(d) The current prospectus and statement of additional information of
the Acquiring Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations of
the Commission thereunder and do not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not materially misleading;
(e) On the Closing Date, the Acquiring Fund will have good and
marketable title to the Acquiring Fund's assets, free of any liens of other
encumbrances, except those liens or encumbrances as to which the Acquired Fund
has received notice and necessary documentation at or prior to the Closing;
(f) PIF is not currently engaged, and the execution, delivery and
performance of this Agreement will not result, in (i) a material violation of
PIF's Articles of Incorporation or By-Laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which PIF, on behalf of the
Acquiring Fund, is a party or by which it is bound, or (ii) the acceleration of
any obligation, or the imposition of any penalty, under any agreement,
indenture, instrument, contract, lease, judgment or decree to which PIF on
behalf of the Acquiring Fund, is a party or by which it is bound;
(g) Except as otherwise disclosed in writing to and accepted by the
Acquired Fund, no litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to the knowledge
of PIF, threatened against PIF, on behalf of the Acquiring Fund, or any of the
Acquiring Fund's properties or assets that, if adversely determined, would
materially and adversely affect the Acquiring Fund's financial condition or the
conduct of its business. PIF, on behalf of the Acquiring Fund, knows of no facts
which might form the basis for the institution of such proceedings and is not a
party to or subject to the provisions of any order, decree or judgment of any
court or governmental body which materially and adversely affects the Acquiring
Fund's business or the Acquiring Fund's ability to consummate the transactions
herein contemplated;
(h) The Statement of Assets and Liabilities, Statements of Operations
and Changes in Net Assets and Schedule of Investments of the Acquiring Fund as
of October 31, 2004 have been audited by Ernst & Young LLP, independent
auditors, and are in accordance with GAAP consistently applied, and such
statements (copies of which have been furnished to the Acquired Fund) present
fairly, in all material respects, the financial condition of the Acquiring Fund
as of such date in accordance with GAAP, and there are no known contingent
liabilities of the Acquiring Fund required to be reflected on a balance sheet
(including the notes thereto) in accordance with GAAP as of such date not
disclosed therein;
(i) Since October 31, 2004, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities or
business, other than changes occurring in the ordinary course of business, or
any incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date such indebtedness was incurred, except as otherwise disclosed to
and accepted by the Acquired Fund. For purposes of this subsection (i), a
decline in net asset value per share of the Acquiring Fund due to declines in
market values of portfolio securities of the Acquiring Fund, the discharge of
Acquiring Fund liabilities as reflected in its Statement of Assets and
Liabilities as of October 31, 2004 (including the notes thereto), or the
redemption of Acquiring Fund Shares by shareholders of the Acquiring Fund, shall
not constitute a material adverse change;
(j) On the Closing Date, all federal and other tax returns, dividend
reporting forms, and other tax-related reports of the Acquiring Fund required by
law to have been filed by such date (including any extensions) shall have been
filed and are or will be correct in all material respects, and all federal and
other taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the payment
thereof, and to the best of the knowledge of PIF, on behalf of the Acquiring
Fund, no such return is currently under audit and no assessment has been
asserted with respect to such returns;
(k) For each taxable year of its operation (including the taxable year
that includes the Closing Date), the Acquiring Fund has met (or will meet) the
requirements of Subchapter M of the Code for qualification as a regulated
investment company, has complied (or will comply) with the applicable
diversification requirements imposed by Subchapter L of the Code, has been
eligible to (or will be eligible to) and has computed (or will compute) its
federal income tax under Section 852 of the Code;
(l) All issued and outstanding Acquiring Fund Shares (i) have been
offered and sold in every state and the District of Columbia in compliance in
all material respects with applicable registration requirements of the 1933 Act
and state securities laws, and in other jurisdictions in compliance with
applicable laws, and (ii) are, and on the Closing Date will be, duly and validly
issued and outstanding, fully paid and non-assessable and not subject to
preemptive or dissenter's rights. The Acquiring Fund does not have outstanding
any options, warrants or other rights to subscribe for or purchase any Acquiring
Fund Shares, nor is there outstanding any security convertible into any
Acquiring Fund Shares;
(m) The execution, delivery and performance of this Agreement will have
been fully authorized prior to the Closing Date by all necessary action on the
part of the Board of Directors of PIF on behalf of the Acquiring Fund, and this
Agreement will constitute a valid and binding obligation of PIF, on behalf of
the Acquiring Fund, enforceable in accordance with its terms, subject, as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and other
laws relating to or affecting creditors' rights and to general equity
principles;
(n) The Acquiring Fund Shares to be issued and delivered to the
Acquired Fund, for the account of the Acquired Fund Shareholders, pursuant to
the terms of this Agreement, will on the Closing Date have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable;
(o) The information to be furnished by PIF, on behalf of the Acquiring
Fund, for use in registration statements, proxy materials and other documents
filed or to be filed with any federal, state or local regulatory authority
(including the NASD), which may be necessary in connection with the transactions
contemplated hereby, shall be accurate and complete in all material respects and
shall comply in all material respects with federal securities and other laws and
regulations applicable thereto; and
(p) The Proxy Statement to be included in the Registration Statement
(including and any amendment or supplement thereto), insofar as it relates to
the Acquiring Fund, will, on the effective date of the Registration Statement
and on the Closing Date (i) not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which such
statements were made, not misleading provided, however, that the representations
and warranties in this subsection (p) shall not apply to statements in or
omissions from the Registration Statement made in reliance upon and in
conformity with information that was furnished by the Acquired Fund for use
therein, and (ii) comply in all material respects with the provisions of the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations
thereunder.
5. COVENANTS OF PIF, ON BEHALF OF THE ACQUIRING FUND, AND THE ACQUIRED FUND
5.1. PIF, on behalf of the Acquiring Fund, and the Acquired Fund each
will operate its business in the ordinary course between the date hereof and the
Closing Date, it being understood that such ordinary course of business will
include the declaration and payment of customary dividends and distributions and
such changes as are contemplated by the Funds' normal operations.
5.2. The Acquired Fund will call a meeting of the shareholders of the
Acquired Fund to consider and act upon this Agreement and will take all other
reasonable action necessary to obtain approval of the transactions contemplated
herein.
5.3. The Acquired Fund covenants that the Class A and Class B Acquiring
Fund Shares to be issued hereunder are not being acquired for the purpose of
making any distribution thereof, other than in accordance with the terms of this
Agreement.
5.4. Subject to the provisions of this Agreement, PIF, on behalf of the
Acquiring Fund, and the Acquired Fund will each take, or cause to be taken, all
action, and do or cause to be done, all things reasonably necessary, proper or
advisable to consummate and make effective the transactions contemplated by this
Agreement.
5.5. PIF, on behalf of the Acquiring Fund, and the Acquired Fund each
covenants to prepare the Registration Statement on Form N-14 (the "Registration
Statement"), in compliance with the 1933 Act, the 1934 Act and the 1940 Act in
connection with the meeting of the Acquired Fund Shareholders to consider and
act upon this Agreement and the transactions contemplated herein. PIF, on behalf
of the Acquiring Fund, will file the Registration Statement, including the Proxy
Statement, with the Commission. The Acquired Fund will provide PIF, on behalf of
the Acquiring Fund, with the information reasonably necessary for preparation of
a prospectus, which will include the Proxy Statement referred to in section
4.1(p), all to be included in the Registration Statement, in compliance in all
material respects with the 1933 Act, the 1934 Act and the 1940 Act.
5.6. As soon as is reasonably practicable after the Closing, the
Acquired Fund will make a liquidating distribution to its shareholders
consisting of the Class A and Class B Acquiring Fund Shares received at the
Closing.
5.7. PIF, on behalf of the Acquiring Fund, and the Acquired Fund will
each use its reasonable best efforts to fulfill or obtain the fulfillment of the
conditions precedent to effect the transactions contemplated by this Agreement
as promptly as practicable.
5.8. The Acquired Fund covenants that it will, from time to time, as
and when reasonably requested by PIF on behalf of the Acquiring Fund, execute
and deliver or cause to be executed and delivered all such assignments and other
instruments, and will take or cause to be taken such further action as PIF, on
behalf of the Acquiring Fund, may reasonably deem necessary or desirable in
order to vest in and confirm the Acquiring Fund's title to and possession of all
the Assets and otherwise to carry out the intent and purpose of this Agreement.
5.9. PIF, on behalf of the Acquiring Fund, covenants that it will, from
time to time, as and when reasonably requested by the Acquired Fund, execute and
deliver or cause to be executed and delivered all such assignments, assumption
agreements, releases and other instruments, and will take or cause to be taken
such further action, as the Acquired Fund may reasonably deem necessary or
desirable in order to (i) vest in and confirm to the Acquired Fund title to and
possession of all Acquiring Fund shares to be transferred to the Acquired Fund
pursuant to this Agreement and (ii) assume the liabilities of the Acquired Fund.
5.10. PIF, on behalf of the Acquiring Fund, will use all reasonable
efforts to obtain the approvals and authorizations required by the 1933 Act, the
1940 Act and such of the state securities laws as it deems appropriate in order
to continue its operations after the Closing Date and to consummate the
transactions contemplated herein.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by
PIF, on behalf of the Acquiring Fund, of all the obligations to be performed by
it hereunder on or before the Closing Date, and, in addition thereto, the
following further conditions:
6.1. All representations and warranties of PIF, on behalf of the
Acquiring Fund, contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected by
the transactions contemplated by this Agreement, as of the Closing Date, with
the same force and effect as if made on and as of the Closing Date;
6.2. PIF, on behalf of the Acquiring Fund, shall have delivered to the
Acquired Fund on the Closing Date a certificate executed in PIF's name by its
President or a Vice President, in a form reasonably satisfactory to the Acquired
Fund and dated as of the Closing Date, to the effect that the representations
and warranties of the Acquiring Fund made in this Agreement are true and correct
on and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters as the
Acquired Fund shall reasonably request;
6.3. PIF, on behalf of the Acquiring Fund, shall have performed all of
the covenants and complied with all of the provisions required by this Agreement
to be performed or complied with by PIF on behalf of the Acquiring Fund on or
before the Closing Date; and
6.4. The Acquired Fund and PIF, on behalf of the Acquiring Fund, shall
have agreed on the number of full and fractional Acquiring Fund Shares of Class
A and Class B to be issued in connection with the Reorganization after such
number has been calculated in accordance with section 1.1.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of PIF, on behalf of the Acquiring Fund, to complete
the transactions provided for herein shall be subject, at PIF's election, to the
performance by the Acquired Fund of all of the obligations to be performed by it
hereunder on or before the Closing Date and, in addition thereto, the following
conditions:
7.1. All representations and warranties of the Acquired Fund contained
in this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of the Closing Date, with the same force and effect as if
made on and as of the Closing Date;
7.2. The Acquired Fund shall have delivered to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities, as of the Closing Date,
certified by the Treasurer of the Acquired Fund;
7.3 The Acquired Fund shall have delivered to PIF, on behalf of the
Acquiring Fund, a certificate executed in the Acquired Fund's name by its
President or a Vice President, in a form reasonably satisfactory to the
Acquiring Fund and dated as of the Closing Date, to the effect that the
representations and warranties of the Acquired Fund made in this Agreement are
true and correct on and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement, and as to such other matters
as the Acquiring Fund shall reasonably request;
7.4. The Acquired Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by it on or before the Closing Date;
7.5. The Acquired Fund and PIF, on behalf of the Acquiring Fund, shall
have agreed on the number of full and fractional Acquiring Fund Shares of Class
A and Class B to be issued in connection with the Reorganization after such
number has been calculated in accordance with section 1.1; and
7.6. The Acquired Fund shall have declared and paid a distribution or
distributions prior to the Closing that, together with all previous
distributions, shall have the effect of distributing to its shareholders (i)
substantially all (and in no event less than 98%) of its investment company
taxable income and realized net capital gain, if any, for the period from the
close of its last fiscal year through the Closing Date; and (ii) any
undistributed investment company taxable income and net realized capital gains
from any period to the extent not otherwise already distributed.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF PIF, ON BEHALF OF THE
ACQUIRING FUND, AND THE ACQUIRED FUND
If any of the conditions set forth below has not been satisfied on or
before the Closing Date with respect to the Acquired Fund or PIF, on behalf of
the Acquiring Fund, either party to this Agreement may choose, at its option,
not to consummate the transactions contemplated by this Agreement:
8.1. The Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding shares of
the Acquired Fund in accordance with the provisions of the Acquired Fund's
Articles of Incorporation, By-Laws, applicable Maryland law and the 1940 Act,
and certified copies of the resolutions evidencing such approval shall have been
delivered to PIF, on behalf of the Acquiring Fund. Notwithstanding anything
herein to the contrary, neither the Acquired Fund nor PIF, on behalf of the
Acquiring Fund, may waive the conditions set forth in this section 8.1;
8.2. On the Closing Date no action, suit or other proceeding shall be
pending or, to the knowledge of the Acquired Fund or of PIF, on behalf of the
Acquiring Fund, threatened, before any court or governmental agency in which it
is sought to restrain or prohibit, or obtain material damages or other relief in
connection with, this Agreement or the transactions contemplated herein;
8.3. All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities deemed necessary by
the Acquired Fund or PIF, on behalf of the Acquiring Fund, to permit
consummation, in all material respects, of the transactions contemplated hereby
shall have been obtained, except where failure to obtain any such consent, order
or permit would not involve a risk of a material adverse effect on the assets or
properties of the Acquired Fund or the Acquiring Fund, provided that either
party hereto may for itself waive any of such conditions;
8.4. The Registration Statement shall have become effective under the
1933 Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending, threatened
or contemplated under the 1933 Act; and
8.5. The parties shall have received the opinion of tax counsel
satisfactory to each party, addressed to each of the Acquired Fund and PIF, in a
form reasonably satisfactory to each such party to this Agreement, substantially
to the effect that, based upon certain facts, assumptions, and representations
of the parties, for federal income tax purposes: (1) the Reorganization will
constitute a reorganization within the meaning of Section 368(a) of the Code
with respect to the Acquired Fund and the Acquiring Fund; (2) no gain or loss
will be recognized by the Acquired Fund or the Acquiring Fund upon the transfer
of all of the assets and liabilities, if any, of the Acquired Fund to the
Acquiring Fund solely in exchange for shares of the Acquiring Fund; (3) no gain
or loss will be recognized by shareholders of the Acquired Fund upon the
exchange of such Acquired Fund's shares solely for shares of the Acquiring Fund;
(4) the holding period and tax basis of the shares of the Acquiring Fund
received by each holder of shares of the Acquired Fund pursuant to the
Reorganization will be the same as the holding period and tax basis of the
shares of the Acquired Fund held by the shareholder (provided the shares of the
Acquired Fund were held as a capital asset on the date of the Reorganization)
immediately prior to the Reorganization; and (5) the holding period and tax
basis of the assets of the Acquired Fund acquired by the Acquiring Fund will be
the same as the holding period and tax basis of those assets to the Acquired
Fund immediately prior to the Reorganization. The delivery of such opinion is
conditioned upon receipt by tax counsel of representations it shall request from
each of the Acquired Fund and PIF. Notwithstanding anything herein to the
contrary, neither the Acquired Fund nor PIF, on behalf of the Acquiring Fund,
may waive the conditions set forth in this section 8.5.
9. FEES AND EXPENSES
9.1. Each of PIF, on behalf of the Acquiring Fund, and the Acquired
Fund represents and warrants to the other that it has no obligations to pay any
brokers' or finders' fees in connection with the transactions provided for
herein.
9.2. The first $1,000,000 of the expenses relating to the
Reorganization will be allocated among the Acquired Funds based on the ratio of
the open accounts of each Acquired Fund to the open accounts of all the Acquired
Funds as of the close of business on February 28, 2005. The Manager will pay 50%
of the balance of the expenses relating to the Reorganization, and the remaining
50% will be allocated among the Acquired Funds in the same manner as the first
$1,000,000 of expenses, except that the Manager will pay 100% of such expenses
allocated to the following Acquired Funds which are not expected to experience
reduced expense ratios as a result of the Reorganization: the Principal Bond
Fund, Principal MidCap Fund, Principal Tax-Exempt Bond Fund, Principal Partners
LargeCap Value Fund, Principal Partners SmallCap Growth Fund, Principal
International Fund and Principal Partners MidCap Growth Fund. In addition, with
respect to each other Acquired Fund, the Manager will pay any portion of the
remaining 50% of the balance of the expenses allocated to the Acquired Fund that
exceeds an amount equal to the sum of (A) and (B), where (A) equals the result
determined by multiplying the net assets attributable to the Class A shares of
the Acquired Fund by the remainder of the Total Fund Operating Expense Ratio of
the Class A shares of the Acquired Fund minus the Total Fund Operating Expense
Ratio of the Class A shares of the Acquiring Fund and (B) equals the result
determined by multiplying the net assets attributable to the Class B shares of
the Acquired Fund by the remainder of the Total Fund Operating Expense Ratio of
the Class B shares of the Acquired Fund minus the Total Fund Operating Expense
Ratio of the Class B shares of the Acquiring Fund. For purposes of the preceding
sentence, the net assets attributable to the Class A shares and the Class B
shares of the Acquired Fund shall be determined as of the Effective Time or such
other time to which the Manager and the Acquired Fund may agree, the Total Fund
Operating Expense Ratios for the Class A shares and the Class B shares of the
Acquired Fund shall be those for the fiscal year ended October 31, 2004 and the
Total Fund Operating Expense Ratios for the Class A shares and the Class B
shares of the Acquiring Fund shall be determined for the period beginning on
November 1, 2004 and ending at the Effective Time or at such other time to which
the Manager and the Acquired Fund may agree. The costs of the Reorganization
shall include, but not be limited to, costs associated with preparation of the
Registration Statement, printing and distribution of the Acquiring Fund's
prospectus and the Acquired Fund's proxy materials, legal fees, accounting fees,
securities registration fees, and expenses of holding the Acquired Fund
Shareholders meeting. Notwithstanding any of the foregoing, expenses will in any
event be paid by the party directly incurring such expenses if and to the extent
that the payment by another person of such expenses would result in the
disqualification of such party as a "regulated investment company" within the
meaning of Section 851 of the Code.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1. The Acquired Fund and PIF, on behalf of the Acquiring Fund, agree
that neither has made any representation, warranty or covenant not set forth
herein and that this Agreement constitutes the entire agreement between the
parties.
10.2. Except as specified in the next sentence, the representations,
warranties and covenants contained in this Agreement or in any document
delivered pursuant hereto or in connection herewith shall not survive the
consummation of the transactions contemplated hereunder. The covenants to be
performed after the Closing shall survive the Closing.
11. TERMINATION
This Agreement may be terminated and the transactions contemplated
hereby may be abandoned by either party by (i) mutual agreement of the parties,
or (ii) by either party if the Closing shall not have occurred on or before June
30, 2005, unless such date is extended by mutual agreement of the parties, or
(iii) by either party if the other party shall have materially breached its
obligations under this Agreement or made a material and intentional
misrepresentation herein or in connection herewith. In the event of any such
termination, this Agreement shall become void and there shall be no liability
hereunder on the part of any of the parties or their respective Board members or
officers, except for any such material breach or intentional misrepresentation,
as to each of which all remedies at law or in equity of the party adversely
affected shall survive.
12. AMENDMENTS; WAIVERS
12.1 This Agreement may be amended, modified or supplemented in such
manner as may be mutually agreed upon in writing by any authorized officer of
the Acquired Fund and any authorized officer of PIF, on behalf of the Acquiring
Fund; provided, however, that, following the meeting of the shareholders of the
Acquired Fund called by the Acquired Fund pursuant to section 5.2 of this
Agreement, no such amendment may have the effect of changing the provisions for
determining the number of the Class A and Class B Acquiring Fund Shares to be
issued to the Acquired Fund Shareholders under this Agreement to the detriment
of such shareholders, or otherwise have a material adverse effect on the
interests or rights of the Acquired Fund or the Acquired Fund Shareholders,
without the Acquired Fund obtaining further approval of the Acquired Fund
Shareholders.
12.2. Except as otherwise expressly provided in this Agreement, each of
the Acquired Fund and PIF, on behalf of the Acquiring Fund, may at any time
prior to the Closing by written instrument signed by it: (i) waive any
inaccuracies in the representations and warranties contained herein and made for
its benefit; and (ii) waive compliance with any of the covenants or conditions
contained herein and made for its benefit, except that any such waiver that
would have a material adverse effect on the interests or rights of the Acquired
Fund or the Acquired Fund Shareholders, or the Acquiring Fund or the Acquiring
Fund Shareholders, shall be made only with the consent of the Board of Directors
of, respectively, the Acquired Fund or the Acquiring Fund.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be deemed given upon
receipt if delivered by hand (including by Federal Express or similar express
courier) or transmitted by facsimile or three days after being mailed by prepaid
registered or certified mail addressed to the Acquired Fund, 680 8th Street, Des
Moines, Iowa 50392-0200, attn: Arthur S. Filean, or to PIF, on behalf of the
Acquiring Fund, 680 8th Street, Des Moines, Iowa 50392-0200, attn: Arthur S.
Filean; or to Principal Management Corporation, Principal Financial Group, Des
Moines, Iowa 50392, attn: Arthur S. Filean.
14 HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF LIABILITY
14.1. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2. This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original.
14.3. This Agreement shall be governed by and construed in accordance
with the laws of the State of Maryland without regard to its principles of
conflicts of laws.
14.4. This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by its President or Vice President as of the date first
written above.
PRINCIPAL BALANCED FUND, INC. PRINCIPAL INVESTORS FUND, INC.
PRINCIPAL CAPITAL VALUE FUND, INC. on behalf of each of the following Acquiring Funds:
PRINCIPAL PARTNERS LARGECAP VALUE FUND, INC. Disciplined LargeCap Blend Fund
PRINCIPAL EQUITY INCOME FUND, INC. LargeCap Value Fund
PRINCIPAL PARTNERS BLUE CHIP FUND, INC. Partners LargeCap Value Fund
PRINCIPAL PARTNERS LARGECAP BLEND FUND, INC. Equity Income Fund
PRINCIPAL LARGECAP STOCK INDEX FUND, INC. Partners LargeCap Blend Fund I
PRINCIPAL GROWTH FUND, INC. Partners LargeCap Blend Fund
PRINCIPAL PARTNERS EQUITY GROWTH FUND, INC. LargeCap S&P 500 Index Fund
PRINCIPAL MIDCAP FUND, INC. LargeCap Growth Fund
PRINCIPAL PARTNERS MIDCAP GROWTH FUND, INC.
PRINCIPAL SMALLCAP FUND, INC. Partners LargeCap Growth Fund I
PRINCIPAL PARTNERS SMALLCAP GROWTH MidCap Blend Fund
FUND, INC. Partners MidCap Growth Fund
PRINCIPAL REAL ESTATE SECURITIES FUND, INC. SmallCap Blend Fund
PRINCIPAL BOND FUND, INC. Partners SmallCap Growth Fund II
PRINCIPAL GOVERNMENT SECURITIES INCOME FUND, INC. Real Estate Securities Fund
PRINCIPAL TAX-EXEMPT BOND FUND, INC. Bond & Mortgage Securities Fund
PRINCIPAL INTERNATIONAL FUND, INC. Government Securities Fund
PRINCIPAL INTERNATIONAL SMALLCAP FUND, INC. Tax-Exempt Bond Fund
PRINCIPAL LIMITED TERM BOND FUND, INC. Diversified International Fund
PRINCIPAL CASH MANAGEMENT FUND, INC. High Quality Short-Term Bond Fund
PRINCIPAL INTERNATIONAL EMERGING FUND, INC. Money Market Fund
International Emerging Markets Fund
By: ___________________________ By: _____________________________
Ralph C. Eucher Michael J. Beer
President Executive Vice President
PRINCIPAL MANAGEMENT CORPORATION
By: ______________________________
Ralph C. Eucher
President
Appendix B
COMPARISON OF FUNDAMENTAL INVESTMENT RESTRICTIONS
The Acquired Fund and PIF on behalf of the Acquiring Fund have adopted
"fundamental" investment restrictions that may not be changed for any Fund
without the approval of a "majority of the outstanding voting securities" (as
defined under "Voting Information - Voting Rights") of the Fund. These
fundamental restrictions deal with such matters as the issuance of senior
securities, purchasing or selling real estate or commodities, borrowing money,
making loans, underwriting securities of other issuers, diversification or
concentration of investments and short sales of securities.
The table below compares the principal fundamental restrictions that
apply to the Acquired and Acquiring Funds. Additional fundamental investment
restrictions that apply only to the Acquired Fund and not the Acquiring Fund are
set forth following the table.
Comparison of Principal Fundamental Investment Restrictions
- ----------------------------------------------------------------- ---------------------------------------------------------------
Applicable to Acquired Fund Applicable to Acquiring Fund
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Senior Securities: Senior Securities:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
The Fund may not issue any senior securities as defined in
the 1940 Act. 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.
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Commodities: Commodities:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
The Fund may not invest in physical commodities or commodity
contracts (other than foreign currencies), but it may
purchase and sell financial futures contracts, options on
such contracts, swaps and securities backed by physical
commodities.
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Real Estate: Real Estate:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
The Fund may not engage in the purchase and sale of illiquid The Fund may not nvest in real estate, although it may
interests in real estate, including interests in real estate invest in securities that are secured by real estate
investment trusts (although it may invest in securities secured and securities of issues that invest or deal in real estate.
by real estate or interests therein) or invest in commodities
or commodity contracts, oil and gas interests,
or mineral exploration or development programs.
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Borrowing: Borrowing:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
The Fund may not borrow money except from banks for temporary The Fund may not borrow money, except that it may a)
or emergency purposes, including the meeting of redemption borrow from banks (as defined in the 1940 Act) or other
requests which might otherwise require the untimely disposition financial institutions or through reverse repurchase
of securities, in an amount not to exceed the lesser of a) 5% agreements in amounts up to 33 1/3% of its total assets
of the value of the Fund's assets, or b) 10% of the value of (including the amount borrowed); b) to the extent
the Fund's net assets taken at cost at the time such borrowing permitted by applicable law, borrow up to an additional 5% of
is made. The Fund will not issue senior securities except in its total assets for temporary purposes; c) obtain
connection with such borrowings. The Fund may not pledge, short-term credits as may be necessary for the clearance of
mortgage, or hypothecate its assets (at value) to an extent purchases and sales of portfolio securities; and d) purchase
greater than 10% of the net assets. securities on margin to the extent permitted by
applicable law (the deposit or payment of margin in
connection with transactions in options and financial
futures contracts is not considered purchase of securities
on margin).*
* The PIF Board of Directors has approved a proposal to
amend this fundamental restriction and has directed that the
proposal be submitted to shareholders of the Acquiring Fund
for approval at the PIF Shareholders Meeting. If approved by
shareholders, the amended fundamental restriction with
respect to borrowing will provide as follows:
The Fund may not borrow money, except as permitted under the
1940 Act, as amended, and as interpreted, modified or
otherwise permitted by regulatory authority having
jurisdiction, from time to time.
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Making Loans: Making Loans:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
The Fund may not make loans, except that the Fund may a) The Fund may not make loans, except that the Fund may a)
purchase and hold debt obligations in accordance with its purchase and hold debt obligations in accordance with its
investment objective and policies, b) enter into repurchase investment objectives and policies; b) enter into
agreements, and c) lend its portfolio securities without repurchase agreements; and c) lend its portfolio
limitation against collateral (consisting of cash or securities securities without limitation against collateral
issued or guaranteed by the U.S. Government or its agencies or (consisting of cash or liquid assets) equal at all times to
instrumentalities) equal at all times to not less than 100% of not less than 100% of the value of the securities loaned.
the value of the securities loaned. This limit does not apply to purchases of debt securities or
commercial paper.
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Diversification: Diversification:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
The Fund may not invest more than 5% of its total assets in
the securities of any one issuer (other than obligations
issued or guaranteed by the U.S. government or its agencies
or instrumentalities) or purchase more than 10% of the
outstanding voting securities of any one issuer, except that
this limitation shall apply only with respect to 75% of the
total assets of the Fund.
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Underwriting: Underwriting:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
The Fund may not act as an underwriter except to the extent The Fund may not act as an underwriter of securities, except
that, in connection wtih the disposition of portfolio securities, to the extent that the Fund may be deemed to be an
it may be deemed to be an underwriter under the federal underwriter in connection with the sale of securities held
securities laws. in its portfolio.
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Concentration: Concentration:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
The Fund may not concentrate its investments in any one The Fund may not concentrate its investments in any
industry. No more than 25% of the value of its total assets particular industry, except that the Fund may invest up to
will be invested in securities of issuers having their principal 25% of the value of its total assets in a single industry,
activities in any one industry, other than securities issued or provided that, when the Fund has adopted a temporary
guaranteed by the U.S. Government or its agencies or defensive posture, there shall be no limitation on the
instrumentalities, or obligations of domestic branches of U.S. purchase of obligations issued or guaranteed by the U.S.
banks and savings institutions. government or its agencies or instrumentalities.
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
Short Sales: Short Sales:
- ----------------------------------------------------------------- ---------------------------------------------------------------
- ----------------------------------------------------------------- ---------------------------------------------------------------
The Fund may not purchase securities on margin, except it The Fund may not sell securities short (except where the
may obtain such short-term credits as are necessary for the Fund holds or has the right to obtain at no added cost a
clearance of transactions. The Fund will not effect a short long position in the securities sold that equals or exceeds
sale of any security. The Fund will not issue or acquire put the securities sold short).
and call options, straddles or spreads or any combination
thereof.
- ----------------------------------------------------------------- ---------------------------------------------------------------
Additional Fundamental Investment
Restrictions Applicable to the Acquired Fund
The Cash Management Fund may not:
o 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).
o purchase the securities of any issuer if the purchase will cause more than
10% of the outstanding voting securities of the issuer to be held by the
Fund (other than securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities).
o 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.
o purchase securities of other investment companies except in connection with
a merger, consolidation, or plan of reorganization.
o 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.
o invest in companies for the purpose of exercising control or management.
o invest in time deposits maturing in more than seven days; time deposits
maturing from two business days through seven calendar days may not exceed
10% of the value of the Fund's total assets.
o invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven days.
Appendix C
CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS
Securities and Investment Practices
Market Volatility. Fixed-income securities include bonds and other debt
instruments that are used by issuers to borrow money from investors. The issuer
generally pays the investor a fixed, variable or floating rate of interest. The
amount borrowed must be repaid at maturity. Some debt securities, such as zero
coupon bonds, do not pay current interest, but are sold at a discount from their
face values.
Interest Rate Changes. Fixed-income securities are sensitive to changes
in interest rates. In general, fixed-income security prices rise when interest
rates fall and fall when interest rates rise. Longer term bonds and zero coupon
bonds are generally more sensitive to interest rate changes.
Credit Risk. Fixed-income security prices are also affected by the
credit quality of the issuer. Investment grade debt securities are medium and
high quality securities. Some bonds, such as lower grade or "junk" bonds, may
have speculative characteristics and may be particularly sensitive to economic
conditions and the financial condition of the issuers.
Repurchase Agreements And Loaned Securities
Although not a principal investment strategy, each of the Funds may
invest a portion of its assets in repurchase agreements. Repurchase agreements
typically involve the purchase of debt securities from a financial institution
such as a bank, savings and loan association or broker-dealer. A repurchase
agreement provides that the Fund sells back to the seller and that the seller
repurchases the underlying securities at a specified price on a specific date.
Repurchase agreements may be viewed as loans by a Fund collateralized by the
underlying securities. This arrangement results in a fixed rate of return that
is not subject to market fluctuation while the Fund holds the security. In the
event of a default or bankruptcy by a selling financial institution, the
affected Fund bears a risk of loss. To minimize such risks, the Fund enters into
repurchase agreements only with large, well-capitalized and well-established
financial institutions. In addition, the value of the securities collateralizing
the repurchase agreement is, and during the entire term of the repurchase
agreement remains, at least equal to the repurchase price, including accrued
interest.
Each of the Funds may lend its portfolio securities to unaffiliated
broker-dealers and other unaffiliated qualified financial institutions.
Currency Contracts
The Funds may each enter into forward currency contracts, currency
futures contracts and options, and options on currencies for hedging purposes
and not as a principal investment strategy. A forward currency contract involves
a privately negotiated obligation to purchase or sell a specific currency at a
future date at a price set in the contract. A Fund will not hedge currency
exposure to an extent greater than the aggregate market value of the securities
held or to be purchased by the Fund (denominated or generally quoted or
currently convertible into the currency). Hedging is a technique used in an
attempt to reduce risk. If a Fund's Sub-Advisor hedges market conditions
incorrectly or employs a strategy that does not correlate well with the Fund's
investment, these techniques could result in a loss. These techniques may
increase the volatility of a Fund and may involve a small investment of cash
relative to the magnitude of the risk assumed. In addition, these techniques
could result in a loss if the other party to the transaction does not perform as
promised. There is also a risk of government action through exchange controls
that would restrict the ability of the Fund to deliver or receive currency.
Forward Commitments
Although not a principal investment strategy, each of the Funds may
enter into forward commitment agreements. These agreements call for the Fund to
purchase or sell a security on a future date at a fixed price. Each of these
Funds may also enter into contracts to sell its investments either on demand or
at a specific interval.
Warrants
Each of the Funds may invest up to 5% of its assets in warrants though
none of the Funds use such investments as a principal investment strategy. A
warrant is a certificate granting its owner the right to purchase securities
from the issuer at a specified price, normally higher than the current market
price.
Derivatives
To the extent permitted by its investment objectives and policies, each
of the Funds may invest in securities that are commonly referred to as
derivative securities. Generally, a derivative is a financial arrangement, the
value of which is derived from, or based on, a traditional security, asset, or
market index. Certain derivative securities are described more accurately as
index/structured securities. Index/structured securities are derivative
securities whose value or performance is linked to other equity securities (such
as depositary receipts), currencies, interest rates, indices or other financial
indicators (reference indices).
Some derivatives, such as mortgage-related and other asset-backed
securities, are in many respects like any other investment, although they may be
more volatile or less liquid than more traditional debt securities.
There are many different types of derivatives and many different ways
to use them. Futures and options are commonly used for traditional hedging
purposes to attempt to protect a Fund from exposure to changing interest rates,
securities prices, or currency exchange rates and for cash management purposes
as a low-cost method of gaining exposure to a particular securities market
without investing directly in those securities. The Funds may enter into put or
call options, future contracts, options on futures contracts and
over-the-counter swap contracts (e.g., interest rate swaps, total return swaps
and credit default swaps) for both hedging and non-hedging purposes.
Generally, no Fund may invest in a derivative security unless the
reference index or the instrument to which it relates is an eligible investment
for the Fund. The return on a derivative security may increase or decrease,
depending upon changes in the reference index or instrument to which it relates.
The risks associated with derivative investments include:
o the risk that the underlying security, interest rate, market index or
other financial asset will not move in the direction the Manager or
Sub-Advisor anticipated;
o the possibility that there may be no liquid secondary market which may
make it difficult or impossible to close out a position when desired;
o the risk that adverse price movements in an instrument can result in a
loss substantially greater than a Fund's initial investment; and
o the counterparty may fail to perform its obligations.
Convertible Securities
Convertible securities are fixed-income securities that a Fund has the
right to exchange for equity securities at a specified conversion price. The
option allows the Fund to realize additional returns if the market price of the
equity securities exceeds the conversion price. For example, the Fund may hold
fixed-income securities that are convertible into shares of common stock at a
conversion price of $10 per share. If the market value of the shares of common
stock reached $12, the Fund could realize an additional $2 per share by
converting its fixed-income securities.
Convertible securities have lower yields than comparable fixed-income
securities. In addition, at the time a convertible security is issued the
conversion price exceeds the market value of the underlying equity securities.
Thus, convertible securities may provide lower returns than non-convertible
fixed-income securities or equity securities depending upon changes in the price
of the underlying equity securities. However, convertible securities permit the
Fund to realize some of the potential appreciation of the underlying equity
securities with less risk of losing its initial investment.
The Funds treat convertible securities as both fixed-income and equity
securities for purposes of investment policies and limitations because of their
unique characteristics. The Funds may invest in convertible securities without
regard to their ratings.
Foreign Investing
Each of the Funds may invest in securities of foreign companies but not
as a principal investment strategy. For the purpose of this restriction, foreign
companies are:
o companies with their principal place of business or principal office
outside the U.S.; and
o companies for which the principal securities trading market is outside
the U.S.
Foreign companies may not be subject to the same uniform accounting,
auditing and financial reporting practices as are required of U.S. companies. In
addition, there may be less publicly available information about a foreign
company than about a U.S. company. Securities of many foreign companies are less
liquid and more volatile than securities of comparable U.S. companies.
Commissions on foreign securities exchanges may be generally higher than those
on U.S. exchanges, although each Fund seeks the most favorable net results on
its portfolio transactions.
Foreign markets also have different clearance and settlement procedures
than those in U.S. markets. In certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct these transactions. Delays in
settlement could result in temporary periods when a portion of Fund assets is
not invested and earning no return. If a Fund is unable to make intended
security purchases due to settlement problems, the Fund may miss attractive
investment opportunities. In addition, a Fund may incur a loss as a result of a
decline in the value of its portfolio if it is unable to sell a security.
With respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments that could affect a Fund's investments in those
countries. In addition, a Fund may also suffer losses due to nationalization,
expropriation or differing accounting practices and treatments. Investments in
foreign securities are subject to laws of the foreign country that may limit the
amount and types of foreign investments. Changes of governments or of economic
or monetary policies, in the U.S. or abroad, changes in dealings between
nations, currency convertibility or exchange rates could result in investment
losses for a Fund. Finally, even though certain currencies may be convertible
into U.S. dollars, the conversion rates may be artificial relative to the actual
market values and may be unfavorable to Fund investors.
Foreign securities are often traded with less frequency and volume, and
therefore may have greater price volatility, than is the case with many U.S.
securities. Brokerage commissions, custodial services, and other costs relating
to investment in foreign countries are generally more expensive than in the U.S.
Though the Funds intend to acquire the securities of foreign issuers where there
are public trading markets, economic or political turmoil in a country in which
a Fund has a significant portion of its assets or deterioration of the
relationship between the U.S. and a foreign country may negatively impact the
liquidity of a Fund's portfolio. A Fund may have difficulty meeting a large
number of redemption requests. Furthermore, there may be difficulties in
obtaining or enforcing judgments against foreign issuers.
A Fund may choose to invest in a foreign company by purchasing
depositary receipts. Depositary receipts are certificates of ownership of shares
in a foreign-based issuer held by a bank or other financial institution. They
are alternatives to purchasing the underlying security but are subject to the
foreign securities to which they relate.
Investments in companies of developing countries may be subject to
higher risks than investments in companies in more developed countries. These
risks include:
o increased social, political and economic instability;
o a smaller market for these securities and low or nonexistent volume of
trading that results in a lack of liquidity and in greater price
volatility; lack of publicly available information, including reports
of payments of dividends or interest on outstanding securities;
o foreign government policies that may restrict opportunities, including
restrictions on investment in issuers or industries deemed sensitive
to national interests;
o relatively new capital market structure or market-oriented economy;
o the possibility that recent favorable economic developments may be
slowed or reversed by unanticipated political or social events in
these countries;
o restrictions that may make it difficult or impossible for the Fund to
vote proxies, exercise shareholder rights, pursue legal remedies, and
obtain judgments in foreign courts; and possible losses through the
holding of securities in domestic and foreign custodial banks and
depositories.
In addition, many developing countries have experienced substantial,
and in some periods, extremely high rates of inflation for many years. Inflation
and rapid fluctuations in inflation rates have had and may continue to have
negative effects on the economies and securities markets of those countries.
Repatriation of investment income, capital and proceeds of sales by
foreign investors may require governmental registration and/or approval in some
developing countries. A Fund could be adversely affected by delays in or a
refusal to grant any required governmental registration or approval for
repatriation.
Further, the economies of developing countries generally are heavily
dependent upon international trade and, accordingly, have been and may continue
to be adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed
or negotiated by the countries with which they trade.
Small and Medium Capitalization Companies
Each of the Funds may hold securities of small and medium
capitalization companies but not as a principal investment strategy. Market
capitalization is defined as total current market value of a company's
outstanding common stock. Investments in companies with smaller market
capitalizations may involve greater risks and price volatility (wide, rapid
fluctuations) than investments in larger, more mature companies. Small companies
may be less significant within their industries and may be at a competitive
disadvantage relative to their larger competitors. While smaller companies may
be subject to these additional risks, they may also realize more substantial
growth than larger or more established companies.
Smaller companies may be less mature than larger companies. At this
earlier stage of development, the companies may have limited product lines,
reduced market liquidity for their shares, limited financial resources or less
depth in management than larger or more established companies. Unseasoned
issuers are companies with a record of less than three years continuous
operation, including the operation of predecessors and parents. Unseasoned
issuers by their nature have only a limited operating history that can be used
for evaluating the company's growth prospects. As a result, investment decisions
for these securities may place a greater emphasis on current or planned product
lines and the reputation and experience of the company's management and less
emphasis on fundamental valuation factors than would be the case for more mature
growth companies.
Temporary Defensive Measures
From time to time, as part of its investment strategy, each of the
Funds may invest without limit in cash and cash equivalents for temporary
defensive purposes in response to adverse market, economic or political
conditions. To the extent that the Fund is in a defensive position, it may lose
the benefit of upswings and limit its ability to meet its investment objective.
For this purpose, cash equivalents include: bank notes, 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. In addition, a Fund may purchase U.S. government securities,
preferred stocks and debt securities, whether or not convertible into or
carrying rights for common stock.
There is no limit on the extent to which the Funds may take temporary
defensive measures. In taking such measures, the Fund may fail to achieve its
investment objective.
Appendix D
DEBT SECURITY RATINGS
Standard & Poor's Ratings Group ("S&P")
Commercial Paper:
A-1 The rating A-1 is the highest rating assigned by S&P to
commercial paper. This designation indicates that the degree
of safety regarding timely payment is either overwhelming or
very strong. Those issues determined to possess overwhelming
safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high
for issuers designated "A-1."
Bonds:
AAA Debt rated AAA has the highest rating assigned by S&P.
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 higher
rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay
principal although it is 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 in higher rated categories.
BB-B-CCC-CC Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance
with the terms of the obligations. BB indicates the lowest
degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
D Bonds rated D are in default. The D category is used when
interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired.
The D rating is also used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus
or minus to show relative standing within the major rating categories.
Moody's Investors Service, Inc. ("Moody's")
Commercial Paper:
P-1 The rating P-1 is the highest commercial paper rating
assigned by Moody's. Issuers rated P-1 (or related
supporting institutions) have a superior capacity for
repayment of short-term promissory obligations. P-1
repayment capacity will normally be evidenced by the
following characteristics: (1) leading market positions in
established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structures with
moderate reliance on debt and ample asset protection; (4)
broad margins in earnings coverage of fixed financial
charges and high internal cash generation; and (5) well
established access to a range of financial markets and
assured sources of alternate liquidity.
P-2 Issuers rated P-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions.
Ample alternative liquidity is maintained.
Bonds:
Aaa Bonds which are rated Aaa by Moody's 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 by Moody's 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 by Moody's 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 by Moody's are considered as medium
grade obligations, that is, 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.
B Bonds which are rated B generally lack characteristics of a
desirable investment. Assurance of interest and principal
payments or of maintenance and 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 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.
Moody's applies numerical modifiers "1," "2" and "3" to certain of its
rating classifications. 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 the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
Appendix E
PRINCIPAL MUTUAL FUNDS
AUDIT AND NOMINATING COMMITTEE CHARTER
Organization
The Audit and Nominating Committee of the Board of Directors ("Board") shall be
composed of directors who are not interested persons as defined in the
Investment Company Act of 1940.
Statement of Policy
The function of the Audit and Nominating Committee is oversight; it is
management's responsibility to maintain appropriate systems for accounting and
internal control over financial reporting, and the auditor's responsibility to
plan and carry out a proper audit. Specifically, Fund management is responsible
for: (1) the preparation, presentation and integrity of the Fund's financial
statements; (2) the maintenance of appropriate accounting and financial
reporting principles and policies; and (3) the maintenance of internal control
over financial reporting and other procedures designed to assure compliance with
accounting standards and related laws and regulations. The independent auditors
are responsible for planning and carrying out an audit consistent with
applicable legal and professional standards and the terms of their engagement
letter. Nothing in this Charter shall be construed to reduce the
responsibilities or liabilities of the Fund's service providers, including the
auditors.
Although the Committee is expected to take a detached and questioning approach
to the matters that come before it, the review of a Fund's financial statements
by the Committee is not an audit, nor does the Committee's review substitute for
the responsibilities of the Funds management for preparing; or the independent
auditors for auditing, the financial statements. Members of the Committee are
not full-time employees of the Fund and, in serving on this Committee, are not,
and do not hold themselves out to be, acting as accountants or auditors. As
such, it is not the duty or responsibility of the Committee or its members to
conduct "field work" or other types of auditing or accounting reviews or
procedures.
In discharging their duties the members of the Committee are entitled to rely on
information, opinions, reports, or statements, including financial statements
and other financial data, if prepared or presented by: (1) one or more officers
of the Fund whom the director reasonably believes to be reliable and competent
in the matters presented; (2) legal counsel, public accountants, or other
persons as to matters the director reasonably believes are within the persons
professional or expert competence; or (3) a Board committee of which the
director is not a member.
The Committee shall assist the directors in fulfilling their responsibilities to
the shareholders, potential shareholders, and investment community relating to
monitoring the integrity of the financial reporting processes and systems of
internal accounting and financial controls, the compliance with legal and
regulatory requirements, the independence and performance of internal and
external auditors, and the effectiveness and efficiency of operations. The
auditors for the Fund shall report directly to the Committee. Further, the
Committee shall be responsible for maintaining free and open communication among
the directors, the independent auditors, the internal auditors, and the
management of the Fund.
Responsibilities
In carrying out its responsibilities, the Committee should be flexible so that
it can best react to changing conditions to provide the directors and
shareholders with reasonable assurance that the Fund accounting and reporting
practices are in accordance with all requirements and are of the highest
quality.
The Committee shall have the authority to retain outside counsel or other
consultants to advise the Committee as it deems appropriate to its duties. The
Committee may request any officer or employee of the Fund or management company
or the company's outside counsel or independent auditors to attend a meeting of
the Committee or to meet with any members of, or consultants to the Committee.
No member of the Committee shall receive any compensation from the Fund except
for service as a member of the Fund's Board or a committee of the Board.
The Committee shall meet not less than twice per year to
review the Fund's financial statements and shall make regular
reports to the Board addressing such matters as the quality
and integrity of the Company's financial statements, the
Company's compliance with legal and regulatory requirements
and the performance of the independent and internal auditors.
The chair of the Committee may call additional meetings as
necessary.
The Committee shall:
1. Appoint, compensate, and conduct oversight of the work of the
independent auditors.
2. Meet with the independent auditors to review the scope and approach of
the proposed audit plan and the audit procedures to be performed.
3. Confirm and ensure the objectivity of the internal auditors and the
independence of the independent auditors. Pre-approve all engagements
and compensation to be paid to the auditor consistent with the Fund's
Policy on Auditor Independence and discuss independence issues with the
independent auditor on an annual basis. If so determined by the
Committee, recommend that the Board take appropriate action to satisfy
itself of the independence of the auditor.
No engagement of the independent auditor should:
(a) create a mutual or conflicting interest between the audit firm
and the Fund
(b) place the audit firm in the position of auditing its own work
(c) result in the audit firm acting in a management role for the
Fund, or
(d) place the audit firm in a position of being an advocate for the
Fund.
Annually, the independent auditor shall report all
relationships that may bear on independence between the
auditor and the Fund with respect to any services provided by
the auditor, its subsidiaries or affiliates.
4. Review the adequacy and effectiveness of the Fund's internal controls,
with the independent auditors, the organization's internal auditors,
and its financial and accounting personnel, and consider their
recommendations for improving the internal controls or particular areas
where new or more detailed controls or procedures are desirable.
Particular emphasis should be given to the adequacy of internal
controls in exposing any payments, transactions, or procedures that
might be deemed illegal or otherwise improper. Consider major changes
to the Fund's auditing and accounting principles and practices as
suggested by the independent auditors, internal auditor or management.
5. Request that management inform the Committee of all new or changed
accounting principles and disclosure practices on a timely basis.
Inquire of the auditors regarding their judgments and reasoning
regarding the appropriateness of the changes or proposed changes, as
well as the appropriateness of the accounting principles and disclosure
practices management employs for new transactions or events.
6. Review legal and regulatory matters that may have a material effect on
the financial statements, the Fund's compliance policies and ethical
business practices programs, and any material related to regulatory
examinations or reports received from regulators or government
agencies.
7. Inquire of management, the internal auditors, and the independent
auditors regarding significant risks or exposures, and assess the steps
management has taken to minimize such risks and exposures to the
organization.
8. Review the results of the Fund's monitoring of compliance with its Code
of Ethics.
9. Review the Fund's policies and procedures with respect to officers' and
directors' expense accounts and perquisites, including their use of the
organization's assets, and consider the results of the internal or
independent auditors' reviews of those areas. (Expenses of individuals
serving in the role of a Fund officer are not charged to the Fund and
there are no related perquisites. Fees and reimbursable expenses of the
independent directors are the only expenses of Fund directors charged
to the Fund).
10. Review the Fund's internal audit function, including its audit plans,
staffing, explanations for any deviations from plans, and the
coordination of such plans with those of the independent auditors.
11. Review the significant issues reported to management prepared by the
internal auditor and management's responses. Receive a summary of
findings from completed internal audits. Review with the internal
auditors any difficulties encountered in the course of the audit work,
including any restrictions on the scope of activities or access to
required information.
12. Meet with the independent auditors, at the conclusion of the audit, to
review the results of the audit, including any comments or
recommendations of the independent auditors. In addition, review with
the independent auditors any major issues regarding accounting and
auditing principles, practices and judgments as well as the adequacy of
internal controls that could significantly affect the financial
statements. Further, report the results of the annual audit to the
Board of Directors.
13. Review the financial statements contained in the annual report to
shareholders with management and the independent auditors. Inquire of
the independent auditors regarding their qualitative judgments about
the appropriateness, not just the acceptability, of the accounting
principles and the clarity of the financial disclosures. Also, inquire
of the independent auditors regarding their reasoning in accepting or
questioning management's significant estimates.
14. Inquire of the independent auditors regarding their judgments about
whether management's accounting principles and estimates are
conservative, moderate, or extreme from the perspective of income,
asset, and liability recognition, and whether those principles are
common practices or minority practices. Also, discuss with the
independent auditors how the Fund's choices of accounting principles
and disclosure practices may affect shareholders' and the public's
views and attitudes about the organization.
15. Discuss with the independent auditors other matters, if any, required
to be discussed by Statements on Auditing Standards relating to the
conduct of the audit such as audit adjustments, fraud and illegal acts,
auditor retention issues, consultation with other auditors,
disagreements with management and resolve any such disagreements,
access to information, other difficulties encountered during the audit,
etc.
16. Meet separately with the independent auditors and internal auditors
without management. Among the items to be discussed in these meetings
are the independent auditors' evaluation of the Fund's financial,
accounting, and auditing personnel, and the cooperation that the
independent auditors received during the audit.
17. Establish and maintain procedures for the handling of complaints
received regarding accounting, internal controls, and auditing.
18. Submit the minutes of all the Committee's meetings to, or discuss the
matters considered at each Committee meeting with, the Board of
Directors. Review and reassess the adequacy of this Charter annually
and recommend any proposed changes to the Board for approval.
19. Select, review and nominate for consideration by the Board candidates
for directors who are not interested persons as defined in the
Investment Company Act of 1940.
(adopted by the Board of Directors of
each of the Principal Mutual Funds on September 13, 2004)
Appendix F
OUTSTANDING SHARES AND SHARE OWNERSHIP
This Appendix sets forth information as to the number of shares
outstanding and entitled to vote of each class of shares of the Acquired Fund,
the number of outstanding shares of each class of shares of the Acquiring Fund
and the percentage ownership by certain shareholders of such shares of the
Acquired and Acquiring Funds.
Acquired Fund
The following table shows as of the Record Date the number of Class A
and Class B shares of the Acquired Fund outstanding and entitled to vote.
Number of Shares
Acquired Fund Share Class Outstanding
Principal Cash Management Fund, Inc. Class A
Class B
The following table shows as of March 3, 2005 the percentage of the
outstanding Class A and Class B shares of the Acquired Fund owned of record or
beneficially by Principal Life, either directly or through subsidiaries.
Principal Life and its subsidiaries own all of these shares both of record and
beneficially, except as otherwise indicated. The ultimate parent of Principal
Life is Principal Financial Group, Inc.
Percentage Owned
Acquired Fund Share Class by Principal Life
Principal Cash Management Fund, Inc. Class A 0.49%
Class B 0.00%
As of March 3, 2005, the Directors and officers of the Acquired Fund
together owned less than 1% of its outstanding shares.
As of March 3, 2005, the following persons owned of record, or were
known by the Acquired Fund or the Acquiring Fund to own beneficially, 5% or more
of the outstanding shares of any Class of the Acquired Fund:
Share Percentage
Acquired Fund Name and Address of Shareholder Class Of Ownership
Principal Cash Management Fund, Inc. Princor Financial Services Corporation Class A 5.0%
Principal Financial Group
Attn: Valorie Hammen, N003-E20
Des Moines, IA 50392-0200
Delaware Charter Guarantee & Trust Co. Class A 9.5%
Attn: Lori N. Richards
P.O. Box 8738 Wilmington, DE 19899-8738
Acquiring Fund
The following table shows as of the Record Date the number of shares
outstanding of each Class of shares of the Acquiring Fund.
Number of Shares
Acquiring Fund Share Class Outstanding
PIF Money Market Fund Institutional
Select
Preferred
Advisors Select
Advisors Signature
Advisors Preferred
Class J
The following table shows as of March 3, 2005 the percentage of the
outstanding shares of each class of the Acquiring Fund owned of record or
beneficially by Principal Life, either directly or through subsidiaries.
Principal Life and its subsidiaries own all of these shares both of record and
beneficially, except as otherwise indicated. The ultimate parent of Principal
Life is Principal Financial Group, Inc.
Percentage Owned
Acquiring Fund Share Class by Principal Life
PIF Money Market Fund Institutional 0.00%
Select 0.29%
Preferred 0.00%
Advisors Select 0.00%
Advisors Signature 100.00%
Advisors Preferred 0.00%
Class J 0.00%
As of March 3, 2005, the Directors and officers of PIF Fund together
owned less than 1% of the outstanding shares of the Acquiring Fund.
As of March 3, 2005, the persons identified below owned of record, or
were known by the Acquiring Fund or the Acquired Fund to own beneficially, 5% or
more of the outstanding shares of the Class of the Acquiring Fund indicated.
Percentage
Share Class Name and Address of Ownership
Institutional Class LIFETIME 2010 FUND 47.2
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA 50392-0200
LIFETIME STRATEGIC INCOME FUND 52.7
ATTN JAMIE SCRIGNOLI N-002-E20
MUTUAL FUND ACCOUNTING
711 HIGH STREET
DES MOINES, IA 50392-0200
Select Class Bankers Trust Company NA 69.3
FBO Delora Williams
665 Locust
Des Moines, IA 50304
Wachovia Bank NA 23.3
FBO Kewaunee Scientific Corp Exec Def Plan
Tanya Whitaker One West Fourth Stre
Winston-Salem, NC 27150
Preferred Class DELAWARE CHARTER GUAR & TRUST 9.1
FBO PRINCIPAL FINANCIAL GROUP
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
INSURANCE SERVICES OFFICE, INC TTEE 7.9
ISO SUPPLEMENTAL EXEC SAVING PLAN
545 WASHINGTON BLVD
JERSEY CITY, NJ 07310-1607
Trustar 10.0
FBO SOUTHWIRE BALANCED FUND
RETIREMENT PLAN
PO BOX 8963
WILMINGTON, DE 19899-8963
Delaware Charter Guarantee & Trust 40.4
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
PRINCIPAL TRUST COMPANY NA TTEE 7.3
ATTN SUSAN SAGGIONE
FBO PRIORITY HLTH SUPPL EX DEF PLN
C/O DEBORAH PHILLIPS
1231 E BELTLINE AVE NE
GRAND RAPIDS, MI 49525-7024
Advisors Select Class Delaware Charter Guarantee & Trust 94.9
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
Advisors Preferred Class DELAWARE CHARTER GUAR & TRUST 22.4
FBO PRINCIPAL ADVANTAGE TRUST
ATTN: RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
Delaware Charter Guarantee & Trust 57.1
FBO Various Qualified Plans
FBO PRINCIPAL FINANCIAL GROUP
ATTN RIS NPIO TRADE DESK
711 HIGH STREET
DES MOINES, IA 50392
Appendix G
ADDITIONAL PERFORMANCE INFORMATION
Set forth below for each of the Acquired and Acquiring Funds is a bar
chart which provides some indication of the risks of investing in the Fund by
showing changes in performance from year to year. The bar chart for the Acquired
Fund shows performance for Class A shares of that Fund. The bar chart for the
Acquiring Fund, which has not yet issued Class A or Class B shares, shows
performance of its Institutional Class Shares. The Class A and Class B shares of
the Acquiring Fund will have higher expenses, and thus lower performance, than
the Institutional Shares.
YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
LOGO
1995 5.44
1996 4.96
1997 4.88
1998 5.15
1999 4.63
2000 5.89
2001 3.72
2002 1.20
2003 0.49
2004 0.74
<FN>
TO OBTAIN THE FUND'S CURRENT YIELD, CALL
1-800-247-4123.
The year-to-date return as of December 31, 2004 for Class A is 0.74% and for
Class B is 0.56%.
</FN>
YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
LOGO
2002 1.49
2003 0.80
2004 1.01
<FN>
TO OBTAIN THE FUND'S CURRENT YIELD, CALL
1-800-547-7754
Year-to-date return as of December 31, 2004 for the Institutional Class is
1.01%.
</FN>
FORM OF PROXY CARD
Two Low-Cost Ways to Cast Your Proxy Vote
Save Time and Money
It's Fast and Convenient. The accompanying Proxy Statement/Prospectus outlines
important issues affecting your [NAME OF PMF FUND]. Help us save time and
postage by voting on the Internet or by telephone. Each method is generally
available 24 hours a day and will ensure that your vote is confirmed and posted
immediately. DO NOT MAIL THE PROXY CARD IF YOU ARE VOTING BY INTERNET OR
TELEPHONE.
VOTING BY PHONE
o Read the Proxy Statement/Prospectus and have this card at hand.
o Call toll-free 1-888-[TELEPHONE NUMBER].
o Enter your Control Number and follow the recorded instructions.
o Do not return this paper ballot.
VOTING ON THE INTERNET
o Read the Proxy Statement/Prospectus and have this card at hand.
o Log onto www.proxyweb.com.
o Enter you Control Number and follow the on-screen instructions.
o Do not return this paper ballot.
VOTE YOUR PROXY TODAY!
JOINT SPECIAL MEETING OF SHAREHOLDERS JUNE 16, 2005
[NAME OF PMF FUND]
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder appoints Arthur S. Filean, Ernest H. Gillum and
Michael J. Beer, and each of them separately, Proxies, with power of
substitution, and authorizes them to represent and to vote as designated on this
ballot, at the meeting of shareholders of the Fund to be held June 16, 2005 at
2:00 p.m., Central Daylight Time, and any adjournments thereof, all the shares
of the Fund that the undersigned shareholder would be entitled to vote if
personally present.
Check the appropriate box on the ballot, date the ballot and sign exactly as you
name appears. Your signature acknowledges receipt of the Notice of Joint Special
Meeting of Shareholders and the Proxy Statement/Prospectus, both dated April___,
2005. Shares will be voted as you instruct. If no direction is made, the proxy
will be voted FOR the proposals listed. In their discretion the Proxies will
also be authorized to vote upon such other matters that may properly come before
the meeting.
Date________________, 2005
- -------------------------------------
Signature of Shareholder(s) (if held jointly)
NOTE: PLEASE SIGN EXACTLY AS YOU NAME APPEARS ON THIS BALLOT. PLEASE MARK, SIGN,
DATE AND MAIL YOUR PROXY BALLOT IN THE ENCLOSED POSTAGE-PAID ENVELOPE. If shares
are held jointly, either party may sign. If executed by a corporation, an
authorized officer must sign. Executors, administrators and trustees should so
indicate when signing.
Please fill in boxes as shown using black or blue ink or number 2 pencil. PLEASE
DO NOT USE FINE POINT PENS.
The Board of Directors recommends that shareholders vote FOR the first Proposal
and FOR the election of all nominees for Director. Sign the proxy ballot and
return it as soon as possible in the enclosed envelope.
PROPOSALS
1. Approval of Agreement and Plan of Reorganization [ ] FOR
providing for the combination of the [NAME OF PMF FUND]
(the "Acquired Fund") into the [NAME OF PIF FUND] (the [ ] AGAINST
"Acquiring Fund").
[ ] ABSTAIN
2. Election of the following nine nominees as Directors of [ ] FOR ALL NOMINEES
[NAME OF PMF FUND]: Elizabeth Ballantine, James D. Davis,
Richard W. Gilbert, Mark A Grimmett, William C. Kimball, [ ] WITHHOLD AUTHORITY FOR ALL NOMINEES
Barbara A. Lukavsky, John E. Aschenbrenner, Ralph C.
Eucher, and Larry D. Zimpleman. [ ] WITHHOLD AUTHORITY FOR INDIVIDUAL
NOMINEE(S) NAMED BELOW:
-----------------------------
PART B
INFORMATION REQUIRED IN
A STATEMENT OF ADDITIONAL INFORMATION
PRINCIPAL INVESTORS FUND, INC.
680 8th Street
Des Moines, Iowa 50392-0200
STATEMENT OF ADDITIONAL INFORMATION
Dated: April __, 2005
This Statement of Additional Information is available to the shareholders of the
"Acquired Funds" listed below, each of which is a separate mutual fund and all
of which are collectively and commonly known as the Principal Mutual Funds
("PMF"), in connection with the proposed Reorganization providing for the
combination of each Acquired Fund into the corresponding "Acquiring Fund" listed
below, each of which is a separate series of Principal Investors Fund, Inc.
("PIF").
Corresponding
PMF Acquired Fund PIF Acquiring Fund
Principal Balanced Fund, Inc. -- PIF Disciplined LargeCap Blend Fund
Principal Capital Value Fund, Inc. -- PIF LargeCap Value Fund
Principal Partners LargeCap Value Fund, Inc. -- PIF Partners LargeCap Value Fund
Principal Equity Income Fund, Inc. -- PIF Equity Income Fund
Principal Partners Blue Chip Fund, Inc. -- PIF Partners LargeCap Blend Fund I
Principal Partners LargeCap Blend Fund, Inc. -- PIF Partners LargeCap Blend Fund
Principal LargeCap Stock Index Fund, Inc. -- PIF LargeCap S&P 500 Index Fund
Principal Growth Fund, Inc. -- PIF LargeCap Growth Fund
Principal Partners Equity Growth Fund, Inc. -- PIF Partners LargeCap Growth Fund I
Principal MidCap Fund, Inc. -- PIF MidCap Blend Fund
Principal Partners MidCap Growth Fund, Inc. -- PIF Partners MidCap Growth Fund
Principal SmallCap Fund, Inc. -- PIF SmallCap Blend Fund
Principal Partners SmallCap Growth Fund, Inc. -- PIF Partners SmallCap Growth Fund II
Principal Real Estate Securities Fund, Inc. -- PIF Real Estate Securities Fund
Principal Bond Fund, Inc. -- PIF Bond & Mortgage Securities Fund
Principal Government Securities Income Fund, Inc. -- PIF Government Securities Fund
Principal Tax-Exempt Bond Fund, Inc. -- PIF Tax-Exempt Bond Fund
Principal International Fund, Inc. -- PIF Diversified International Fund
Principal International SmallCap Fund, Inc. -- PIF Diversified International Fund
Principal Limited Term Bond Fund, Inc. -- PIF High Quality Short-Term Bond Fund
Principal Cash Management Fund, Inc. -- PIF Money Market Fund
Principal International Emerging Markets Fund, Inc. -- PIF International Emerging Markets Fund
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Proxy Statement/Prospectus dated April __, 2005,
relating to the Joint Special Meeting of Shareholders of the Acquired Funds to
be held on May 26, 2005. The Proxy Statement/Prospectus, which describes the
proposed Reorganization, may be obtained without charge by writing to Principal
Management Corporation, 680 8th Street, Des Moines, Iowa 50392-2080, or by
calling toll free at 1-800-247-4123. This Statement of Additional Information
includes and is accompanied by the Statement of Additional Information of PIF
dated March 1, 2005.
This Statement of Additional Information incorporates by reference the
following documents (or designated portions thereof) that have been filed with
the Securities and Exchange Commission:
(1) The Statement of Additional Information of PIF dated March 1, 2005, as
filed on __________;
(2) The financial statements of PIF included in its Annual Report to
Shareholders for the fiscal year ended October 31, 2004, which have
been audited by Ernst & Young LLP, Independent Registered Public
Accounting Firm, as filed on ________, 2005, insofar as such financial
statements relate to the Acquiring Funds; and the financial statements
of each of the Acquired Funds included in their respective Annual
Reports to Shareholders for the fiscal year ended October 31, 2004,
which have been audited by Ernst & Young LLP, Independent Registered
Public Accounting Firm, as filed on ________, 2005.
The Annual and Semi-Annual Reports to Shareholders of PIF and each of the
Acquired Funds are available upon request and without charge by calling
toll-free at 1-800-247-4123.
TABLE OF CONTENTS
Pro Forma Financial Statements consisting of (i) Statement of Assets and
Liabilities, (ii) Statement of Operations; (iii) Schedule of Portfolio
Investments and (iv) Notes to Pro Forma Financial Statements (see below), for
each of the following combinations of an Acquired Fund into an Acquiring Fund:
- --Principal Balanced Fund, Inc. and PIF Disciplined LargeCap Blend Fund
- --Principal Capital Value Fund, Inc. and PIF LargeCap Value Fund
- --Principal Partners Blue Chip Fund, Inc. and PIF Partners LargeCap Blend Fund I
- --Principal Partners LargeCap Blend Fund, Inc. and PIF Partners LargeCap Blend Fund
- --Principal LargeCap Stock Index Fund, Inc. and PIF LargeCap S&P 500 Index Fund
- --Principal Growth Fund, Inc. and PIF LargeCap Growth Fund
- --Principal MidCap Fund, Inc. and PIF MidCap Blend Fund
- --Principal Partners MidCap Growth Fund, Inc. and PIF Partners MidCap Growth Fund
- --Principal SmallCap Fund, Inc. and PIF SmallCap Blend Fund
- --Principal Partners SmallCap Growth Fund, Inc. and PIF Partners SmallCap Growth Fund II
- --Principal Real Estate Securities Fund, Inc. and PIF Real Estate Securities Fund
- --Principal Bond Fund, Inc. and PIF Bond & Mortgage Securities Fund
- --Principal Government Securities Income Fund, Inc. and PIF Government Securities Fund
- --Principal International Fund, Inc. , Principal International SmallCap Fund, Inc.
and PIF Diversified International Fund
- --Principal Limited Term Bond Fund, Inc. and PIF High Quality Short-Term Bond Fund
- --Principal Cash Management Fund, Inc. and PIF Money Market Fund
- --Principal International Emerging Markets Fund, Inc. and PIF International Emerging Markets Fund
- --Notes to Pro Forma Financial Statements
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
COMBINED
PRINCIPAL DISCIPLINED DISCIPLINED
BALANCED LARGECAP PRO FORMA LARGECAP
FUND, INC. BLEND FUND/(D)/ ADJUSTMENTS BLEND FUND
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $103,021,102 $242,096,087 $ -- $345,117,189
============ ============ ========= ============
ASSETS
Investment in
securities--at value. $104,898,965/(c)/ $247,236,853 $ -- $352,135,818/(c)/
Cash.................. 19,964 9,751 -- 29,715
Receivables:
Capital Shares sold.. 14,723 587,026 -- 601,749
Dividends and
interest............ 437,140 117,836 -- 554,976
Investment securities
sold................ 787,211 433,594 -- 1,220,805
Variation margin on
futures contracts.... -- 3,270 -- 3,270
Other assets.......... 4,818 -- -- 4,818
Prepaid directors'
expenses............. 51 -- -- 51
------------ ------------ --------- ------------
Total Assets 106,162,872 248,388,330 -- 354,551,202
LIABILITIES
Accrued management and
investment advisory
fees................. 11,503 28,156 -- 39,659
Accrued administrative
service fees......... -- 1 -- 1
Accrued distribution
fees................. 5,040 1 -- 5,041
Accrued service fees.. -- 1 -- 1
Accrued transfer and
administrative fees.. 62,387 -- -- 62,387
Accrued other expenses 54,414 -- -- 54,414
Payables:
Capital Shares
reacquired.......... 64,548 -- -- 64,548
Investment securities
purchased........... 4,178,275 343,433 -- 4,521,708
Collateral obligation
on securities
loaned, at value.... 778,576 -- -- 778,576
------------ ------------ --------- ------------
Total Liabilities 5,154,743 371,592 -- 5,526,335
------------ ------------ --------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $101,008,129 $248,016,738 $ -- $349,024,867
============ ============ ========= ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $110,701,478 $241,480,005 $ -- $352,181,483
Accumulated
undistributed
(overdistributed) net
investment income
(operating loss)..... 87,242 198,078 -- 285,320
Accumulated
undistributed
(overdistributed) net
realized gain (loss). (11,658,454) 1,119,941 -- (10,538,513)
Net unrealized
appreciation
(depreciation) of
investments.......... 1,877,863 5,218,714 -- 7,096,577
------------ ------------ --------- ------------
Total Net Assets $101,008,129 $248,016,738 $ -- $349,024,867
============ ============ ========= ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 100,000,000 200,000,000 -- 200,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 9,230 N/A $ 9,230
Shares issued and
outstanding.......... 716 716
Net asset value per
share................ $ 12.89 $ 12.89
============ ============
Advisors Select: Net
Assets............... N/A $ 10,042 N/A $ 10,042
Shares issued and
outstanding.......... 780 780
Net asset value per
share................ $ 12.87 $ 12.87
============ ============
Class A: Net Assets... $ 85,881,686 N/A -- $ 85,881,686
Shares issued and
outstanding.......... 6,823,852 (192,062) 6,631,790
Net asset value per
share................ $ 12.59 -- $ 12.95
Maximum offering
price per share /(a)/ $ 13.36 -- $ 13.74
============ == ============
Class B: Net Assets... $ 15,126,443 N/A -- $ 15,126,443
Shares issued and
outstanding.......... 1,208,875 (40,810) 1,168,065
Net asset value per
share /(b)/.......... $ 12.51 -- $ 12.95
============ == ============
Institutional: Net
Assets............... N/A $247,978,493 N/A $247,978,493
Shares issued and
outstanding.......... 19,149,187 19,149,187
Net asset value per
share................ $ 12.95 $ 12.95
============ ============
Preferred: Net Assets. N/A $ 9,539 N/A $ 9,539
Shares issued and
outstanding.......... 738 738
Net asset value per
share................ $ 12.93 $ 12.93
============ ============
Select: Net Assets.... N/A $ 9,434 N/A $ 9,434
Shares issued and
outstanding.......... 731 731
Net asset value per
share................ $ 12.91 $ 12.91
============ ============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 5.75% of the offering price or 6.10% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
/(c) /Includes fair market value of securities loaned, see "Securities Lending"
in Notes to Financial Statements.
/(d) /Effective March 1, 2005, LargeCap Blend Fund I changed its name to
Disciplined LargeCap Blend Fund.
See accompanying notes.
1
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
COMBINED
PRINCIPAL DISCIPLINED DISCIPLINED
BALANCED LARGECAP PRO FORMA LARGECAP
FUND, INC. BLEND FUND ADJUSTMENTS /(A)/ BLEND FUND
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Dividends............ $1,002,270 $ 331,531 $ -- $ 1,333,801
Interest............. 1,747,349 45,570 -- 1,792,919
Securities lending... 2,889 -- -- 2,889
---------- ---------- -------- -----------
Total Income 2,752,508 377,101 -- 3,129,609
Expenses:
Management and
investment advisory
fees................ 604,671 153,994 434 759,099
Distribution fees -
Advisors Preferred.. -- 299 -- 299
Distribution fees -
Advisors Select..... -- 358 -- 358
Distribution fees -
Class A............. 168,458 -- -- 168,458
Distribution fees -
Class B............. 144,277 -- -- 144,277
Distribution fees -
Select.............. -- 120 -- 120
Administrative
service fees -
Advisors Preferred.. -- 179 -- 179
Administrative
service fees -
Advisors Select..... -- 239 -- 239
Administrative
service fees -
Preferred........... -- 132 -- 132
Administrative
service fees -
Select.............. -- 155 -- 155
Registration fees -
Class A............. 8,074 -- -- 8,074
Registration fees -
Class B............. 9,245 -- -- 9,245
Service fees -
Advisors Preferred.. -- 203 -- 203
Service fees -
Advisors Select..... -- 299 -- 299
Service fees -
Preferred........... -- 180 -- 180
Service fees - Select -- 179 -- 179
Shareholder reports -
Class A............. 15,413 -- -- 15,413
Shareholder reports -
Class B............. 3,371 -- -- 3,371
Transfer and
administrative fees
- Class A........... 89,242 -- -- 89,242
Transfer and
administrative fees
- Class B........... 20,517 -- -- 20,517
Auditing and legal
fees................ 9,538 -- (9,538) --
Custodian fees....... 50,166 -- (50,166) --
Directors' expenses.. 3,416 -- (3,416) --
Registration fees.... 30,886 -- -- 30,886
Transfer and
administrative fees. 238,592 -- 2,033 240,625
Other expenses....... 5,873 -- (5,873) --
---------- ---------- -------- -----------
Total Gross Expenses 1,401,739 156,337 (66,526) 1,491,550
Less: Fees paid
indirectly.......... 1,225 -- -- 1,225
---------- ---------- -------- -----------
Total Net Expenses 1,400,514 156,337 (66,526) 1,490,325
---------- ---------- -------- -----------
Net Investment Income
(Operating Loss) 1,351,994 220,764 66,526 1,639,284
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ 4,735,935 1,082,257 -- 5,818,192
Futures contracts.... -- 41,591 -- 41,591
Change in unrealized
appreciation/depreciation
of:
Investments........... 947,601 3,377,162 -- 4,324,763
Futures contracts..... -- 77,948 -- 77,948
---------- ---------- -------- -----------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies 5,683,536 4,578,958 -- 10,262,494
---------- ---------- -------- -----------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $7,035,530 $4,799,722 $ 66,526 $11,901,778
========== ========== ======== ===========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
17
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Disciplined Principal Disciplined
Balanced LargeCap Blend Balanced LargeCap Blend
Fund, Inc. Fund Combined Fund, Inc. Fund Combined
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (88.04%)
ADVERTISING SALES (0.11%)
1,070 9,630 Lamar Advertising (1) $44,319 $354,555 $398,874
8,560
ADVERTISING SERVICES (0.02%)
1,233 1,233 WPP Group 61,971 61,971
- -
AEROSPACE & DEFENSE (0.45%)
1,050 5,750 Boeing 52,395 286,925
4,700 234,530
4,010 24,470 Northrop Grumman 207,517 1,266,322
20,460 1,058,805
AEROSPACE & DEFENSE EQUIPMENT (1.04%)
2,810 14,140 General Dynamics 286,957 1,443,976
11,330 1,157,019
407 407 Moog (1) 15,275 15,275
- -
1,020 1,020 Orbital Sciences (1) (2) 10,557 10,557
- -
333 333 United Defense Industries (1) 13,367 13,367
- -
5,200 23,140 United Technologies 482,664 2,147,855
17,940 1,665,191
AIRLINES (0.02%)
5,647 5,647 ExpressJet Holdings (1) 62,795 62,795
- -
1,115 1,115 Skywest 19,044 19,044
- -
APPAREL MANUFACTURERS (0.47%)
6,300 22,610 Coach (1) 293,769 1,054,305
16,310 760,536
2,540 15,550 Polo Ralph Lauren 93,802 574,261
13,010 480,459
603 603 Quiksilver (1) 16,432 16,432
- -
APPLICATIONS SOFTWARE (2.58%)
4,250 37,416 Citrix Systems (1) 102,553 902,849
33,166 800,296
51,250 288,235 Microsoft 1,434,487 8,067,697
236,985 6,633,210
1,456 1,456 Serena Software (1) 25,829 25,829
- -
873 873 SS&C Technologies 20,638 20,638
- -
ATHLETIC FOOTWEAR (0.53%)
5,360 22,250 Nike 435,822 1,809,148
16,890 1,373,326
835 835 Reebok International 30,895 30,895
- -
AUDIO & VIDEO PRODUCTS (0.04%)
4,650 4,650 Matsushita Electric Industrial 67,471 67,471
- -
1,400 1,400 Pioneer 25,900 25,900
- -
1,821 1,821 Polycom (1) 37,604 37,604
- -
AUTO-CARS & LIGHT TRUCKS (0.09%)
5,120 5,120 Ford Motor 66,713 66,713
- -
5,146 5,146 Nissan Motor (2) 115,528 115,528
- -
1,646 1,646 Toyota Motor 127,713 127,713
- -
AUTO-MEDIUM & HEAVY DUTY TRUCKS (0.42%)
794 794 Oshkosh Truck 46,767 46,767
- -
3,370 19,503 Paccar 233,575 1,351,753
16,133 1,118,178
2,096 2,096 Volvo 79,438 79,438
- -
AUTO/TRUCK PARTS & EQUIPMENT-ORIGINAL (0.03%)
450 450 American Axle & Manufacturing Holdings 12,915 12,915
- -
1,046 1,046 Dana 15,596 15,596
- -
620 620 Magna International 45,229 45,229
- -
2,374 2,374 Tenneco Automotive (1) 30,245 30,245
- -
BEVERAGES-NON-ALCOHOLIC (1.98%)
11,027 86,890 Coca-Cola 448,358 3,532,948
75,863 3,084,590
2,035 2,035 Cott (1) 53,439 53,439
- -
11,320 66,960 Pepsico 561,246 3,319,877
55,640 2,758,631
BEVERAGES-WINE & SPIRITS (0.02%)
1,424 1,424 Diageo 76,583 76,583
- -
BREWERY (0.01%)
1,626 1,626 SABMiller 23,252 23,252
- -
BROADCASTING SERVICES & PROGRAMMING (0.01%)
1,200 1,200 Fox Entertainment Group (1) 35,592 35,592
- -
BUILDING & CONSTRUCTION PRODUCTS-
MISCELLANEOUS (0.22%)
2,959 2,959 CRH 70,743 70,743
- -
2,150 19,140 Masco 73,659 655,736
16,990 582,077
210 210 Simpson Manufacturing 13,499 13,499
- -
2,056 2,056 USG (1) (2) 46,034 46,034
- -
BUILDING PRODUCTS-CEMENT & AGGREGATE (0.01%)
557 557 Eagle Materials 38,494 38,494
- -
BUILDING PRODUCTS-LIGHT FIXTURES (0.01%)
281 281 Genlyte Group (1) 20,670 20,670
- -
BUILDING PRODUCTS-WOOD (0.01%)
664 664 Universal Forest Products 24,352 24,352
- -
BUILDING-HEAVY CONSTRUCTION (0.01%)
687 687 Washington Group International (1) 23,956 23,956
- -
BUILDING-MAINTENANCE & SERVICE (0.01%)
808 808 Rollins 21,291 21,291
- -
BUILDING-RESIDENTIAL & COMMERCIAL (0.24%)
987 987 Brookfield Homes 25,563 25,563
- -
152 152 Daiwa House Industry 15,516 15,516
- -
878 878 Hovnanian Enterprises (1) 32,960 32,960
- -
1,447 7,277 KB Home 119,016 598,534
5,830 479,518
579 579 M/I Schottenstein Homes 24,897 24,897
- -
1,130 1,130 MDC Holdings 86,728 86,728
- -
1,080 1,080 Pulte 59,270 59,270
- -
CABLE TV (0.62%)
10,630 72,539 Comcast (1) 313,585 2,139,900
61,909 1,826,315
2,400 2,400 Mediacom Communications (1) 15,720 15,720
- -
CASINO SERVICES (0.04%)
3,280 3,280 International Game Technology 108,371 108,371
- -
1,630 1,630 Scientific Games (1) 34,524 34,524
- -
CELLULAR TELECOMMUNICATIONS (0.11%)
1,010 1,010 Boston Communications Group (1) 9,191 9,191
- -
3,747 3,747 mmO2 (1) 72,092 72,092
- -
2,720 2,720 Nextel Partners (1) 45,805 45,805
- -
6,962 6,962 Vodafone Group 179,550 179,550
- -
2,640 2,640 Western Wireless (1) 76,930 76,930
- -
CHEMICALS-DIVERSIFIED (0.03%)
638 638 BASF 40,086 40,086
- -
1,339 1,339 FMC (1) 58,715 58,715
- -
CHEMICALS-SPECIALTY (0.04%)
537 537 Albemarle 19,251 19,251
- -
1,130 1,130 Lubrizol 39,245 39,245
- -
392 392 MacDermid 12,372 12,372
- -
1,420 1,420 Sigma-Aldrich 79,009 79,009
- -
CIRCUIT BOARDS (0.01%)
1,324 1,324 Benchmark Electronics (1) 44,976 44,976
- -
COAL (0.30%)
2,510 16,610 Peabody Energy 160,088 1,059,386
14,100 899,298
COATINGS & PAINT (0.25%)
2,290 20,550 Sherwin-Williams 97,829 877,896
18,260 780,067
COMMERCIAL BANKS (1.02%)
9,918 9,918 Banco Santander Central Hispano (2) 110,883 110,883
- -
1,240 1,240 Bank of Ireland 68,076 68,076
- -
3,340 3,340 Bank of Nova Scotia 108,583 108,583
- -
760 6,870 BB&T 31,244 282,426
6,110 251,182
400 400 City Holding 13,860 13,860
- -
2,972 10,652 City National 204,771 733,923
7,680 529,152
559 559 Columbia Banking Systems 13,696 13,696
- -
233 233 Cullen/Frost Bankers 11,417 11,417
- -
403 403 CVB Financial 9,994 9,994
- -
454 454 First Bancorp. 24,757 24,757
- -
407 407 First Midwest Bancorp 14,208 14,208
- -
1,500 1,500 Fremont General 32,250 32,250
- -
2,532 2,532 Hibernia 73,428 73,428
- -
1,220 1,220 Hudson United Bancorp 48,556 48,556
- -
857 857 Kookmin Bank 28,821 28,821
- -
4,040 16,090 Marshall & Ilsley 169,559 675,298
12,050 505,739
235 235 MB Financial 10,044 10,044
- -
6,934 6,934 National Bank of Greece 39,524 39,524
- -
336 336 Oriental Financial Group 9,519 9,519
- -
958 958 Pacific Capital Bancorp. 30,493 30,493
- -
1,837 1,837 R&G Financial 69,108 69,108
- -
1,974 1,974 Toronto-Dominion Bank 79,315 79,315
- -
900 900 UCBH Holdings 38,781 38,781
- -
3,610 17,030 UnionBanCal 219,307 1,034,572
13,420 815,265
COMMERCIAL SERVICES (0.26%)
2,380 20,520 Alliance Data Systems (1) 100,626 867,585
18,140 766,959
724 724 Magellan Health Services (1) 27,078 27,078
- -
COMMUNICATIONS SOFTWARE (0.09%)
610 5,670 Avid Technology (1) 32,318 300,397
5,060 268,079
COMPUTER AIDED DESIGN (0.36%)
404 404 ANSYS (1) 11,151 11,151
- -
3,875 23,395 Autodesk 204,406 1,234,086
19,520 1,029,680
COMPUTER SERVICES (0.29%)
3,466 3,466 Cognizant Technology Solutions (1) 117,844 117,844
- -
1,870 16,920 Computer Sciences (1) 92,883 840,416
15,050 747,533
1,187 1,187 Perot Systems (1) 19,028 19,028
- -
387 387 SRA International (1) 20,805 20,805
- -
COMPUTERS (1.46%)
5,040 20,670 Apple Computer (1) 264,751 1,085,795
15,630 821,044
3,290 29,671 Hewlett-Packard 61,392 553,662
26,381 492,270
4,580 38,455 International Business Machines 411,055 3,451,336
33,875 3,040,281
COMPUTERS-INTEGRATED SYSTEMS (0.89%)
8,350 8,350 Brocade Communications Systems (1) 56,697 56,697
- -
16,335 86,204 Dell (1) 572,705 3,022,312
69,869 2,449,607
1,193 1,193 RadiSys (1) 15,843 15,843
- -
COMPUTERS-MEMORY DEVICES (0.32%)
18,080 80,320 EMC (1) 232,689 1,033,718
62,240 801,029
561 561 Storage Technology (1) 15,158 15,158
- -
790 790 TDK 54,779 54,779
- -
COMPUTERS-PERIPHERAL EQUIPMENT (0.27%)
1,144 1,144 Electronics for Imaging (1) 20,638 20,638
- -
2,530 10,990 Lexmark International (1) 210,268 913,379
8,460 703,111
CONSULTING SERVICES (0.22%)
3,500 31,340 Accenture (1) 84,735 758,741
27,840 674,006
CONSUMER PRODUCTS-MISCELLANEOUS (0.01%)
348 348 Central Garden & Pet (1) 12,431 12,431
- -
470 470 Scotts (1) 30,183 30,183
- -
CONTAINERS-METAL & GLASS (0.28%)
5,300 23,930 Ball 211,205 953,610
18,630 742,405
313 313 Silgan Holdings 14,853 14,853
- -
COSMETICS & TOILETRIES (2.84%)
1,260 11,320 Alberto-Culver 56,524 507,816
10,060 451,292
9,660 35,720 Avon Products 382,053 1,412,726
26,060 1,030,673
482 482 Chattem (1) 16,128 16,128
- -
4,800 19,700 Estee Lauder 206,160 846,115
14,900 639,955
5,680 49,950 Gillette 235,606 2,071,926
44,270 1,836,320
930 8,250 Kimberly-Clark 55,493 492,277
7,320 436,784
17,430 88,976 Procter & Gamble 892,067 4,553,791
71,546 3,661,724
DATA PROCESSING & MANAGEMENT (0.28%)
470 470 First Data 19,402 19,402
- -
2,146 15,576 Global Payments 117,515 852,942
13,430 735,427
3,100 3,100 SEI Investments 111,569 111,569
- -
DECISION SUPPORT SOFTWARE (0.01%)
1,519 1,519 Wind River Systems (1) 20,339 20,339
- -
DENTAL SUPPLIES & EQUIPMENT (0.01%)
1,350 1,350 Sybron Dental Specialties (1) 43,970 43,970
- -
DIAGNOSTIC EQUIPMENT (0.07%)
995 7,065 Gen-Probe (1) 34,865 247,558
6,070 212,693
DIALYSIS CENTERS (0.01%)
819 819 DaVita (1) 24,259 24,259
- -
DIRECT MARKETING (0.28%)
843 843 Catalina Marketing 21,589 21,589
- -
6,870 36,620 Harte-Hanks 176,834 942,599
29,750 765,765
DISPOSABLE MEDICAL PRODUCTS (0.15%)
2,680 9,340 C.R. Bard 152,224 530,512
6,660 378,288
DISTRIBUTION-WHOLESALE (0.06%)
758 758 Aviall (1) 16,411 16,411
- -
1,330 1,330 Fastenal 73,456 73,456
- -
1,678 1,678 Hughes Supply 47,672 47,672
- -
1,021 1,021 Owens & Minor 26,740 26,740
- -
720 720 United Stationers (1) 32,040 32,040
- -
725 725 Watsco 20,633 20,633
- -
DIVERSIFIED MANUFACTURING OPERATIONS (4.04%)
4,210 13,316 3M 326,570 1,032,923
9,106 706,353
974 4,869 Carlisle 56,619 283,035
3,895 226,416
2,870 2,870 Danaher 158,223 158,223
- -
1,890 17,150 Eaton 120,865 1,096,742
15,260 975,877
38,754 250,629 General Electric (8) 1,322,286 8,551,461
211,875 7,229,175
1,290 1,290 Illinois Tool Works 119,041 119,041
- -
928 8,494 ITT Industries 75,298 689,203
7,566 613,905
1,305 1,305 Siemens 97,536 97,536
- -
7,540 66,679 Tyco International 234,871 2,077,051
59,139 1,842,180
DIVERSIFIED MINERALS (0.07%)
2,590 2,590 Anglo American 57,602 57,602
- -
4,750 4,750 BHP Billiton 98,182 98,182
- -
3,510 3,510 Cia Vale do Rio Doce 74,272 74,272
- -
DIVERSIFIED OPERATIONS (0.05%)
2,731 2,731 Brascan 97,442 97,442
- -
3,537 3,537 Tomkins (2) 65,399 65,399
- -
E-COMMERCE-SERVICES (0.32%)
2,285 11,583 eBay (1) 223,039 1,130,617
9,298 907,578
E-MARKETING-INFORMATION (0.01%)
226 226 Digital River (1) 7,526 7,526
- -
3,096 3,096 Digitas (1) 27,864 27,864
- -
E-SERVICES-CONSULTING (0.01%)
843 843 Websense (1) 34,201 34,201
- -
ELECTRIC PRODUCTS-MISCELLANEOUS (0.28%)
1,430 12,850 Emerson Electric 91,592 823,043
11,420 731,451
1,120 1,120 Hitachi 70,168 70,168
- -
787 787 Littelfuse (1) 25,672 25,672
- -
4,079 4,079 Sharp 56,290 56,290
- -
ELECTRIC-INTEGRATED (1.92%)
3,315 19,405 Constellation Energy Group 134,655 788,231
16,090 653,576
878 878 E.ON 71,601 71,601
- -
6,650 33,390 Edison International 202,825 1,018,395
26,740 815,570
1,820 1,820 Enel 82,246 82,246
- -
2,098 2,098 Exelon 83,123 83,123
- -
330 330 Great Plains Energy 9,402 9,402
- -
9,269 41,809 MDU Resources Group 237,750 1,072,401
32,540 834,651
868 868 OGE Energy 22,021 22,021
- -
3,360 22,990 PPL 174,720 1,195,480
19,630 1,020,760
731 731 RWE 38,560 38,560
- -
3,020 3,020 Scottish Power 97,788 97,788
- -
8,130 36,450 TXU 497,718 2,231,468
28,320 1,733,750
ELECTRIC-TRANSMISSION (0.03%)
2,611 2,611 National Grid Group 115,145 115,145
- -
ELECTRONIC COMPONENTS-MISCELLANEOUS (0.04%)
1,422 1,422 DSP Group (1) 28,198 28,198
- -
2,376 2,376 Koninklijke Philips Electronics 56,597 56,597
- -
1,263 1,263 Methode Electronics 16,962 16,962
- -
1,531 1,531 Omron 34,674 34,674
- -
ELECTRONIC COMPONENTS-SEMICONDUCTOR (1.54%)
4,150 22,120 Altera (1) 94,329 502,787
17,970 408,458
1,055 1,055 Cree (1) 36,408 36,408
- -
2,240 2,240 Fairchild Semiconductor International (1) 32,189 32,189
- -
30,873 178,521 Intel 687,233 3,973,878
147,648 3,286,645
1,350 11,850 International Rectifier (1) 53,663 471,038
10,500 417,375
2,349 2,349 Microsemi (1) 36,503 36,503
- -
1,011 1,011 PMC - Sierra (1) 10,373 10,373
- -
418 418 Silicon Laboratories (1) 12,527 12,527
- -
4,744 11,684 Texas Instruments 115,991 285,674
6,940 169,683
ELECTRONIC CONNECTORS (0.28%)
6,158 28,158 Amphenol (1) 211,404 966,664
22,000 755,260
ELECTRONIC FORMS (0.46%)
5,160 28,880 Adobe Systems 289,115 1,618,147
23,720 1,329,032
ELECTRONIC MEASUREMENT INSTRUMENTS (0.02%)
2,270 2,270 Tektronix 68,849 68,849
- -
ELECTRONIC PARTS DISTRIBUTION (0.01%)
1,818 1,818 Avnet (1) 30,833 30,833
- -
ELECTRONICS-MILITARY (0.01%)
1,036 1,036 Engineered Support Systems 49,769 49,769
- -
ENGINES-INTERNAL COMBUSTION (0.49%)
2,286 8,996 Briggs & Stratton 164,158 646,003
6,710 481,845
2,450 15,110 Cummins Engine 171,696 1,058,909
12,660 887,213
ENTERPRISE SOFTWARE & SERVICE (0.37%)
1,183 1,183 Hyperion Solutions (1) 47,474 47,474
- -
705 705 MicroStrategy (1) 42,286 42,286
- -
14,450 92,130 Oracle (1) 182,937 1,166,366
77,680 983,429
1,175 1,175 SAP 50,113 50,113
- -
FIDUCIARY BANKS (0.20%)
2,710 24,430 Mellon Financial 78,319 706,027
21,720 627,708
FILTRATION & SEPARATION PRODUCTS (0.01%)
662 662 CLARCOR 32,637 32,637
- -
FINANCE-AUTO LOANS (0.01%)
391 391 Westcorp 15,609 15,609
- -
835 835 WFS Financial (1) 36,790 36,790
- -
FINANCE-CONSUMER LOANS (0.02%)
749 749 Aiful 18,656 18,656
- -
902 902 Collegiate Funding Services (1) 11,140 11,140
- -
788 788 Portfolio Recovery Associates (1) 26,571 26,571
- -
FINANCE-CREDIT CARD (1.49%)
2,230 20,085 American Express 118,346 1,065,911
17,855 947,565
7,720 27,460 Capital One Financial 569,427 2,025,449
19,740 1,456,022
16,743 82,140 MBNA 429,123 2,105,248
65,397 1,676,125
FINANCE-INVESTMENT BANKER & BROKER (4.10%)
20,465 125,716 Citigroup (8) 908,032 5,578,019
105,251 4,669,987
5,370 27,379 Goldman Sachs Group 528,301 2,693,546
22,009 2,165,245
3,080 16,285 Legg Mason 196,227 1,037,518
13,205 841,291
3,856 21,526 Lehman Brothers Holdings 316,770 1,768,360
17,670 1,451,590
2,925 15,503 Merrill Lynch 157,774 836,231
12,578 678,457
7,200 45,774 Morgan Stanley 367,848 2,338,594
38,574 1,970,746
5,175 5,175 Nomura Holdings 62,980 62,980
- -
247 247 Raymond James Financial 6,447 6,447
- -
FINANCE-MORTGAGE LOAN/BANKER (0.52%)
1,192 1,192 American Home Mortgage Investment 32,935 32,935
- -
1,510 13,120 Doral Financial 63,390 550,778
11,610 487,388
1,080 9,770 Federal Home Loan Mortgage 71,928 650,682
8,690 578,754
1,430 8,262 Federal National Mortgage Association 100,314 579,579
6,832 479,265
FINANCIAL GUARANTEE INSURANCE (0.27%)
2,930 14,240 MGIC Investment 188,428 915,774
11,310 727,346
180 180 Triad Guaranty (1) 9,812 9,812
- -
FOOD-CONFECTIONERY (0.16%)
1,200 11,080 Hershey Foods 60,828 561,645
9,880 500,817
FOOD-FLOUR & GRAIN (0.48%)
15,800 87,080 Archer Daniels Midland 306,046 1,686,740
71,280 1,380,694
FOOD-MISCELLANEOUS/DIVERSIFIED (0.30%)
2,210 19,820 Kellogg 95,030 852,260
17,610 757,230
2,053 2,053 Nestle 121,743 121,743
- -
976 976 Unilever 56,891 56,891
- -
FOOD-RETAIL (0.03%)
6,162 6,162 Tesco 98,900 98,900
- -
FOOTWEAR & RELATED APPAREL (0.00%)
557 557 Wolverine World Wide 16,955 16,955
- -
GARDEN PRODUCTS (0.02%)
961 961 Toro 65,588 65,588
- -
GAS-DISTRIBUTION (0.43%)
1,072 1,072 AGL Resources 33,446 33,446
- -
5,547 26,297 Energen 298,318 1,414,253
20,750 1,115,935
1,157 1,157 ONEOK 31,031 31,031
- -
551 551 UGI 21,285 21,285
- -
HEALTH CARE COST CONTAINMENT (0.34%)
4,310 38,630 Caremark Rx (1) 129,171 1,157,741
34,320 1,028,570
1,684 1,684 First Health Group (1) 26,809 26,809
- -
HOTELS & MOTELS (0.04%)
274 274 Choice Hotels International 13,672 13,672
- -
4,987 4,987 InterContinental Hotels Group 61,739 61,739
- -
1,060 1,060 Starwood Hotels & Resorts Worldwide 50,594 50,594
- -
HUMAN RESOURCES (0.38%)
1,382 1,382 Korn/Ferry International (1) 24,047 24,047
- -
2,603 2,603 Labor Ready (1) 37,353 37,353
- -
6,463 47,473 Robert Half International 171,463 1,259,458
41,010 1,087,995
IMPORT & EXPORT (0.04%)
6,230 6,230 Mitsubishi 136,437 136,437
- -
INDEX FUND (0.02%)
505 505 Regional Bank HOLDRs Trust 68,594 68,594
- -
INSTRUMENTS-CONTROLS (0.19%)
1,040 9,340 Parker Hannifin 73,455 659,684
8,300 586,229
INSTRUMENTS-SCIENTIFIC (0.24%)
1,830 1,830 Applied Biosystems Group 34,916 34,916
- -
261 261 Dionex (1) 14,616 14,616
- -
1,950 17,460 Millipore (1) 89,681 802,986
15,510 713,305
INTERNET APPLICATION SOFTWARE (0.00%)
1,487 1,487 eResearch Technology (1) 17,383 17,383
- -
INTERNET BROKERS (0.21%)
8,260 8,260 Ameritrade Holding (1) 107,545 107,545
- -
5,240 47,450 E*trade Group (1) 67,596 612,105
42,210 544,509
INTERNET CONNECTIVE SERVICES (0.00%)
5,937 5,937 Hanaro Telecom (1) 17,217 17,217
- -
INTERNET FINANCIAL SERVICES (0.02%)
1,951 1,951 IndyMac Bancorp 62,939 62,939
- -
INTERNET SECURITY (0.59%)
1,194 1,194 RSA Security (1) 24,429 24,429
- -
7,100 35,710 Symantec (1) 404,274 2,033,327
28,610 1,629,053
INTERNET TELEPHONY (0.01%)
1,011 1,011 j2 Global Communications (1) 30,482 30,482
- -
INTIMATE APPAREL (0.00%)
622 622 Warnaco Group (1) 12,689 12,689
- -
LEISURE & RECREATION PRODUCTS (0.35%)
2,890 26,020 Brunswick 135,599 1,220,859
23,130 1,085,260
LIFE & HEALTH INSURANCE (0.71%)
2,280 13,960 AmerUs Group 95,258 583,249
11,680 487,991
2,040 2,040 Jefferson-Pilot 98,512 98,512
- -
870 1,860 Lincoln National 38,106 81,468
990 43,362
1,680 15,120 Nationwide Financial Services 58,128 523,152
13,440 465,024
770 7,000 Protective Life 30,261 275,100
6,230 244,839
420 420 Stancorp Financial Group 31,660 31,660
- -
940 940 Universal American Financial (1) 11,430 11,430
- -
10,510 62,980 UnumProvident 143,567 860,307
52,470 716,740
MACHINERY TOOLS & RELATED PRODUCTS (0.02%)
1,790 1,790 Lincoln Electric Holdings 59,750 59,750
- -
MACHINERY-CONSTRUCTION & MINING (0.52%)
2,270 21,890 Caterpillar 182,826 1,763,021
19,620 1,580,195
503 503 Joy Global 16,996 16,996
- -
924 924 Terex (1) 35,112 35,112
- -
MACHINERY-FARM (0.39%)
4,320 22,870 Deere 258,250 1,367,169
18,550 1,108,919
MACHINERY-GENERAL INDUSTRY (0.44%)
598 598 Gardner Denver (1) 17,928 17,928
- -
4,080 21,985 Ingersoll-Rand 279,235 1,504,653
17,905 1,225,418
MACHINERY-PUMPS (0.03%)
3,115 3,115 Graco 107,156 107,156
- -
MEDICAL INFORMATION SYSTEM (0.00%)
883 883 Dendrite International (1) 12,936 12,936
- -
MEDICAL INSTRUMENTS (0.35%)
585 585 dj Orthopedics (1) 9,974 9,974
- -
1,068 1,068 Kensey Nash (1) 30,545 30,545
- -
1,069 9,637 Medtronic 54,636 492,546
8,568 437,910
1,726 8,926 St. Jude Medical (1) 132,160 683,464
7,200 551,304
195 195 Techne (1) 7,024 7,024
- -
MEDICAL LASER SYSTEMS (0.01%)
2,848 2,848 Candela (1) 28,978 28,978
- -
MEDICAL PRODUCTS (2.25%)
2,410 4,290 Becton Dickinson 126,525 225,225
1,880 98,700
261 261 Cooper 18,361 18,361
- -
377 377 INAMED (1) 20,038 20,038
- -
17,550 96,401 Johnson & Johnson 1,024,569 5,627,890
78,851 4,603,321
3,790 21,680 Varian Medical Systems (1) 152,168 870,452
17,890 718,284
2,510 14,180 Zimmer Holdings (1) 194,751 1,100,226
11,670 905,475
MEDICAL-BIOMEDICAL/GENE (1.12%)
2,349 2,349 Affymetrix (1) 71,645 71,645
- -
7,890 48,289 Amgen (1) 448,152 2,742,815
40,399 2,294,663
1,131 1,131 Celera Genomics Group (1) 14,499 14,499
- -
1,370 12,150 Charles River Laboratories International (1) 64,102 568,498
10,780 504,396
1,562 1,562 deCODE genetics (1) 10,934 10,934
- -
3,430 10,800 Genentech (1) 156,168 491,724
7,370 335,556
2,136 2,136 Lexicon Genetics (1) 13,905 13,905
- -
3,149 3,149 Maxim Pharmaceuticals (1) 7,873 7,873
- -
MEDICAL-DRUGS (3.85%)
5,440 48,834 Abbott Laboratories 231,907 2,081,793
43,394 1,849,886
1,045 1,045 AstraZeneca 43,054 43,054
- -
10,366 Bristol-Myers Squibb 242,875
- 10,366 - 242,875
1,650 14,920 Cephalon (1) 78,656 711,237
13,270 632,581
2,362 2,362 Eisai 67,553 67,553
- -
1,400 12,192 Eli Lilly 76,874 669,463
10,792 592,589
1,102 1,102 Endo Pharmaceuticals Holdings (1) 24,024 24,024
- -
842 842 First Horizon Pharmaceutical (1) 20,696 20,696
- -
5,684 32,844 Forest Laboratories (1) 253,506 1,464,842
27,160 1,211,336
1,556 1,556 GlaxoSmithKline 65,974 65,974
- -
500 500 Hi-Tech Pharmacal (1) 8,105 8,105
- -
928 928 Ligand Pharmaceuticals (1) 8,273 8,273
- -
1,720 15,107 Merck 53,853 473,000
13,387 419,147
2,159 2,159 Novartis 103,654 103,654
- -
705 705 Novo Nordisk 35,215 35,215
- -
39,702 231,940 Pfizer 1,149,373 6,714,663
192,238 5,565,290
450 450 Roche Holding 46,170 46,170
- -
548 548 Salix Pharmaceuticals (1) 8,784 8,784
- -
1,351 1,351 Sanofi-Synthelabo 49,312 49,312
- -
1,880 1,880 Teva Pharmaceutical Industries 48,880 48,880
- -
1,570 14,100 Wyeth 62,251 559,066
12,530 496,815
MEDICAL-GENERIC DRUGS (0.15%)
1,400 12,205 Barr Laboratories (1) 52,710 459,518
10,805 406,808
2,530 2,530 Eon Labs (1) 62,263 62,263
- -
MEDICAL-HMO (1.83%)
2,070 13,830 Aetna 196,650 1,313,850
11,760 1,117,200
1,710 15,528 Anthem (1) 137,484 1,248,451
13,818 1,110,967
1,034 1,034 Sierra Health Services (1) 49,343 49,343
- -
7,101 34,851 UnitedHealth Group 514,112 2,523,212
27,750 2,009,100
648 648 WellChoice (1) 27,061 27,061
- -
1,370 12,495 Wellpoint Health Networks (1) 133,794 1,220,262
11,125 1,086,468
MEDICAL-HOSPITALS (0.02%)
1,700 1,700 LifePoint Hospitals (1) 55,114 55,114
- -
668 668 VCA Antech (1) 14,977 14,977
- -
MEDICAL-OUTPATIENT & HOME MEDICAL CARE (0.01%)
673 673 Apria Healthcare Group (1) 18,413 18,413
- -
METAL PROCESSORS & FABRICATION (0.02%)
634 634 Commercial Metals 22,919 22,919
- -
610 610 Quanex 30,927 30,927
- -
METAL-ALUMINUM (0.03%)
4,483 4,483 Century Aluminum (1) 103,737 103,737
- -
METAL-COPPER (0.15%)
660 5,880 Phelps Dodge 57,776 514,735
5,220 456,959
METAL-DIVERSIFIED (0.01%)
1,025 1,025 Inco (1) 36,285 36,285
- -
METAL-IRON (0.01%)
564 564 Cleveland-Cliffs (1) 41,115 41,115
- -
263 263 Gibraltar Industries 9,208 9,208
- -
MISCELLANEOUS INVESTING (0.16%)
1,060 1,060 Archstone-Smith Trust 35,563 35,563
- -
705 705 CRT Properties 15,623 15,623
- -
868 868 Entertainment Properties Trust 34,633 34,633
- -
2,040 2,040 Equity Residential Properties Trust 68,034 68,034
- -
551 551 Federal Realty Investment Trust 26,145 26,145
- -
980 980 Gramercy Capital (1) 15,974 15,974
- -
618 618 Healthcare Realty Trust (2) 24,936 24,936
- -
1,480 1,480 Kimco Realty 80,734 80,734
- -
425 425 New Century Financial 23,439 23,439
- -
1,499 1,499 Newcastle Investment 45,884 45,884
- -
1,260 1,260 Prologis Trust 49,115 49,115
- -
317 317 PS Business Parks 13,923 13,923
- -
586 586 SL Green Realty 32,125 32,125
- -
969 969 Thornburg Mortgage 27,684 27,684
- -
2,895 2,895 Ventas 77,875 77,875
- -
MONEY CENTER BANKS (3.12%)
4,990 4,990 ABN AMRO Holding 120,059 120,059
- -
19,344 127,828 Bank of America 866,418 5,725,416
108,484 4,858,998
3,628 3,628 Barclays 143,161 143,161
- -
5,500 5,500 BNP Paribas 187,825 187,825
- -
3,710 3,710 Credit Suisse Group (1) 127,142 127,142
- -
810 810 HBOS 32,481 32,481
- -
427 427 HSBC Holdings 34,600 34,600
- -
18,349 112,350 JP Morgan Chase 708,271 4,336,710
94,001 3,628,439
7,655 7,655 Mitsubishi Tokyo Financial Group 64,991 64,991
- -
1,621 1,621 UBS 117,506 117,506
- -
MOTION PICTURES & SERVICES (0.01%)
1,176 1,176 Macrovision (1) 31,799 31,799
- -
253 253 Metro-Goldwyn-Mayer (1) 2,991 2,991
- -
MOTORCYCLE & MOTOR SCOOTER (0.10%)
3,500 6,070 Harley-Davidson 201,495 349,450
2,570 147,955
MULTI-LEVEL DIRECT SELLING (0.01%)
1,492 1,492 Nu Skin Enterprises 28,855 28,855
- -
MULTI-LINE INSURANCE (2.77%)
11,675 67,337 American International Group 708,789 4,088,029
55,662 3,379,240
3,146 3,146 AXA 68,111 68,111
- -
860 7,680 Cigna 54,576 487,373
6,820 432,797
3,635 22,765 Hartford Financial Services Group 212,575 1,331,297
19,130 1,118,722
2,883 2,883 ING Groep 76,774 76,774
- -
5,830 43,814 MetLife 223,580 1,680,267
37,984 1,456,687
4,440 40,080 Prudential Financial 206,327 1,862,518
35,640 1,656,191
4,900 4,900 Zurich Financial Services 69,335 69,335
- -
MULTIMEDIA (2.18%)
180 1,660 Gannett 14,931 137,697
1,480 122,766
512 512 Journal Communications 8,254 8,254
- -
2,420 16,080 McGraw-Hill 208,725 1,386,900
13,660 1,178,175
298 298 Media General 17,373 17,373
- -
5,122 5,122 News (2) 165,236 165,236
- -
30,610 199,627 Time Warner (1) 509,350 3,321,793
169,017 2,812,443
2,080 18,020 Viacom 75,899 657,549
15,940 581,650
2,759 2,759 Vivendi Universal (1) 75,679 75,679
- -
11,180 73,057 Walt Disney 281,960 1,842,498
61,877 1,560,538
NETWORKING PRODUCTS (1.37%)
41,150 210,481 Cisco Systems (1) 790,492 4,043,341
169,331 3,252,849
1,820 1,820 Juniper Networks (1) 48,430 48,430
- -
19,000 195,700 Lucent Technologies (1) 67,450 694,735
176,700 627,285
OFFICE AUTOMATION & EQUIPMENT (0.03%)
1,667 1,667 Canon 82,516 82,516
- -
630 630 Imagistics International (1) 21,685 21,685
- -
OFFICE FURNISHINGS-ORIGINAL (0.01%)
889 889 HNI 35,916 35,916
- -
OFFICE SUPPLIES & FORMS (0.01%)
848 848 John H. Harland 27,331 27,331
- -
OIL COMPANY-EXPLORATION & PRODUCTION (1.21%)
7,540 30,760 Apache 382,278 1,559,532
23,220 1,177,254
5,680 31,150 Burlington Resources 235,720 1,292,725
25,470 1,057,005
2,440 2,440 Canadian Natural Resources 102,382 102,382
- -
1,780 13,159 Devon Energy 131,667 973,372
11,379 841,705
513 513 Houston Exploration (1) 30,062 30,062
- -
1,151 1,151 KCS Energy (1) 15,665 15,665
- -
2,830 2,830 Meridian Resource (1) 22,782 22,782
- -
899 899 Noble Energy 52,142 52,142
- -
1,228 1,228 PetroKazakhstan 45,313 45,313
- -
1,346 1,346 Plains Exploration & Production (1) 33,650 33,650
- -
670 670 Pogo Producing 30,719 30,719
- -
1,890 1,890 Talisman Energy 50,784 50,784
- -
OIL COMPANY-INTEGRATED (4.66%)
550 550 Amerada Hess 44,390 44,390
- -
593 593 BP Amoco 34,542 34,542
- -
10,942 69,758 ChevronTexaco 580,583 3,701,360
58,816 3,120,777
4,100 23,610 ConocoPhillips 345,671 1,990,559
19,510 1,644,888
1,155 1,155 ENI 132,167 132,167
- -
27,108 166,253 Exxon Mobil 1,334,256 8,182,973
139,145 6,848,717
2,020 2,020 Marathon Oil 76,982 76,982
- -
6,176 31,483 Occidental Petroleum 344,806 1,757,696
25,307 1,412,890
592 592 Petro-Canada 32,258 32,258
- -
1,170 1,170 Petroleo Brasileiro 41,547 41,547
- -
5,290 5,290 Repsol YPF 114,634 114,634
- -
1,555 1,555 TotalFinaElf 162,155 162,155
- -
OIL FIELD MACHINERY & EQUIPMENT (0.16%)
646 646 FMC Technologies (1) 19,528 19,528
- -
2,830 25,510 Grant Prideco (1) 58,185 524,486
22,680 466,301
431 431 Universal Compression Holdings (1) 14,904 14,904
- -
OIL REFINING & MARKETING (0.34%)
6,200 6,200 Statoil 90,396 90,396
- -
2,305 2,305 Tesoro Petroleum (1) 69,795 69,795
- -
2,600 23,590 Valero Energy 111,722 1,013,662
20,990 901,940
OIL-FIELD SERVICES (0.48%)
2,380 2,380 BJ Services 121,380 121,380
- -
1,342 1,342 Cal Dive International (1) 47,520 47,520
- -
2,705 23,990 Schlumberger 170,253 1,509,931
21,285 1,339,678
OPTICAL SUPPLIES (0.24%)
706 706 Advanced Medical Optics (1) 27,605 27,605
- -
2,702 13,380 Bausch & Lomb 164,714 815,645
10,678 650,931
PAPER & RELATED PRODUCTS (1.01%)
5,700 32,870 Georgia-Pacific 197,163 1,136,973
27,170 939,810
6,747 21,161 Louisiana-Pacific 165,369 518,656
14,414 353,287
20,280 MeadWestvaco 639,428
- 20,280 639,428
540 4,630 Temple-Inland 31,925 273,726
4,090 241,801
2,396 2,396 UPM-Kymmene Oyj 47,584 47,584
- -
1,590 14,500 Weyerhaeuser 99,598 908,281
12,910 808,683
PIPELINES (0.54%)
5,160 22,340 National Fuel Gas 144,583 625,967
17,180 481,384
5,726 25,986 Questar 274,848 1,247,328
20,260 972,480
POULTRY (0.02%)
2,568 2,568 Pilgrims Pride 69,439 69,439
- -
PRINTING-COMMERCIAL (0.01%)
670 670 Banta 27,256 27,256
- -
479 479 Consolidated Graphics (1) 20,453 20,453
- -
PROPERTY & CASUALTY INSURANCE (0.68%)
772 772 Arch Capital Group (1) 29,004 29,004
- -
2,780 17,390 Chubb 200,521 1,254,340
14,610 1,053,819
609 609 First American 18,995 18,995
- -
1,207 1,207 Infinity Property & Casualty 37,514 37,514
- -
750 9,810 Progressive 70,162 917,725
9,060 847,563
400 400 Selective Insurance Group 15,632 15,632
- -
1,150 1,150 State Auto Financial 32,718 32,718
- -
1,237 1,237 W.R. Berkley 52,869 52,869
- -
PUBLICLY TRADED INVESTMENT FUND (0.11%)
12,431 12,431 iShares MSCI Japan Index Fund 123,440 123,440
- -
1,430 1,430 iShares Russell 1000 Value Index Fund 88,016 88,016
- -
1,475 1,475 iShares Russell 2000 Index Fund 171,587 171,587
- -
160 Standard & Poor's 500 Depository Receipts 18,142
- 160 - 18,142
PUBLISHING-NEWSPAPERS (0.01%)
2,429 2,429 Journal Register (1) 45,665 45,665
- -
RACETRACKS (0.01%)
721 721 Penn National Gaming (1) 29,943 29,943
- -
RADIO (0.02%)
2,064 2,064 Emmis Communications (1) 38,597 38,597
- -
1,096 1,096 Radio One (1) 16,100 16,100
- -
RECYCLING (0.01%)
1,825 1,825 Metal Management (1) 33,215 33,215
- -
REGIONAL BANKS (2.61%)
560 560 Comerica 34,446 34,446
- -
7,480 36,970 Huntington Bancshares 179,146 885,431
29,490 706,285
4,000 4,000 KeyCorp 134,360 134,360
- -
2,180 2,180 National City 84,955 84,955
- -
4,225 28,980 PNC Financial Services Group 220,967 1,515,653
24,755 1,294,686
11,244 65,701 U.S. Bancorp 321,691 1,879,706
54,457 1,558,015
7,330 50,090 Wachovia 360,709 2,464,929
42,760 2,104,220
5,455 35,526 Wells Fargo 325,772 2,121,612
30,071 1,795,840
RENTAL-AUTO & EQUIPMENT (0.00%)
368 368 Rent-A-Center (1) 8,828 8,828
- -
RESPIRATORY PRODUCTS (0.01%)
628 628 Respironics (1) 32,085 32,085
- -
RETAIL-APPAREL & SHOE (0.65%)
2,010 17,910 American Eagle Outfitters 82,169 732,161
15,900 649,992
950 950 Chico's FAS (1) 38,028 38,028
-
4,020 18,270 Claire's Stores 104,600 475,385
14,250 370,785
1,767 1,767 Foot Locker 43,115 43,115
- -
928 928 Kenneth Cole Productions 24,592 24,592
- -
5,730 21,530 Nordstrom 247,421 929,665
15,800 682,244
1,280 1,280 Stein Mart (1) 21,274 21,274
- -
RETAIL-AUTO PARTS (0.00%)
980 980 CSK Auto (1) 14,347 14,347
- -
RETAIL-BEDDING (0.20%)
4,935 17,485 Bed Bath & Beyond (1) 201,299 713,214
12,550 511,915
RETAIL-BOOKSTORE (0.02%)
1,716 1,716 Barnes & Noble (1) 57,091 57,091
- -
523 523 Borders Group 11,919 11,919
- -
RETAIL-BUILDING PRODUCTS (0.89%)
8,430 75,413 Home Depot 346,304 3,097,966
66,983 2,751,662
RETAIL-CATALOG SHOPPING (0.01%)
1,041 1,041 Coldwater Creek (1) 23,964 23,964
- -
RETAIL-CONSUMER ELECTRONICS (0.78%)
5,460 24,590 Best Buy 323,341 1,456,220
19,130 1,132,879
5,932 42,272 RadioShack 177,545 1,265,201
36,340 1,087,656
RETAIL-CONVENIENCE STORE (0.00%)
297 297 Pantry (1) 6,828 6,828
- -
RETAIL-DISCOUNT (1.94%)
2,360 21,260 BJ's Wholesale Club (1) 68,511 617,178
18,900 548,667
990 8,940 Target 49,520 447,179
7,950 397,659
14,775 105,978 Wal-Mart Stores 796,668 5,714,334
91,203 4,917,666
RETAIL-DRUG STORE (0.08%)
840 7,560 Walgreen 30,148 271,329
6,720 241,181
RETAIL-HAIR SALONS (0.01%)
1,092 1,092 Regis 46,738 46,738
- -
RETAIL-JEWELRY (0.01%)
1,845 1,845 Signet Group 35,627 35,627
- -
454 454 Zale (1) 12,948 12,948
- -
RETAIL-MISCELLANEOUS/DIVERSIFIED (0.01%)
1,077 1,077 Ito-Yokado 38,540 38,540
- -
RETAIL-OFFICE SUPPLIES (0.38%)
10,670 44,830 Staples 317,326 1,333,244
34,160 1,015,918
RETAIL-REGIONAL DEPARTMENT STORE (0.27%)
2,660 15,440 Neiman Marcus Group (2) 161,808 939,215
12,780 777,407
RETAIL-RESTAURANTS (1.48%)
1,277 1,277 CBRL Group 46,304 46,304
- -
421 421 CEC Entertainment (1) 16,006 16,006
- -
12,800 74,584 McDonald's 373,120 2,174,124
61,784 1,801,004
1,117 1,117 Ruby Tuesday 27,590 27,590
-
2,320 21,300 Starbucks (1) 122,682 1,126,344
18,980 1,003,662
8,710 40,950 Yum! Brands 378,885 1,781,325
32,240 1,402,440
RUBBER-TIRES (0.01%)
862 862 Continental 47,022 47,022
- -
SAVINGS & LOANS-THRIFTS (0.02%)
555 555 Independence Community Bank 20,885 20,885
- -
489 489 PFF Bancorp 19,291 19,291
- -
419 419 Sterling Financial (1) 15,742 15,742
- -
SCHOOLS (0.17%)
2,370 8,790 Apollo Group (1) 156,420 580,140
6,420 423,720
SEMICONDUCTOR COMPONENT-INTEGRATED
CIRCUITS (0.36%)
2,390 21,370 Analog Devices 96,221 860,356
18,980 764,135
600 600 Exar (1) 9,012 9,012
- -
3,775 3,775 Linear Technology 142,997 142,997
- -
2,405 2,405 Maxim Integrated Products 105,796 105,796
- -
1,340 1,340 Micrel (1) 15,048 15,048
- -
7,840 7,840 Taiwan Semiconductor Manufacturing (2) 59,349 59,349
- -
14,800 14,800 United Microelectronics (1) 51,800 51,800
- -
SEMICONDUCTOR EQUIPMENT (0.59%)
7,150 60,590 Applied Materials (1) 115,115 975,499
53,440 860,384
343 343 Brooks Automation (1) (2) 5,104 5,104
- -
2,560 22,510 Kla-Tencor (1) 116,557 1,024,880
19,950 908,323
441 441 MKS Instruments (1) 6,977 6,977
- -
610 610 Mykrolis (1) 6,411 6,411
- -
955 955 Varian Semiconductor Equipment Associates (1) 33,052 33,052
- -
STEEL PRODUCERS (0.03%)
1,974 1,974 Arcelor 36,717 36,717
- -
646 646 POSCO 24,154 24,154
- -
2,077 2,077 Schnitzer Steel Industries 58,675 58,675
- -
TELECOMMUNICATION EQUIPMENT (0.89%)
291 291 Comtech Telecommunications (1) 7,976 7,976
- -
1,910 1,910 Ditech Communications (1) 43,815 43,815
- -
687 687 Plantronics 29,885 29,885
- -
5,250 47,160 Qualcomm 219,503 1,971,760
41,910 1,752,257
4,100 33,280 Scientific-Atlanta 112,299 911,539
29,180 799,240
1,160 1,160 Tekelec (1) 25,891 25,891
- -
3,830 3,830 Telefonaktiebolaget LM Ericsson (1) 110,725 110,725
- -
2,128 2,128 Westell Technologies (1) 11,938 11,938
- -
TELECOMMUNICATION EQUIPMENT-FIBER
OPTICS (0.20%)
2,357 2,357 C-COR.net (1) 17,725 17,725
- -
6,680 60,230 Corning (1) 76,486 689,633
53,550 613,147
1,439 1,439 Sycamore Networks (1) 5,281 5,281
- -
TELECOMMUNICATION SERVICES (0.01%)
4,900 4,900 PTEK Holdings (1) 48,804 48,804
- -
TELEPHONE-INTEGRATED (2.88%)
1,420 12,860 ALLTEL 78,001 706,400
11,440 628,399
2,530 2,530 AT&T 43,288 43,288
- -
2,450 19,900 BellSouth 65,342 530,734
17,450 465,392
1,630 1,630 Nippon Telegraph & Telephone 34,638 34,638
- -
19,350 114,426 SBC Communications 488,781 2,890,401
95,076 2,401,620
10,350 91,580 Sprint 216,832 1,918,600
81,230 1,701,768
16,085 100,431 Verizon Communications 628,923 3,926,852
84,346 3,297,929
THEATERS (0.00%)
202 202 Carmike Cinemas 7,232 7,232
- -
THERAPEUTICS (0.23%)
1,634 1,634 Dyax (1) 9,379 9,379
- -
614 614 Eyetech Pharmaceuticals (1) 26,058 26,058
- -
6,300 20,880 Gilead Sciences (1) 218,169 723,074
14,580 504,905
1,045 1,045 Medicines (1) 27,839 27,839
- -
926 926 NeoPharm (1) 6,728 6,728
- -
TOBACCO (0.70%)
7,491 47,544 Altria Group 363,014 2,303,982
40,053 1,940,968
1,846 1,846 British American Tobacco 55,565 55,565
- -
1,810 1,810 Imperial Tobacco Group 84,979 84,979
- -
TOOLS-HAND HELD (0.13%)
640 5,490 Black & Decker 51,379 440,737
4,850 389,358
TRANSACTIONAL SOFTWARE (0.01%)
1,141 1,141 Transaction Systems Architects (1) 18,707 18,707
- -
TRANSPORT-AIR FREIGHT (0.16%)
3,680 12,900 CNF 161,110 564,762
9,220 403,652
TRANSPORT-RAIL (0.24%)
2,770 24,940 Norfolk Southern 94,042 846,713
22,170 752,671
TRANSPORT-SERVICES (0.51%)
100 850 FedEx 9,112 77,452
750 68,340
423 423 Offshore Logistics (1) 15,295 15,295
- -
2,410 21,519 United Parcel Service 190,824 1,703,875
19,109 1,513,051
TRANSPORT-TRUCK (0.01%)
469 469 J.B. Hunt Transport Services 19,163 19,163
- -
539 539 Yellow Roadway (1) 25,867 25,867
- -
TRAVEL SERVICES (0.09%)
1,600 14,370 Sabre Holdings 34,416 309,099
12,770 274,683
TRUCKING & LEASING (0.00%)
251 251 Ryder System 12,575 12,575
- -
VITAMINS & NUTRITION PRODUCTS (0.01%)
646 646 USANA Health Sciences (1) (2) 19,270 19,270
- -
WATER (0.01%)
1,696 1,696 Suez 39,856 39,856
- -
WEB PORTALS (0.39%)
1,964 1,964 United Online (1) 18,442 18,442
- -
4,392 37,317 Yahoo (1) 158,946 1,350,502
32,925 1,191,556
WIRELESS EQUIPMENT (0.51%)
24,430 103,670 Motorola 421,662 1,789,344
79,240 1,367,682
TOTAL COMMON STOCKS 64,313,833 242,958,431 307,272,264
BONDS (6.00%)
AEROSPACE & DEFENSE EQUIPMENT (0.01%)
K&F Industries
35,000 35,000 9.25%; 10/15/07 35,700 35,700
- -
AGRICULTURAL OPERATIONS (0.04%)
Bunge Limited Finance
80,000 4.38%; 12/15/08 80,857 80,857
80,000 - -
45,000 45,000 5.35%; 04/15/14 46,077 46,077
- -
25,000 25,000 5.88%; 05/15/13 26,501 26,501
- -
AIRLINES (0.04%)
Southwest Airlines
152,222 152,222 5.10%; 05/01/06 155,849 155,849
- -
ASSET BACKED SECURITIES (0.16%)
Chase Funding Mortgage Loan Asset
Backed Certificates (3)
100,000 100,000 2.22%; 09/25/33 99,995 99,995
- -
Countrywide Asset Backed Certificates (3)
196,429 196,429 2.43%; 02/25/34 196,420 196,420
- -
180,000 180,000 3.00%; 01/25/34 180,318 180,318
-
Master Adjustable Rate Mortgages Trust (3)
95,000 95,000 3.03%; 03/25/34 95,659 95,659
- -
AUTO-CARS & LIGHT TRUCKS (0.06%)
DaimlerChrysler Holding
70,000 70,000 4.05%; 06/04/08 70,472 70,472
- -
15,000 15,000 4.75%; 01/15/08 15,454 15,454
- -
40,000 40,000 7.25%; 01/18/06 42,046 42,046
- -
Ford Motor
30,000 30,000 7.45%; 07/16/31 29,216 29,216
- -
General Motors
40,000 40,000 8.25%; 07/15/23 41,668 41,668
- -
Hyundai Motor Manufacturing (4)
25,000 25,000 5.30%; 12/19/08 26,012 26,012
- -
AUTO/TRUCK PARTS & EQUIPMENT-ORIGINAL (0.02%)
Lear
45,000 45,000 7.96%; 05/15/05 46,188 46,188
- -
Tenneco Automotive
15,000 15,000 11.63%; 10/15/09 15,938 15,938
- -
AUTOMOBILE SEQUENTIAL (0.04%)
Ford Credit Auto Owner Trust
132,368 132,368 4.72%; 12/15/05 132,743 132,743
- -
BEVERAGES-WINE & SPIRITS (0.04%)
Diageo Capital (3)
150,000 150,000 2.17%; 04/20/07 150,056 150,056
- -
BREWERY (0.04%)
Cia Brasileira de Bebidas
40,000 40,000 10.50%; 12/15/11 49,200 49,200
- -
Coors Brewing
50,000 50,000 6.38%; 05/15/12 55,458 55,458
- -
SABMiller (4)
30,000 30,000 6.63%; 08/15/33 33,761 33,761
- -
BROADCASTING SERVICES & PROGRAMMING (0.04%)
Clear Channel Communications
65,000 65,000 5.75%; 01/15/13 67,317 67,317
- -
Grupo Televisa
20,000 8.50%; 03/11/32 22,850 22,850
20,000 - -
Liberty Media
60,000 60,000 3.50%; 09/25/06 60,059 60,059
- -
BUILDING & CONSTRUCTION PRODUCTS-
MISCELLANEOUS (0.06%)
CRH America
25,000 25,000 5.30%; 10/15/13 25,827 25,827
- -
25,000 25,000 6.40%; 10/15/33 26,907 26,907
- -
35,000 35,000 6.95%; 03/15/12 40,231 40,231
- -
Masco (3) (4)
110,000 110,000 2.11%; 03/09/07 110,185 110,185
- -
BUILDING PRODUCTS-AIR & HEATING (0.02%)
York International
75,000 75,000 6.63%; 08/15/06 79,224 79,224
- -
BUILDING PRODUCTS-WOOD (0.00%)
Celulosa Arauco y Constitucion
15,000 15,000 5.13%; 07/09/13 14,840 14,840
- -
BUILDING-RESIDENTIAL & COMMERCIAL (0.03%)
DR Horton
50,000 50,000 8.50%; 04/15/12 56,375 56,375
- -
KB Home
45,000 45,000 7.75%; 02/01/10 49,050 49,050
- -
CABLE TV (0.08%)
Charter Communications (4)
35,000 35,000 8.00%; 04/30/12 35,394 35,394
- -
Comcast
5,000 5,000 5.30%; 01/15/14 5,099 5,099
- -
5,000 5,000 5.85%; 01/15/10 5,378 5,378
- -
35,000 35,000 7.05%; 03/15/33 39,533 39,533
- -
Comcast Cable Communications
25,000 25,000 6.75%; 01/30/11 28,045 28,045
- -
Cox Communications
45,000 45,000 6.75%; 03/15/11 49,432 49,432
- -
EchoStar DBS (4)
60,000 60,000 6.63%; 10/01/14 61,350 61,350
- -
Rogers Cablesystems
40,000 40,000 10.00%; 03/15/05 41,000 41,000
- -
CASINO HOTELS (0.06%)
Aztar
55,000 55,000 7.88%; 06/15/14 59,675 59,675
- -
Harrah's Operating
50,000 50,000 5.50%; 07/01/10 52,173 52,173
- -
Mandalay Resort Group
25,000 25,000 6.45%; 02/01/06 25,781 25,781
- -
MGM Mirage
35,000 35,000 7.25%; 10/15/06 37,275 37,275
- -
Park Place Entertainment
45,000 45,000 8.50%; 11/15/06 49,500 49,500
- -
CELLULAR TELECOMMUNICATIONS (0.14%)
AT&T Wireless Services
65,000 65,000 7.88%; 03/01/11 77,435 77,435
- -
65,000 65,000 8.13%; 05/01/12 79,299 79,299
- -
Dobson Cellular Systems (1) (3) (4)
55,000 55,000 0.00%; 11/01/11 56,512 56,512
- -
PTC International Finance II
75,000 75,000 11.25%; 12/01/09 79,500 79,500
- -
Rural Cellular (4)
20,000 20,000 8.25%; 03/15/12 21,000 21,000
- -
Telus
40,000 40,000 7.50%; 06/01/07 43,951 43,951
- -
10,000 10,000 8.00%; 06/01/11 11,824 11,824
- -
US Unwired
60,000 60,000 5.79%; 06/15/10 61,650 61,650
- -
Verizon Wireless Capital
65,000 65,000 5.38%; 12/15/06 68,129 68,129
- -
CHEMICALS-DIVERSIFIED (0.05%)
Chevron Phillips Chemical
50,000 50,000 7.00%; 03/15/11 56,710 56,710
- -
FMC
55,000 55,000 6.75%; 05/05/05 55,825 55,825
- -
ICI Wilmington I
30,000 30,000 5.63%; 12/01/13 31,044 31,044
- -
Lyondell Chemical
27,000 27,000 9.88%; 05/01/07 28,552 28,552
- -
CHEMICALS-SPECIALTY (0.02%)
Lubrizol
45,000 45,000 4.63%; 10/01/09 45,441 45,441
- -
20,000 20,000 6.50%; 10/01/34 20,156 20,156
- -
COAL (0.01%)
Massey Energy
30,000 30,000 6.63%; 11/15/10 31,275 31,275
- -
COATINGS & PAINT (0.01%)
Valspar
25,000 25,000 6.00%; 05/01/07 26,573 26,573
- -
COMMERCIAL BANKS (0.02%)
Union Planters Bank
50,000 50,000 5.13%; 06/15/07 52,743 52,743
- -
United Overseas Bank (4)
20,000 20,000 4.50%; 07/02/13 19,692 19,692
- -
COMMERCIAL SERVICE-FINANCE (0.02%)
Dollar Financial Group
50,000 50,000 9.75%; 11/15/11 53,375 53,375
- -
COMMERCIAL SERVICES (0.02%)
Iron Mountain
55,000 55,000 8.25%; 07/01/11 57,475 57,475
- -
COMPUTER SERVICES (0.03%)
Unisys
20,000 20,000 7.25%; 01/15/05 20,200 20,200
- -
35,000 35,000 7.88%; 04/01/08 35,919 35,919
- -
35,000 35,000 8.13%; 06/01/06 37,187 37,187
- -
COMPUTERS-INTEGRATED SYSTEMS (0.00%)
NCR
15,000 15,000 7.13%; 06/15/09 16,730 16,730
- -
COMPUTERS-MEMORY DEVICES (0.01%)
Seagate Technology HDD Holdings
45,000 45,000 8.00%; 05/15/09 48,656 48,656
- -
CONSUMER PRODUCTS-MISCELLANEOUS (0.02%)
Fortune Brands (4)
75,000 75,000 7.13%; 11/01/04 75,000 75,000
- -
CONTAINERS-PAPER & PLASTIC (0.01%)
Norampac
40,000 40,000 6.75%; 06/01/13 42,200 42,200
- -
CREDIT CARD ASSET BACKED SECURITIES (0.23%)
American Express Credit Account Master Trust
500,000 500,000 5.53%; 10/15/08 519,155 519,155
- -
Capital One Multi-Asset Execution Trust (3)
95,000 95,000 2.09%; 12/15/09 95,059 95,059
- -
Chase Credit Card Master Trust (3)
100,000 100,000 2.07%; 05/15/09 99,994 99,994
- -
MBNA Credit Card Master Note Trust
100,000 100,000 3.90%; 11/15/07 100,911 100,911
- -
DATA PROCESSING & MANAGEMENT (0.00%)
Certegy
15,000 15,000 4.75%; 09/15/08 15,447 15,447
- -
DISTRIBUTION-WHOLESALE (0.02%)
Ingram Micro
50,000 50,000 9.88%; 08/15/08 54,875 54,875
- -
DIVERSIFIED FINANCIAL SERVICES (0.04%)
General Electric Capital
65,000 65,000 6.75%; 03/15/32 75,804 75,804
- -
John Deere Capital
40,000 40,000 3.13%; 12/15/05 40,145 40,145
- -
NiSource Finance
40,000 40,000 3.20%; 11/01/06 39,946 39,946
- -
DIVERSIFIED MANUFACTURING OPERATIONS (0.02%)
Tyco International Group
35,000 35,000 6.00%; 11/15/13 38,236 38,236
- -
40,000 40,000 6.38%; 02/15/06 41,759 41,759
- -
DIVERSIFIED MINERALS (0.01%)
Corp. Nacional del Cobre de Chile
20,000 20,000 5.50%; 10/15/13 20,936 20,936
- -
Vale Overseas
25,000 25,000 9.00%; 08/15/13 28,125 28,125
- -
DIVERSIFIED OPERATIONS (0.01%)
Hutchison Whampoa International (4)
25,000 25,000 6.50%; 02/13/13 26,609 26,609
- -
E-COMMERCE-PRODUCTS (0.01%)
FTD
25,000 25,000 7.75%; 02/15/14 25,063 25,063
- -
ELECTRIC-DISTRIBUTION (0.01%)
Detroit Edison
25,000 25,000 5.40%; 08/01/14 26,396 26,396
- -
ELECTRIC-GENERATION (0.01%)
Korea East-West Power (4)
15,000 15,000 4.88%; 04/21/11 15,337 15,337
- -
Tenaska Virginia Partners (4)
29,822 29,822 6.12%; 03/30/24 31,567 31,567
- -
ELECTRIC-INTEGRATED (0.34%)
Alabama Power
10,000 10,000 5.70%; 02/15/33 10,248 10,248
- -
Arizona Public Service
35,000 35,000 5.80%; 06/30/14 37,235 37,235
- -
20,000 20,000 6.50%; 03/01/12 22,367 22,367
- -
Carolina Power & Light
40,000 40,000 6.65%; 04/01/08 43,547 43,547
- -
Centerpoint Energy
25,000 25,000 5.88%; 06/01/08 26,326 26,326
- -
Cincinnati Gas & Electric
15,000 15,000 5.40%; 06/15/33 13,978 13,978
- -
Consumers Energy
10,000 10,000 4.25%; 04/15/08 10,183 10,183
- -
Dayton Power & Light (4)
30,000 30,000 5.13%; 10/01/13 30,592 30,592
- -
Duke Energy (3)
130,000 130,000 2.42%; 01/15/05 130,027 130,027
- -
Entergy Gulf States
25,000 25,000 3.60%; 06/01/08 24,798 24,798
- -
Exelon
30,000 30,000 6.75%; 05/01/11 33,803 33,803
- -
FirstEnergy
55,000 55,000 6.45%; 11/15/11 60,262 60,262
- -
FPL Group Capital
25,000 25,000 3.25%; 04/11/06 25,170 25,170
- -
Indianapolis Power & Light
35,000 35,000 7.38%; 08/01/07 37,877 37,877
- -
Jersey Central Power & Light (4)
15,000 15,000 5.63%; 05/01/16 15,733 15,733
- -
ELECTRIC-INTEGRATED (continued)
MSW Energy Holdings II
50,000 50,000 7.38%; 09/01/10 52,500 52,500
- -
Northeast Utilities
20,000 20,000 3.30%; 06/01/08 19,576 19,576
- -
NorthWestern (4)
55,000 55,000 5.88%; 11/01/14 56,719 56,719
- -
Ohio Power
20,000 20,000 4.85%; 01/15/14 20,103 20,103
- -
Oncor Electric Delivery
45,000 45,000 6.38%; 05/01/12 49,928 49,928
- -
Pacific Gas & Electric
25,000 25,000 3.60%; 03/01/09 24,821 24,821
- -
85,000 85,000 6.05%; 03/01/34 87,544 87,544
- -
Pepco Holdings
80,000 80,000 3.75%; 02/15/06 80,773 80,773
- -
10,000 10,000 4.00%; 05/15/10 9,774 9,774
- -
Power Contract Financing (4)
16,625 16,625 5.20%; 02/01/06 16,855 16,855
- -
PPL Energy Supply
35,000 35,000 5.40%; 08/15/14 35,882 35,882
- -
PSEG Power
50,000 50,000 6.95%; 06/01/12 56,323 56,323
- -
Puget Energy
25,000 25,000 3.36%; 06/01/08 24,803 24,803
- -
Southern California Edison
15,000 15,000 5.00%; 01/15/14 15,367 15,367
- -
40,000 40,000 8.00%; 02/15/07 44,231 44,231
- -
Southwestern Electric Power
50,000 50,000 4.50%; 07/01/05 50,620 50,620
- -
TXU Energy
20,000 20,000 6.13%; 03/15/08 21,482 21,482
- -
ELECTRONIC COMPONENTS-MISCELLANEOUS (0.01%)
Flextronics International
25,000 25,000 6.50%; 05/15/13 26,250 26,250
- -
ELECTRONIC COMPONENTS-SEMICONDUCTOR (0.02%)
Fairchild Semiconductor International
60,000 60,000 10.50%; 02/01/09 64,200 64,200
- -
ELECTRONICS-MILITARY (0.02%)
L-3 Communications
80,000 80,000 8.00%; 08/01/08 82,400 82,400
- -
EXPORT/IMPORT BANK (0.01%)
Export-Import Bank of Korea
30,000 30,000 4.50%; 08/12/09 30,684 30,684
- -
FEDERAL & FEDERALLY SPONSORED CREDIT (0.02%)
Housing Urban Development
60,000 60,000 2.99%; 08/01/05 60,294 60,294
- -
FILTRATION & SEPARATION PRODUCTS (0.01%)
Polypore (4)
35,000 35,000 8.75%; 05/15/12 36,575 36,575
- -
FINANCE-AUTO LOANS (0.07%)
Ford Motor Credit
35,000 35,000 6.13%; 01/09/06 36,164 36,164
- -
20,000 20,000 6.50%; 01/25/07 21,013 21,013
- -
125,000 125,000 6.88%; 02/01/06 129,959 129,959
- -
25,000 25,000 7.88%; 06/15/10 27,741 27,741
- -
General Motors Acceptance
15,000 15,000 5.63%; 05/15/09 15,147 15,147
- -
20,000 20,000 8.00%; 11/01/31 20,701 20,701
- -
FINANCE-COMMERCIAL (0.01%)
CIT Group
35,000 35,000 5.13%; 09/30/14 35,220 35,220
- -
FINANCE-CONSUMER LOANS (0.01%)
Household Finance
20,000 20,000 4.75%; 07/15/13 19,970 19,970
- -
FINANCE-CREDIT CARD (0.04%)
Capital One Bank
30,000 30,000 5.00%; 06/15/09 31,170 31,170
- -
100,000 100,000 6.88%; 02/01/06 104,953 104,953
- -
FINANCE-INVESTMENT BANKER & BROKER (0.28%)
BCP Caylux Holdings Luxembourg (4)
40,000 40,000 9.63%; 06/15/14 44,800 44,800
- -
Bear Stearns
130,000 130,000 2.43%; 01/30/09 (3) 130,313 130,313
- -
70,000 70,000 2.50%; 06/25/34 (3) 70,208 70,208
- -
40,000 40,000 3.00%; 03/30/06 40,143 40,143
- -
45,000 45,000 4.00%; 01/31/08 45,731 45,731
- -
Citigroup
20,000 20,000 5.88%; 02/22/33 20,261 20,261
- -
50,000 50,000 6.63%; 06/15/32 55,790 55,790
- -
E*Trade Financial (4)
50,000 50,000 8.00%; 06/15/11 52,750 52,750
- -
Goldman Sachs Group
35,000 35,000 3.88%; 01/15/09 35,238 35,238
- -
110,000 110,000 6.60%; 01/15/12 123,583 123,583
- -
Lehman Brothers Holdings
50,000 50,000 4.80%; 03/13/14 49,807 49,807
- -
Merrill Lynch
130,000 130,000 1.95%; 02/06/09 (3) 130,004 130,004
- -
40,000 40,000 5.45%; 07/15/14 41,774 41,774
- -
Morgan Stanley
45,000 45,000 4.75%; 04/01/14 44,083 44,083
- -
25,000 25,000 5.30%; 03/01/13 25,958 25,958
- -
70,000 70,000 6.75%; 04/15/11 79,454 79,454
- -
FINANCE-MORTGAGE LOAN/BANKER (0.52%)
Countrywide Home Loan
25,000 25,000 4.25%; 12/19/07 25,464 25,464
- -
200,000 200,000 4.62%; 12/19/33 (3) 198,200 198,200
- -
Federal Home Loan Mortgage
225,000 225,000 3.25%; 02/25/08 223,759 223,759
- -
375,000 375,000 4.50%; 07/15/13 379,117 379,117
- -
45,000 45,000 4.63%; 05/28/13 44,956 44,956
- -
80,000 80,000 4.75%; 10/11/12 79,930 79,930
- -
75,000 75,000 4.75%; 05/06/13 74,309 74,309
- -
20,000 20,000 5.13%; 11/07/13 20,158 20,158
- -
256,000 256,000 6.75%; 03/15/31 310,055 310,055
- -
Federal National Mortgage Association
50,000 50,000 2.88%; 05/19/08 49,151 49,151
- -
230,000 230,000 3.70%; 11/01/07 231,899 231,899
- -
90,000 90,000 4.32%; 07/26/07 91,215 91,215
- -
75,000 75,000 4.75%; 02/21/13 74,917 74,917
- -
FOOD-MISCELLANEOUS/DIVERSIFIED (0.08%)
Chiquita Brands International (4)
45,000 45,000 7.50%; 11/01/14 46,125 46,125
- -
ConAgra Foods
75,000 75,000 7.50%; 09/15/05 77,808 77,808
- -
Corn Products International
40,000 40,000 8.45%; 08/15/09 45,800 45,800
- -
Kraft Foods
85,000 85,000 4.63%; 11/01/06 87,486 87,486
- -
35,000 35,000 6.25%; 06/01/12 38,522 38,522
- -
FOOD-RETAIL (0.03%)
Delhaize America
45,000 45,000 7.38%; 04/15/06 47,527 47,527
- -
Kroger
25,000 25,000 6.20%; 06/15/12 27,389 27,389
- -
20,000 20,000 7.50%; 04/01/31 23,502 23,502
- -
GAS-DISTRIBUTION (0.03%)
Colorado Interstate Gas
50,000 50,000 10.00%; 06/15/05 52,375 52,375
- -
Sempra Energy
35,000 35,000 4.75%; 05/15/09 35,947 35,947
- -
HOME DECORATION PRODUCTS (0.01%)
Newell Rubbermaid
10,000 10,000 4.00%; 05/01/10 9,785 9,785
- -
15,000 15,000 4.63%; 12/15/09 15,377 15,377
- -
HOME EQUITY-OTHER (0.15%)
Asset Backed Funding Certificates (3)
45,000 45,000 2.12%; 02/25/30 44,998 44,998
- -
Long Beach Mortgage Loan Trust (3)
25,000 25,000 2.46%; 06/25/34 24,978 24,978
- -
30,000 30,000 3.01%; 06/25/34 30,036 30,036
- -
New Century Home Equity Loan Trust (3)
115,000 115,000 2.65%; 01/25/34 115,337 115,337
- -
Option One Mortgage Loan Trust (3)
70,000 70,000 2.46%; 05/25/34 69,911 69,911
- -
70,000 70,000 2.98%; 05/25/34 69,997 69,997
- -
Specialty Underwriting & Residential Finance (3)
65,000 65,000 2.44%; 02/25/35 64,997 64,997
- -
Wells Fargo Home Equity Trust (3)
90,000 90,000 2.43%; 04/25/34 89,997 89,997
- -
HOME EQUITY-SEQUENTIAL (0.03%)
Ameriquest Mortgage Securities (3)
75,000 75,000 2.13%; 04/25/34 74,996 74,996
- -
Residential Asset Securities
13,531 13,531 4.59%; 10/25/26 13,541 13,541
- -
HOTELS & MOTELS (0.01%)
Host Marriott
18,000 18,000 7.88%; 08/01/08 18,495 18,495
- -
INVESTMENT COMPANIES (0.02%)
Canadian Oil Sands (4)
80,000 80,000 4.80%; 08/10/09 81,738 81,738
- -
LIFE & HEALTH INSURANCE (0.00%)
Nationwide Financial Services
10,000 10,000 5.63%; 02/13/15 10,328 10,328
- -
MACHINERY-FARM (0.03%)
Case
75,000 75,000 7.25%; 08/01/05 77,062 77,062
- -
Case New Holland (4)
40,000 40,000 6.00%; 06/01/09 40,000 40,000
- -
MEDICAL INFORMATION SYSTEM (0.02%)
NDCHealth
50,000 50,000 10.50%; 12/01/12 53,000 53,000
- -
MEDICAL PRODUCTS (0.01%)
Medical Device Manufacturing (4)
25,000 25,000 10.00%; 07/15/12 26,750 26,750
- -
MEDICAL-DRUGS (0.04%)
Biovail
45,000 45,000 7.88%; 04/01/10 46,688 46,688
- -
Eli Lilly
60,000 60,000 5.50%; 07/15/06 62,685 62,685
- -
Schering-Plough
30,000 30,000 5.30%; 12/01/13 31,114 31,114
- -
MEDICAL-HMO (0.06%)
Anthem
200,000 200,000 4.88%; 08/01/05 202,327 202,327
- -
MEDICAL-HOSPITALS (0.02%)
HCA
50,000 50,000 6.95%; 05/01/12 52,720 52,720
- -
10,000 10,000 7.13%; 06/01/06 10,490 10,490
- -
MEDICAL-WHOLESALE DRUG DISTRIBUTION (0.01%)
Bergen Brunswig
35,000 35,000 7.25%; 06/01/05 35,700 35,700
- -
METAL PROCESSORS & FABRICATION (0.01%)
Mueller Group
35,000 35,000 10.00%; 05/01/12 37,800 37,800
- -
METAL-DIVERSIFIED (0.01%)
Falconbridge
10,000 10,000 5.38%; 06/01/15 10,077 10,077
- -
15,000 15,000 7.35%; 06/05/12 17,224 17,224
- -
MISCELLANEOUS INVESTING (0.02%)
iStar Financial
45,000 45,000 4.88%; 01/15/09 45,938 45,938
- -
United Dominion Realty Trust
30,000 30,000 6.50%; 06/15/09 32,810 32,810
- -
MISCELLANEOUS MANUFACTURERS (0.02%)
Samsonite
55,000 55,000 8.88%; 06/01/11 58,575 58,575
- -
MONEY CENTER BANKS (0.06%)
Bank of America
60,000 60,000 4.88%; 09/15/12 61,619 61,619
- -
60,000 60,000 7.40%; 01/15/11 70,295 70,295
- -
JP Morgan Chase
75,000 75,000 5.13%; 09/15/14 76,206 76,206
- -
MORTGAGE BACKED SECURITIES (0.58%)
Bear Stearns Adjustable Rate Mortgage
Trust (3) (4)
50,000 50,000 3.52%; 06/25/34 49,365 49,365
- -
Bear Stearns Commercial Mortgage
Securities
448,646 448,646 0.65%; 05/11/39 (3) (4) 12,707 12,707
- -
110,000 110,000 5.47%; 06/11/41 116,289 116,289
- -
Credit Suisse First Boston
Mortgage Securities (3)
50,000 50,000 2.53%; 05/25/34 49,712 49,712
- -
CS First Boston Mortgage Securities (3)
827,328 827,328 0.57%; 05/15/36 (4) 18,427 18,427
- -
737,859 737,859 0.68%; 07/15/36 (4) 24,197 24,197
- -
30,000 30,000 2.53%; 06/25/34 (4) 29,913 29,913
- -
25,000 25,000 7.68%; 09/15/41 28,970 28,970
- -
DLJ Commercial Mortgage
700,000 700,000 6.59%; 02/18/31 764,236 764,236
- -
DLJ Mortgage Acceptance (4)
100,000 100,000 6.99%; 10/15/30 106,976 106,976
- -
First Union National Bank Commercial Mortgage
40,000 40,000 8.09%; 05/17/32 47,266 47,266
- -
Greenwich Capital Commercial Funding (3) (4)
1,483,000 1,483,000 0.39%; 06/10/36 27,422 27,422
- -
JP Morgan Chase Commercial Mortgage
Securities
650,000 650,000 1.22%; 01/12/39 (3) (4) 34,041 34,041
- -
150,000 150,000 6.04%; 11/15/35 161,353 161,353
- -
LB-UBS Commercial Mortgage Trust
357,668 357,668 0.14%; 03/15/36 (3) (4) 10,060 10,060
- -
708,201 708,201 0.63%; 03/15/34 (3) (4) 15,399 15,399
- -
565,325 565,325 0.75%; 08/15/36 (4) 19,621 19,621
- -
422,905 422,905 1.23%; 03/15/36 (3) (4) 22,050 22,050
- -
325,000 325,000 5.97%; 03/15/26 347,656 347,656
- -
Merrill Lynch Mortgage Investors (3)
90,000 90,000 2.49%; 01/25/35 89,996 89,996
- -
Merrill Lynch Mortgage Trust (3)
1,471,015 1,471,015 0.60%; 02/12/42 36,134 36,134
- -
Morgan Stanley Capital I (3) (4)
425,000 425,000 1.12%; 01/13/41 22,336 22,336
- -
MOTION PICTURES & SERVICES (0.01%)
Alliance Atlantis Communications
20,000 20,000 13.00%; 12/15/09 21,500 21,500
- -
MULTI-LINE INSURANCE (0.04%)
Metropolitan Life Global Funding I (3) (4)
130,000 130,000 2.04%; 03/17/09 129,811 129,811
- -
MULTIMEDIA (0.10%)
AOL Time Warner
20,000 20,000 5.63%; 05/01/05 20,302 20,302
- -
70,000 70,000 6.15%; 05/01/07 74,878 74,878
- -
60,000 60,000 7.63%; 04/15/31 71,089 71,089
- -
Gannett
75,000 75,000 4.95%; 04/01/05 75,740 75,740
- -
News America
15,000 15,000 4.75%; 03/15/10 15,435 15,435
- -
30,000 30,000 6.55%; 03/15/33 32,276 32,276
- -
35,000 35,000 6.63%; 01/09/08 38,303 38,303
- -
Viacom
15,000 15,000 6.63%; 05/15/11 16,912 16,912
- -
MUTUAL INSURANCE (0.02%)
Liberty Mutual Group (4)
35,000 35,000 5.75%; 03/15/14 34,304 34,304
- -
25,000 25,000 7.00%; 03/15/34 25,184 25,184
- -
NON-HAZARDOUS WASTE DISPOSAL (0.01%)
Allied Waste North America
20,000 20,000 5.75%; 02/15/11 18,450 18,450
- -
Waste Management
20,000 20,000 5.00%; 03/15/14 20,223 20,223
- -
OFFICE AUTOMATION & EQUIPMENT (0.05%)
Xerox
55,000 55,000 6.88%; 08/15/11 58,713 58,713
- -
OIL & GAS DRILLING (0.11%)
Consolidated Natural Gas
25,000 25,000 5.00%; 03/01/14 25,260 25,260
- -
Nabors Holdings
45,000 45,000 4.88%; 08/15/09 46,657 46,657
- -
Precision Drilling
40,000 40,000 5.63%; 06/01/14 42,228 42,228
- -
OIL COMPANY-EXPLORATION & PRODUCTION (0.14%)
Canadian Natural Resources
25,000 25,000 7.20%; 01/15/32 29,545 29,545
- -
Chesapeake Energy
40,000 40,000 8.38%; 11/01/08 43,600 43,600
- -
Devon Financing
40,000 40,000 7.88%; 09/30/31 50,457 50,457
- -
EnCana
20,000 20,000 4.75%; 10/15/13 19,972 19,972
- -
Husky Energy
35,000 35,000 6.15%; 06/15/19 37,705 37,705
- -
Nexen
15,000 15,000 5.05%; 11/20/13 15,055 15,055
- -
25,000 25,000 7.88%; 03/15/32 31,161 31,161
- -
Pemex Project Funding Master Trust
185,000 185,000 7.88%; 02/01/09 208,125 208,125
- -
Swift Energy
60,000 60,000 7.63%; 07/15/11 65,100 65,100
- -
OIL COMPANY-INTEGRATED (0.05%)
Occidental Petroleum
25,000 25,000 4.00%; 11/30/07 25,474 25,474
- -
PanCanadian Energy
35,000 35,000 7.20%; 11/01/31 41,027 41,027
- -
Petrobras International Finance
40,000 40,000 8.38%; 12/10/18 40,200 40,200
- -
30,000 30,000 9.13%; 07/02/13 32,700 32,700
- -
Petronas Capital (4)
20,000 20,000 7.88%; 05/22/22 24,645 24,645
- -
OIL FIELD MACHINERY & EQUIPMENT (0.03%)
Cooper Cameron
50,000 50,000 2.65%; 04/15/07 49,135 49,135
- -
Grant Prideco
40,000 40,000 9.00%; 12/15/09 44,900 44,900
- -
OIL REFINING & MARKETING (0.10%)
CITGO Petroleum (4)
40,000 40,000 6.00%; 10/15/11 40,700 40,700
- -
Enterprise Products Operating (4)
50,000 50,000 4.00%; 10/15/07 50,394 50,394
- -
Enterprise Products Partners
15,000 15,000 6.38%; 02/01/13 16,220 16,220
- -
Frontier Oil
75,000 75,000 11.75%; 11/15/09 79,687 79,687
- -
Tesoro Petroleum
40,000 40,000 8.00%; 04/15/08 43,500 43,500
- -
35,000 35,000 9.63%; 11/01/08 38,588 38,588
- -
Valero Energy
55,000 55,000 6.88%; 04/15/12 62,600 62,600
- -
PAPER & RELATED PRODUCTS (0.11%)
Boise Cascade (4)
45,000 45,000 5.01%; 10/15/12 46,012 46,012
- -
International Paper
80,000 80,000 3.80%; 04/01/08 80,145 80,145
- -
25,000 25,000 6.75%; 09/01/11 28,100 28,100
- -
Norske Skog (4)
50,000 50,000 7.63%; 10/15/11 56,967 56,967
- -
Sappi Papier Holding (4)
20,000 20,000 6.75%; 06/15/12 22,154 22,154
- -
Smurfit Capital Funding
40,000 40,000 6.75%; 11/20/05 41,300 41,300
- -
PAPER & RELATED PRODUCTS (continued)
Weyerhaeuser
60,000 60,000 6.13%; 03/15/07 63,978 63,978
- -
30,000 30,000 6.75%; 03/15/12 33,953 33,953
- -
PETROCHEMICALS (0.01%)
Braskem (4)
45,000 45,000 11.75%; 01/22/14 50,175 50,175
- -
PHYSICAL THERAPY & REHABILITATION CENTERS (0.02%)
HealthSouth
80,000 80,000 6.88%; 06/15/05 80,400 80,400
- -
PHYSICIAN PRACTICE MANAGEMENT (0.02%)
US Oncology (4)
55,000 55,000 9.00%; 08/15/12 59,400 59,400
- -
PIPELINES (0.07%)
Buckeye Partners
35,000 35,000 4.63%; 07/15/13 34,250 34,250
- -
Duke Capital
25,000 25,000 4.37%; 03/01/09 25,349 25,349
- -
Duke Energy Field Services
20,000 20,000 7.88%; 08/16/10 23,654 23,654
- -
Enbridge Energy Partners
15,000 15,000 4.00%; 01/15/09 14,919 14,919
- -
Equitable Resources
25,000 25,000 5.15%; 11/15/12 26,121 26,121
- -
National Fuel Gas
25,000 25,000 5.25%; 03/01/13 25,752 25,752
- -
TEPPCO Partners
45,000 45,000 6.13%; 02/01/13 48,445 48,445
- -
Texas Eastern Transmission
50,000 50,000 5.25%; 07/15/07 52,353 52,353
- -
PROPERTY & CASUALTY INSURANCE (0.18%)
ACE
70,000 70,000 6.00%; 04/01/07 73,478 73,478
- -
ACE INA Holdings
15,000 15,000 5.88%; 06/15/14 15,591 15,591
- -
Arch Capital Group
60,000 60,000 7.35%; 05/01/34 63,266 63,266
- -
Infinity Property & Casualty
55,000 55,000 5.50%; 02/18/14 54,876 54,876
- -
Markel
55,000 55,000 6.80%; 02/15/13 59,400 59,400
- -
St. Paul
80,000 80,000 5.75%; 03/15/07 83,839 83,839
- -
W.R. Berkley
90,000 90,000 5.13%; 09/30/10 91,642 91,642
- -
20,000 20,000 5.88%; 02/15/13 20,590 20,590
- -
XL Capital
100,000 100,000 5.25%; 09/15/14 99,835 99,835
- -
70,000 70,000 6.50%; 01/15/12 76,417 76,417
- -
PUBLISHING-BOOKS (0.02%)
Reed Elsevier Capital
55,000 55,000 6.13%; 08/01/06 57,797 57,797
- -
RECREATIONAL CENTERS (0.01%)
AMF Bowling Worldwide (4)
45,000 45,000 10.00%; 03/01/10 48,150 48,150
- -
REGIONAL BANKS (0.17%)
Bank One
80,000 80,000 7.63%; 08/01/05 83,078 83,078
- -
KeyCorp
100,000 100,000 4.63%; 05/16/05 101,067 101,067
- -
PNC Funding
100,000 100,000 5.75%; 08/01/06 104,728 104,728
- -
SunTrust Banks
35,000 35,000 5.05%; 07/01/07 36,631 36,631
- -
Wachovia
40,000 40,000 5.25%; 08/01/14 41,321 41,321
- -
100,000 100,000 5.63%; 12/15/08 107,744 107,744
- -
Wells Fargo
30,000 30,000 3.12%; 08/15/08 29,442 29,442
- -
100,000 100,000 5.13%; 02/15/07 104,344 104,344
- -
REINSURANCE (0.04%)
Berkshire Hathaway Finance
55,000 55,000 4.63%; 10/15/13 55,220 55,220
- -
Endurance Specialty Holdings
70,000 70,000 7.00%; 07/15/34 71,215 71,215
- -
RENTAL-AUTO & EQUIPMENT (0.01%)
United Rentals
20,000 20,000 6.50%; 02/15/12 19,800 19,800
- -
RETAIL-ARTS & CRAFTS (0.02%)
Michaels Stores
50,000 50,000 9.25%; 07/01/09 53,938 53,938
- -
RETAIL-DRUG STORE (0.02%)
Rite Aid
50,000 50,000 12.50%; 09/15/06 56,750 56,750
- -
RETAIL-MAJOR DEPARTMENT STORE (0.01%)
J.C. Penney
45,000 45,000 8.13%; 04/01/27 49,613 49,613
- -
RETAIL-PROPANE DISTRIBUTION (0.01%)
Ferrellgas
35,000 35,000 6.75%; 05/01/14 36,225 36,225
- -
RETAIL-VISION SERVICE CENTER (0.00%)
Cole National Group
15,000 15,000 8.63%; 08/15/07 15,216 15,216
- -
SAVINGS & LOANS-THRIFTS (0.04%)
Washington Mutual
70,000 70,000 3.81%; 06/25/34 69,328 69,328
- -
72,000 72,000 3.97%; 03/25/33 71,760 71,760
- -
15,000 15,000 5.50%; 01/15/13 15,683 15,683
- -
SOVEREIGN (0.09%)
Mexico Government
50,000 50,000 2.75%; 01/13/09 (3) 50,350 50,350
- -
35,000 35,000 8.30%; 08/15/31 40,460 40,460
- -
140,000 140,000 8.38%; 01/14/11 165,200 165,200
- -
South Africa Government
40,000 40,000 6.50%; 06/02/14 43,450 43,450
- -
SPECIAL PURPOSE ENTITY (0.04%)
Borden US Finance/Nova Scotia Finance (4)
40,000 40,000 9.00%; 07/15/14 43,750 43,750
- -
Fondo Latinoamericano de Reservas (4)
45,000 45,000 3.00%; 08/01/06 45,132 45,132
- -
Jostens (4)
50,000 50,000 7.63%; 10/01/12 51,750 51,750
- -
STEEL PRODUCERS (0.02%)
International Steel Group
75,000 75,000 6.50%; 04/15/14 80,250 80,250
- -
STEEL-SPECIALTY (0.02%)
CSN Islands VIII (4)
60,000 60,000 9.75%; 12/16/13 60,900 60,900
- -
SUPRANATIONAL BANK (0.03%)
Corp Andina de Fomento
65,000 65,000 6.75%; 03/15/05 65,938 65,938
- -
45,000 45,000 6.88%; 03/15/12 50,470 50,470
- -
TELEPHONE-INTEGRATED (0.33%)
British Telecommunications (3)
230,000 230,000 7.88%; 12/15/05 242,959 242,959
- -
Deutsche Telekom International Finance
35,000 35,000 5.25%; 07/22/13 36,187 36,187
- -
30,000 30,000 8.50%; 06/15/10 (3) 36,143 36,143
- -
France Telecom (3)
70,000 70,000 8.50%; 03/01/11 84,072 84,072
- -
MCI
70,000 70,000 5.91%; 05/01/07 69,825 69,825
- -
Qwest (4)
50,000 50,000 7.88%; 09/01/11 53,250 53,250
- -
SBC Communications
35,000 35,000 4.13%; 09/15/09 35,175 35,175
- -
20,000 20,000 6.15%; 09/15/34 20,204 20,204
- -
Sprint Capital
40,000 40,000 6.00%; 01/15/07 42,298 42,298
- -
35,000 35,000 6.13%; 11/15/08 37,921 37,921
- -
75,000 75,000 6.88%; 11/15/28 80,544 80,544
- -
30,000 30,000 6.90%; 05/01/19 33,585 33,585
- -
Telecom Italia Capital
190,000 190,000 4.00%; 01/15/10 (4) 188,232 188,232
- -
50,000 50,000 5.25%; 11/15/13 51,194 51,194
- -
20,000 20,000 6.38%; 11/15/33 20,757 20,757
- -
TELEPHONE-INTEGRATED (continued)
Telefonos de Mexico
10,000 10,000 4.50%; 11/19/08 10,088 10,088
- -
100,000 100,000 8.25%; 01/26/06 106,325 106,325
- -
TEXTILE-HOME FURNISHINGS (0.01%)
Mohawk Industries
30,000 30,000 6.50%; 04/15/07 32,079 32,079
- -
THEATERS (0.01%)
Cinemark (1) (3)
50,000 50,000 0.00%; 03/15/14 35,375 35,375
- -
TRANSPORT-RAIL (0.02%)
Canadian National Railway
40,000 40,000 4.25%; 08/01/09 40,703 40,703
- -
Union Pacific
15,000 15,000 4.70%; 01/02/24 14,601 14,601
- -
TRANSPORT-SERVICES (0.01%)
FedEx
30,000 30,000 1.88%; 04/01/05 30,017 30,017
- -
20,000 20,000 3.50%; 04/01/09 19,742 19,742
- -
VENTURE CAPITAL (0.01%)
Arch Western Finance
35,000 35,000 6.75%; 07/01/13 37,188 37,188
- -
VITAMINS & NUTRITION PRODUCTS (0.02%)
NBTY
30,000 30,000 8.63%; 09/15/07 30,300 30,300
- -
WH Holdings/WH Capital
25,000 25,000 9.50%; 04/01/11 27,375 27,375
- -
WIRE & CABLE PRODUCTS (0.01%)
Superior Essex Communications
40,000 40,000 9.00%; 04/15/12 40,600 40,600
- -
TOTAL BONDS 20,936,173 20,936,173
-
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) CERTIFICATES (1.43%)
119,400 119,400 5.00%; 12/01/17 121,909 121,909
- -
150,292 150,292 5.00%; 03/01/18 153,463 153,463
- -
897,309 897,309 5.00%; 05/01/18 916,244 916,244
- -
20,338 20,338 5.00%; 06/01/34 20,301 20,301
- -
925,001 925,001 5.00%; 06/01/34 923,329 923,329
- -
900,000 900,000 5.00%; 11/01/34 (5) 897,187 897,187
- -
187,720 187,720 5.50%; 03/01/33 191,537 191,537
- -
613,028 613,028 5.50%; 05/01/33 625,492 625,492
- -
172,911 172,911 5.50%; 10/01/33 176,426 176,426
- -
250,000 250,000 5.50%; 11/01/34 (5) 254,610 254,610
- -
127,799 127,799 6.00%; 01/01/29 132,650 132,650
- -
40,361 40,361 6.50%; 12/01/20 42,647 42,647
- -
71,838 71,838 6.50%; 05/01/31 75,627 75,627
- -
95,977 95,977 6.50%; 06/01/31 101,039 101,039
- -
106,339 106,339 7.00%; 12/01/27 113,206 113,206
- -
38,401 38,401 7.00%; 09/01/31 40,797 40,797
- -
FHLMC (continued)
-
26,048 26,048 7.50%; 11/01/30 27,975 27,975
- -
21,612 21,612 7.50%; 11/01/30 23,211 23,211
- -
24,499 24,499 7.50%; 01/01/31 26,312 26,312
- -
107,648 107,648 8.00%; 12/01/30 116,909 116,909
- -
TOTAL FHLMC CERTIFICATES 4,980,871 4,980,871
-
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(FNMA) CERTIFICATES (1.34%)
233,540 233,540 4.50%; 05/01/10 236,843 236,843
- -
225,000 225,000 4.50%; 11/01/34 (5) 218,390 218,390
- -
98,193 98,193 5.00%; 03/01/18 100,349 100,349
- -
300,000 300,000 5.00%; 11/01/34 (5) 298,875 298,875
- -
398,313 398,313 5.50%; 01/01/33 406,752 406,752
- -
467,885 467,885 5.50%; 07/01/33 477,328 477,328
- -
446,216 446,216 5.50%; 09/01/33 455,222 455,222
- -
1,750,000 1,750,000 5.50%; 11/01/34 (5) 1,781,719 1,781,719
- -
9,458 9,458 6.00%; 06/01/06 9,654 9,654
- -
77,576 77,576 6.00%; 04/01/08 81,512 81,512
- -
1,454 1,454 6.00%; 03/01/09 1,535 1,535
- -
61,943 61,943 6.00%; 05/01/09 65,412 65,412
- -
31,956 31,956 6.00%; 05/01/09 33,745 33,745
- -
2,058 2,058 6.00%; 11/01/09 2,174 2,174
- -
45,074 45,074 6.00%; 11/01/09 47,598 47,598
- -
8,791 8,791 6.00%; 12/01/09 9,246 9,246
- -
31,038 31,038 6.00%; 05/01/10 32,775 32,775
- -
257,514 257,514 6.00%; 12/01/33 267,369 267,369
- -
98,877 98,877 6.50%; 05/01/06 101,510 101,510
- -
64,083 64,083 6.50%; 03/01/08 67,709 67,709
- -
TOTAL FNMA CERTIFICATES 4,695,717 4,695,717
-
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GNMA) CERTIFICATES (0.38%)
145,532 145,532 6.00%; 06/20/26 151,920 151,920
- -
98,453 98,453 6.00%; 09/20/26 102,741 102,741
- -
52,325 52,325 6.00%; 06/20/27 54,621 54,621
- -
53,601 53,601 6.00%; 06/15/32 55,867 55,867
- -
155,752 155,752 6.00%; 12/15/33 162,183 162,183
- -
230,600 230,600 6.50%; 10/20/31 243,544 243,544
- -
326,431 326,431 6.50%; 05/15/32 345,777 345,777
- -
62,963 62,963 7.00%; 05/15/31 67,237 67,237
- -
121,291 121,291 7.00%; 02/15/32 129,493 129,493
- -
TOTAL GNMA CERTIFICATES 1,313,383 1,313,383
-
TREASURY BONDS (1.51%)
U.S. Treasury
300,000 300,000 3.63%; 07/15/09 304,793 304,793
- -
200,000 200,000 3.88%; 02/15/13 200,062 200,062
- -
175,000 175,000 4.00%; 02/15/14 175,007 175,007
- -
325,000 325,000 4.75%; 05/15/14 343,637 343,637
- -
450,000 450,000 5.00%; 02/15/11 485,930 485,930
- -
275,000 275,000 5.38%; 02/15/31 298,687 298,687
- -
225,000 225,000 6.25%; 05/15/30 270,562 270,562
- -
240,000 240,000 7.13%; 02/15/23 309,234 309,234
- -
50,000 50,000 7.25%; 05/15/16 63,430 63,430
- -
135,000 135,000 7.50%; 11/15/16 174,841 174,841
- -
285,000 285,000 8.00%; 11/15/21 395,493 395,493
- -
U.S. Treasury Inflation-Indexed
ations
179,477 179,477 2.00%; 01/15/14 186,046 186,046
- -
598,035 598,035 3.38%; 01/15/07 640,879 640,879
- -
439,868 439,868 3.63%; 01/15/08 485,195 485,195
- -
433,309 433,309 3.88%; 01/15/09 491,619 491,619
- -
225,266 225,266 4.25%; 01/15/10 264,036 264,036
- -
U.S. Treasury Strip (1)
300,000 300,000 0.00%; 02/15/15 193,065 193,065
- -
TOTAL TREASURY BONDS 5,282,516 5,282,516
-
COMMERCIAL PAPER (1.97%)
FINANCE-CONSUMER LOANS (1.97%)
2,597,896 2,597,896 Investment in Joint Trading Account;
Household Finance 1.84%; 11/01/04 2,597,896 2,597,896
- -
4,278,422 Investment in Joint Trading Account;
Federal Home Loan Bank 1.69%; 11/01/04 4,278,422 4,278,422
- 4,278,422 -
TOTAL COMMERCIAL PAPER 2,597,896 4,278,422 6,876,318
REPURCHASE AGREEMENTS (0.22%)
Bear Stearns; 1.85%; dated 10/29/04
maturing 11/01/04
778,696 (collateralized by FNMA; $794,148; 11/17/11)(6) 778,576 778,576
778,696 - -
TOTAL REPURCHASE AGREEMENTS 778,576 778,576
-
TOTAL PORTFOLIO INVESTMENTS (100.89%) 104,898,965 247,236,853 352,135,818
Liabilities, net of cash, receivables
and other assets (-0.89%) (3,890,836) (3,110,951)
779,885
TOTAL NET ASSETS (100.00%) $101,008,129 $248,016,738 $349,024,867
============================================
<FN>
(1) Non-income producing security.
(2) Security or a portion of the security was on loan at the end of the period
(3) Variable rate.
(4) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the end of the
period, the value of these securities totaled $2,405,416 or 0.69% of net
assets
(5) Security or a portion of the security was purchased in a "to-be-announced"
("TBA") transaction. See Notes to Financial Statements.
(6) Security was purchased with the cash proceeds from securities loans.
(7) Affiliated securities.
(8) Security or a portion of the security was pledged to cover margin
requirements for futures contracts.
</FN>
UNREALIZED APPRECIATION (DEPRECIATION)
The net federal income tax unrealized appreciation (depreciation) and federal
tax cost of investments held by the fund as of the period end were as follows.
Unrealized Appreciation $ 7,219,777 $ 7,597,000 $ 14,816,777
Unrealized Depreciation (5,678,514) (2,539,845) (8,218,359)
Net Unrealized Appreciation (Depreciation) 1,541,263 5,057,155 6,598,418
Cost for federal income tax purposes $ 103,357,702 $ 242,179,698 $345,537,400
Opening Current Unrealized
Contract Type Commitment Market Value Market Value Gain(Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
FUTURES CONTRACTS
3 Russell 1000 December 2004 $ 899,650 $ 907,050 $ 7,400
Futures Buy
6 Russell 2000 December 2004
Futures Buy 1,709,000 1,753,500 44,500
27 S&P 500 eMini December 2004
Futures Buy 1,499,857 1,525,905 26,048
INVESTMENTS BY SECTOR (UNAUDITED)
Percentage of Total Value Sector Value
- ---------------------------------------------------------------------------------------------------------------------------------
19.46% 19.17% 19.25% Financial $ 20,411,458 $ 48,194,775 $ 68,606,233
13.44 20.73 18.58 Consumer, Non-cyclical 14,094,373 52,111,723 66,206,096
9.15 11.87 11.07 Communications 9,597,830 29,837,963 39,435,793
7.60 10.94 9.96 Industrial 7,973,721 27,517,536 35,491,257
6.90 11.00 9.79 Technology 7,235,416 27,649,029 34,884,445
8.49 9.95 9.52 Consumer, Cyclical 8,904,199 25,012,650 33,916,849
6.77 8.42 7.93 Energy 7,100,454 21,164,316 28,264,770
12.68 - 3.73 Mortgage Securities 13,298,167 - 13,298,167
7.19 2.12 3.62 Government 7,541,070 5,336,441 12,877,511
3.41 2.45 2.74 Utilities 3,582,505 6,174,242 9,756,747
2.29 1.68 1.86 Basic Materials 2,405,304 4,220,035 6,625,339
- 1.66 1.18 Futures Contracts - 4,186,455 4,186,455
2.01 - 0.59 Asset Backed Securities 2,113,380 - 2,113,380
0.43 0.01 0.13 Funds 451,637 18,143 469,780
0.18 - 0.05 Diversified 189,451 - 189,451
TOTAL $ 104,898,965 $ 251,423,308 $ 356,322,273
====================================================
<FN>
Percentages are adjusted to reflect the impact of currency contracts, futures
contracts, and swap agreements, if applicable.
See accompanying notes.
</FN>
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
PRINCIPAL COMBINED
CAPITAL VALUE LARGECAP PRO FORMA LARGECAP
FUND, INC. VALUE FUND ADJUSTMENTS VALUE FUND
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $326,177,289 $115,728,918 $ -- $441,906,207
============ ============ =========== ============
ASSETS
Investment in
securities--at value. $345,639,296/(c)/ $122,034,946 $ -- $467,674,242/(c)/
Cash.................. 79,878 32,699 -- 112,577
Receivables:
Capital Shares sold.. 3,798 166,460 -- 170,258
Dividends and
interest............ 358,335 122,757 -- 481,092
Investment securities
sold................ 3,577,645 1,237,387 -- 4,815,032
Variation margin on
futures contracts... 11,625 -- -- 11,625
Other assets.......... 28,459 -- -- 28,459
------------ ------------ ----------- ------------
Total Assets 349,699,036 123,594,249 -- 473,293,285
LIABILITIES
Accrued management and
investment advisory
fees................. 37,708 10,394 -- 48,102
Accrued administrative
service fees......... -- 156 -- 156
Accrued distribution
fees................. 4,870 1,858 -- 6,728
Accrued directors'
expense.............. 360 -- -- 360
Accrued service fees.. -- 201 -- 201
Accrued transfer and
administrative fees.. 130,188 11,440 -- 141,628
Accrued other expenses 39,764 4,039 -- 43,803
Payables:
Capital Shares
reacquired.......... 144,466 -- -- 144,466
Investment securities
purchased........... 3,650,950 1,320,749 -- 4,971,699
Collateral obligation
on securities loaned,
at value............. 6,895,000 -- -- 6,895,000
------------ ------------ ----------- ------------
Total Liabilities 10,903,306 1,348,837 -- 12,252,143
------------ ------------ ----------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $338,795,730 $122,245,412 $ -- $461,041,142
============ ============ =========== ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $321,209,498 $110,297,761 $ -- $431,507,259
Accumulated
undistributed
(overdistributed) net
investment income
(operating loss)..... 2,561,515 1,110,714 -- 3,672,229
Accumulated
undistributed
(overdistributed) net
realized gain (loss). (4,401,296) 4,530,909 -- 129,613
Net unrealized
appreciation
(depreciation) of
investments.......... 19,426,013 6,306,028 -- 25,732,041
------------ ------------ ----------- ------------
Total Net Assets $338,795,730 $122,245,412 $ -- $461,041,142
============ ============ =========== ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 100,000,000 225,000,000 -- 225,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 911,485 N/A $ 911,485
Shares issued and
outstanding.......... 85,603 85,603
Net asset value per
share................ $ 10.65 $ 10.65
============ ============
Advisors Select: Net
Assets............... N/A $ 1,387,526 N/A $ 1,387,526
Shares issued and
outstanding.......... 130,030 130,030
Net asset value per
share................ $ 10.67 $ 10.67
============ ============
Class A: Net Assets... $311,582,761 N/A -- $311,582,761
Shares issued and
outstanding.......... 13,198,050 16,003,708 29,201,758
Net asset value per
share................ $ 23.61 -- $ 10.67
Maximum offering
price per share /(a)/ $ 25.05 -- $ 11.32
============ == ============
Class B: Net Assets... $ 27,212,969 N/A -- $ 27,212,969
Shares issued and
outstanding.......... 1,164,337 1,386,082 2,550,419
Net asset value per
share /(b)/.......... $ 23.37 -- $ 10.67
============ == ============
Class J: Net Assets... N/A $ 18,334,328 N/A $ 18,334,328
Shares issued and
outstanding.......... 1,728,575 1,728,575
Net asset value per
share /(b)/.......... $ 10.61 $ 10.61
============ ============
Institutional: Net
Assets............... N/A $ 97,880,620 N/A $ 97,880,620
Shares issued and
outstanding.......... 9,169,377 9,169,377
Net asset value per
share................ $ 10.67 $ 10.67
============ ============
Preferred: Net Assets. N/A $ 3,716,277 N/A $ 3,716,277
Shares issued and
outstanding.......... 347,510 347,510
Net asset value per
share................ $ 10.69 $ 10.69
============ ============
Select: Net Assets.... N/A $ 15,176 N/A $ 15,176
Shares issued and
outstanding.......... 1,426 1,426
Net asset value per
share................ $ 10.64 $ 10.64
============ ============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 5.75% of the offering price or 6.10% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
/(c) /Includes fair market value of securities loaned, see "Securities Lending"
in Notes to Financial Statements.
See accompanying notes.
3
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PRINCIPAL COMBINED
CAPITAL VALUE LARGECAP PRO FORMA LARGECAP
FUND, INC. VALUE FUND ADJUSTMENTS /(A)/ VALUE FUND
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Dividends............ $ 6,943,010 $ 1,991,419 $ -- $ 8,934,429
Interest............. 66,613 17,101 -- 83,714
Securities lending... 16,596 -- -- 16,596
------------ ----------- --------- ------------
Total Income 7,026,219 2,008,520 -- 9,034,739
Expenses:
Management and
investment advisory
fees................ 2,075,121 460,338 (479,761) 2,055,698
Distribution fees -
Advisors Preferred.. -- 370 -- 370
Distribution fees -
Advisors Select..... -- 5,184 -- 5,184
Distribution fees -
Class A............. 469,600 -- -- 469,600
Distribution fees -
Class B............. 210,113 -- -- 210,113
Distribution fees -
Class J............. -- 76,001 -- 76,001
Distribution fees -
Select.............. -- 13 -- 13
Administrative
service fees -
Advisors Preferred.. -- 222 -- 222
Administrative
service fees -
Advisors Select..... -- 3,456 -- 3,456
Administrative
service fees -
Preferred........... -- 4,461 -- 4,461
Administrative
service fees -
Select.............. -- 17 -- 17
Registration fees -
Class A............. 13,195 -- -- 13,195
Registration fees -
Class B............. 8,299 -- -- 8,299
Registration fees -
Class J............. -- 9,997 -- 9,997
Service fees -
Advisors Preferred.. -- 252 -- 252
Service fees -
Advisors Select..... -- 4,320 -- 4,320
Service fees -
Preferred........... -- 6,084 -- 6,084
Service fees - Select -- 20 -- 20
Shareholder reports -
Class A............. 34,315 -- -- 34,315
Shareholder reports -
Class B............. 6,698 -- -- 6,698
Shareholder reports -
Class J............. -- 4,752 -- 4,752
Transfer and
administrative fees
- Class A........... 183,834 -- -- 183,834
Transfer and
administrative fees
- Class B........... 36,667 -- -- 36,667
Transfer and
administrative fees
- Class J........... -- 49,670 -- 49,670
Auditing and legal
fees................ 10,231 -- (10,231) --
Custodian fees....... 7,353 -- (7,353) --
Directors' expenses.. 12,470 -- (12,470) --
Registration fees.... 28,279 -- -- 28,279
Transfer and
administrative fees. 456,262 -- 9,825 466,087
Other expenses....... 21,014 -- (21,014) --
Other expenses -
Class J............. -- 8 -- 8
------------ ----------- --------- ------------
Total Gross Expenses 3,573,451 625,165 (521,004) 3,677,612
Less: Fees paid
indirectly.......... 34,250 7,217 -- 41,467
------------ ----------- --------- ------------
Total Net Expenses 3,539,201 617,948 (521,004) 3,636,145
------------ ----------- --------- ------------
Net Investment Income
(Operating Loss) 3,487,018 1,390,572 521,004 5,398,594
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ 42,415,114 8,761,205 -- 51,176,319
Futures contracts.... 207,479 -- -- 207,479
Other investment
companies........... -- 20,729 -- 20,729
Change in unrealized
appreciation/depreciation
of:
Investments........... (13,310,175) (1,369,610) -- (14,679,785)
Futures contracts..... (105,745) -- -- (105,745)
------------ ----------- --------- ------------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies 29,206,673 7,412,324 -- 36,618,997
------------ ----------- --------- ------------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $ 32,693,691 $ 8,802,896 $ 521,004 $ 42,017,591
============ =========== ========= ============
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
19
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- -----------------------------------------------------------------------------------------------------------------------------------
Principal Principal
Capital LargeCap Capital LargeCap
Value Value Value Value
Fund, Inc Fund Combined Fund, Inc Fund Combined
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (97.36%)
AEROSPACE & DEFENSE (0.67%)
43,970 59,650 Northrop Grumman $ 2,275,447 $ 811,440 $ 3,086,887
15,680
AEROSPACE & DEFENSE EQUIPMENT (2.23%)
39,730 53,360 General Dynamics 4,057,228 5,449,124
13,630 1,391,896
38,750 51,950 United Technologies 3,596,775 4,821,999
13,200 1,225,224
AIRLINES (0.38%)
116,600 156,480 ExpressJet Holdings (1) (2) 1,296,592 1,740,058
39,880 443,466
APPAREL MANUFACTURERS (0.29%)
26,380 35,820 Polo Ralph Lauren 974,213 1,322,832
9,440 348,619
APPLICATIONS SOFTWARE (0.70%)
84,800 114,930 Microsoft 2,373,552 3,216,891
30,130 843,339
ATHLETIC FOOTWEAR (0.52%)
21,800 29,530 Nike 1,772,558 2,401,084
7,730 628,526
AUTO-CARS & LIGHT TRUCKS (0.57%)
149,040 202,190 Ford Motor 1,941,991 2,634,536
53,150 692,545
AUTO-MEDIUM & HEAVY DUTY TRUCKS (0.81%)
39,621 53,541 Paccar 2,746,132 3,710,927
13,920 964,795
BEVERAGES-NON-ALCOHOLIC (0.48%)
40,170 54,500 Coca-Cola 1,633,312 2,215,970
14,330 582,658
BROADCASTING SERVICES & PROGRAMMING(0.32%)
36,600 49,100 Fox Entertainment Group (1) 1,085,556 1,456,306
12,500 370,750
BUILDING-RESIDENTIAL & COMMERCIAL (1.26%)
33,170 44,810 MDC Holdings 2,545,798 3,439,168
11,640 893,370
31,480 42,780 Pulte 1,727,622 2,347,766
11,300 620,144
CABLE TV (0.83%)
85,660 116,260 Comcast (1) 2,526,970 3,429,670
30,600 902,700
42,700 57,305 Mediacom Communications (1) 279,685 375,348
14,605 95,663
CELLULAR TELECOMMUNICATIONS (1.07%)
82,300 111,570 Nextel Partners (1) (2) 1,385,932 1,878,839
29,270 492,907
77,800 104,760 Western Wireless (1) 2,267,092 3,052,706
26,960 785,614
CHEMICALS-SPECIALTY (1.06%)
34,300 46,520 Lubrizol 1,191,239 1,615,640
12,220 424,401
43,000 58,340 Sigma-Aldrich 2,392,520 3,246,037
15,340 853,517
COAL (0.43%)
22,900 31,070 Peabody Energy 1,460,562 1,981,645
8,170 521,083
COMMERCIAL BANKS (3.11%)
33,980 45,910 City National 2,341,222 3,163,199
11,930 821,977
43,650 59,250 Fremont General 938,475 1,273,875
15,600 335,400
75,650 102,200 Marshall & Ilsley 3,175,030 4,289,334
26,550 1,114,304
25,330 34,340 R&G Financial 952,915 1,291,871
9,010 338,956
53,580 71,419 UnionBanCal 3,254,985 4,338,704
17,839 1,083,719
COMPUTER AIDED DESIGN (0.66%)
42,850 57,780 Autodesk 2,260,338 3,047,895
14,930 787,557
COMPUTERS (0.69%)
26,200 35,510 International Business Machines 2,351,450 3,187,022
9,310 835,572
COMPUTERS-INTEGRATED SYSTEMS (0.49%)
242,900 329,630 Brocade Communications Systems (1) 1,649,291 2,238,188
86,730 588,897
CONTAINERS-METAL & GLASS (0.62%)
52,860 71,818 Ball 2,106,471 2,861,947
18,958 755,476
COSMETICS & TOILETRIES (1.68%)
56,760 77,040 Avon Products 2,244,858 3,046,932
20,280 802,074
67,880 91,370 Procter & Gamble 3,474,098 4,676,316
23,490 1,202,218
DIRECT MARKETING (0.70%)
92,890 125,990 Harte-Hanks 2,390,989 3,242,983
33,100 851,994
DIVERSIFIED MANUFACTURING
OPERATIONS (3.72%)
371,288 503,134 General Electric 12,668,347 17,166,933
131,846 4,498,586
ELECTRIC-INTEGRATED (4.31%)
39,930 53,950 Constellation Energy Group 1,621,957 2,191,449
14,020 569,492
102,200 138,660 Edison International 3,117,100 4,229,130
36,460 1,112,030
60,560 82,950 Exelon 2,399,387 3,286,479
22,390 887,092
97,370 130,500 MDU Resources Group 2,497,541 3,347,325
33,130 849,784
27,600 37,390 PPL 1,435,200 1,944,280
9,790 509,080
58,720 79,710 TXU 3,594,838 4,879,846
20,990 1,285,008
ELECTRONIC CONNECTORS (0.61%)
60,630 82,310 Amphenol (1) 2,081,428 2,825,702
21,680 744,274
ELECTRONIC MEASUREMENT INSTRUMENTS (0.43%)
48,670 66,050 Tektronix 1,476,161 2,003,296
17,380 527,135
ENGINES-INTERNAL COMBUSTION (1.12%)
32,830 44,330 Briggs & Stratton 2,357,522 3,183,337
11,500 825,815
20,700 28,060 Cummins Engine 1,450,656 1,966,445
7,360 515,789
ENTERPRISE SOFTWARE & SERVICE (0.53%)
144,700 194,260 Oracle (1) 1,831,902 2,459,332
49,560 627,430
FINANCE-AUTO LOANS (0.26%)
20,400 27,700 WFS Financial (1) 898,824 1,220,462
7,300 321,638
FINANCE-CREDIT CARD (2.01%)
49,380 65,840 Capital One Financial 3,642,269 4,856,359
16,460 1,214,090
129,090 172,960 MBNA 3,308,576 4,432,964
43,870 1,124,388
FINANCE-INVESTMENT BANKER & BROKER (6.79%)
213,680 286,254 Citigroup (3) 9,480,982 12,701,090
72,574 3,220,108
40,620 53,862 Goldman Sachs Group 3,996,196 5,298,944
13,242 1,302,748
48,017 64,296 Lehman Brothers Holdings 3,944,596 5,281,916
16,279 1,337,320
42,120 57,090 Merrill Lynch 2,271,953 3,079,435
14,970 807,482
71,990 96,450 Morgan Stanley 3,677,969 4,927,630
24,460 1,249,661
FINANCIAL GUARANTEE INSURANCE (0.84%)
44,800 60,500 MGIC Investment 2,881,088 3,890,755
15,700 1,009,667
FOOD-FLOUR & GRAIN (1.07%)
191,340 255,000 Archer Daniels Midland 3,706,256 4,939,350
63,660 1,233,094
GARDEN PRODUCTS (0.37%)
18,650 25,200 Toro 1,272,863 1,719,901
6,550 447,038
GAS-DISTRIBUTION (0.77%)
48,670 66,140 Energen 2,617,473 3,557,010
17,470 939,537
HOTELS & MOTELS (0.45%)
32,100 43,520 Starwood Hotels & Resorts Worldwide 1,532,133 2,077,210
11,420 545,077
HUMAN RESOURCES (0.31%)
40,212 54,338 Robert Half International 1,066,824 1,441,587
14,126 374,763
INSTRUMENTS-SCIENTIFIC (0.30%)
53,130 72,180 Applied Biosystems Group 1,013,720 1,377,194
19,050 363,474
INTERNET FINANCIAL SERVICES (0.45%)
47,300 64,480 IndyMac Bancorp 1,525,898 2,080,125
17,180 554,227
LIFE & HEALTH INSURANCE (1.92%)
23,910 32,410 AmerUs Group (2) 998,960 1,354,090
8,500 355,130
59,250 80,420 Jefferson-Pilot 2,861,182 3,883,481
21,170 1,022,299
22,310 30,270 Lincoln National 977,178 1,325,826
7,960 348,648
121,700 165,700 UnumProvident 1,662,422 2,263,462
44,000 601,040
MACHINERY TOOLS & RELATED PRODUCTS (0.51%)
52,160 70,340 Lincoln Electric Holdings (2) 1,741,101 2,347,949
18,180 606,848
MACHINERY-FARM (1.02%)
59,210 78,960 Deere 3,539,574 4,720,229
19,750 1,180,655
MEDICAL PRODUCTS (0.67%)
29,320 39,620 Zimmer Holdings (1) 2,274,939 3,074,116
10,300 799,177
MEDICAL-BIOMEDICAL/GENE (0.30%)
33,820 45,380 Affymetrix (1) (2) 1,031,510 1,384,090
11,560 352,580
MEDICAL-GENERIC DRUGS (0.53%)
74,200 99,070 Eon Labs (1) (2) 1,826,062 2,438,113
24,870 612,051
MEDICAL-HMO (0.47%)
17,010 23,050 Aetna 1,615,950 2,189,750
6,040 573,800
METAL-ALUMINUM (0.65%)
94,870 128,810 Century Aluminum (1) (2) 2,195,292 2,980,664
33,940 785,372
MISCELLANEOUS INVESTING (2.56%)
30,910 41,430 Archstone-Smith Trust 1,037,031 1,389,977
10,520 352,946
61,870 83,870 Equity Residential Properties Trust 2,063,364 2,797,064
22,000 733,700
44,800 60,780 Kimco Realty 2,443,840 3,315,549
15,980 871,709
38,000 51,610 Prologis Trust 1,481,240 2,011,758
13,610 530,518
63,310 85,870 Ventas 1,703,039 2,309,903
22,560 606,864
MONEY CENTER BANKS (4.39%)
169,122 226,576 Bank of America 7,574,974 10,148,338
57,454 2,573,364
195,020 261,258 JP Morgan Chase 7,527,772 10,084,559
66,238 2,556,787
MULTI-LINE INSURANCE (1.94%)
51,600 70,180 American International Group 3,132,636 4,260,628
18,580 1,127,992
36,300 49,300 Hartford Financial Services Group 2,122,824 2,883,064
13,000 760,240
34,740 46,940 MetLife 1,332,279 1,800,149
12,200 467,870
MULTIMEDIA (2.63%)
21,060 28,560 McGraw-Hill 1,816,425 2,463,300
7,500 646,875
280,970 375,490 Time Warner (1) 4,675,341 6,248,154
94,520 1,572,813
100,300 135,540 Walt Disney 2,529,566 3,418,319
35,240 888,753
NETWORKING PRODUCTS (0.41%)
52,760 71,560 Juniper Networks (1) 1,403,944 1,904,212
18,800 500,268
OIL COMPANY-EXPLORATION &
PRODUCTION (2.50%)
66,730 90,440 Apache 3,383,211 4,585,308
23,710 1,202,097
70,500 95,580 Burlington Resources 2,925,750 3,966,570
25,080 1,040,820
29,520 40,010 Devon Energy 2,183,594 2,959,539
10,490 775,945
OIL COMPANY-INTEGRATED (9.67%)
16,600 22,530 Amerada Hess 1,339,786 1,818,396
5,930 478,610
107,440 145,034 ChevronTexaco 5,700,766 7,695,504
37,594 1,994,738
51,750 70,119 ConocoPhillips 4,363,042 5,911,732
18,369 1,548,690
290,203 393,212 Exxon Mobil (3) 14,283,792 19,353,895
103,009 5,070,103
58,860 80,060 Marathon Oil 2,243,155 3,051,087
21,200 807,932
89,549 121,342 Occidental Petroleum 4,999,521 6,774,524
31,793 1,775,003
OPTICAL SUPPLIES (0.62%)
34,910 47,200 Bausch & Lomb 2,128,114 2,877,312
12,290 749,198
PAPER & RELATED PRODUCTS (1.40%)
66,470 89,050 Georgia-Pacific 2,299,197 3,080,239
22,580 781,042
100,900 137,130 Louisiana-Pacific 2,473,059 3,361,056
36,230 887,997
PIPELINES (1.47%)
87,860 119,290 National Fuel Gas 2,461,837 3,342,506
31,430 880,669
52,975 71,896 Questar 2,542,800 3,451,008
18,921 908,208
POULTRY (0.28%)
34,920 47,450 Pilgrims Pride (2) 944,237 1,283,048
12,530 338,811
PROPERTY & CASUALTY INSURANCE (0.88%)
28,300 38,490 Chubb 2,041,279 2,776,284
10,190 735,005
33,300 45,160 State Auto Financial 947,385 1,284,802
11,860 337,417
PUBLICALY TRADED INVESTMENT FUND (1.28%)
96,100 iShares Russell 1000 Value Index Fund 5,914,955
- 96,100 - 5,914,955
PUBLISHING-NEWSPAPERS (0.29%)
53,800 72,250 Journal Register (1) 1,011,440 1,358,300
18,450 346,860
RECYCLING (0.30%)
55,426 75,005 Metal Management (1) (2) 1,008,753 1,365,091
19,579 356,338
REGIONAL BANKS (6.64%)
16,160 21,930 Comerica 994,002 1,348,915
5,770 354,913
110,440 148,930 Huntington Bancshares 2,645,038 3,566,874
38,490 921,836
120,140 161,000 KeyCorp 4,035,502 5,407,989
40,860 1,372,487
65,900 89,600 National City 2,568,123 3,491,712
23,700 923,589
30,450 41,330 PNC Financial Services Group 1,592,535 2,161,559
10,880 569,024
130,120 175,470 U.S. Bancorp 3,722,733 5,020,196
45,350 1,297,463
57,020 77,254 Wachovia 2,805,954 3,801,669
20,234 995,715
71,490 97,040 Wells Fargo 4,269,383 5,795,229
25,550 1,525,846
RETAIL-CONSUMER ELECTRONICS (0.37%)
41,566 56,532 RadioShack 1,244,070 1,692,002
14,966 447,932
RETAIL-REGIONAL DEPARTMENT STORE (0.61%)
33,780 45,880 Neiman Marcus Group 2,054,837 2,790,880
12,100 736,043
RETAIL-RESTAURANTS (1.84%)
143,560 192,390 McDonald's 4,184,774 5,608,168
48,830 1,423,394
48,670 65,770 Yum! Brands 2,117,145 2,860,995
17,100 743,850
STEEL PRODUCERS (0.27%)
32,540 44,034 Schnitzer Steel Industries 919,255 1,243,961
11,494 324,706
TELECOMMUNICATION SERVICES (0.43%)
148,500 200,570 PTEK Holdings (1) 1,479,060 1,997,677
52,070 518,617
TELEPHONE-INTEGRATED (3.77%)
76,700 104,040 AT&T 1,312,337 1,780,125
27,340 467,788
207,430 277,900 SBC Communications 5,239,682 7,019,754
70,470 1,780,072
161,392 218,893 Verizon Communications 6,310,427 8,558,716
57,501 2,248,289
TOBACCO (1.07%)
75,150 102,030 Altria Group 3,641,769 4,944,374
26,880 1,302,605
TRANSPORT-AIR FREIGHT (0.96%)
75,780 101,610 CNF 3,317,648 4,448,485
25,830 1,130,837
WIRELESS EQUIPMENT (0.80%)
158,750 213,810 Motorola 2,740,025 3,690,361
55,060 950,336
TOTAL COMMON STOCKS 328,084,019 448,884,726
120,800,707
COMMERCIAL PAPER (2.58%)
FINANCE-CONSUMER LOANS (2.31%)
10,660,277 10,660,277 Investment in Joint Trading Account;
Household Finance 1.84%; 11/01/04 10,660,277 10,660,277
- -
FINANCE-MORTGAGE LOAN/BANKER (.27%)
Investment in Joint Trading Account;
Federal Home Loan Bank 1.69%; 11/01/04
- 1,234,239 1,234,239 - 1,234,239 1,234,239
TOTAL COMMERCIAL PAPER 10,660,277
1,234,239 11,894,516
REPURCHASE AGREEMENTS (1.50%)
Goldman Sachs; 1.75%, 11/01/04
(collateralized by U.S. Treasuries;
$6,954,716; 11/18/04 - 01/15/12) (4)
6,896,006 - 6,896,006 6,895,000 - 6,895,000
TOTAL REPURCHASE AGREEMENTS
6,895,000 - 6,895,000
TOTAL PORTFOLIO INVESTMENTS (101.44%) 345,639,296 467,674,242
122,034,946
Liabilities, net of cash, receivables
and other assets (-1.44%) (6,843,566) (6,633,100)
210,466
TOTAL NET ASSETS (100.00%) $ 338,795,730 $ 122,245,412 $ 461,041,142
================================================
<FN>
(1) Non-income producing security.
(2) Security or a portion of the security was on loan at the end of the period.
(3) Security or a portion of the security was pledged to cover margin
requirements for futures contracts
(4) Security was purchased with the cash proceeds from securities loans.
</FN>
UNREALIZED APPRECIATION (DEPRECIATION)
The net federal income tax unrealized appreciation (depreciation) and federal
tax cost of investments held by the fund as of the period end were as follows:
Unrealized Appreciation $24,737,789 $8,062,913 $32,800,702
Unrealized Depreciation (6,115,573) (1,894,950) (8,010,523)
------------------------------------------------------------
Net Unrealized Appreciation (Depreciation) 18,622,216 6,167,963 24,790,179
Cost for federal income tax purposes $327,017,080 $115,866,983 $442,884,063
- -------------------------------------------------------------------------------------------------------------------------
Opening Current Unrealized
Contract Type Commitment Market Value Market Value Gain(Loss)
- -------------------------------------------------------------------------------------------------------------------------
FUTURES CONTRACTS
31 Russell 1000 December 2004 Futures Buy $ 9,408,844 $ 9,372,850 $ (35,994)
INVESTMENTS BY SECTOR (UNAUDITED)
Percentage of Total Value Sector Value
- ------------------------------------------------------------------------------------------------------------------------------------
35.60% 30.96% 34.41% Financial $126,386,931 $37,778,087 $164,165,018
13.49 13.93 13.60 Energy 47,887,816 17,003,898 57,624,620
12.02 12.24 12.08 Industrial 42,690,832 14,933,788 51,874,768
10.83 11.00 10.87 Communications 38,454,470 13,420,298 34,510,958
7.21 7.31 7.24 Consumer, Non-cyclical 25,587,929 8,923,029 34,345,527
7.16 7.32 7.20 Consumer, Cyclical 25,410,728 8,934,799 23,435,518
4.87 5.04 4.92 Utilities 17,283,495 6,152,023 15,527,597
3.23 3.32 3.25 Basic Materials 11,470,562 4,057,035 14,149,328
2.95 3.02 2.97 Technology 10,466,533 3,682,795 9,372,850
2.64 0.00 1.96 Futures Contracts 9,372,850 - 5,914,955
0.00 4.85 1.24 Funds - 5,914,955 5,914,955
0.00 1.01 0.26 Government - 1,234,239 1,234,239
TOTAL $355,012,146 $122,034,946 $477,047,092
====================================================
<FN>
Percentages are adjusted to reflect the impact of currency contracts, futures
contracts, and swap agreements, if applicable.
See accompanying notes.
</FN>
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
COMBINED
PRINCIPAL PARTNERS PARTNERS
PARTNERS LARGECAP PRO FORMA LARGECAP
BLUE CHIP FUND, INC. BLEND FUND I ADJUSTMENTS BLEND FUND I
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $145,612,509 $ 28,978,962 $ -- $174,591,471
============ ============ ========== ============
ASSETS
Investment in
securities--at value. $150,584,126/(c)/ $ 31,197,018 $ -- $181,781,144/(c)/
Cash.................. 1,033,605 456,747 -- 1,490,352
Receivables:
Capital Shares sold.. 7,544 51,119 -- 58,663
Dividends and
interest............ 133,031 30,980 -- 164,011
Other assets.......... 2,366 -- -- 2,366
Prepaid directors'
expenses............. 41 -- -- 41
------------ ------------ ---------- ------------
Total Assets 151,760,713 31,735,864 -- 183,496,577
LIABILITIES
Accrued management and
investment advisory
fees................. 16,991 2,690 -- 19,681
Accrued administrative
service fees......... -- 185 -- 185
Accrued distribution
fees................. 7,028 2,575 -- 9,603
Accrued service fees.. -- 231 -- 231
Accrued transfer and
administrative fees.. 95,844 9,946 -- 105,790
Accrued other expenses 43,337 3,312 -- 46,649
Payables:
Capital Shares
reacquired.......... 38,210 40,236 -- 78,446
Investment securities
purchased........... 129,418 15,743 -- 145,161
Collateral obligation
on securities loaned,
at value............. 1,727,000 -- -- 1,727,000
------------ ------------ ---------- ------------
Total Liabilities 2,057,828 74,918 -- 2,132,746
------------ ------------ ---------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $149,702,885 $ 31,660,946 $ -- $181,363,831
============ ============ ========== ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $171,538,033 $ 30,989,191 $ -- $202,527,224
Accumulated
undistributed
(overdistributed) net
investment income
(operating loss)..... 215,732 83,259 -- 298,991
Accumulated
undistributed
(overdistributed) net
realized gain (loss). (27,026,889) (1,632,137) -- (28,659,026)
Net unrealized
appreciation
(depreciation) of
investments.......... 4,976,009 2,220,633 -- 7,196,642
------------ ------------ ---------- ------------
Total Net Assets $149,702,885 $ 31,660,946 $ -- $181,363,831
============ ============ ========== ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 100,000,000 225,000,000 -- 225,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 1,325,282 N/A $ 1,325,282
Shares issued and
outstanding.......... 170,876 170,876
Net asset value per
share................ $ 7.76 $ 7.76
============ ============
Advisors Select: Net
Assets............... N/A $ 2,271,966 N/A $ 2,271,966
Shares issued and
outstanding.......... 293,604 293,604
Net asset value per
share................ $ 7.74 $ 7.74
============ ============
Class A: Net Assets... $123,303,668 N/A -- $123,303,668
Shares issued and
outstanding.......... 7,017,035 8,954,943 15,971,978
Net asset value per
share................ $ 17.57 -- $ 7.72
Maximum offering
price per share /(a)/ $ 18.64 -- $ 8.19
============ == ============
Class B: Net Assets... $ 26,399,217 N/A -- $ 26,399,217
Shares issued and
outstanding.......... 1,568,898 1,850,690 3,419,588
Net asset value per
share /(b)/.......... $ 16.83 -- $ 7.72
============ == ============
Class J: Net Assets... N/A $ 25,188,745 N/A $ 25,188,745
Shares issued and
outstanding.......... 3,282,334 3,282,334
Net asset value per
share /(b)/.......... $ 7.67 $ 7.67
============ ============
Institutional: Net
Assets............... N/A $ 8,583 N/A $ 8,583
Shares issued and
outstanding.......... 1,112 1,112
Net asset value per
share................ $ 7.72 $ 7.72
============ ============
Preferred: Net Assets. N/A $ 2,518,552 N/A $ 2,518,552
Shares issued and
outstanding.......... 323,853 323,853
Net asset value per
share................ $ 7.78 $ 7.78
============ ============
Select: Net Assets.... N/A $ 347,818 N/A $ 347,818
Shares issued and
outstanding.......... 44,823 44,823
Net asset value per
share................ $ 7.76 $ 7.76
============ ============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 5.75% of the offering price or 6.10% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
/(c)/ Includes fair market value of securities loaned, see "Securities Lending"
in Notes to Financial Statements.
See accompanying notes.
12
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
COMBINED
PRINCIPAL PARTNERS PARTNERS
PARTNERS LARGECAP PRO FORMA LARGECAP
BLUE CHIP FUND, INC. BLEND FUND I ADJUSTMENTS /(A)/ BLEND FUND I
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Dividends............ $ 2,360,422 $ 443,594 $ -- $ 2,804,016
Interest............. 933 663 -- 1,596
Securities lending... 4,383 -- -- 4,383
----------- ---------- --------- -----------
Total Income 2,365,738 444,257 -- 2,809,995
Expenses:
Management and
investment advisory
fees................ 917,369 129,570 (229,512) 817,427
Distribution fees -
Advisors Preferred.. -- 4,263 -- 4,263
Distribution fees -
Advisors Select..... -- 6,293 -- 6,293
Distribution fees -
Class A............. 230,870 -- -- 230,870
Distribution fees -
Class B............. 265,247 -- -- 265,247
Distribution fees -
Class J............. -- 107,639 -- 107,639
Distribution fees -
Select.............. -- 602 -- 602
Administrative
service fees -
Advisors Preferred.. -- 2,558 -- 2,558
Administrative
service fees -
Advisors Select..... -- 4,195 -- 4,195
Administrative
service fees -
Preferred........... -- 3,138 -- 3,138
Administrative
service fees -
Select.............. -- 782 -- 782
Registration fees -
Class A............. 10,928 -- -- 10,928
Registration fees -
Class B............. 5,673 -- -- 5,673
Registration fees -
Class J............. -- 14,148 -- 14,148
Service fees -
Advisors Preferred.. -- 2,899 -- 2,899
Service fees -
Advisors Select..... -- 5,244 -- 5,244
Service fees -
Preferred........... -- 4,280 -- 4,280
Service fees - Select -- 902 -- 902
Shareholder reports -
Class A............. 28,845 -- -- 28,845
Shareholder reports -
Class B............. 8,172 -- -- 8,172
Shareholder reports -
Class J............. -- 4,703 -- 4,703
Transfer and
administrative fees
- Class A........... 154,721 -- -- 154,721
Transfer and
administrative fees
- Class B........... 47,641 -- -- 47,641
Transfer and
administrative fees
- Class J........... -- 48,677 -- 48,677
Auditing and legal
fees................ 9,212 -- (9,212) --
Custodian fees....... 19,790 -- (19,790) --
Directors' expenses.. 5,170 -- (5,170) --
Registration fees.... 25,485 -- -- 25,485
Transfer and
administrative fees. 411,861 -- 3,374 415,235
Other expenses....... 9,022 -- (9,022) --
Other expenses -
Class J............. -- 151 -- 151
----------- ---------- --------- -----------
Total Gross Expenses 2,150,006 340,044 (269,332) 2,220,718
Less: Fees paid
indirectly.......... 8,538 1,509 -- 10,047
----------- ---------- --------- -----------
Total Net Expenses 2,141,468 338,535 (269,332) 2,210,671
----------- ---------- --------- -----------
Net Investment Income
(Operating Loss) 224,270 105,722 269,332 599,324
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ 11,502,956 1,590,588 -- 13,093,544
Futures contracts.... 26,591 23,960 -- 50,551
Change in unrealized
appreciation/depreciation
of:
Investments........... 711,594 466,772 -- 1,178,366
Futures contracts..... (2,880) (3,663) -- (6,543)
----------- ---------- --------- -----------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies 12,238,261 2,077,657 -- 14,315,918
----------- ---------- --------- -----------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $12,462,531 $2,183,379 $ 269,332 $14,915,242
=========== ========== ========= ===========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
28
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- -----------------------------------------------------------------------------------------------------------------------------------
Principal Partners Principal Partners
Partners Blue LargeCap Blend Partners Blue LargeCap Blend
Chip Fund, Inc. Fund I Combined Chip Fund, Inc. Fund I Combined
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (99.28%)
AEROSPACE & DEFENSE (1.76%)
Boeing
25,200 5,300 30,500 $1,257,480 $ 264,470 $ 1,521,950
Northrop Grumman
11,200 1,200 12,400 579,600 62,100 641,700
Raytheon
23,800 4,500 28,300 868,224 164,160 1,032,384
AEROSPACE & DEFENSE EQUIPMENT (0.80%)
General Dynamics
3,800 800 4,600 388,056 81,696 469,752
United Technologies
8,800 1,800 10,600 816,816 167,076 983,892
AGRICULTURAL OPERATIONS (0.38%)
Monsanto
13,600 2,500 16,100 581,400 106,875 688,275
APPLICATIONS SOFTWARE (3.97%)
Microsoft
212,244 44,898 257,142 5,940,710 1,256,695 7,197,405
ATHLETIC FOOTWEAR (0.23%)
Nike
4,244 819 5,063 345,080 66,593 411,673
AUDIO & VIDEO PRODUCTS (0.62%)
Harman International Industries
7,800 1,600 9,400 937,404 192,288 1,129,692
AUTO-CARS & LIGHT TRUCKS (0.72%)
Ford Motor
82,400 17,300 99,700 1,073,672 225,419 1,299,091
BEVERAGES-NON-ALCOHOLIC (1.14%)
Coca-Cola
5,250 4,900 10,150 927,048 199,234 1,126,282
Pepsico
15,472 3,390 18,862 767,102 168,076 935,178
BEVERAGES-WINE & SPIRITS (0.05%)
Brown-Forman
2,200 - 2,200 98,780 - 98,780
BREWERY (0.13%)
Anheuser-Busch
4,000 700 4,700 199,800 34,965 234,765
BUILDING & CONSTRUCTION PRODUCTS-
MISCELLANEOUS (0.10%)
Masco
5,400 - 5,400 185,004 - 185,004
CABLE TV (0.60%)
Comcast (1)
22,500 4,200 26,700 663,750 123,900 787,650
Liberty Media International (1)
4,200 4,200 8,400 151,410 151,410 302,820
CELLULAR TELECOMMUNICATIONS (0.44%)
Nextel Communications (1)
18,500 3,900 22,400 490,065 103,311 593,376
U.S. Cellular (1)
4,600 500 5,100 191,590 20,825 212,415
CHEMICALS-DIVERSIFIED (0.38%)
E. I. Du Pont de Nemours
12,900 2,700 15,600 553,023 115,749 668,772
Rohm & Haas
- - 500 500 - 21,195 21,195
CHEMICALS-SPECIALTY (0.32%)
Lubrizol
13,800 2,900 16,700 479,274 100,717 579,991
COMMERCIAL BANKS (0.59%)
Bank of Hawaii
12,700 800 13,500 606,425 38,200 644,625
UnionBanCal
4,200 2,900 7,100 255,150 176,175 431,325
COMMERCIAL SERVICE-FINANCE (0.73%)
Deluxe
2,700 - 2,700 102,843 - 102,843
Moody's
12,900 2,700 15,600 1,003,749 210,087 1,213,836
COMPUTER AIDED DESIGN (0.57%)
Autodesk
17,800 1,900 19,700 938,950 100,225 1,039,175
COMPUTER SERVICES (0.30%)
Computer Sciences (1)
9,100 1,900 11,000 451,997 94,373 546,370
COMPUTERS (2.11%)
Hewlett-Packard
42,900 8,400 51,300 800,514 156,744 957,258
International Business Machines
26,400 5,500 31,900 2,369,400 493,625 2,863,025
COMPUTERS-INTEGRATED SYSTEMS (0.98%)
Dell (1)
38,600 6,700 45,300 1,353,316 234,902 1,588,218
NCR (1)
3,300 - 3,300 185,955 - 185,955
CONSULTING SERVICES (0.30%)
Accenture (1)
18,606 3,726 22,332 450,451 90,207 540,658
CONSUMER PRODUCTS-MISCELLANEOUS (0.13%)
American Greetings (1)
9,000 - 9,000 238,050 - 238,050
COSMETICS & TOILETRIES (3.50%)
Avon Products
8,400 1,400 9,800 332,220 55,370 387,590
Gillette
48,127 10,354 58,481 1,996,308 429,484 2,425,792
Procter & Gamble
56,690 12,304 68,994 2,901,394 629,719 3,531,113
CRUISE LINES (0.24%)
Carnival
5,900 500 6,400 298,304 25,280 323,584
Royal Caribbean Cruises
2,500 - 2,500 116,500 - 116,500
DATA PROCESSING & MANAGEMENT (0.53%)
Axciom
- - 1,400 1,400 - 35,000 35,000
First Data
18,600 4,000 22,600 767,808 165,120 932,928
DISTRIBUTION-WHOLESALE (0.23%)
Tech Data (1)
9,400 800 10,200 379,666 32,312 411,978
DIVERSIFIED MANUFACTURING
OPERATIONS (5.78%)
3M
11,500 3,000 14,500 892,055 232,710 1,124,765
General Electric
142,283 28,580 170,863 4,854,696 975,150 5,829,846
ITT Industries
6,900 1,700 8,600 559,866 137,938 697,804
Tyco International
75,900 15,100 91,000 2,364,285 470,365 2,834,650
DIVERSIFIED OPERATORS-COMMERCIAL
SERVICES (0.72%)
Cendant
52,500 11,000 63,500 1,080,975 226,490 1,307,465
E-COMMERCE-SERVICES (0.72%)
eBay (1)
11,100 2,300 13,400 1,083,471 224,503 1,307,974
ELECTRIC PRODUCTS-MISCELLANEOUS (0.04%)
Emerson Electric
- - 1,200 1,200 - 76,860 76,860
ELECTRIC-INTEGRATED (1.45%)
Alliant Energy
- - 3,000 3,000 - 79,140 79,140
Dominion Resources
3,200 600 3,800 205,824 38,592 244,416
Edison International
28,900 6,400 35,300 881,450 195,200 1,076,650
Northeast Utilities
14,800 4,000 18,800 286,084 77,320 363,404
PG&E (1)
19,100 3,700 22,800 611,964 118,548 730,512
Sierra Pacific Resources (1)
11,400 2,600 14,000 109,440 24,960 134,400
ELECTRONIC COMPONENTS-
SEMICONDUCTOR (2.29%)
Freescale Semiconductor (1) (2)
28,500 8,800 37,300 442,890 136,752 579,642
Intel
97,668 21,753 119,421 2,174,090 484,222 2,658,312
Micron Technology (1)
19,900 6,000 25,900 242,382 73,080 315,462
Texas Instruments
20,500 4,300 24,800 501,225 105,135 606,360
ENTERPRISE SOFTWARE & SERVICE (0.20%)
BMC Software (1)
13,200 6,400 19,600 249,744 121,088 370,832
FINANCE-AUTO LOANS (0.33%)
AmeriCredit (1)
26,500 4,000 30,500 514,100 77,600 591,700
FINANCE-COMMERCIAL (0.47%)
CIT Group
20,300 700 21,000 820,120 28,280 848,400
FINANCE-CREDIT CARD (0.20%)
American Express
5,600 1,100 6,700 297,192 58,377 355,569
FINANCE-INVESTMENT BANKER & BROKER(4.42%)
Bear Stearns
- - 1,000 1,000 - 94,750 94,750
Citigroup
75,690 15,092 90,782 3,358,365 669,632 4,027,997
Lehman Brothers Holdings
13,300 2,800 16,100 1,092,595 230,020 1,322,615
Merrill Lynch
39,098 8,516 47,614 2,108,946 459,353 2,568,299
FINANCE-MORTGAGE LOAN/BANKER (1.91%)
Countrywide Credit Industries
28,200 5,800 34,000 900,426 185,194 1,085,620
Federal Home Loan Mortgage
19,700 4,100 23,800 1,312,020 273,060 1,585,080
Federal National Mortgage Association
9,311 2,088 11,399 653,167 146,473 799,640
FINANCIAL GUARANTEE INSURANCE (0.63%)
MBIA
16,400 3,200 19,600 948,904 185,152 1,134,056
FOOD-FLOUR & GRAIN (0.59%)
Archer Daniels Midland
48,700 6,100 54,800 943,319 118,157 1,061,476
FOOD-MEAT PRODUCTS (0.43%)
Tyson Foods
45,400 8,700 54,100 658,300 126,150 784,450
FOOD-MISCELLANEOUS/DIVERSIFIED (0.57%)
Kraft Foods
25,500 5,300 30,800 849,405 176,543 1,025,948
FOOD-RETAIL (0.58%)
Albertson's
38,300 8,200 46,500 873,623 187,042 1,060,665
FOOD-WHOLESALE & DISTRIBUTION (0.36%)
Supervalu
19,000 3,100 22,100 560,310 91,419 651,729
GOLD MINING (0.07%)
Newmont Mining
2,200 500 2,700 104,544 23,760 128,304
HEALTH CARE COST CONTAINMENT (0.46%)
Caremark Rx (1)
22,900 4,700 27,600 686,313 140,859 827,172
HOTELS & MOTELS (0.06%)
Choice Hotels International
- - 2,300 2,300 - 114,770 114,770
INDEPENDENT POWER PRODUCER (0.32%)
NRG Energy (1)
16,400 4,300 20,700 454,936 119,282 574,218
INDUSTRIAL GASES (0.33%)
Air Products & Chemicals
9,400 1,900 11,300 499,892 101,042 600,934
INTERNET SECURITY (0.66%)
Symantec (1)
17,300 3,600 20,900 985,062 204,984 1,190,046
INVESTMENT MANAGEMENT & ADVISORY
SERVICES (0.31%)
Franklin Resources
7,700 1,500 9,200 466,774 90,930 557,704
LEISURE & RECREATION PRODUCTS (0.01%)
Brunswick
- - 500 500 - 23,460 23,460
LIFE & HEALTH INSURANCE (0.03%)
Lincoln National
- - 1,300 1,300 - 56,940 56,940
LOTTERY SERVICES (0.14%)
GTECH Holdings
9,100 1,700 10,800 215,397 40,239 255,636
MACHINERY-CONSTRUCTION & MINING (0.27%)
Caterpillar
5,260 760 6,020 423,640 61,210 484,850
MACHINERY-FARM (0.01%)
AGCO (1)
- - 1,100 1,100 - 21,362 21,362
MACHINERY-GENERAL INDUSTRY (0.23%)
Ingersoll-Rand
5,000 1,000 6,000 342,200 68,440 410,640
MACHINERY-PUMPS (0.10%)
Graco
5,200 - 5,200 178,880 - 178,880
MEDICAL INFORMATION SYSTEM (0.02%)
IMS Health
- - 1,300 1,300 - 27,534 27,534
MEDICAL INSTRUMENTS (0.61%)
Guidant
6,451 1,165 7,616 429,766 77,612 507,378
Medtronic
9,800 2,000 11,800 500,878 102,220 603,098
MEDICAL PRODUCTS (2.70%)
Becton Dickinson
8,900 2,400 11,300 467,250 126,000 593,250
Johnson & Johnson
44,500 9,300 53,800 2,597,910 542,934 3,140,844
Zimmer Holdings (1)
12,700 2,300 15,000 985,393 178,457 1,163,850
MEDICAL-BIOMEDICAL/GENE (1.94%)
Amgen (1)
11,626 2,346 13,972 660,357 133,253 793,610
Biogen Idec (1)
18,000 3,800 21,800 1,046,880 221,008 1,267,888
Genentech (1)
16,700 3,500 20,200 760,351 159,355 919,706
Genzyme (1)
8,900 1,500 10,400 466,983 78,705 545,688
MEDICAL-DRUGS (6.49%)
Abbott Laboratories
17,333 3,771 21,104 738,906 160,758 899,664
Allergan
11,000 1,900 12,900 787,160 135,964 923,124
Elan (1)
1,500 300 1,800 38,700 7,740 46,440
Eli Lilly
12,233 7,849 20,082 2,006,027 430,988 2,437,015
Merck
14,200 4,000 18,200 444,602 125,240 569,842
Pfizer
157,850 32,845 190,695 4,569,757 950,863 5,520,620
Schering-Plough
32,200 6,800 39,000 583,142 123,148 706,290
Wyeth
13,732 3,134 16,866 544,474 124,263 668,737
MEDICAL-HMO (1.03%)
Aetna
7,400 2,400 9,800 703,000 228,000 931,000
UnitedHealth Group
11,200 1,700 12,900 810,880 123,080 933,960
METAL-ALUMINUM (0.44%)
Alcoa
20,281 4,302 24,583 659,133 139,815 798,948
METAL-DIVERSIFIED (0.52%)
Rio Tinto
7,300 1,500 8,800 775,990 159,450 935,440
MISCELLANEOUS INVESTING (0.41%)
Equity Office Properties Trust
21,800 4,600 26,400 613,016 129,352 742,368
MONEY CENTER BANKS (3.46%)
Bank of America
101,418 21,274 122,692 4,542,512 952,863 5,495,375
JP Morgan Chase
17,160 3,020 20,180 662,376 116,572 778,948
MULTI-LINE INSURANCE (3.50%)
American International Group
34,587 5,699 40,286 2,099,777 345,986 2,445,763
Loews
16,500 3,500 20,000 988,350 209,650 1,198,000
MetLife
29,500 5,800 35,300 1,131,325 222,430 1,353,755
Prudential Financial
24,000 5,000 29,000 1,115,280 232,350 1,347,630
MULTIMEDIA (3.74%)
Time Warner (1)
172,219 36,175 208,394 2,865,724 601,952 3,467,676
Viacom
61,090 12,925 74,015 2,229,174 471,633 2,700,807
Walt Disney
17,900 6,400 24,300 451,438 161,408 612,846
NETWORKING PRODUCTS (1.20%)
Cisco Systems (1)
93,219 19,921 113,140 1,790,737 382,682 2,173,419
NON-HAZARDOUS WASTE DISPOSAL (0.49%)
Republic Services
9,700 1,300 11,000 298,760 40,040 338,800
Waste Management
15,200 4,100 19,300 432,896 116,768 549,664
OIL & GAS DRILLING (0.29%)
GlobalSantaFe
13,900 3,000 16,900 410,050 88,500 498,550
Transocean Sedco Forex (1)
- - 600 600 - 21,150 21,150
OIL COMPANY-EXPLORATION &
PRODUCTION (1.62%)
Anadarko Petroleum
27,800 5,100 32,900 1,875,110 343,995 2,219,105
Apache
4,800 2,000 6,800 243,360 101,400 344,760
Devon Energy
1,500 2,800 4,300 110,955 207,116 318,071
EOG Resources
- - 800 800 - 53,248 53,248
OIL COMPANY-INTEGRATED (4.78%)
ChevronTexaco
14,600 3,000 17,600 774,676 159,180 933,856
ConocoPhillips
23,300 5,100 28,400 1,964,423 429,981 2,394,404
Exxon Mobil
73,291 14,758 88,049 3,607,383 726,389 4,333,772
Occidental Petroleum
16,600 1,600 18,200 926,778 89,328 1,016,106
OIL FIELD MACHINERY & EQUIPMENT (0.05%)
FMC Technologies (1)
3,100 - 3,100 93,713 - 93,713
OIL REFINING & MARKETING (0.53%)
Sunoco
2,800 1,000 3,800 208,208 74,360 282,568
Valero Energy
16,000 - 16,000 687,520 - 687,520
OIL-FIELD SERVICES (0.36%)
Schlumberger
8,619 1,747 10,366 542,480 109,956 652,436
PAPER & RELATED PRODUCTS (0.63%)
International Paper
10,146 2,214 12,360 390,722 85,261 475,983
Louisiana-Pacific
23,100 3,800 26,900 566,181 93,138 659,319
PHOTO EQUIPMENT & SUPPLIES (0.54%)
Eastman Kodak
28,900 3,500 32,400 875,092 105,980 981,072
POULTRY (0.05%)
Pilgrims Pride
- - 3,200 3,200 - 86,528 86,528
PROPERTY & CASUALTY INSURANCE (0.35%)
St. Paul
15,003 3,768 18,771 509,502 127,961 637,463
REGIONAL BANKS (2.86%)
Comerica
2,200 400 2,600 135,322 24,604 159,926
National City
3,200 1,100 4,300 124,704 42,867 167,571
U.S. Bancorp
40,200 9,400 49,600 1,150,122 268,934 1,419,056
Wachovia
30,900 6,500 37,400 1,520,589 319,865 1,840,454
Wells Fargo
23,500 3,400 26,900 1,403,420 203,048 1,606,468
RETAIL-APPAREL & SHOE (0.15%)
Gap
11,400 2,400 13,800 227,772 47,952 275,724
RETAIL-AUTOMOBILE (0.34%)
AutoNation (1)
31,800 4,000 35,800 547,914 68,920 616,834
RETAIL-BUILDING PRODUCTS (0.67%)
Home Depot
2,700 3,100 5,800 110,916 127,348 238,264
Lowe's
14,600 2,800 17,400 821,688 157,584 979,272
RETAIL-CONSUMER ELECTRONICS (0.14%)
Circuit City Stores
13,300 2,600 15,900 216,125 42,250 258,375
RETAIL-DISCOUNT (2.48%)
Costco Wholesale
9,100 2,200 11,300 436,254 105,468 541,722
Kmart Holding (1) (2)
9,300 1,900 11,200 855,972 174,876 1,030,848
Target
6,400 1,300 7,700 320,128 65,026 385,154
Wal-Mart Stores
38,570 8,493 47,063 2,079,694 457,943 2,537,637
RETAIL-OFFICE SUPPLIES (0.08%)
Staples
4,300 - 4,300 127,882 - 127,882
RETAIL-REGIONAL DEPARTMENT STORE (0.52%)
Federated Department Stores
18,100 700 18,800 913,145 35,315 948,460
RETAIL-TOY STORE (0.39%)
Toys R Us (1)
33,500 5,700 39,200 603,335 102,657 705,992
SAVINGS & LOANS-THRIFTS (0.01%)
Golden West Financial
- - 200 200 - 23,384 23,384
SEMICONDUCTOR COMPONENT-INTEGRATED
CIRCUITS (0.16%)
Analog Devices
6,200 1,200 7,400 249,612 48,312 297,924
SEMICONDUCTOR EQUIPMENT (0.31%)
Applied Materials (1)
29,100 6,300 35,400 468,510 101,430 569,940
STEEL PRODUCERS (0.49%)
Nucor
16,800 4,000 20,800 709,464 168,920 878,384
TELECOMMUNICATION EQUIPMENT (1.01%)
Qualcomm
36,200 7,600 43,800 1,513,522 317,756 1,831,278
TELECOMMUNICATION EQUIPMENT-FIBER
OPTICS (0.17%)
Corning (1)
21,600 4,600 26,200 247,320 52,670 299,990
TELEPHONE-INTEGRATED (3.02%)
BellSouth
49,000 9,600 58,600 1,306,830 256,032 1,562,862
CenturyTel
26,100 - 26,100 837,549 - 837,549
SBC Communications
12,700 6,700 19,400 320,802 169,242 490,044
Sprint
74,600 15,500 90,100 1,562,870 324,725 1,887,595
Telephone & Data Systems
1,300 - 1,300 97,370 - 97,370
Verizon Communications
9,800 5,700 15,500 383,180 222,870 606,050
TELEVISION (0.13%)
Hearst-Argyle Television
7,700 1,300 9,000 200,662 33,878 234,540
THERAPEUTICS (0.22%)
ImClone Systems (1) (2)
8,300 1,000 9,300 363,540 43,800 407,340
TOBACCO (0.82%)
Altria Group
5,700 1,100 6,800 276,222 53,306 329,528
Reynolds American
13,500 2,500 16,000 929,610 172,150 1,101,760
UST
- - 1,300 1,300 - 53,508 53,508
TOOLS-HAND HELD (0.04%)
Black & Decker
- - 800 800 - 64,224 64,224
TRANSPORT-RAIL (0.78%)
Burlington Northern Santa Fe
13,300 700 14,000 556,073 29,267 585,340
CSX
18,000 3,900 21,900 657,000 142,350 799,350
- - 1,100 1,100 Norfolk Southern 37,345 37,345
TRANSPORT-SERVICES (0.49%)
FedEx
6,945 1,357 8,302 632,828 123,650 756,478
United Parcel Service
1,400 300 1,700 110,852 23,754 134,606
TRANSPORT-TRUCK (0.17%)
J.B. Hunt Transport Services
3,300 4,300 7,600 134,838 175,698 310,536
WEB PORTALS (0.44%)
Yahoo (1)
17,600 4,400 22,000 636,944 159,236 796,180
WIRELESS EQUIPMENT (1.10%)
Motorola
95,500 20,000 115,500 1,648,330 345,200 1,993,530
-----------------------------------------------
TOTAL COMMON STOCKS 148,857,126 31,197,018 180,054,144
REPURCHASE AGREEMENTS (0.95%)
Goldman Sachs; 1.75%; dated 10/29/04
maturing 11/01/04 (collateralized by
U.S. Treasuries; $1,741,957;
11/18/04 - 01/15/12) (3)
1,727,252 - 1,727,252 1,727,000 - 1,727,000
-----------------------------------------------
TOTAL REPURCHASE AGREEMENTS
1,727,000 - 1,727,000
-----------------------------------------------
TOTAL PORTFOLIO INVESTMENTS (100.23%) 150,584,126 31,197,018 181,781,144
Liabilities, net of cash, receivables,
and other assets (-0.23%) (881,241) 463,928 (417,313)
-----------------------------------------------
TOTAL NET ASSETS (100.00%) $ 149,702,885 $31,660,946 181,363,831
===============================================
<FN>
(1) Non-income producing security.
(2) Security or a portion of the security was on loan at the end of the period.
(3) Security was purchased with the cash proceeds from securities loans.
</FN>
UNREALIZED APPRECIATION (DEPRECIATION)
The net federal income tax unrealized appreciation (depreciation) and federal
tax cost of investments held by the fund as of the period end were as follows:
Unrealized Appreciation $17,860,096 $ 3,215,612 $ 21,075,708
Unrealized Depreciation (14,368,644) (1,105,629) (15,474,273)
--------------------------------------------
Net Unrealized Appreciation (Depreciation) 3,491,452 2,109,983 5,601,435
Cost for federal income tax purposes $147,092,674 29,087,035 176,179,709
- ----------------------------------------------------------------------------------------------------------
Opening Current Unrealized
Contract Type Commitment Market Value Market Value Gain(Loss)
- ----------------------------------------------------------------------------------------------------------
FUTURES CONTRACTS
10 S&P 500 eMini December 2004 Futures Buy $560,758 $565,150 $4,392
4 S&P 500 eMini December 2004 Futures Buy 223,483 226,060 2,577
- ----------------------------------------------------------------------------------------------------------
14 S&P 500 eMini December 2004 Futures $784,241 $791,210 $6,969
INVESTMENTS BY SECTOR (UNAUDITED)
Percentage of Total Value Sector Value
- -----------------------------------------------------------------------------------------------------------------------------------
23.79% 23.64% 23.77% Consumer, Non-cyclical
$ 35,963,178 $ 7,429,557 $ 43,392,735
Financial
19.25 17.73 18.99 29,092,292 5,570,469 34,662,761
Communications
13.01 13.77 13.14 19,657,800 4,328,218 23,986,018
Industrial
11.52 11.59 11.53 17,409,142 3,642,613 21,051,755
Technology
11.34 11.57 11.38 17,137,102 3,634,237 20,771,339
Energy
7.57 7.65 7.58 11,444,656 2,404,603 13,849,259
Consumer, Cyclical
7.03 6.7 6.97 10,626,848 2,105,699 12,732,547
Basic Materials
3.13 3.21 3.15 4,738,223 1,009,047 5,747,270
Utilities
1.69 2.08 1.75 2,549,698 653,042 3,202,740
Government
1.30 1.34 1.31 1,965,187 419,533 2,384,720
Futures Contracts
0.37 0.72 0.43 565,150 226,060 791,210
----------------------------------------------
TOTAL $151,149,276 $31,423,078 $182,572,354
==============================================
<FN>
Percentages are adjusted to reflect the impact of currency contracts, futures
contracts, and swap agreements, if applicable.
See accompanying notes.
</FN>
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
COMBINED
PRINCIPAL PARTNERS PARTNERS
PARTNERS LARGECAP LARGECAP PRO FORMA LARGECAP
BLEND FUND, INC. BLEND FUND ADJUSTMENTS BLEND FUND
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $ 57,265,706 $556,425,167 $ -- $613,690,873
============ ============ ========= ============
ASSETS
Investment in
securities--at value. $ 60,364,359 $582,151,087 $ -- $642,515,446
Cash.................. 1,045,488 7,716,631 -- 8,762,119
Receivables:
Capital Shares sold.. 15,513 299,442 -- 314,955
Dividends and
interest............ 56,422 544,468 -- 600,890
Investment securities
sold................ 400,005 3,839,058 -- 4,239,063
Variation margin on
futures contracts... 945 9,450 -- 10,395
Other assets.......... 66 -- -- 66
Prepaid directors'
expenses............. 33 -- -- 33
------------ ------------ --------- ------------
Total Assets 61,882,831 594,560,136 -- 656,442,967
LIABILITIES
Accrued management and
investment advisory
fees................. 8,736 84,019 -- 92,755
Accrued administrative
service fees......... -- 2,318 -- 2,318
Accrued distribution
fees................. 5,422 6,516 -- 11,938
Accrued service fees.. -- 2,888 -- 2,888
Accrued transfer and
administrative fees.. 35,537 14,816 -- 50,353
Accrued other expenses 28,978 7,060 -- 36,038
Payables:
Capital Shares
reacquired.......... 21,571 16,516 -- 38,087
Investment securities
purchased........... 135,087 1,254,221 -- 1,389,308
------------ ------------ --------- ------------
Total Liabilities 235,331 1,388,354 -- 1,623,685
------------ ------------ --------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $ 61,647,500 $593,171,782 $ -- $654,819,282
============ ============ ========= ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $ 56,555,777 $531,589,364 $ -- $588,145,141
Accumulated
undistributed
(overdistributed) net
investment income
(operating loss)..... -- 2,953,047 -- 2,953,047
Accumulated
undistributed
(overdistributed) net
realized gain (loss). 1,986,970 32,859,376 -- 34,846,346
Net unrealized
appreciation
(depreciation) of
investments.......... 3,104,753 25,769,995 -- 28,874,748
------------ ------------ --------- ------------
Total Net Assets $ 61,647,500 $593,171,782 $ -- $654,819,282
============ ============ ========= ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 100,000,000 290,000,000 -- 290,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 23,025,673 N/A $ 23,025,673
Shares issued and
outstanding.......... 2,279,337 2,279,337
Net asset value per
share................ $ 10.10 $ 10.10
============ ============
Advisors Select: Net
Assets............... N/A $ 22,390,274 N/A $ 22,390,274
Shares issued and
outstanding.......... 2,224,860 2,224,860
Net asset value per
share................ $ 10.06 $ 10.06
============ ============
Class A: Net Assets... $ 43,209,784 N/A -- $ 43,209,784
Shares issued and
outstanding.......... 4,368,684 (107,364) 4,261,320
Net asset value per
share................ $ 9.89 -- $ 10.14
Maximum offering
price per share /(a)/ $ 10.49 -- $ 10.76
============ ============
Class B: Net Assets... $ 18,437,716 N/A -- $ 18,437,716
Shares issued and
outstanding.......... 1,917,403 (99,088) 1,818,315
Net asset value per
share /(b)/.......... $ 9.62 -- $ 10.14
============ ============
Class J: Net Assets... N/A $ 43,662,259 N/A $ 43,662,259
Shares issued and
outstanding.......... 4,386,721 4,386,721
Net asset value per
share /(b)/.......... $ 9.95 $ 9.95
============ ============
Institutional: Net
Assets............... N/A $464,034,476 N/A $464,034,476
Shares issued and
outstanding.......... 45,741,745 45,741,745
Net asset value per
share................ $ 10.14 $ 10.14
============ ============
Preferred: Net Assets. N/A $ 34,283,220 N/A $ 34,283,220
Shares issued and
outstanding.......... 3,389,896 3,389,896
Net asset value per
share................ $ 10.11 $ 10.11
============ ============
Select: Net Assets.... N/A $ 5,775,880 N/A $ 5,775,880
Shares issued and
outstanding.......... 569,540 569,540
Net asset value per
share................ $ 10.14 $ 10.14
============ ============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 5.75% of the offering price or 6.10% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See accompanying notes.
13
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
COMBINED
PRINCIPAL PARTNERS PARTNERS
PARTNERS LARGECAP LARGECAP PRO FORMA LARGECAP
BLEND FUND, INC. BLEND FUND ADJUSTMENTS /(A)/ BLEND FUND
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Dividends............ $ 882,046 $ 8,013,624 $ -- $ 8,895,670
Interest............. 1,288 13,787 -- 15,075
---------- ----------- -------- -----------
Total Income 883,334 8,027,411 -- 8,910,745
Expenses:
Management and
investment advisory
fees................ 417,573 3,816,625 (18,539) 4,215,659
Distribution fees -
Advisors Preferred.. -- 46,318 -- 46,318
Distribution fees -
Advisors Select..... -- 47,202 -- 47,202
Distribution fees -
Class A............. 96,860 -- -- 96,860
Distribution fees -
Class B............. 157,652 -- -- 157,652
Distribution fees -
Class J............. -- 163,536 -- 163,536
Distribution fees -
Select.............. -- 3,943 -- 3,943
Administrative
service fees -
Advisors Preferred.. -- 27,791 -- 27,791
Administrative
service fees -
Advisors Select..... -- 31,468 -- 31,468
Administrative
service fees -
Preferred........... -- 32,865 -- 32,865
Administrative
service fees -
Select.............. -- 5,126 -- 5,126
Registration fees -
Class A............. 8,084 -- -- 8,084
Registration fees -
Class B............. 9,374 -- -- 9,374
Registration fees -
Class J............. -- 14,083 -- 14,083
Service fees -
Advisors Preferred.. -- 31,496 -- 31,496
Service fees -
Advisors Select..... -- 39,335 -- 39,335
Service fees -
Preferred........... -- 44,816 -- 44,816
Service fees - Select -- 5,914 -- 5,914
Shareholder reports -
Class A............. 6,395 -- -- 6,395
Shareholder reports -
Class B............. 2,909 -- -- 2,909
Shareholder reports -
Class J............. -- 7,514 -- 7,514
Transfer and
administrative fees
- Class A........... 40,192 -- -- 40,192
Transfer and
administrative fees
- Class B........... 18,438 -- -- 18,438
Transfer and
administrative fees
- Class J........... -- 78,428 -- 78,428
Auditing and legal
fees................ 6,616 -- (6,616) --
Custodian fees....... 16,787 -- (16,787) --
Directors' expenses.. 1,879 -- (1,879) --
Registration fees.... 24,294 -- -- 24,294
Transfer and
administrative fees. 161,416 -- 1,030 162,446
Other expenses....... 2,969 -- (2,969) --
Other expenses -
Class J............. -- 201 -- 201
---------- ----------- -------- -----------
Total Gross Expenses 971,438 4,396,661 (45,760) 5,322,339
Less: Fees paid
indirectly.......... 6,291 124,607 -- 130,898
Less: Reimbursement
from Manager - Class
A................... 14,404 -- (14,404) --
Less: Reimbursement
from Manager - Class
B................... 3,315 -- (3,315) --
---------- ----------- -------- -----------
Total Net Expenses 947,428 4,272,054 (28,041) 5,191,441
---------- ----------- -------- -----------
Net Investment Income
(Operating Loss) (64,094) 3,755,357 28,041 3,719,304
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ 4,200,025 41,932,634 -- 46,132,659
Futures contracts.... (1,520) (9,297) -- (10,817)
Change in unrealized
appreciation/depreciation
of:
Investments........... 40,615 (8,973,438) -- (8,932,823)
Futures contracts..... 6,100 44,075 -- 50,175
---------- ----------- -------- -----------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies 4,245,220 32,993,974 -- 37,239,194
---------- ----------- -------- -----------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $4,181,126 $36,749,331 $ 28,041 $40,958,498
========== =========== ======== ===========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
29
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- ----------------------------------------------------------------------------------------------------------------------------------
Principal Principal
Partners Partners Partners Partners
LargeCap LargeCap LargeCap LargeCap
Blend Blend Blend Blend
Fund, Inc. Fund Combined Fund, Inc. Fund Combined
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (97.81%)
AEROSPACE & DEFENSE (0.56%)
3,000 32,000 Boeing $ 149,700 $ 1,447,100 $1,596,800
29,000
1,900 19,400 Raytheon 69,312 707,712
17,500 638,400
3,600 39,000 Rockwell Collins 127,692 1,383,330
35,400 1,255,638
AEROSPACE & DEFENSE EQUIPMENT (1.09%)
1,500 15,700 General Dynamics 153,180 1,603,284
14,200 1,450,104
5,400 53,500 Lockheed Martin 297,486 2,947,315
48,100 2,649,829
2,400 28,100 United Technologies 222,768 2,608,242
25,700 2,385,474
AGRICULTURAL CHEMICALS (0.54%)
5,200 75,400 Agrium 86,268 1,250,886
70,200 1,164,618
3,700 40,000 Mosaic (1) 55,648 601,600
36,300 545,952
2,300 25,100 Potash Corp. of Saskatchewan 153,617 1,676,429
22,800 1,522,812
AIRLINES (0.11%)
4,500 46,200 Southwest Airlines 70,965 728,574
41,700 657,609
APPLIANCES (0.18%)
1,600 17,500 Maytag 27,840 304,500
15,900 276,660
1,400 15,300 Whirlpool 82,250 898,875
13,900 816,625
APPLICATIONS SOFTWARE (3.45%)
2,500 27,100 Intuit (1) 113,400 1,229,256
24,600 1,115,856
900 8,900 Mercury Interactive (1) 39,087 386,527
8,000 347,440
66,100 709,600 Microsoft 1,850,139 19,861,704
643,500 18,011,565
7,800 71,400 Red Hat (1) 100,152 916,776
63,600 816,624
2,100 21,000 Siebel Systems (1) 19,950 199,500
18,900 179,550
AUDIO & VIDEO PRODUCTS (0.06%)
2,000 23,300 Digital Theater Systems (1) 34,020 396,333
21,300 362,313
AUTO-CARS & LIGHT TRUCKS (0.30%)
4,700 50,400 General Motors 181,185 1,942,920
45,700 1,761,735
AUTO-MEDIUM & HEAVY DUTY TRUCKS (0.15%)
1,300 14,500 Paccar 90,103 1,004,995
13,200 914,892
AUTO/TRUCK PARTS & EQUIPMENT- ORIGINAL (0.25%)
1,200 12,200 Lear 64,704 657,824
11,000 593,120
6,000 51,700 TRW Automotive Holdings (1) 110,160 949,212
45,700 839,052
BEVERAGES-NON-ALCOHOLIC (2.10%)
15,700 165,400 Coca-Cola 638,362 6,725,164
149,700 6,086,802
4,000 41,900 Cott (1) 105,040 1,100,294
37,900 995,254
11,300 119,700 Pepsico 560,254 5,934,726
108,400 5,374,472
BREWERY (0.26%)
3,200 33,800 Anheuser-Busch 159,840 1,688,310
30,600 1,528,470
BROADCASTING SERVICES & PROGRAMMING (0.25%)
16,800 182,800 Liberty Media (1) 149,856 1,630,576
166,000 1,480,720
CABLE TV (0.10%)
2,700 28,600 Rogers Communications 62,208 658,944
25,900 596,736
CASINO HOTELS (0.07%)
900 8,800 Station Casinos 45,855 448,360
7,900 402,505
CASINO SERVICES (0.27%)
4,700 52,400 International Game Technology 155,288 1,731,296
47,700 1,576,008
CELLULAR TELECOMMUNICATIONS (0.48%)
8,100 85,400 Nextel Communications (1) 214,569 2,262,246
77,300 2,047,677
4,600 50,300 Nextel Partners (1) 77,464 847,052
45,700 769,588
CHEMICALS-DIVERSIFIED (0.63%)
7,200 75,500 Dow Chemical 323,568 3,392,970
68,300 3,069,402
1,600 17,200 E. I. Du Pont de Nemours 68,592 737,364
15,600 668,772
CHEMICALS-SPECIALTY (0.36%)
1,600 16,000 Cabot 54,528 545,280
14,400 490,752
1,500 15,800 Ferro 31,605 332,906
14,300 301,301
600 13,000 Great Lakes Chemical 15,372 333,060
12,400 317,688
4,100 41,400 Millennium Chemicals (1) 88,068 889,272
37,300 801,204
400 4,600 Minerals Technologies 24,040 276,460
4,200 252,420
CIRCUIT BOARDS (0.16%)
4,000 44,300 Jabil Circuit (1) 97,240 1,076,933
40,300 979,693
COMMERCIAL BANKS (0.39%)
2,800 29,900 First Horizon National 121,184 1,294,072
27,100 1,172,888
4,400 46,800 Synovus Financial 119,636 1,272,492
42,400 1,152,856
COMMERCIAL SERVICE-FINANCE (0.11%)
900 9,200 Moody's 70,029 715,852
8,300 645,823
COMPUTERS (1.45%)
4,000 44,100 Gateway (1) 23,400 257,985
40,100 234,585
11,900 124,700 Hewlett-Packard 222,054 2,326,902
112,800 2,104,848
7,400 77,200 International Business Machines 664,150 6,928,700
69,800 6,264,550
COMPUTERS-INTEGRATED SYSTEMS (1.47%)
26,000 275,000 Dell (1) 911,560 9,641,500
249,000 8,729,940
COMPUTERS-MEMORY DEVICES (0.07%)
2,000 21,900 Veritas Software (1) 43,760 479,172
19,900 435,412
COMPUTERS-PERIPHERAL EQUIPMENT (0.17%)
1,200 13,300 Lexmark International (1) 99,732 1,105,363
12,100 1,005,631
CONSULTING SERVICES (0.32%)
2,700 28,900 Accenture (1) 65,367 699,669
26,200 634,302
4,100 43,800 Advisory Board (1) 133,578 1,427,004
39,700 1,293,426
CONSUMER PRODUCTS-MISCELLANEOUS (0.30%)
1,700 23,200 Clorox 92,820 1,266,720
21,500 1,173,900
900 9,300 Fortune Brands 65,538 677,226
8,400 611,688
COSMETICS & TOILETRIES (2.36%)
3,000 32,000 Colgate-Palmolive 133,860 1,427,840
29,000 1,293,980
5,700 60,200 Gillette 236,436 2,497,096
54,500 2,260,660
2,500 26,700 Kimberly-Clark 149,175 1,593,189
24,200 1,444,014
18,400 194,700 Procter & Gamble 941,712 9,964,746
176,300 9,023,034
CRUISE LINES (0.46%)
4,300 47,200 Carnival 217,408 2,386,432
42,900 2,169,024
1,400 14,000 Royal Caribbean Cruises 65,240 652,400
12,600 587,160
DATA PROCESSING & MANAGEMENT (0.82%)
6,100 65,200 Automatic Data Processing 264,679 2,829,028
59,100 2,564,349
4,800 46,700 First Data 198,144 1,927,776
41,900 1,729,632
1,600 16,600 Fiserv (1) 56,864 589,964
15,000 533,100
DECISION SUPPORT SOFTWARE (0.14%)
5,900 73,000 NetIQ (1) 74,812 925,640
67,100 850,828
DISPOSABLE MEDICAL PRODUCTS (0.09%)
1,200 10,000 C.R. Bard 68,160 568,000
8,800 499,840
DISTRIBUTION-WHOLESALE (0.21%)
2,300 21,900 CDW 142,669 1,358,457
19,600 1,215,788
DIVERSIFIED MANUFACTURING OPERATIONS (6.38%)
3,000 32,000 Danaher 165,390 1,764,160
29,000 1,598,770
75,500 808,500 General Electric 2,576,060 27,586,020
733,000 25,009,960
9,700 101,000 Honeywell International 326,696 3,401,680
91,300 3,074,984
500 5,400 Illinois Tool Works 46,140 498,312
4,900 452,172
500 5,100 ITT Industries 40,570 413,814
4,600 373,244
1,000 7,100 Roper Industries 61,660 437,786
6,100 376,126
23,100 247,400 Tyco International 719,565 7,706,510
224,300 6,986,945
DIVERSIFIED MINERALS (0.20%)
5,700 62,400 BHP Billiton 117,819 1,289,808
56,700 1,171,989
DIVERSIFIED OPERATORS-COMMERCIAL
SERVICES (0.19%)
5,700 60,900 Cendant 117,363 1,253,931
55,200 1,136,568
E-COMMERCE-SERVICES (0.95%)
4,200 40,900 eBay (1) 409,962 3,992,249
36,700 3,582,287
7,000 73,900 InterActiveCorp (1) 151,340 1,597,718
66,900 1,446,378
1,300 21,500 Monster Worldwide (1) 36,465 603,075
20,200 566,610
ELECTRIC-INTEGRATED (3.13%)
3,200 21,500 American Electric Power 105,376 707,995
18,300 602,619
2,000 20,900 CMS Energy (1) 18,720 195,624
18,900 176,904
1,200 19,900 Constellation Energy Group 48,744 808,338
18,700 759,594
10,700 112,100 Duke Energy 262,471 2,749,813
101,400 2,487,342
3,200 32,900 Edison International 97,600 1,003,450
29,700 905,850
2,800 48,900 El Paso Electric (1) 46,620 814,185
46,100 767,565
1,600 16,900 Entergy 104,576 1,104,584
15,300 1,000,008
4,200 44,500 Exelon 166,404 1,763,090
40,300 1,596,686
5,000 58,000 FirstEnergy 206,650 2,397,140
53,000 2,190,490
4,000 42,300 NiSource 85,800 907,335
38,300 821,535
3,400 45,200 PG&E (1) 108,936 1,448,208
41,800 1,339,272
2,700 26,800 Pinnacle West Capital 115,074 1,142,216
24,100 1,027,142
3,100 29,900 PPL 161,200 1,554,800
26,800 1,393,600
2,100 21,700 Southern 66,339 685,503
19,600 619,164
3,700 39,400 TECO Energy 51,800 551,600
35,700 499,800
3,700 43,300 TXU 226,514 2,650,826
39,600 2,424,312
ELECTRONIC COMPONENTS-SEMICONDUCTOR (2.21%)
38,200 410,300 Intel 850,332 9,133,278
372,100 8,282,946
4,500 49,000 QLogic (1) 146,250 1,592,500
44,500 1,446,250
8,100 88,900 Texas Instruments 198,045 2,173,605
80,800 1,975,560
4,800 51,200 Xilinx 146,880 1,566,720
46,400 1,419,840
ENTERPRISE SOFTWARE & SERVICE (0.73%)
34,000 375,700 Oracle (1) 430,440 4,756,362
341,700 4,325,922
FIDUCIARY BANKS (0.81%)
3,700 40,200 Investors Financial Services 142,413 1,547,298
36,500 1,404,885
8,200 84,000 State Street 369,410 3,784,200
75,800 3,414,790
FILTRATION & SEPARATION PRODUCTS (0.15%)
2,400 37,100 Pall 62,064 959,406
34,700 897,342
FINANCE-COMMERCIAL (0.17%)
4,700 49,800 CapitalSource (1) 105,280 1,115,520
45,100 1,010,240
FINANCE-CONSUMER LOANS (0.25%)
3,300 35,800 SLM 149,358 1,620,308
32,500 1,470,950
FINANCE-CREDIT CARD (0.82%)
7,500 78,600 American Express 398,025 4,171,302
71,100 3,773,277
4,400 47,000 MBNA 112,772 1,204,610
42,600 1,091,838
FINANCE-INVESTMENT BANKER & BROKER (4.09%)
8,600 94,800 Charles Schwab 78,690 867,420
86,200 788,730
29,300 310,500 Citigroup 1,300,041 13,776,885
281,200 12,476,844
3,000 29,600 Goldman Sachs Group 295,140 2,912,048
26,600 2,616,908
750 5,850 Legg Mason 47,782 372,703
5,100 324,921
1,900 20,200 Lehman Brothers Holdings 156,085 1,659,430
18,300 1,503,345
6,300 68,900 Merrill Lynch 339,822 3,716,466
62,600 3,376,644
6,600 67,900 Morgan Stanley 337,194 3,469,011
61,300 3,131,817
FINANCE-MORTGAGE LOAN/BANKER (1.05%)
2,100 21,900 Countrywide Credit Industries 67,053 699,267
19,800 632,214
4,100 43,800 Federal Home Loan Mortgage 273,060 2,917,080
39,700 2,644,020
4,600 46,500 Federal National Mortgage Association 322,690 3,261,975
41,900 2,939,285
FINANCIAL GUARANTEE INSURANCE (0.32%)
1,500 15,500 MGIC Investment 96,465 996,805
14,000 900,340
2,400 22,300 Radian Group 115,032 1,068,839
19,900 953,807
FOOD-CONFECTIONERY (0.17%)
1,400 21,400 Hershey Foods 70,966 1,084,766
20,000 1,013,800
FOOD-MISCELLANEOUS/DIVERSIFIED (0.67%)
3,900 43,200 Campbell Soup 104,676 1,159,488
39,300 1,054,812
3,500 36,900 General Mills 154,875 1,632,825
33,400 1,477,950
800 10,300 H.J. Heinz 29,080 374,405
9,500 345,325
2,100 28,000 Kellogg 90,300 1,204,000
25,900 1,113,700
FOOD-WHOLESALE & DISTRIBUTION (0.23%)
4,300 46,200 Sysco 138,761 1,490,874
41,900 1,352,113
GAS-DISTRIBUTION (0.04%)
700 7,700 Sempra Energy 23,478 258,258
7,000 234,780
GOLD MINING (0.55%)
7,100 75,300 Newmont Mining 337,392 3,578,256
68,200 3,240,864
HEALTH CARE COST CONTAINMENT (0.13%)
2,800 27,300 Caremark Rx (1) 83,916 818,181
24,500 734,265
HOME DECORATION PRODUCTS (0.16%)
4,600 49,700 Newell Rubbermaid 99,176 1,071,532
45,100 972,356
HOTELS & MOTELS (0.18%)
800 8,600 Fairmont Hotels & Resorts 22,704 244,068
7,800 221,364
1,600 17,000 Marriott International 87,184 926,330
15,400 839,146
HUMAN RESOURCES (0.17%)
1,100 11,200 Manpower 49,775 506,800
10,100 457,025
1,500 23,300 Robert Half International 39,795 618,149
21,800 578,354
INSURANCE BROKERS (0.44%)
9,800 104,200 Marsh & McLennan 271,068 2,882,172
94,400 2,611,104
INTERNET APPLICATION SOFTWARE (0.18%)
7,500 76,000 MatrixOne (1) 42,750 433,200
68,500 390,450
5,400 58,100 Verity (1) 69,768 750,652
52,700 680,884
INTERNET BROKERS (0.48%)
22,400 241,600 Ameritrade Holding (1) 291,648 3,145,632
219,200 2,853,984
INTERNET CONTENT-INFORMATION & NEWS (0.09%)
7,200 76,100 CNET Networks (1) 58,824 621,737
68,900 562,913
INVESTMENT MANAGEMENT & ADVISORY
SERVICES (0.19%)
2,000 20,400 Franklin Resources 121,240 1,236,648
18,400 1,115,408
LEISURE & RECREATION PRODUCTS (0.23%)
2,200 22,700 Brunswick 103,224 1,065,084
20,500 961,860
2,300 15,900 WMS Industries (1) 67,275 465,075
13,600 397,800
LIFE & HEALTH INSURANCE (0.15%)
3,500 40,700 Genworth Financial 83,510 971,102
37,200 887,592
MACHINERY-FARM (0.33%)
3,400 36,100 Deere 203,252 2,158,058
32,700 1,954,806
MEDICAL INSTRUMENTS (1.41%)
1,800 16,400 Biomet 84,024 765,552
14,600 681,528
5,200 53,200 Boston Scientific (1) 183,560 1,877,960
48,000 1,694,400
2,200 25,200 Guidant 146,564 1,678,824
23,000 1,532,260
7,700 75,900 Medtronic 393,547 3,879,249
68,200 3,485,702
1,300 13,400 St. Jude Medical (1) 99,541 1,026,038
12,100 926,497
MEDICAL LABORATORY & TESTING SERVICE (0.13%)
1,700 18,800 Laboratory Corp. of America Holdings (1) 77,860 861,040
17,100 783,180
MEDICAL PRODUCTS (2.34%)
3,600 35,400 Baxter International 110,736 1,088,904
31,800 978,168
1,300 19,200 Becton Dickinson 68,250 1,008,000
17,900 939,750
17,600 188,000 Johnson & Johnson 1,027,488 10,975,440
170,400 9,947,952
2,700 24,700 Stryker 116,343 1,064,323
22,000 947,980
1,500 15,400 Zimmer Holdings (1) 116,385 1,194,886
13,900 1,078,501
MEDICAL-BIOMEDICAL/GENE (1.17%)
8,700 89,700 Amgen (1) 494,160 5,094,960
81,000 4,600,800
2,800 23,600 Biogen Idec (1) 162,848 1,372,576
20,800 1,209,728
1,300 14,200 Chiron (1) 42,146 460,364
12,900 418,218
1,200 16,600 Genentech (1) 54,636 755,798
15,400 701,162
MEDICAL-DRUGS (4.79%)
8,000 80,300 Abbott Laboratories 341,040 3,423,189
72,300 3,082,149
600 6,400 Cephalon (1) 28,602 305,088
5,800 276,486
7,200 75,200 Eli Lilly 395,352 4,129,232
68,000 3,733,880
2,800 30,400 Forest Laboratories (1) 124,880 1,355,840
27,600 1,230,960
1,300 13,300 Medimmune (1) 36,946 377,986
12,000 341,040
12,000 127,800 Merck 375,720 4,001,418
115,800 3,625,698
42,800 461,000 Pfizer 1,239,060 13,345,950
418,200 12,106,890
3,300 33,400 Schering-Plough 59,763 604,874
30,100 545,111
8,800 96,200 Wyeth 348,920 3,814,330
87,400 3,465,410
MEDICAL-GENERIC DRUGS (0.08%)
1,100 18,900 Watson Pharmaceutical (1) 30,833 529,767
17,800 498,934
MEDICAL-HMO (0.91%)
1,300 14,000 Anthem (1) 104,520 1,125,600
12,700 1,021,080
6,100 66,900 UnitedHealth Group 441,640 4,843,560
60,800 4,401,920
MEDICAL-HOSPITALS (0.14%)
2,800 24,500 HCA 102,844 899,885
21,700 797,041
MEDICAL-WHOLESALE DRUG DISTRIBUTION (0.30%)
900 11,100 AmerisourceBergen 49,536 610,944
10,200 561,408
2,900 29,600 Cardinal Health 135,575 1,383,800
26,700 1,248,225
METAL-ALUMINUM (0.31%)
5,000 61,700 Alcoa 162,500 2,005,250
56,700 1,842,750
METAL-DIVERSIFIED (0.06%)
1,100 11,400 Freeport-McMoran Copper & Gold 39,842 412,908
10,300 373,066
MISCELLANEOUS INVESTING (0.35%)
2,600 26,900 Duke-Weeks Realty 88,660 917,290
24,300 828,630
1,000 11,500 Simon Property Group 58,320 670,680
10,500 612,360
3,400 34,700 United Dominion Realty Trust 71,672 731,476
31,300 659,804
MONEY CENTER BANKS (3.08%)
18,242 198,670 Bank of America 817,059 8,898,429
180,428 8,081,370
27,588 291,828 JP Morgan Chase 1,064,897 11,264,561
264,240 10,199,664
MOTORCYCLE & MOTOR SCOOTER (0.06%)
600 6,500 Harley-Davidson 34,542 374,205
5,900 339,663
MULTI-LINE INSURANCE (2.42%)
16,400 170,700 American International Group 995,644 10,363,197
154,300 9,367,553
3,400 36,400 Hartford Financial Services Group 198,832 2,128,672
33,000 1,929,840
4,300 44,000 Prudential Financial 199,821 2,044,680
39,700 1,844,859
2,600 28,700 Safeco 120,224 1,327,088
26,100 1,206,864
MULTIMEDIA (2.21%)
800 7,800 E.W. Scripps 38,176 372,216
7,000 334,040
1,900 19,700 Gannett 157,605 1,634,115
17,800 1,476,510
1,100 13,800 McGraw-Hill 94,875 1,190,250
12,700 1,095,375
400 4,300 Meredith 19,600 210,700
3,900 191,100
37,100 370,800 Time Warner (1) 617,344 6,170,112
333,700 5,552,768
11,900 123,300 Viacom 434,231 4,499,217
111,400 4,064,986
1,300 14,900 Walt Disney 32,786 375,778
13,600 342,992
NETWORKING PRODUCTS (1.48%)
39,400 429,800 Cisco Systems (1) 756,874 8,256,458
390,400 7,499,584
3,300 35,200 Emulex (1) 34,683 369,952
31,900 335,269
2,100 22,000 Juniper Networks (1) 55,881 585,420
19,900 529,539
18,000 127,200 Lucent Technologies (1) 63,900 451,560
109,200 387,660
NON-HAZARDOUS WASTE DISPOSAL (0.11%)
100 1,000 Republic Services 3,080 30,800
900 27,720
2,200 23,400 Waste Management 62,656 666,432
21,200 603,776
OFFICE AUTOMATION & EQUIPMENT (0.09%)
1,300 14,100 Pitney Bowes 56,875 616,875
12,800 560,000
OIL & GAS DRILLING (0.31%)
500 5,500 Nabors Industries (1) 24,560 270,160
5,000 245,600
3,800 49,300 Transocean Sedco Forex (1) 133,950 1,737,825
45,500 1,603,875
OIL COMPANY-EXPLORATION & PRODUCTION (0.57%)
1,500 20,600 Anadarko Petroleum 101,175 1,389,470
19,100 1,288,295
500 5,500 Devon Energy 36,985 406,835
5,000 369,850
700 7,400 EOG Resources 46,592 492,544
6,700 445,952
1,800 18,200 Murphy Oil 144,036 1,456,364
16,400 1,312,328
OIL COMPANY-INTEGRATED (5.37%)
14,000 148,800 ChevronTexaco 742,840 7,895,328
134,800 7,152,488
4,900 50,100 ConocoPhillips 413,119 4,223,931
45,200 3,810,812
39,800 428,300 Exxon Mobil 1,958,956 21,080,926
388,500 19,121,970
1,100 10,900 Occidental Petroleum 61,413 608,547
9,800 547,134
1,300 12,900 TotalFinaElf 135,564 1,345,212
11,600 1,209,648
OIL FIELD MACHINERY & EQUIPMENT (0.20%)
1,700 19,800 FMC Technologies (1) 51,391 598,554
18,100 547,163
3,200 36,100 Grant Prideco (1) 65,792 742,216
32,900 676,424
OIL-FIELD SERVICES (0.72%)
2,600 26,200 Baker Hughes 111,358 1,122,146
23,600 1,010,788
900 6,500 BJ Services 45,900 331,500
5,600 285,600
4,900 51,500 Schlumberger 308,406 3,241,410
46,600 2,933,004
OPTICAL SUPPLIES (0.03%)
300 3,000 Bausch & Lomb 18,288 182,880
2,700 164,592
PAPER & RELATED PRODUCTS (0.69%)
700 14,200 Bowater 25,788 523,128
13,500 497,340
3,800 40,700 International Paper 146,338 1,567,357
36,900 1,421,019
2,200 33,600 MeadWestvaco 69,366 1,059,408
31,400 990,042
1,900 18,400 Potlatch 89,471 866,456
16,500 776,985
800 8,300 Weyerhaeuser 50,112 519,912
7,500 469,800
PHARMACY SERVICES (0.09%)
800 16,700 Medco Health Solutions (1) 27,128 566,297
15,900 539,169
PIPELINES (0.08%)
6,800 74,500 Dynegy (1) 33,524 367,285
67,700 333,761
1,100 11,600 Williams 13,761 145,116
10,500 131,355
PROPERTY & CASUALTY INSURANCE (1.30%)
1,200 12,900 Progressive 112,260 1,206,795
11,700 1,094,535
15,302 161,371 St. Paul 519,656 5,480,159
146,069 4,960,503
2,300 25,300 XL Capital 166,750 1,834,250
23,000 1,667,500
PUBLISHING-NEWSPAPERS (0.20%)
1,700 16,800 New York Times 68,085 672,840
15,100 604,755
100 700 Washington Post 91,500 640,500
600 549,000
REGIONAL BANKS (3.80%)
10,100 111,800 Comerica 621,251 6,876,818
101,700 6,255,567
1,700 18,800 SunTrust Banks 119,646 1,323,144
17,100 1,203,498
30,300 322,900 U.S. Bancorp 866,883 9,238,169
292,600 8,371,286
6,800 77,500 Wachovia 334,628 3,813,775
70,700 3,479,147
6,000 61,100 Wells Fargo 358,320 3,648,892
55,100 3,290,572
REINSURANCE (0.15%)
3,700 39,700 AXIS Capital Holdings 92,722 994,882
36,000 902,160
RETAIL-APPAREL & SHOE (0.68%)
3,200 33,400 Abercrombie & Fitch 125,376 1,308,612
30,200 1,183,236
3,100 32,900 Christopher & Banks 50,375 534,625
29,800 484,250
5,400 59,400 Hot Topic (1) 111,024 1,221,264
54,000 1,110,240
4,700 52,400 Ross Stores 123,469 1,376,548
47,700 1,253,079
RETAIL-AUTO PARTS (0.10%)
1,500 15,100 O'Reilly Automotive (1) 64,590 650,206
13,600 585,616
RETAIL-BUILDING PRODUCTS (1.26%)
12,900 134,700 Home Depot 529,932 5,533,476
121,800 5,003,544
4,900 48,700 Lowe's 275,772 2,740,836
43,800 2,465,064
RETAIL-CONSUMER ELECTRONICS (0.21%)
2,200 23,600 Best Buy 130,284 1,397,592
21,400 1,267,308
RETAIL-DISCOUNT (3.23%)
2,100 22,200 Dollar Tree Stores (1) 60,690 641,580
20,100 580,890
5,300 57,700 Family Dollar Stores 156,615 1,705,035
52,400 1,548,420
9,900 103,100 Target 495,198 5,157,062
93,200 4,661,864
3,700 42,400 TJX 88,726 1,016,752
38,700 928,026
22,200 234,400 Wal-Mart Stores 1,197,024 12,638,848
212,200 11,441,824
RETAIL-DRUG STORE (0.69%)
2,600 34,400 CVS 112,996 1,495,024
31,800 1,382,028
7,300 84,200 Walgreen 261,997 3,021,938
76,900 2,759,941
RETAIL-OFFICE SUPPLIES (0.11%)
2,500 25,100 Staples 74,350 746,474
22,600 672,124
RETAIL-PET FOOD & SUPPLIES (0.04%)
800 8,100 PETsMART 25,584 259,038
7,300 233,454
RETAIL-REGIONAL DEPARTMENT STORE (0.40%)
5,100 52,100 Kohl's (1) 258,876 2,644,596
47,000 2,385,720
RETAIL-RESTAURANTS (0.92%)
5,100 56,300 McDonald's 148,665 1,641,145
51,200 1,492,480
3,500 31,600 Panera Bread (1) 122,255 1,103,788
28,100 981,533
3,400 36,300 RARE Hospitality International (1) 94,214 1,005,873
32,900 911,659
2,100 23,300 Starbucks (1) 111,048 1,232,104
21,200 1,121,056
1,600 23,300 Yum! Brands 69,600 1,013,550
21,700 943,950
SATELLITE TELECOM (0.23%)
4,400 47,900 EchoStar Communications (1) 139,128 1,514,598
43,500 1,375,470
SCHOOLS (0.13%)
1,000 12,800 Apollo Group (1) 66,000 844,800
11,800 778,800
SEMICONDUCTOR COMPONENT-INTEGRATED
CIRCUITS (0.66%)
3,800 35,800 Analog Devices 152,988 1,441,308
32,000 1,288,320
3,200 35,500 Linear Technology 121,216 1,344,740
32,300 1,223,524
3,200 34,600 Maxim Integrated Products 140,768 1,522,054
31,400 1,381,286
SEMICONDUCTOR EQUIPMENT (0.50%)
9,900 105,400 Applied Materials (1) 159,390 1,696,940
95,500 1,537,550
2,100 22,700 Kla-Tencor (1) 95,613 1,033,531
20,600 937,918
1,900 20,800 Novellus Systems (1) 49,229 538,928
18,900 489,699
STEEL PRODUCERS (0.40%)
5,800 62,200 Nucor 244,934 2,626,706
56,400 2,381,772
TELECOMMUNICATION EQUIPMENT (0.71%)
900 9,300 Andrew (1) 12,582 130,014
8,400 117,432
1,100 11,200 Comverse Technology (1) 22,704 231,168
10,100 208,464
9,600 102,200 Qualcomm 401,376 4,272,982
92,600 3,871,606
TELECOMMUNICATION EQUIPMENT-FIBER
OPTICS (0.18%)
10,000 103,800 Corning (1) 114,500 1,188,510
93,800 1,074,010
TELEPHONE-INTEGRATED (2.69%)
21,900 232,100 SBC Communications 553,194 5,862,846
210,200 5,309,652
16,800 168,900 Sprint 351,960 3,538,455
152,100 3,186,495
19,900 210,100 Verizon Communications 778,090 8,214,910
190,200 7,436,820
THERAPEUTICS (0.21%)
3,800 38,800 Gilead Sciences (1) 131,594 1,343,644
35,000 1,212,050
TOBACCO (1.22%)
16,200 165,000 Altria Group 785,052 7,995,900
148,800 7,210,848
TOYS (0.14%)
4,200 42,900 Hasbro 74,298 758,901
38,700 684,603
1,000 10,700 Mattel 17,510 187,357
9,700 169,847
TRANSPORT-RAIL (0.50%)
4,600 49,400 CSX 167,900 1,803,100
44,800 1,635,200
2,100 23,000 Union Pacific 132,237 1,448,310
20,900 1,316,073
TRANSPORT-SERVICES (0.95%)
7,400 78,700 United Parcel Service 585,932 6,231,466
71,300 5,645,534
WEB PORTALS (0.65%)
700 6,600 Google (1) 133,494 1,258,654
5,900 1,125,160
8,000 82,500 Yahoo (1) 289,520 2,985,675
74,500 2,696,155
WIRELESS EQUIPMENT (0.48%)
14,500 149,300 Motorola 250,270 2,576,918
134,800 2,326,648
1,000 10,600 Spectrasite (1) 51,300 543,780
9,600 492,480
TOTAL COMMON STOCKS
60,173,007 580,291,015 640,464,022
PREFERRED STOCKS (0.23%)
MULTIMEDIA (0.23%)
4,500 47,800 News 141,480 1,361,352 1,502,832
43,300
TOTAL PREFERRED STOCKS 141,480 1,361,352 1,502,832
TREASURY BONDS (0.08%)
U.S. Treasury (2)
50,000 550,000 1.67%; 12/23/04 49,872 548,592
500,000 498,720
TOTAL TREASURY BONDS 49,872 548,592
498,720
TOTAL PORTFOLIO INVESTMENTS (98.12%) 60,364,359 582,151,087 642,515,446
Cash, receivables and other assets,
net of liabilities (1.88%)
1,283,141 11,020,695 12,303,836
TOTAL NET ASSETS (100.00%) $61,647,500 $ 593,171,782 $ 654,819,282
===============================================
<FN>
(1) Non-income producing security.
(2) Security or a portion of the security was pledged to cover margin
requirements for futures contracts.
</FN>
UNREALIZED APPRECIATION (DEPRECIATION)
The net federal income tax unrealized appreciation (depreciation) and federal
tax cost of investments held by the fund as of the period end were as follows:
Unrealized Appreciation $ 5,718,091 $ 49,969,383 $ 55,687,474
Unrealized Depreciation (2,630,539) (25,398,733) (28,029,272)
Net Unrealized Appreciation (Depreciation) 3,087,552 24,570,650 27,658,202
Cost for federal income tax purposes $57,276,807 $ 557,580,437 $ 614,857,244
Opening Current Unrealized
Contract Type Commitment Market Value Market Value Gain (Loss)
FUTURES CONTRACTS
7 S&P 500 eMini December 2004 Futures Buy $ 389,505 $ 395,605 $ 6,100
14 S&P 500 December 2004 Futures Buy $3,911,975 $ 3,956,050 $ 44,075
INVESTMENTS BY SECTOR (UNAUDITED)
Percentage of Total Value Sector Value
- ----------------------------------------------------------------------------------------------------------------------
20.28% 20.29% 20.29% Consumer, Non-cyclical $ 12,321,059 $ 118,897,094 $ 131,218,153
19.63 19.56 19.56 Financial 11,926,093 126,547,187
114,621,094
11.96 11.96 11.96 Technology 7,264,592 77,392,586
70,127,994
11.43 11.15 11.17 Communications 6,943,661 72,277,957
65,334,296
10.67 10.6 10.61 Consumer, Cyclical 6,482,260 68,638,696
62,156,436
10.32 10.37 10.36 Industrial 6,270,580 67,029,470
60,758,890
7.29 7.34 7.34 Energy 4,429,322 47,455,369
43,026,047
3.59 3.8 3.79 Basic Materials 2,184,868 24,485,416
22,300,548
3.12 3.22 3.21 Utilities 1,896,302 20,742,965
18,846,663
1.06 1.04 1.04 Government 645,622 6,727,647
6,082,025
0.65 0.67 0.67 Futures Contracts 395,605 4,351,655
3,956,050
TOTAL $ 60,759,964 $ 586,107,137 $ 646,867,101
=====================================================
<FN>
Percentages are adjusted to reflect the impact of currency contracts, futures
contracts, and swap agreements, if applicable.
See accompanying notes.
</FN>
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
PRINCIPAL COMBINED
LARGECAP LARGECAP LARGECAP
STOCK INDEX S&P 500 PRO FORMA S&P 500
FUND, INC. INDEX FUND ADJUSTMENTS INDEX FUND
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
Investment in
affiliated
securities--at cost.. $ 54,798 $ 490,837 $ -- $ 545,635
Investment in
securities--at cost.. 71,579,926 488,596,162 -- 560,176,088
------------ ------------ --------- ------------
TOTAL INVESTMENTS--AT
COST ................ $ 71,634,724 $489,086,999 $ -- $560,721,723
============ ============ ========= ============
ASSETS
Investment in
affiliated
securities--at value. $ 71,140 $ 560,472 $ -- $ 631,612
Investment in
securities--at value. 67,148,994/(c)/ 518,733,704 -- 585,882,698/(c)/
Cash.................. 17,950 100,480 -- 118,430
Receivables:
Capital Shares sold.. 17,007 1,482,859 -- 1,499,866
Dividends and
interest............ 73,921 686,967 -- 760,888
Expense reimbursement
from Manager........ 239 -- -- 239
Investment securities
sold................ 39,542 225,955 -- 265,497
Variation margin
on futures contracts. 4,725 43,875 -- 48,600
Other assets.......... 308 -- -- 308
Prepaid directors'
expenses............. 39 -- -- 39
------------ ------------ --------- ------------
Total Assets 67,373,865 521,834,312 -- 589,208,177
LIABILITIES
Accrued management and
investment advisory
fees................. 4,374 14,723 -- 19,097
Accrued administrative
service fees......... -- 7,236 -- 7,236
Accrued distribution
fees................. 2,693 30,585 -- 33,278
Accrued service fees.. -- 9,006 -- 9,006
Accrued transfer and
administrative fees.. 38,162 94,846 -- 133,008
Accrued other expenses 30,516 21,471 -- 51,987
Payables:
Capital Shares
reacquired.......... 25,146 231,143 -- 256,289
Investment securities
purchased........... -- 326,720 -- 326,720
Collateral obligation
on securities loaned,
at value............. 1,130,000 -- -- 1,130,000
------------ ------------ --------- ------------
Total Liabilities 1,230,891 735,730 -- 1,966,621
------------ ------------ --------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $ 66,142,974 $521,098,582 $ -- $587,241,556
============ ============ ========= ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $ 72,729,385 $454,205,405 $ -- $526,934,790
Accumulated
undistributed
(overdistributed) net
investment income
(operating loss)..... 354,642 5,673,190 -- 6,027,832
Accumulated
undistributed
(overdistributed) net
realized gain (loss). (2,533,588) 30,852,795 -- 28,319,207
Net unrealized
appreciation
(depreciation) of
investments.......... (4,407,465) 30,367,192 -- 25,959,727
------------ ------------ --------- ------------
Total Net Assets $ 66,142,974 $521,098,582 $ -- $587,241,556
============ ============ ========= ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 100,000,000 278,000,000 -- 278,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 91,854,400 N/A $ 91,854,400
Shares issued and
outstanding.......... 10,559,987 10,559,987
Net asset value per
share................ $ 8.70 $ 8.70
============ ============
Advisors Select: Net
Assets............... N/A $ 50,013,468 N/A $ 50,013,468
Shares issued and
outstanding.......... 5,755,211 5,755,211
Net asset value per
share................ $ 8.69 $ 8.69
============ ============
Class A: Net Assets... $ 53,384,398 N/A -- $ 53,384,398
Shares issued and
outstanding.......... 6,363,291 (205,921) 6,157,370
Net asset value per
share................ $ 8.39 -- $ 8.67
Maximum offering
price per share /(a)/ $ 8.52 -- $ 8.80
============ == ============
Class B: Net Assets... $ 12,758,576 N/A -- $ 12,758,576
Shares issued and
outstanding.......... 1,521,918 (50,341) 1,471,577
Net asset value per
share /(b)/.......... $ 8.38 -- $ 8.67
============ == ============
Class J: Net Assets... N/A $247,010,310 N/A $247,010,310
Shares issued and
outstanding.......... 28,646,150 28,646,150
Net asset value per
share /(b)/.......... $ 8.62 $ 8.62
============ ============
Institutional: Net
Assets............... N/A $ 10,203 N/A $ 10,203
Shares issued and
outstanding.......... 1,177 1,177
Net asset value per
share................ $ 8.67 $ 8.67
============ ============
Preferred: Net Assets. N/A $122,210,003 N/A $122,210,003
Shares issued and
outstanding.......... 13,960,517 13,960,517
Net asset value per
share................ $ 8.75 $ 8.75
============ ============
Select: Net Assets.... N/A $ 10,000,198 N/A $ 10,000,198
Shares issued and
outstanding.......... 1,147,016 1,147,016
Net asset value per
share................ $ 8.72 $ 8.72
============ ============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 1.50% of the offering price or 1.52% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
/(c) /Includes fair market value of securities loaned, see "Securities Lending"
in Notes to Financial Statements.
See accompanying notes.
9
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PRINCIPAL COMBINED
LARGECAP LARGECAP LARGECAP
STOCK INDEX S&P 500 PRO FORMA S&P 500
FUND, INC. INDEX FUND ADJUSTMENTS /(A)/ INDEX FUND
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Dividends from
affiliates.......... $ 713 $ 5,817 $ -- $ 6,530
Dividends............ 1,010,972 9,809,424 -- 10,820,396
Interest............. 24,346 276,642 -- 300,988
Securities lending... 933 -- -- 933
---------- ----------- --------- -----------
Total Income 1,036,964 10,091,883 -- 11,128,847
Expenses:
Management and
investment advisory
fees................ 216,322 899,740 (123,692) 992,370
Distribution fees -
Advisors Preferred.. -- 174,854 -- 174,854
Distribution fees -
Advisors Select..... -- 105,244 -- 105,244
Distribution fees -
Class A............. 75,010 -- -- 75,010
Distribution fees -
Class B............. 54,092 -- -- 54,092
Distribution fees -
Class J............. -- 1,037,666 -- 1,037,666
Distribution fees -
Select.............. -- 7,360 -- 7,360
Administrative
service fees -
Advisors Preferred.. -- 104,914 -- 104,914
Administrative
service fees -
Advisors Select..... -- 70,163 -- 70,163
Administrative
service fees -
Preferred........... -- 120,801 -- 120,801
Administrative
service fees -
Select.............. -- 9,569 -- 9,569
Registration fees -
Class A............. 11,499 -- -- 11,499
Registration fees -
Class B............. 11,750 -- -- 11,750
Registration fees -
Class J............. -- 29,472 -- 29,472
Service fees -
Advisors Preferred.. -- 118,901 -- 118,901
Service fees -
Advisors Select..... -- 87,703 -- 87,703
Service fees -
Preferred........... -- 164,728 -- 164,728
Service fees - Select -- 11,041 -- 11,041
Shareholder reports -
Class A............. 8,419 -- -- 8,419
Shareholder reports -
Class B............. 2,468 -- -- 2,468
Shareholder reports -
Class J............. -- 51,654 -- 51,654
Transfer and
administrative fees
- Class A........... 52,281 -- -- 52,281
Transfer and
administrative fees
- Class B........... 14,758 -- -- 14,758
Transfer and
administrative fees
- Class J........... -- 436,669 -- 436,669
Auditing and legal
fees................ 7,803 -- (7,803) --
Custodian fees....... 22,326 -- (22,326) --
Directors' expenses.. 1,971 -- (1,971) --
Registration fees.... 20,825 -- -- 20,825
Transfer and
administrative fees. 170,697 -- 1,129 171,826
Other expenses....... 4,023 -- (4,023) --
Other expenses -
Class J............. -- 1 -- 1
---------- ----------- --------- -----------
Total Gross Expenses. 674,244 3,430,480 (158,686) 3,946,038
Less: Reimbursement
from Manager - Class
A................... 56,476 -- (56,476) --
Less: Reimbursement
from Manager - Class
B................... 20,337 -- (20,337) --
---------- ----------- --------- -----------
Total Net Expenses 597,431 3,430,480 (81,873) 3,946,038
---------- ----------- --------- -----------
Net Investment Income
(Operating Loss) 439,533 6,661,403 81,873 7,182,809
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ 72,450 32,655,099 -- 32,727,549
Investment
transactions in
affiliates.......... 60 54,896 -- 54,956
Futures contracts.... 118,071 (767,802) -- (649,731)
Change in unrealized
appreciation/depreciation
of:
Investments........... 3,742,706 (1,386,829) -- 2,355,877
Investments in
affiliates........... 11,205 44,977 -- 56,182
Futures contracts..... (30,450) (100,992) -- (131,442)
---------- ----------- --------- -----------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies 3,914,042 30,499,349 -- 34,413,391
---------- ----------- --------- -----------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $4,353,575 $37,160,752 $ 81,873 $41,596,200
========== =========== ========= ===========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
25
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
Principal LargeCap Principal LargeCap
LargeCap S&P 500 LargeCap S&P 500
Stock Index Index Stock Index Index
Fund, Inc. Fund Combined Fund, Inc. Fund Combined
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (96.20%)
ADVERTISING AGENCIES (0.18%)
2,539 19,992 22,531 Interpublic Group (1) $31,128 $245,102 $276,230
1,125 8,868 9,993 Omnicom Group 88,763 699,685 788,448
AEROSPACE & DEFENSE (0.76%)
5,047 39,756 44,803 Boeing 251,845 1,983,824 2,235,669
2,156 16,979 19,135 Northrop Grumman 111,573 878,663 990,236
2,712 21,363 24,075 Raytheon 98,934 779,322 878,256
1,065 8,384 9,449 Rockwell Collins 37,776 297,381 335,157
AEROSPACE & DEFENSE EQUIPMENT (0.87%)
1,203 9,468 10,671 General Dynamics 122,850 966,872 1,089,722
717 5,622 6,339 Goodrich 22,105 173,326 195,431
2,674 21,070 23,744 Lockheed Martin 147,311 1,160,746 1,308,057
3,076 24,231 27,307 United Technologies 285,514 2,249,122 2,534,636
AGRICULTURAL OPERATIONS (0.10%)
1,606 12,646 14,252 Monsanto 68,657 540,616 609,273
AIRLINES (0.12%)
758 5,948 6,706 Delta Air Lines (1) (2) 4,131 32,417 36,548
4,751 37,424 42,175 Southwest Airlines 74,923 590,176 665,099
APPAREL MANUFACTURERS (0.21%)
1,132 8,912 10,044 Coach (1) 52,785 415,567 468,352
749 5,905 6,654 Jones Apparel Group 26,440 208,446 234,886
647 5,101 5,748 Liz Claiborne 26,449 208,529 234,978
664 5,221 5,885 VF 35,743 281,046 316,789
APPLIANCES (0.05%)
475 3,737 4,212 Maytag (2) 8,265 65,024 73,289
399 3,145 3,544 Whirlpool 23,441 184,769 208,210
APPLICATIONS SOFTWARE (2.99%)
1,018 8,010 9,028 Citrix Systems (1) 24,564 193,281 217,845
2,322 18,290 20,612 Compuware (1) 13,444 105,899 119,343
1,152 9,071 10,223 Intuit (1) 52,255 411,461 463,716
562 4,411 4,973 Mercury Interactive (1) 24,408 191,570 215,978
65,364 514,953 580,317 Microsoft 1,829,538 14,413,534 16,243,072
1,634 12,746 14,380 Parametric Technology (1) 8,480 66,152 74,632
3,039 23,941 26,980 Siebel Systems (1) 28,871 227,439 256,310
ATHLETIC FOOTWEAR (0.21%)
1,584 12,472 14,056 Nike 128,795 1,014,098 1,142,893
355 2,801 3,156 Reebok International 13,135 103,637 116,772
AUTO-CARS & LIGHT TRUCKS (0.41%)
11,001 86,662 97,663 Ford Motor 143,343 1,129,206 1,272,549
3,395 26,747 30,142 General Motors 130,877 1,031,097 1,161,974
AUTO-MEDIUM & HEAVY DUTY TRUCKS (0.13%)
420 3,305 3,725 Navistar International (1) 14,511 114,188 128,699
1,043 8,220 9,263 Paccar 72,290 569,728 642,018
AUTO/TRUCK PARTS & EQUIPMENT-
ORIGINAL (0.07%)
899 7,072 7,971 Dana 13,404 105,444 118,848
3,374 26,579 29,953 Delphi Automotive Systems 28,375 223,529 251,904
790 6,136 6,926 Visteon 5,617 43,627 49,244
BEVERAGES-NON-ALCOHOLIC (1.80%)
14,587 114,914 129,501 Coca-Cola 593,108 4,672,403 5,265,511
2,820 22,212 25,032 Coca-Cola Enterprises 58,966 464,453 523,419
1,528 12,046 13,574 Pepsi Bottling Group 42,845 337,770 380,615
10,183 80,232 90,415 Pepsico 504,873 3,977,903 4,482,776
BEVERAGES-WINE & SPIRITS (0.05%)
731 5,752 6,483 Brown-Forman 32,822 258,265 291,087
BREWERY (0.39%)
227 1,769 1,996 Adolph Coors 15,141 117,992 133,133
4,816 37,936 42,752 Anheuser-Busch 240,559 1,894,903 2,135,462
BROADCASTING SERVICES &
PROGRAMMING (0.18%)
3,547 27,944 31,491 Clear Channel Communications 118,470 933,330 1,051,800
BUILDING & CONSTRUCTION PRODUCTS-
MISCELLANEOUS (0.18%)
2,605 20,520 23,125 Masco 89,247 703,015 792,262
616 4,842 5,458 Vulcan Materials 30,665 241,035 271,700
BUILDING PRODUCTS-AIR & HEATING (0.07%)
1,286 10,130 11,416 American Standard (1) 47,029 370,454 417,483
BUILDING-MAINTENANCE & SERVICE (0.08%)
1,548 12,192 13,740 Ecolab 52,400 412,699 465,099
BUILDING-RESIDENTIAL & COMMERCIAL (0.16%)
743 5,852 6,595 Centex 38,591 303,953 342,544
278 2,192 2,470 KB Home 22,866 180,292 203,158
763 6,010 6,773 Pulte 41,873 329,829 371,702
CABLE TV (0.60%)
13,435 105,846 119,281 Comcast (1) 396,332 3,122,457 3,518,789
CASINO HOTELS (0.06%)
672 5,301 5,973 Harrah's Entertainment 39,325 310,215 349,540
CASINO SERVICES (0.10%)
2,071 16,322 18,393 International Game Technology 68,426 539,279 607,705
CELLULAR TELECOMMUNICATIONS (0.27%)
6,694 52,739 59,433 Nextel Communications (1) 177,324 1,397,056 1,574,380
CHEMICALS-DIVERSIFIED (0.96%)
5,648 44,493 50,141 Dow Chemical 253,821 1,999,515 2,253,336
6,000 47,261 53,261 E. I. Du Pont de Nemours 257,220 2,026,079 2,283,299
1,033 8,135 9,168 PPG Industries 65,854 518,606 584,460
1,350 10,625 11,975 Rohm & Haas 57,226 450,394 507,620
CHEMICALS-SPECIALTY (0.13%)
472 3,687 4,159 Eastman Chemical 22,406 175,022 197,428
748 5,890 6,638 Engelhard 21,168 166,687 187,855
309 2,405 2,714 Great Lakes Chemical 7,917 61,616 69,533
670 5,293 5,963 Hercules (1) 9,568 75,584 85,152
416 3,272 3,688 Sigma-Aldrich 23,146 182,054 205,200
CIRCUIT BOARDS (0.04%)
1,209 9,517 10,726 Jabil Circuit (1) 29,391 231,358 260,749
COATINGS & PAINT (0.06%)
856 6,742 7,598 Sherwin-Williams 36,568 288,018 324,586
COMMERCIAL BANKS (1.06%)
2,127 16,753 18,880 AmSouth Bancorp 56,131 442,112 498,243
3,333 26,258 29,591 BB&T 137,020 1,079,466 1,216,486
743 5,848 6,591 First Horizon National 32,157 253,101 285,258
704 5,545 6,249 M&T Bank 72,512 571,135 643,647
1,340 10,553 11,893 Marshall & Ilsley 56,240 442,909 499,149
1,873 14,755 16,628 North Fork Bancorp 82,599 650,696 733,295
2,778 21,885 24,663 Regions Financial 97,452 767,726 865,178
2,001 15,764 17,765 SouthTrust 87,184 686,837 774,021
1,858 14,653 16,511 Synovus Financial 50,519 398,415 448,934
539 4,239 4,778 Zions Bancorp 35,666 280,495 316,161
COMMERCIAL SERVICE-FINANCE (0.34%)
304 2,368 2,672 Deluxe 11,579 90,197 101,776
819 6,451 7,270 Equifax 21,417 168,694 190,111
991 7,808 8,799 H&R Block 47,122 371,271 418,393
889 7,009 7,898 Moody's 69,173 545,370 614,543
2,274 17,907 20,181 Paychex 74,574 587,242 661,816
COMMERCIAL SERVICES (0.02%)
857 6,750 7,607 Convergys (1) 11,150 87,818 98,968
COMPUTER AIDED DESIGN (0.05%)
683 5,375 6,058 Autodesk 36,028 283,531 319,559
COMPUTER SERVICES (0.35%)
769 6,060 6,829 Affiliated Computer Services (1) 41,949 330,573 372,522
1,135 8,937 10,072 Computer Sciences (1) 56,375 443,901 500,276
3,081 24,266 27,347 Electronic Data Systems 65,533 516,138 581,671
1,734 13,658 15,392 Sungard Data Systems (1) 45,934 361,800 407,734
2,014 15,858 17,872 Unisys (1) 21,389 168,412 189,801
COMPUTERS (2.22%)
2,331 18,373 20,704 Apple Computer (1) 122,447 965,134 1,087,581
2,241 17,651 19,892 Gateway (1) 13,110 103,258 116,368
18,154 143,028 161,182 Hewlett-Packard 338,754 2,668,903 3,007,657
10,071 79,340 89,411 International Business Machines 903,872 7,120,765 8,024,637
19,996 157,529 177,525 Sun Microsystems (1) 90,582 713,606 804,188
COMPUTERS-INTEGRATED SYSTEMS (0.84%)
15,008 118,244 133,252 Dell (1) 526,181 4,145,635 4,671,816
567 4,461 5,028 NCR (1) 31,950 251,377 283,327
COMPUTERS-MEMORY DEVICES (0.37%)
14,455 113,890 128,345 EMC (1) 186,036 1,465,765 1,651,801
2,603 20,498 23,101 Veritas Software (1) 56,953 448,496 505,449
COMPUTERS-PERIPHERAL EQUIPMENT (0.10%)
779 6,133 6,912 Lexmark International (1) 64,743 509,714 574,457
CONSUMER PRODUCTS-MISCELLANEOUS (0.20%)
1,282 10,089 11,371 Clorox 69,997 550,860 620,857
865 6,821 7,686 Fortune Brands 62,990 496,705 559,695
CONTAINERS-METAL & GLASS (0.04%)
676 5,321 5,997 Ball 26,939 212,042 238,981
CONTAINERS-PAPER & PLASTIC (0.10%)
643 5,063 5,706 Bemis 17,020 134,017 151,037
903 7,117 8,020 Pactiv (1) 21,392 168,602 189,994
505 3,976 4,481 Sealed Air (1) 25,018 196,971 221,989
COSMETICS & TOILETRIES (2.28%)
546 4,295 4,841 Alberto-Culver 24,494 192,674 217,168
2,844 22,395 25,239 Avon Products 112,480 885,722 998,202
3,193 25,152 28,345 Colgate-Palmolive 142,472 1,122,282 1,264,754
6,024 47,449 53,473 Gillette 249,875 1,968,185 2,218,060
567 4,462 5,029 International Flavors & Fragrances 22,141 174,241 196,382
2,972 23,420 26,392 Kimberly-Clark 177,339 1,397,471 1,574,810
15,282 120,404 135,686 Procter & Gamble 782,133 6,162,277 6,944,410
CRUISE LINES (0.29%)
3,806 29,983 33,789 Carnival 192,431 1,515,940 1,708,371
DATA PROCESSING & MANAGEMENT (0.62%)
3,511 27,666 31,177 Automatic Data Processing 152,342 1,200,428 1,352,770
5,154 40,611 45,765 First Data 212,757 1,676,422 1,889,179
1,174 9,248 10,422 Fiserv (1) 41,724 328,674 370,398
DISPOSABLE MEDICAL PRODUCTS (0.05%)
631 4,964 5,595 C.R. Bard 35,841 281,955 317,796
DISTRIBUTION-WHOLESALE (0.11%)
1,052 8,287 9,339 Genuine Parts 41,964 330,568 372,532
547 4,310 4,857 W.W. Grainger 32,049 252,523 284,572
DIVERSIFIED MANUFACTURING
OPERATIONS (5.45%)
4,706 37,069 41,775 3M 365,044 2,875,442 3,240,486
569 4,484 5,053 Cooper Industries 36,359 286,528 322,887
355 2,794 3,149 Crane 9,894 77,869 87,763
1,853 14,599 16,452 Danaher 102,156 804,843 906,999
1,223 9,629 10,852 Dover 48,027 378,131 426,158
911 7,174 8,085 Eaton 58,258 458,777 517,035
63,473 500,060 563,533 General Electric (3) 2,165,699 17,062,047 19,227,746
5,168 40,710 45,878 Honeywell International 174,058 1,371,113 1,545,171
1,817 14,315 16,132 Illinois Tool Works 167,673 1,320,988 1,488,661
555 4,370 4,925 ITT Industries 45,033 354,582 399,615
833 6,564 7,397 Textron 56,769 447,336 504,105
12,077 95,140 107,217 Tyco International 376,199 2,963,611 3,339,810
DIVERSIFIED OPERATORS-COMMERCIAL
SERVICES (0.20%)
6,346 49,999 56,345 Cendant 130,664 1,029,479 1,160,143
DRUG DELIVERY SYSTEMS (0.05%)
939 7,390 8,329 Hospira (1) 29,963 235,815 265,778
E-COMMERCE-SERVICES (0.62%)
3,974 31,306 35,280 eBay (1) 387,902 3,055,779 3,443,681
714 5,617 6,331 Monster Worldwide (1) 20,028 157,557 177,585
ELECTRIC PRODUCTS-MISCELLANEOUS (0.30%)
2,526 19,898 22,424 Emerson Electric 161,790 1,274,467 1,436,257
1,140 8,981 10,121 Molex 33,710 265,568 299,278
ELECTRIC-GENERATION (0.06%)
3,884 30,615 34,499 AES (1) 42,336 333,704 376,040
ELECTRIC-INTEGRATED (2.61%)
824 6,493 7,317 Allegheny Energy (1) (2) 15,087 118,887 133,974
1,168 9,201 10,369 Ameren 56,064 441,648 497,712
2,379 18,738 21,117 American Electric Power 78,340 617,042 695,382
1,850 14,565 16,415 CenterPoint Energy (2) 19,444 153,078 172,522
1,086 8,552 9,638 Cinergy 42,919 337,975 380,894
1,141 8,987 10,128 CMS Energy (1) 10,680 84,118 94,798
1,452 11,435 12,887 Consolidated Edison 63,089 496,851 559,940
1,054 8,309 9,363 Constellation Energy Group 42,814 337,512 380,326
1,986 15,639 17,625 Dominion Resources 127,740 1,005,901 1,133,641
1,044 8,227 9,271 DTE Energy 44,589 351,375 395,964
5,637 44,414 50,051 Duke Energy 138,276 1,089,475 1,227,751
1,959 15,430 17,389 Edison International 59,750 470,615 530,365
1,364 10,746 12,110 Entergy 89,151 702,359 791,510
3,969 31,265 35,234 Exelon 157,252 1,238,719 1,395,971
1,983 15,621 17,604 FirstEnergy 81,957 645,616 727,573
1,115 8,773 9,888 FPL Group 76,824 604,460 681,284
1,585 12,478 14,063 NiSource 33,998 267,653 301,651
2,410 18,987 21,397 PG&E (1) 77,216 608,343 685,559
549 4,324 4,873 Pinnacle West Capital 23,398 184,289 207,687
1,137 8,946 10,083 PPL 59,124 465,192 524,316
1,484 11,688 13,172 Progress Energy 61,289 482,714 544,003
1,426 11,235 12,661 Public Service Enterprise Group 60,733 478,499 539,232
4,438 34,961 39,399 Southern 140,196 1,104,418 1,244,614
1,195 9,414 10,609 TECO Energy 16,730 131,796 148,526
1,784 14,056 15,840 TXU 109,217 860,508 969,725
2,404 18,936 21,340 XCEL Energy 41,108 323,806 364,914
ELECTRICAL COMPONENTS & EQUIPMENT (0.01%)
510 3,970 4,480 Power-One (1) 3,580 27,869 31,449
ELECTRONIC COMPONENTS-MISCELLANEOUS (0.08%
3,133 24,682 27,815 Sanmina (1) 25,064 197,456 222,520
5,782 45,546 51,328 Solectron (1) 30,182 237,750 267,932
ELECTRONIC COMPONENTS-
SEMICONDUCTOR (2.20%)
2,135 16,809 18,944 Advanced Micro Devices (1) 35,911 282,727 318,638
2,234 17,606 19,840 Altera (1) 50,779 400,184 450,963
1,901 14,830 16,731 Applied Micro Circuits (1) 6,920 53,981 60,901
1,936 15,253 17,189 Broadcom (1) 52,369 412,594 464,963
38,564 303,827 342,391 Intel 858,435 6,763,189 7,621,624
2,330 18,229 20,559 LSI Logic (1) 10,601 82,942 93,543
3,677 28,960 32,637 Micron Technology (1) (2) 44,786 352,733 397,519
2,154 16,959 19,113 National Semiconductor (1) 35,972 283,215 319,187
1,001 7,887 8,888 Nvidia (1) 14,484 114,125 128,609
1,065 8,380 9,445 PMC - Sierra (1) 10,927 85,979 96,906
555 4,374 4,929 QLogic (1) 18,037 142,155 160,192
10,407 81,987 92,394 Texas Instruments 254,451 2,004,582 2,259,033
2,087 16,438 18,525 Xilinx 63,862 503,003 566,865
ELECTRONIC FORMS (0.12%)
1,442 11,356 12,798 Adobe Systems 80,795 636,277 717,072
ELECTRONIC MEASUREMENT
INSTRUMENTS (0.14%)
2,919 22,999 25,918 Agilent Technologies (1) 73,150 576,355 649,505
551 4,339 4,890 Tektronix 16,712 131,602 148,314
ENGINEERING-RESEARCH & DEVELOPMENT
SERVICES (0.04%)
502 3,950 4,452 Fluor 23,313 183,438 206,751
ENGINES-INTERNAL COMBUSTION (0.03%)
266 2,097 2,363 Cummins Engine 18,641 146,958 165,599
ENTERPRISE SOFTWARE & SERVICE (0.88%)
1,342 10,565 11,907 BMC Software (1) 25,391 199,890 225,281
3,519 27,722 31,241 Computer Associates International 97,512 768,176 865,688
2,326 18,313 20,639 Novell (1) 16,724 131,670 148,394
31,085 244,898 275,983 Oracle (1) 393,536 3,100,409 3,493,945
2,207 17,375 19,582 Peoplesoft (1) 45,839 360,879 406,718
ENTERTAINMENT SOFTWARE (0.12%)
1,827 14,382 16,209 Electronic Arts (1) 82,069 646,039 728,108
FIDUCIARY BANKS (0.56%)
4,677 36,848 41,525 Bank of New York 151,815 1,196,086 1,347,901
2,549 20,081 22,630 Mellon Financial 73,666 580,341 654,007
1,322 10,410 11,732 Northern Trust 56,238 442,842 499,080
2,022 15,925 17,947 State Street 91,091 717,421 808,512
FILTRATION & SEPARATION PRODUCTS (0.03%)
753 5,924 6,677 Pall 19,473 153,195 172,668
FINANCE-COMMERCIAL (0.08%)
1,271 10,016 11,287 CIT Group 51,348 404,646 455,994
FINANCE-CONSUMER LOANS (0.18%)
2,620 20,648 23,268 SLM 118,581 934,528 1,053,109
FINANCE-CREDIT CARD (1.11%)
7,621 60,045 67,666 American Express 404,446 3,186,588 3,591,034
1,452 11,438 12,890 Capital One Financial 107,100 843,667 950,767
7,682 60,512 68,194 MBNA 196,890 1,550,923 1,747,813
1,760 13,862 15,622 Providian Financial (1) 27,368 215,554 242,922
FINANCE-INVESTMENT BANKER &
BROKER (3.90%)
619 4,881 5,500 Bear Stearns 58,650 462,475 521,125
8,215 64,719 72,934 Charles Schwab 75,167 592,179 667,346
31,142 245,348 276,490 Citigroup 1,381,771 10,886,091 12,267,862
2,922 23,015 25,937 Goldman Sachs Group 287,466 2,264,216 2,551,682
1,631 12,850 14,481 Lehman Brothers Holdings 133,987 1,055,627 1,189,614
5,647 44,494 50,141 Merrill Lynch 304,599 2,400,006 2,704,605
6,604 52,023 58,627 Morgan Stanley 337,399 2,657,855 2,995,254
FINANCE-MORTGAGE LOAN/BANKER (1.20%)
3,386 26,669 30,055 Countrywide Credit Industries 108,115 851,541 959,656
4,130 32,537 36,667 Federal Home Loan Mortgage 275,058 2,166,965 2,442,023
5,819 45,841 51,660 Federal National Mortgage Association 408,203 3,215,746 3,623,949
FINANCIAL GUARANTEE INSURANCE (0.21%)
652 5,136 5,788 Ambac Financial Group 50,895 400,916 451,811
860 6,783 7,643 MBIA 49,760 392,464 442,224
593 4,666 5,259 MGIC Investment 38,136 300,071 338,207
FOOD-CONFECTIONERY (0.25%)
1,480 11,663 13,143 Hershey Foods 75,021 591,197 666,218
1,352 10,644 11,996 Wm. Wrigley Jr. 88,421 696,118 784,539
FOOD-FLOUR & GRAIN (0.11%)
3,914 30,829 34,743 Archer Daniels Midland 75,814 597,158 672,972
FOOD-MISCELLANEOUS/DIVERSIFIED (0.87%)
2,468 19,440 21,908 Campbell Soup 66,241 521,770 588,011
3,178 25,026 28,204 ConAgra Foods 83,899 660,686 744,585
2,286 18,006 20,292 General Mills 101,155 796,765 897,920
2,100 16,550 18,650 H.J. Heinz 76,335 601,593 677,928
2,486 19,579 22,065 Kellogg 106,898 841,897 948,795
825 6,491 7,316 McCormick 29,230 229,976 259,206
4,770 37,570 42,340 Sara Lee 111,046 874,630 985,676
FOOD-RETAIL (0.26%)
2,211 17,419 19,630 Albertson's 50,433 397,327 447,760
4,444 35,005 39,449 Kroger (1) 67,149 528,926 596,075
2,687 21,166 23,853 Safeway (1) 49,011 386,068 435,079
866 6,727 7,593 Winn-Dixie Stores (2) 2,979 23,141 26,120
FOOD-WHOLESALE & DISTRIBUTION (0.22%)
822 6,439 7,261 Supervalu 24,241 189,886 214,127
3,844 30,284 34,128 Sysco 124,046 977,265 1,101,311
FORESTRY (0.06%)
1,103 8,681 9,784 Plum Creek Timber 40,028 315,033 355,061
GAS-DISTRIBUTION (0.16%)
964 7,586 8,550 KeySpan 38,512 303,060 341,572
265 2,086 2,351 Nicor (2) 9,943 78,267 88,210
229 1,782 2,011 Peoples Energy (2) 9,796 76,234 86,030
1,394 10,978 12,372 Sempra Energy 46,755 368,202 414,957
GOLD MINING (0.19%)
2,666 20,998 23,664 Newmont Mining 126,688 997,825 1,124,513
HEALTH CARE COST CONTAINMENT (0.20%)
2,800 22,069 24,869 Caremark Rx (1) 83,916 661,408 745,324
1,765 13,904 15,669 McKesson 47,055 370,681 417,736
HOME DECORATION PRODUCTS (0.05%)
1,653 13,019 14,672 Newell Rubbermaid 35,639 280,690 316,329
1,153 9,078 10,231 HOME FURNISHINGS (0.05%)
Leggett & Platt 32,434 255,364 287,798
HOTELS & MOTELS (0.27%)
2,315 18,231 20,546 Hilton Hotels 46,069 362,797 408,866
1,378 10,840 12,218 Marriott International 75,087 590,672 665,759
1,252 9,858 11,110 Starwood Hotels & Resorts Worldwide 59,758 470,522 530,280
HUMAN RESOURCES (0.04%)
1,036 8,160 9,196 Robert Half International 27,485 216,485 243,970
IDENTIFICATION SYSTEM-DEVELOPMENT (0.03%)
1,439 11,335 12,774 Symbol Technologies 21,139 166,511 187,650
INDEPENDENT POWER PRODUCER (0.01%)
3,203 25,234 28,437 Calpine (1) 7,975 62,833 70,808
INDUSTRIAL AUTOMATION & ROBOTS (0.07%)
1,108 8,729 9,837 Rockwell International 46,193 363,912 410,105
INDUSTRIAL GASES (0.23%)
1,367 10,764 12,131 Air Products & Chemicals 72,697 572,429 645,126
1,954 15,388 17,342 Praxair 82,459 649,374 731,833
INSTRUMENTS-CONTROLS (0.22%)
1,144 9,010 10,154 Johnson Controls 65,609 516,724 582,333
718 5,656 6,374 Parker Hannifin 50,712 399,483 450,195
981 7,732 8,713 Thermo Electron (1) 28,449 224,228 252,677
INSTRUMENTS-SCIENTIFIC (0.18%)
1,214 9,558 10,772 Applied Biosystems Group 23,163 182,367 205,530
691 5,443 6,134 Fisher Scientific International (1) 39,636 312,210 351,846
301 2,348 2,649 Millipore (1) 13,843 107,985 121,828
771 6,068 6,839 PerkinElmer 15,836 124,637 140,473
711 5,598 6,309 Waters (1) 29,357 231,141 260,498
INSURANCE BROKERS (0.19%)
1,899 14,958 16,857 Aon 38,759 305,293 344,052
3,131 24,657 27,788 Marsh & McLennan 86,603 682,012 768,615
INTERNET BROKERS (0.04%)
2,244 17,678 19,922 E*trade Group (1) 28,948 228,046 256,994
INTERNET SECURITY (0.16%)
1,895 14,926 16,821 Symantec (1) 107,901 849,886 957,787
INVESTMENT MANAGEMENT & ADVISORY
SERVICES (0.26%)
652 5,133 5,785 Federated Investors 18,902 148,806 167,708
1,499 11,810 13,309 Franklin Resources 90,869 715,922 806,791
1,440 11,336 12,776 Janus Capital Group 21,960 172,874 194,834
765 6,027 6,792 T. Rowe Price Group 42,664 336,126 378,790
LEISURE & RECREATION PRODUCTS (0.04%)
577 4,527 5,104 Brunswick 27,073 212,407 239,480
LIFE & HEALTH INSURANCE (0.49%)
3,049 24,019 27,068 Aflac 109,398 861,802 971,200
820 6,463 7,283 Jefferson-Pilot 39,598 312,098 351,696
1,058 8,334 9,392 Lincoln National 46,340 365,029 411,369
1,884 14,843 16,727 Principal Financial Group (4) 71,140 560,472 631,612
659 5,194 5,853 Torchmark 35,599 280,580 316,179
1,782 14,038 15,820 UnumProvident 24,342 191,759 216,101
LINEN SUPPLY & RELATED ITEMS (0.07%)
1,029 8,107 9,136 Cintas 44,391 349,736 394,127
MACHINERY-CONSTRUCTION & MINING (0.25%)
2,061 16,232 18,293 Caterpillar 165,993 1,307,325 1,473,318
MACHINERY-FARM (0.14%)
1,493 11,752 13,245 Deere 89,252 702,535 791,787
MACHINERY-GENERAL INDUSTRY (0.11%)
1,043 8,208 9,251 Ingersoll-Rand 71,383 561,756 633,139
MEDICAL INFORMATION SYSTEM (0.05%)
1,406 11,075 12,481 IMS Health 29,779 234,569 264,348
MEDICAL INSTRUMENTS (1.25%)
1,527 12,030 13,557 Biomet 71,280 561,560 632,840
5,063 39,886 44,949 Boston Scientific (1) 178,724 1,407,976 1,586,700
1,892 14,898 16,790 Guidant 126,045 992,505 1,118,550
7,271 57,280 64,551 Medtronic 371,621 2,927,581 3,299,202
1,065 8,382 9,447 St. Jude Medical (1) 81,547 641,809 723,356
MEDICAL LABORATORY & TESTING
SERVICE (0.08%)
612 4,825 5,437 Quest Diagnostics 53,574 422,381 475,955
MEDICAL PRODUCTS (2.20%)
3,697 29,117 32,814 Baxter International 113,720 895,639 1,009,359
1,506 11,866 13,372 Becton Dickinson 79,065 622,965 702,030
17,843 140,576 158,419 Johnson & Johnson 1,041,674 8,206,827 9,248,501
2,413 19,003 21,416 Stryker 103,976 818,839 922,815
1,473 11,605 13,078 Zimmer Holdings (1) 114,290 900,432 1,014,722
MEDICAL-BIOMEDICAL/GENE (1.00%)
7,612 59,961 67,573 Amgen (1) 432,362 3,405,785 3,838,147
2,035 16,026 18,061 Biogen Idec (1) 118,356 932,072 1,050,428
1,129 8,890 10,019 Chiron (1) 36,602 288,214 324,816
1,371 10,797 12,168 Genzyme (1) 71,936 566,518 638,454
MEDICAL-DRUGS (5.25%)
9,386 73,939 83,325 Abbott Laboratories 400,125 3,152,019 3,552,144
792 6,238 7,030 Allergan 56,676 446,391 503,067
11,695 92,127 103,822 Bristol-Myers Squibb 274,014 2,158,536 2,432,550
6,797 53,546 60,343 Eli Lilly 373,223 2,940,211 3,313,434
2,227 17,536 19,763 Forest Laboratories (1) 99,324 782,106 881,430
1,452 11,440 12,892 King Pharmaceuticals (1) 15,841 124,810 140,651
1,499 11,804 13,303 Medimmune (1) 42,602 335,470 378,072
13,338 105,082 118,420 Merck 417,613 3,290,117 3,707,730
45,392 357,620 403,012 Pfizer 1,314,098 10,353,099 11,667,197
8,851 69,734 78,585 Schering-Plough 160,292 1,262,883 1,423,175
8,019 63,171 71,190 Wyeth 317,953 2,504,730 2,822,683
MEDICAL-GENERIC DRUGS (0.07%)
1,616 12,727 14,343 Mylan Laboratories (2) 27,827 219,159 246,986
659 5,183 5,842 Watson Pharmaceutical (1) 18,472 145,279 163,751
MEDICAL-HMO (0.84%)
924 7,272 8,196 Aetna 87,780 690,840 778,620
840 6,611 7,451 Anthem (1) 67,536 531,524 599,060
958 7,548 8,506 Humana (1) 18,346 144,544 162,890
3,996 31,481 35,477 UnitedHealth Group 289,310 2,279,225 2,568,535
945 7,438 8,383 Wellpoint Health Networks (1) 92,289 726,395 818,684
MEDICAL-HOSPITALS (0.25%)
2,902 22,859 25,761 HCA 106,591 839,611 946,202
1,464 11,527 12,991 Health Management Associates 30,246 238,148 268,394
2,802 22,076 24,878 Tenet Healthcare (1) 30,037 236,655 266,692
MEDICAL-NURSING HOMES (0.03%)
525 4,141 4,666 Manor Care 17,189 135,576 152,765
MEDICAL-WHOLESALE DRUG
DISTRIBUTION (0.24%)
676 5,324 6,000 AmerisourceBergen 37,207 293,033 330,240
2,587 20,384 22,971 Cardinal Health 120,942 952,952 1,073,894
METAL PROCESSORS & FABRICATION (0.02%)
529 4,134 4,663 Worthington Industries 10,501 82,060 92,561
METAL-ALUMINUM (0.26%)
5,230 41,196 46,426 Alcoa 169,975 1,338,870 1,508,845
METAL-COPPER (0.08%)
566 4,451 5,017 Phelps Dodge 49,548 389,641 439,189
METAL-DIVERSIFIED (0.06%)
1,065 8,384 9,449 Freeport-McMoran Copper & Gold 38,574 303,668 342,242
MISCELLANEOUS INVESTING (0.40%)
573 4,482 5,055 Apartment Investment & Management 21,023 164,444 185,467
2,422 19,082 21,504 Equity Office Properties Trust 68,107 536,586 604,693
1,687 13,292 14,979 Equity Residential Properties Trust 56,262 443,288 499,550
1,093 8,610 9,703 Prologis Trust 42,605 335,618 378,223
1,329 10,471 11,800 Simon Property Group 77,507 610,669 688,176
MONEY CENTER BANKS (2.91%)
24,454 192,650 217,104 Bank of America 1,095,295 8,628,794 9,724,089
21,414 168,704 190,118 JP Morgan Chase 826,580 6,511,974 7,338,554
MOTORCYCLE & MOTOR SCOOTER (0.15%)
1,775 13,975 15,750 Harley-Davidson 102,187 804,541 906,728
MULTI-LINE INSURANCE (2.67%)
4,166 32,820 36,986 Allstate 200,343 1,578,314 1,778,657
15,663 123,396 139,059 American International Group 950,901 7,491,371 8,442,272
827 6,513 7,340 Cigna 52,482 413,315 465,797
1,012 7,971 8,983 Cincinnati Financial 42,251 332,789 375,040
1,763 13,885 15,648 Hartford Financial Services Group 103,100 811,995 915,095
1,116 8,784 9,900 Loews 66,848 526,162 593,010
4,509 35,527 40,036 MetLife 172,920 1,362,460 1,535,380
3,120 24,580 27,700 Prudential Financial 144,986 1,142,233 1,287,219
757 5,963 6,720 Safeco 35,004 275,729 310,733
MULTIMEDIA (2.11%)
1,599 12,603 14,202 Gannett 132,637 1,045,419 1,178,056
1,142 8,998 10,140 McGraw-Hill 98,498 776,078 874,576
303 2,379 2,682 Meredith 14,847 116,571 131,418
27,489 216,560 244,049 Time Warner (1) 457,417 3,603,558 4,060,975
10,430 82,167 92,597 Viacom 380,591 2,998,274 3,378,865
12,352 97,309 109,661 Walt Disney 311,517 2,454,133 2,765,650
NETWORKING PRODUCTS (1.40%)
40,648 320,238 360,886 Cisco Systems (1) 780,848 6,151,772 6,932,620
25,908 204,105 230,013 Lucent Technologies (1) (2) 91,973 724,573 816,546
2,150 16,939 19,089 Network Appliance (1) 52,611 414,497 467,108
NON-HAZARDOUS WASTE DISPOSAL (0.17%)
1,914 15,070 16,984 Allied Waste Industries (1) 15,618 122,971 138,589
3,487 27,463 30,950 Waste Management 99,310 782,146 881,456
OFFICE AUTOMATION & EQUIPMENT (0.20%)
1,390 10,946 12,336 Pitney Bowes 60,812 478,887 539,699
5,044 39,741 44,785 Xerox (1) 74,500 586,975 661,475
OFFICE SUPPLIES & FORMS (0.06%)
665 5,231 5,896 Avery Dennison 40,459 318,254 358,713
OIL & GAS DRILLING (0.25%)
895 7,045 7,940 Nabors Industries (1) 43,963 346,050 390,013
806 6,341 7,147 Noble (1) 36,818 289,657 326,475
645 5,058 5,703 Rowan (1) 16,467 129,131 145,598
1,929 15,195 17,124 Transocean Sedco Forex (1) 67,997 535,624 603,621
OIL COMPANY-EXPLORATION &
PRODUCTION (0.77%)
1,505 11,850 13,355 Anadarko Petroleum 101,512 799,283 900,795
1,960 15,439 17,399 Apache 99,372 782,757 882,129
2,373 18,696 21,069 Burlington Resources 98,479 775,884 874,363
1,454 11,449 12,903 Devon Energy 107,552 846,883 954,435
710 5,581 6,291 EOG Resources 47,258 371,471 418,729
908 7,151 8,059 Kerr-McGee 53,772 423,482 477,254
OIL COMPANY-INTEGRATED (4.95%)
549 4,316 4,865 Amerada Hess 44,310 348,344 392,654
12,806 100,888 113,694 ChevronTexaco 679,486 5,353,117 6,032,603
4,141 32,619 36,760 ConocoPhillips 349,128 2,750,108 3,099,236
39,109 308,114 347,223 Exxon Mobil 1,924,945 15,165,371 17,090,316
2,081 16,389 18,470 Marathon Oil 79,307 624,585 703,892
2,355 18,551 20,906 Occidental Petroleum 131,479 1,035,702 1,167,181
1,592 12,538 14,130 Unocal 66,466 523,462 589,928
OIL REFINING & MARKETING (0.19%)
429 3,365 3,794 Ashland 24,719 193,891 218,610
453 3,567 4,020 Sunoco 33,685 265,242 298,927
1,536 12,109 13,645 Valero Energy 66,002 520,324 586,326
OIL-FIELD SERVICES (0.69%)
2,007 15,806 17,813 Baker Hughes 85,960 676,971 762,931
972 7,649 8,621 BJ Services 49,572 390,099 439,671
2,655 20,911 23,566 Halliburton 98,341 774,543 872,884
3,551 27,967 31,518 Schlumberger 223,500 1,760,243 1,983,743
OPTICAL SUPPLIES (0.03%)
320 2,518 2,838 Bausch & Lomb 19,507 153,497 173,004
PAPER & RELATED PRODUCTS (0.52%)
530 4,169 4,699 Boise Cascade 15,646 123,069 138,715
1,554 12,226 13,780 Georgia-Pacific 53,753 422,897 476,650
2,924 23,030 25,954 International Paper 112,603 886,885 999,488
658 5,174 5,832 Louisiana-Pacific 16,127 126,815 142,942
1,213 9,557 10,770 MeadWestvaco 38,246 301,332 339,578
338 2,638 2,976 Temple-Inland 19,982 155,959 175,941
1,440 11,340 12,780 Weyerhaeuser 90,202 710,338 800,540
PHARMACY SERVICES (0.13%)
467 3,674 4,141 Express Scripts (1) 29,888 235,136 265,024
1,638 12,887 14,525 Medco Health Solutions (1) 55,545 436,998 492,543
PHOTO EQUIPMENT & SUPPLIES (0.08%)
1,724 13,573 15,297 Eastman Kodak 52,203 410,990 463,193
PIPELINES (0.20%)
2,282 17,975 20,257 Dynegy (1) 11,250 88,617 99,867
3,854 30,358 34,212 El Paso 34,455 271,401 305,856
743 5,850 6,593 Kinder Morgan 47,827 376,564 424,391
3,340 26,306 29,646 Williams 41,783 329,088 370,871
POWER CONVERTER & SUPPLY
EQUIPMENT (0.04%)
1,205 9,490 10,695 American Power Conversion 23,232 182,967 206,199
PRINTING-COMMERCIAL (0.06%)
1,318 10,376 11,694 R.R. Donnelley & Sons 41,451 326,325 367,776
PROPERTY & CASUALTY INSURANCE (0.69%)
1,708 13,451 15,159 ACE 65,007 511,945 576,952
1,149 9,045 10,194 Chubb 82,877 652,416 735,293
1,203 9,480 10,683 Progressive 112,541 886,854 999,395
4,021 31,674 35,695 St. Paul 136,553 1,075,649 1,212,202
832 6,553 7,385 XL Capital 60,320 475,092 535,412
PUBLICLY TRADED INVESTMENT FUND (0.56%)
7,940 20,860 28,800 iShares S&P 500 Index Fund (2) 899,761 2,363,855 3,263,616
PUBLISHING-NEWSPAPERS (0.26%)
493 3,877 4,370 Dow Jones 21,815 171,557 193,372
465 3,666 4,131 Knight Ridder 31,866 251,231 283,097
882 6,953 7,835 New York Times 35,324 278,468 313,792
1,913 15,073 16,986 Tribune 82,642 651,153 733,795
REGIONAL BANKS (3.11%)
1,030 8,117 9,147 Comerica 63,355 499,277 562,632
3,427 26,992 30,419 Fifth Third Bancorp 168,574 1,327,736 1,496,310
1,381 10,878 12,259 Huntington Bancshares 33,075 260,528 293,603
2,445 19,266 21,711 KeyCorp 82,128 647,145 729,273
3,984 31,388 35,372 National City 155,257 1,223,190 1,378,447
1,698 13,373 15,071 PNC Financial Services Group 88,805 699,408 788,213
2,151 16,945 19,096 SunTrust Banks 151,387 1,192,589 1,343,976
11,297 89,006 100,303 U.S. Bancorp 323,207 2,546,462 2,869,669
7,872 62,014 69,886 Wachovia 387,381 3,051,709 3,439,090
10,152 79,978 90,130 Wells Fargo 606,278 4,776,286 5,382,564
RETAIL-APPAREL & SHOE (0.33%)
5,434 42,803 48,237 Gap 108,571 855,204 963,775
2,842 22,381 25,223 Limited 70,425 554,601 625,026
848 6,650 7,498 Nordstrom 36,617 287,147 323,764
RETAIL-AUTO PARTS (0.06%)
500 3,937 4,437 Autozone (1) 40,905 322,086 362,991
RETAIL-AUTOMOBILE (0.04%)
1,603 12,626 14,229 AutoNation (1) 27,620 217,546 245,166
RETAIL-BEDDING (0.11%)
1,807 14,235 16,042 Bed Bath & Beyond (1) 73,708 580,646 654,354
RETAIL-BUILDING PRODUCTS (1.22%)
13,198 103,980 117,178 Home Depot 542,174 4,271,498 4,813,672
4,686 36,925 41,611 Lowe's 263,728 2,078,139 2,341,867
RETAIL-CONSUMER ELECTRONICS (0.25%)
1,954 15,392 17,346 Best Buy 115,716 911,514 1,027,230
1,195 9,414 10,609 Circuit City Stores 19,418 152,978 172,396
959 7,560 8,519 RadioShack 28,703 226,271 254,974
RETAIL-DISCOUNT (2.91%)
693 5,455 6,148 Big Lots (1) 8,586 67,587 76,173
2,773 21,842 24,615 Costco Wholesale 132,938 1,047,106 1,180,044
1,974 15,553 17,527 Dollar General 37,999 299,395 337,394
1,011 7,969 8,980 Family Dollar Stores 29,875 235,484 265,359
RETAIL-DISCOUNT (continued)
5,430 42,783 48,213 Target 271,609 2,140,006 2,411,615
2,938 23,148 26,086 TJX 70,453 555,089 625,542
25,504 200,934 226,438 Wal-Mart Stores 1,375,176 10,834,361 12,209,537
RETAIL-DRUG STORE (0.49%)
2,401 18,916 21,317 CVS 104,348 822,089 926,437
6,160 48,523 54,683 Walgreen 221,082 1,741,491 1,962,573
RETAIL-JEWELRY (0.04%)
878 6,920 7,798 Tiffany 25,752 202,964 228,716
RETAIL-MAJOR DEPARTMENT STORE (0.23%)
1,732 13,649 15,381 J.C. Penney 59,910 472,119 532,029
1,753 13,802 15,555 May Department Stores 45,683 359,680 405,363
1,275 10,041 11,316 Sears Roebuck 44,625 351,435 396,060
RETAIL-OFFICE SUPPLIES (0.18%)
1,884 14,836 16,720 Office Depot (1) 30,502 240,195 270,697
2,991 23,565 26,556 Staples 88,952 700,823 789,775
RETAIL-REGIONAL DEPARTMENT STORE (0.26%)
502 3,954 4,456 Dillards 10,286 81,018 91,304
1,081 8,515 9,596 Federated Department Stores 54,536 429,582 484,118
2,055 16,182 18,237 Kohl's (1) 104,312 821,398 925,710
RETAIL-RESTAURANTS (0.71%)
949 7,473 8,422 Darden Restaurants 23,251 183,089 206,340
7,552 59,497 67,049 McDonald's 220,141 1,734,338 1,954,479
2,390 18,824 21,214 Starbucks (1) 126,383 995,413 1,121,796
684 5,378 6,062 Wendy's International 22,825 179,464 202,289
1,747 13,761 15,508 Yum! Brands 75,994 598,603 674,597
RETAIL-TOY STORE (0.04%)
1,287 10,133 11,420 Toys R Us (1) 23,179 182,495 205,674
RUBBER-TIRES (0.03%)
452 3,543 3,995 Cooper Tire & Rubber 8,805 69,018 77,823
1,055 8,304 9,359 Goodyear Tire & Rubber (1) (2) 10,634 83,704 94,338
SAVINGS & LOANS-THRIFTS (0.54%)
919 7,235 8,154 Golden West Financial 107,449 845,916 953,365
2,064 16,256 18,320 Sovereign Bancorp 44,686 351,942 396,628
5,246 41,325 46,571 Washington Mutual 203,073 1,599,691 1,802,764
SCHOOLS (0.12%)
1,159 9,134 10,293 Apollo Group (1) 76,494 602,844 679,338
SEMICONDUCTOR COMPONENT-INTEGRATED
CIRCUITS (0.37%)
2,276 17,920 20,196 Analog Devices 91,632 721,459 813,091
1,850 14,563 16,413 Linear Technology 70,078 551,647 621,725
1,953 15,379 17,332 Maxim Integrated Products 85,912 676,522 762,434
SEMICONDUCTOR EQUIPMENT (0.39%)
10,209 80,431 90,640 Applied Materials (1) 164,365 1,294,939 1,459,304
1,181 9,299 10,480 Kla-Tencor (1) 53,771 423,383 477,154
857 6,761 7,618 Novellus Systems (1) 22,205 175,178 197,383
1,167 9,193 10,360 Teradyne (1) 19,325 152,236 171,561
STEEL PRODUCERS (0.10%)
954 7,506 8,460 Nucor 40,287 316,978 357,265
682 5,369 6,051 United States Steel 25,043 197,150 222,193
STEEL-SPECIALTY (0.02%)
572 4,512 5,084 Allegheny Technologies 9,615 75,847 85,462
TELECOMMUNICATION EQUIPMENT (0.76%)
4,864 38,311 43,175 ADC Telecommunications (1) 10,749 84,667 95,416
967 7,615 8,582 Andrew (1) 13,519 106,458 119,977
1,177 9,265 10,442 Comverse Technology (1) 24,293 191,230 215,523
9,786 77,093 86,879 Qualcomm 409,153 3,223,258 3,632,411
922 7,253 8,175 Scientific-Atlanta 25,254 198,660 223,914
2,503 19,712 22,215 Tellabs (1) 20,024 157,696 177,720
TELECOMMUNICATION EQUIPMENT-FIBER
OPTICS (0.20%)
3,461 26,956 30,417 CIENA (1) 8,549 66,581 75,130
8,377 66,005 74,382 Corning (1) 95,916 755,757 851,673
8,659 68,208 76,867 JDS Uniphase (1) 27,449 216,220 243,669
TELECOMMUNICATION SERVICES (0.06%)
2,721 21,437 24,158 Avaya (1) 39,182 308,693 347,875
TELEPHONE-INTEGRATED (2.88%)
1,853 14,599 16,452 ALLTEL 101,785 801,923 903,708
4,778 37,639 42,417 AT&T 81,752 644,003 725,755
11,007 86,707 97,714 BellSouth 293,557 2,312,476 2,606,033
811 6,394 7,205 CenturyTel 26,025 205,183 231,208
1,998 15,703 17,701 Citizens Communications 26,773 210,420 237,193
10,912 85,966 96,878 Qwest Communications International (1) 37,319 294,004 331,323
19,921 156,941 176,862 SBC Communications 503,205 3,964,330 4,467,535
8,732 68,796 77,528 Sprint 182,935 1,441,276 1,624,211
16,644 131,120 147,764 Verizon Communications 650,780 5,126,792 5,777,572
TELEVISION (0.09%)
1,940 15,277 17,217 Univision Communications (1) 60,062 472,976 533,038
THERAPEUTICS (0.14%)
2,589 20,392 22,981 Gilead Sciences (1) 89,657 706,175 795,832
TOBACCO (1.06%)
12,335 97,176 109,511 Altria Group 597,754 4,709,149 5,306,903
889 7,009 7,898 Reynolds American 61,217 482,640 543,857
994 7,825 8,819 UST 40,913 322,077 362,990
TOOLS-HAND HELD (0.11%)
482 3,795 4,277 Black & Decker 38,695 304,663 343,358
348 2,737 3,085 Snap-On 10,224 80,413 90,637
493 3,878 4,371 Stanley Works 21,949 172,648 194,597
TOYS (0.09%)
1,064 8,375 9,439 Hasbro 18,822 148,154 166,976
2,489 19,612 22,101 Mattel 43,583 343,406 386,989
TRANSPORT-RAIL (0.48%)
2,239 17,637 19,876 Burlington Northern Santa Fe 93,612 737,403 831,015
1,292 10,173 11,465 CSX 47,158 371,314 418,472
2,367 18,645 21,012 Norfolk Southern 80,360 632,998 713,358
1,559 12,277 13,836 Union Pacific 98,170 773,083 871,253
TRANSPORT-SERVICES (1.06%)
1,806 14,227 16,033 FedEx 164,563 1,296,364 1,460,927
6,760 53,252 60,012 United Parcel Service 535,257 4,216,494 4,751,751
TRAVEL SERVICES (0.03%)
825 6,500 7,325 Sabre Holdings 17,746 139,815 157,561
TRUCKING & LEASING (0.03%)
386 3,049 3,435 Ryder System 19,339 152,755 172,094
WEB PORTALS (0.45%)
8,180 64,439 72,619 Yahoo (1) 296,034 2,332,047 2,628,081
WIRELESS EQUIPMENT (0.37%)
14,203 111,894 126,097 Motorola 245,144 1,931,290 2,176,434
TOTAL COMMON STOCKS 64,166,992 500,728,421 564,895,413
COMMERCIAL PAPER (3.49%)
FINANCE-MORTGAGE LOAN/BANKER (3.49%)
1,923,142 18,565,756 20,488,898 Investment in Joint Trading Account;
Federal Home Loan Bank 1.69%; 11/01/04 1,923,142 18,565,755 20,488,897
TOTAL COMMERCIAL PAPER 1,923,142 18,565,755 20,488,897
REPURCHASE AGREEMENTS (0.19%)
1,130,165 - 1,130,165 Goldman Sachs; 1.75%; dated 10/29/04
maturing 11/01/04 (collateralized by U.S.
Treasu1,130,000,139,787; 11/18-04 -
01/15/12) (1,130,000
TOTAL REPURCHASE AGREEMENTS 1,130,000 - 1,130,000
TOTAL PORTFOLIO INVESTMENTS (99.88%) 67,220,134 519,294,176 586,514,310
Liabilities, net of cash, receivables and
other assets (0.12%) (1,077,160) 1,804,406 727,246
TOTAL NET ASSETS (100.00%) $66,142,974 $521,098,582 $587,241,556
-============================================
<FN>
(1) Non-income producing security.
(2) Security or a portion of the security was on loan at the end of the period.
(3) Security or a portion of the security was pledged to cover margin
requirements for futures contracts.
(4) Affiliated security.
(5) Security was purchased with the cash proceeds from securities loans.
</FN>
UNREALIZED APPRECIATION (DEPRECIATION)
The net federal income tax unrealized appreciation (depreciation) and federal
tax cost of investments held by the fund as of the period end were as follows:
Unrealized Appreciation $ 9,484,094 $ 50,363,495 $ 59,847,589
Unrealized Depreciation (13,920,231) (25,182,819) (39,103,050)
Net Unrealized Appreciation (Depreciation) (4,436,137) 25,180,676 20,744,539
Cost for federal income tax purposes $ 71,656,271 $494,113,500 $ 565,769,771
Opening Current Unrealized
Contract Type Commitment Market Value Market Value Gain(Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
FUTURES CONTRACTS
7 S&P 500 December 2004 Futures Buy $ 1,970,900 $ 1,978,025 $ 7,125
31 S&P 500 December 2004 Futures Buy $18,207,360 $ 18,367,375 $ 160,015
38 S&P 500 December 2004 Futures $ 1,970,900 $ 1,978,025 $ 7,125
INVESTMENTS BY SECTOR (UNAUDITED)
Percentage of Total Value Sector Value
- -----------------------------------------------------------------------------------------------------------------------------------
19.40% 19.59% 19.56% Financial $ 13,425,256 $105,305,848 $ 118,731,104
19.32 18.01 18.16 Consumer, Non-cyclical 13,368,691 96,859,326 $110,228,017
11.44 11.6 11.58 Technology 7,914,610 62,346,909 $70,261,519
10.50 10.64 10.63 Industrial 7,266,695 57,238,051 $64,504,746
10.04 10.18 10.16 Communications 6,947,283 54,729,579 $61,676,862
9.27 9.39 9.38 Consumer, Cyclical 6,412,818 50,514,473 $56,927,291
6.70 6.80 6.79 Energy 4,640,687 36,554,003 $41,194,690
3.77 4.45 4.38 Government 2,606,402 23,948,466 $26,554,868
2.86 3.42 3.35 Futures Contracts 1,978,025 18,367,375 $20,345,400
2.72 2.76 2.76 Utilities 1,882,302 14,825,149 $16,707,451
2.68 2.72 2.71 Basic Materials 1,855,629 14,608,517 $16,464,146
1.30 0.44 0.54 Funds 899,761 2,363,855 $3,263,616
$ 69,198,159 $537,661,551 $ 606,859,710
====================================================
<FN>
Percentages are adjusted to reflect the impact of currency contracts,
futures contracts, and swap agreements, if applicable.
See accompanying notes.
</FN>
------------------------------------------------------------------------------------------------------
Affiliated Securities
------------------------------------------------------------------------------------------------------
Realized
October 31, 2003 Purchases Sales October 31, 2004 Gain/Loss
Shares Cost Shares Cost Shares Proceeds Shares Cost Dividends on Investments
------------------------------------------------------------------------------------------------------
LargeCap S&P 500 Index Fund
Principal Financial Group 12,927 $380,604 8,635 $299,365 6,719 $244,028 14,843 $490,837 $5,817 $54,896
Principal LargeCap Stock Index
Fund, Inc.
Principal Financial Group 1,584 44,522 363 12,491 1,884 54,798 1,884 54,798 713 60
------------------------------------------------------------------------------------------------------
14,511 $425,126 8,998 $311,856 8,603 $298,826 16,727 $545,635 $6,530 $54,956
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
PRINCIPAL COMBINED
GROWTH LARGECAP PRO FORMA LARGECAP
FUND, INC. GROWTH FUND ADJUSTMENTS GROWTH FUND
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $ 304,865,250 $132,914,801 $ -- $ 437,780,051
============= ============ =========== =============
ASSETS
Investment in
securities--at value. $295,548,113/(c)/ $140,532,811 $ -- $436,080,924/(c)/
Cash.................. 10,001 10,131 -- 20,132
Receivables:
Capital Shares sold.. 20,672 243,873 -- 264,545
Dividends and
interest............ 98,246 45,147 -- 143,393
Other assets.......... 12,492 -- -- 12,492
Prepaid directors'
expenses............. 116 -- -- 116
------------- ------------ ----------- -------------
Total Assets 295,689,640 140,831,962 -- 436,521,602
LIABILITIES
Accrued management and
investment advisory
fees................. 32,924 14,587 -- 47,511
Accrued administrative
service fees......... -- 66 -- 66
Accrued distribution
fees................. 10,740 1,529 -- 12,269
Accrued service fees.. -- 87 -- 87
Accrued transfer and
administrative fees.. 209,047 11,521 -- 220,568
Accrued other expenses 44,997 4,068 -- 49,065
Payables:
Capital Shares
reacquired.......... 209,010 -- -- 209,010
Investment securities
purchased........... 265,425 124,834 -- 390,259
Collateral obligation
on securities loaned,
at value............. 1,754,000 -- -- 1,754,000
------------- ------------ ----------- -------------
Total Liabilities 2,526,143 156,692 -- 2,682,835
------------- ------------ ----------- -------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $ 293,163,497 $140,675,270 $ -- $ 433,838,767
============= ============ =========== =============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $ 472,118,232 $136,426,105 $ -- $ 608,544,337
Accumulated
undistributed
(overdistributed) net
investment income
(operating loss)..... -- 194,686 -- 194,686
Accumulated
undistributed
(overdistributed) net
realized gain (loss). (169,637,598) (3,563,531) -- (173,201,129)
Net unrealized
appreciation
(depreciation) of
investments.......... (9,317,137) 7,618,010 -- (1,699,127)
------------- ------------ ----------- -------------
Total Net Assets $ 293,163,497 $140,675,270 $ -- $ 433,838,767
============= ============ =========== =============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 200,000,000 330,000,000 -- 330,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 512,899 N/A $ 512,899
Shares issued and
outstanding.......... 80,885 80,885
Net asset value per
share................ $ 6.34 $ 6.34
============ =============
Advisors Select: Net
Assets............... N/A $ 71,871 N/A $ 71,871
Shares issued and
outstanding.......... 11,801 11,801
Net asset value per
share................ $ 6.09 $ 6.09
============ =============
Class A: Net Assets... $ 252,693,971 N/A -- $ 252,693,971
Shares issued and
outstanding.......... 9,605,221 31,888,042 41,493,263
Net asset value per
share................ $ 26.31 -- $ 6.09
Maximum offering
price per share /(a)/ $ 27.92 -- $ 6.46
============= =============
Class B: Net Assets... $ 40,469,526 N/A -- $ 40,469,526
Shares issued and
outstanding.......... 1,610,993 5,034,249 6,645,242
Net asset value per
share /(b)/.......... $ 25.12 -- $ 6.09
============= =============
Class J: Net Assets... N/A $ 15,897,448 N/A $ 15,897,448
Shares issued and
outstanding.......... 2,696,917 2,696,917
Net asset value per
share /(b)/.......... $ 5.89 $ 5.89
============ =============
Institutional: Net
Assets............... N/A $121,840,399 N/A $ 121,840,399
Shares issued and
outstanding.......... 19,998,536 19,998,536
Net asset value per
share................ $ 6.09 $ 6.09
============ =============
Preferred: Net Assets. N/A $ 2,299,446 N/A $ 2,299,446
Shares issued and
outstanding.......... 372,320 372,320
Net asset value per
share................ $ 6.18 $ 6.18
============ =============
Select: Net Assets.... N/A $ 53,207 N/A $ 53,207
Shares issued and
outstanding.......... 8,482 8,482
Net asset value per
share................ $ 6.27 $ 6.27
============ =============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 5.75% of the offering price or 6.10% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
/(c) /Includes fair market value of securities loaned, see "Securities Lending"
in Notes to Financial Statements.
See accompanying notes.
6
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PRINCIPAL COMBINED
GROWTH LARGECAP PRO FORMA LARGECAP
FUND, INC. GROWTH FUND ADJUSTMENTS /(A)/ GROWTH FUND
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Dividends............ $ 2,563,869 $ 928,378 $ -- $ 3,492,247
Interest............. 60,401 52,232 -- 112,633
Securities lending... 5,081 -- -- 5,081
------------ ----------- --------- ------------
Total Income 2,629,351 980,610 -- 3,609,961
Expenses:
Management and
investment advisory
fees................ 1,828,265 604,743 (125,400) 2,307,608
Distribution fees -
Advisors Preferred.. -- 1,650 -- 1,650
Distribution fees -
Advisors Select..... -- 156 -- 156
Distribution fees -
Class A............. 501,357 -- -- 501,357
Distribution fees -
Class B............. 411,774 -- -- 411,774
Distribution fees -
Class J............. -- 73,989 -- 73,989
Distribution fees -
Select.............. -- 45 -- 45
Administrative
service fees -
Advisors Preferred.. -- 990 -- 990
Administrative
service fees -
Advisors Select..... -- 104 -- 104
Administrative
service fees -
Preferred........... -- 2,314 -- 2,314
Administrative
service fees -
Select.............. -- 59 -- 59
Registration fees -
Class A............. 11,835 -- -- 11,835
Registration fees -
Class B............. 6,491 -- -- 6,491
Registration fees -
Class J............. -- 10,990 -- 10,990
Service fees -
Advisors Preferred.. -- 1,122 -- 1,122
Service fees -
Advisors Select..... -- 130 -- 130
Service fees -
Preferred........... -- 3,156 -- 3,156
Service fees - Select -- 67 -- 67
Shareholder reports -
Class A............. 51,928 -- -- 51,928
Shareholder reports -
Class B............. 12,528 -- -- 12,528
Shareholder reports -
Class J............. -- 5,756 -- 5,756
Transfer and
administrative fees
- Class A........... 303,316 -- -- 303,316
Transfer and
administrative fees
- Class B........... 75,956 -- -- 75,956
Transfer and
administrative fees
- Class J........... -- 54,158 -- 54,158
Auditing and legal
fees................ 10,030 -- (10,030) --
Custodian fees....... 1,515 -- (1,515) --
Directors' expenses.. 10,242 -- (10,242) --
Registration fees.... 31,327 -- -- 31,327
Transfer and
administrative fees. 650,251 -- 6,480 656,731
Other expenses....... 16,802 -- (16,802) --
------------ ----------- --------- ------------
Total Gross Expenses 3,923,617 759,429 (157,509) 4,525,537
Less: Fees paid
indirectly.......... 3,477 625 -- 4,102
------------ ----------- --------- ------------
Total Net Expenses 3,920,140 758,804 (157,509) 4,521,435
------------ ----------- --------- ------------
Net Investment Income
(Operating Loss) (1,290,789) 221,806 157,509 (911,474)
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ (14,806,416) 4,477,317 -- (10,329,099)
Change in unrealized
appreciation/depreciation
of:
Investments........... 26,195,529 (1,726,383) -- 24,469,146
------------ ----------- --------- ------------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies 11,389,113 2,750,934 -- 14,140,047
------------ ----------- --------- ------------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $ 10,098,324 $ 2,972,740 $ 157,509 $ 13,228,573
============ =========== ========= ============
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
22
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Principal
Growth LargeCap Growth LargeCap
Fund, Growth Fund, Growth
Inc. Fund Combined Inc. Fund Combined
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (99.83%)
AEROSPACE & DEFENSE EQUIPMENT (1.46%)
46,630 21,590 68,220 United Technologies $ 4,328,197 $ 2,003,984 $ 6,332,181
APPAREL MANUFACTURERS (1.97%)
124,600 58,700 183,300 Coach (1) 5,810,098 2,737,181 8,547,279
APPLICATIONS SOFTWARE (5.13%)
551,280 243,038 794,318 Microsoft 15,430,327 6,802,634 22,232,961
ATHLETIC FOOTWEAR (2.10%)
72,730 39,230 111,960 Nike 5,913,676 3,189,791 9,103,467
BEVERAGES-NON-ALCOHOLIC (2.07%)
123,830 57,650 181,480 Pepsico 6,139,491 2,858,287 8,997,778
CASINO SERVICES (1.06%)
96,920 42,720 139,640 International Game Technology 3,202,237 1,411,469 4,613,706
COMPUTER SERVICES (0.89%)
77,950 35,930 113,880 Cognizant Technology Solutions (1) 2,650,300 1,221,620 3,871,920
COMPUTERS (1.71%)
90,970 50,590 141,560 Apple Computer (1) 4,778,654 2,657,493 7,436,147
COMPUTERS-INTEGRATED SYSTEMS (2.62%)
220,808 102,802 323,610 Dell (1) 7,741,528 3,604,238 11,345,766
COMPUTERS-MEMORY DEVICES (1.33%)
311,030 137,080 448,110 EMC (1) 4,002,956 1,764,220 5,767,176
COMPUTERS-PERIPHERAL EQUIPMENT (1.22%)
43,260 20,140 63,400 Lexmark International (1) 3,595,339 1,673,835 5,269,174
COSMETICS & TOILETRIES (6.08%)
129,140 65,460 194,600 Avon Products 5,107,487 2,588,943 7,696,430
85,140 40,260 125,400 Estee Lauder 3,656,763 1,729,167 5,385,930
180,630 79,450 260,080 Procter & Gamble 9,244,643 4,066,251 13,310,894
DATA PROCESSING & MANAGEMENT (1.29%)
13,720 6,160 19,880 First Data 566,361 254,285 820,646
91,120 41,480 132,600 SEI Investments 3,279,409 1,492,865 4,772,274
DISPOSABLE MEDICAL PRODUCTS (1.21%)
54,870 37,160 92,030 C.R. Bard 3,116,616 2,110,688 5,227,304
DISTRIBUTION-WHOLESALE (0.72%)
39,300 17,910 57,210 Fastenal (2) 2,170,539 989,169 3,159,708
DIVERSIFIED MANUFACTURING
OPERATIONS (4.90%)
83,436 37,604 121,040 3M 6,472,130 2,916,942 9,389,072
83,860 38,650 122,510 Danaher 4,623,202 2,130,775 6,753,977
37,770 17,790 55,560 Illinois Tool Works 3,485,416 1,641,661 5,127,077
E-COMMERCE-SERVICES (1.02%)
31,170 13,990 45,160 eBay (1) 3,042,504 1,365,564 4,408,068
ELECTRIC-INTEGRATED (1.58%)
71,690 40,410 112,100 TXU 4,388,862 2,473,900 6,862,762
ELECTRONIC COMPONENTS-
SEMICONDUCTOR (3.89%)
54,230 24,990 79,220 Altera (1) 1,232,648 568,023 1,800,671
337,522 157,361 494,883 Intel 7,513,240 3,502,856 11,016,096
114,163 51,965 166,128 Texas Instruments 2,791,285 1,270,544 4,061,829
ELECTRONIC FORMS (1.03%)
49,030 30,790 79,820 Adobe Systems 2,747,151 1,725,164 4,472,315
FINANCE-CREDIT CARD (3.70%)
106,540 50,100 156,640 Capital One Financial 7,858,391 3,695,376 11,553,767
119,510 56,520 176,030 MBNA 3,063,041 1,448,608 4,511,649
FINANCE-INVESTMENT BANKER &
BROKER (2.07%)
27,580 17,300 44,880 Goldman Sachs Group 2,713,320 1,701,974 4,415,294
44,340 27,335 71,675 Legg Mason 2,824,902 1,741,513 4,566,415
FINANCE-MORTGAGE LOAN/BANKER (0.46%)
19,580 8,870 28,450 Federal National Mortgage Association 1,373,537 622,231 1,995,768
INTERNET BROKERS (1.06%)
242,280 109,580 351,860 Ameritrade Holding (1) 3,154,486 1,426,732 4,581,218
INTERNET SECURITY (2.17%)
108,310 57,070 165,380 Symantec (1) 6,167,171 3,249,566 9,416,737
MACHINERY-GENERAL INDUSTRY (1.28%)
52,850 28,520 81,370 Ingersoll-Rand 3,617,054 1,951,909 5,568,963
MACHINERY-PUMPS (1.05%)
91,035 41,950 132,985 Graco 3,131,604 1,443,080 4,574,684
MEDICAL INSTRUMENTS (1.30%)
50,731 22,950 73,681 St. Jude Medical (1) 3,884,473 1,757,281 5,641,754
MEDICAL PRODUCTS (6.07%)
64,250 28,100 92,350 Becton Dickinson 3,373,125 1,475,250 4,848,375
222,300 101,190 323,490 Johnson & Johnson 12,977,874 5,907,472 18,885,346
44,520 20,520 65,040 Varian Medical Systems (1) 1,787,478 823,878 2,611,356
MEDICAL-BIOMEDICAL/GENE (2.80%)
84,480 36,050 120,530 Amgen (1) 4,798,464 2,047,640 6,846,104
73,410 42,730 116,140 Genentech (1) 3,342,357 1,945,497 5,287,854
MEDICAL-DRUGS (5.41%)
66,430 30,040 96,470 Forest Laboratories (1) 2,962,778 1,339,784 4,302,562
464,595 198,115 662,710 Pfizer 13,450,025 5,735,429 19,185,454
MEDICAL-HMO (2.57%)
107,290 46,830 154,120 UnitedHealth Group 7,767,796 3,390,492 11,158,288
MOTORCYCLE & MOTOR SCOOTER (1.79%)
92,690 42,550 135,240 Harley-Davidson 5,336,163 2,449,603 7,785,766
MULTI-LINE INSURANCE (1.75%)
86,070 39,040 125,110 American International Group 5,225,310 2,370,118 7,595,428
NETWORKING PRODUCTS (3.77%)
579,890 270,353 850,243 Cisco Systems (1) 11,139,687 5,193,481 16,333,168
OIL COMPANY-EXPLORATION &
PRODUCTION (1.28%)
68,530 41,380 109,910 Apache 3,474,471 2,097,966 5,572,437
OIL-FIELD SERVICES (1.03%)
55,320 32,700 88,020 BJ Services 2,821,320 1,667,700 4,489,020
RETAIL-APPAREL & SHOE (1.95%)
27,790 12,300 40,090 Chico's FAS (1) 1,112,434 492,369 1,604,803
107,480 50,830 158,310 Nordstrom 4,640,986 2,194,839 6,835,825
RETAIL-BEDDING (1.35%)
99,148 44,843 143,991 Bed Bath & Beyond (1) 4,044,247 1,829,146 5,873,393
RETAIL-CONSUMER ELECTRONICS (1.78%)
90,110 40,020 130,130 Best Buy 5,336,314 2,369,984 7,706,298
RETAIL-DISCOUNT (2.07%)
115,100 51,420 166,520 Wal-Mart Stores 6,206,192 2,772,566 8,978,758
RETAIL-OFFICE SUPPLIES (1.96%)
190,000 95,124 285,124 Staples 5,650,600 2,828,988 8,479,588
RETAIL-RESTAURANTS (1.38%)
89,850 47,400 137,250 Yum! Brands 3,908,475 2,061,900 5,970,375
SCHOOLS (1.01%)
45,460 20,950 66,410 Apollo Group (1) 3,000,360 1,382,700 4,383,060
SEMICONDUCTOR COMPONENT-INTEGRATED
CIRCUITS (2.47)
112,399 50,514 162,913 Linear Technology 4,257,674 1,913,471 6,171,145
70,721 32,070 102,791 Maxim Integrated Products 3,111,017 1,410,759 4,521,776
THERAPEUTICS (1.53%)
131,640 59,540 191,180 Gilead Sciences (1) 4,558,693 2,061,870 6,620,563
WIRELESS EQUIPMENT (1.49%)
254,030 120,130 374,160 Motorola 4,384,558 2,073,444 6,458,002
TOTAL COMMON STOCKS 293,487,436 139,626,165 433,113,601
COMMERCIAL PAPER (0.28%)
FINANCE-CONSUMER LOANS (0.07%)
Investment in Joint Trading Account;
306,677 - 306,677 Household Finance 1.84%; 11/01/04 306,677 - 306,677
FINANCE-MORTGAGE LOAN/BANKER (0.21%)
Investment in Joint Trading Account;
- 906,646 906,646 Federal Home Loan Bank 1.69%; 11/01/04 - 906,646 906,646
TOTAL COMMERCIAL PAPER 306,677 906,646 1,213,323
REPURCHASE AGREEMENTS (0.41%)
Goldman Sachs; 1.75%; dated 10/29/04
maturing 11/01/04 (collateralized by
1,754,256 - 1,754,256 U.S. Treasuries; $1,769,191; 11/18/04 -
01/15/12) (3) 1,754,000 - 1,754,000
TOTAL REPURCHASE AGREEMENTS 1,754,000 - 1,754,000
TOTAL PORTFOLIO INVESTMENTS (100.52%) 295,548,113 140,532,811 436,080,924
Liabilities, net of cash, receivable and
other assets (-0.52%) (2,384,616) 142,459 (2,242,157)
TOTAL NET ASSETS (100.00%)$293,163,497 $140,675,270 $433,838,767
=============================================
<FN>
(1) Non-income producing security.
(2) Security or a portion of the security was on loan at the end of the period.
(3) Security was purchased with the cash proceeds from securities loans.
</FN>
UNREALIZED APPRECIATION (DEPRECIATION)
The net federal income tax unrealized appreciation (depreciation) and federal
tax cost of investments held by the fund as of the period end were as follows:
Unrealized Appreciation $32,569,555 $12,314,087 $ 44,883,642
Unrealized Depreciation (42,157,428) (5,011,675) (47,169,103)
-----------------------------------------------
Net Unrealized Appreciation (Depreciation) (9,587,873) 7,302,412 (2,285,461)
Cost for federal income tax purposes $305,135,986 $133,230,399 $438,366,385
Percentage of Total Value Sector Value
- ----------------------------------------------------------------------------------------------------------------
30.17% 29.33% 29.90% Consumer, Non-cyclical $89,168,424 $41,220,630 $130,389,054
21.55 21.25 21.45 Technology 63,697,890 29,862,006 93,559,896
18.05 18.02 18.03 Consumer, Cyclical 53,331,961 25,327,007 78,658,968
9.1 8.81 9.01 Financial 26,900,126 12,384,320 39,284,446
8.68 8.6 8.66 Industrial 25,657,602 12,088,351 37,745,953
8.37 8.46 8.40 Communications 24,733,920 11,882,055 36,615,975
2.13 2.68 2.31 Energy 6,295,791 3,765,666 10,061,457
1.49 1.76 1.57 Utilities 4,388,862 2,473,900 6,862,762
0.46 1.09 0.67 Government 1,373,537 1,528,876 2,902,413
TOTAL $295,548,113 $140,532,811 $436,080,924
===============================================
<FN>
Percentages are adjusted to reflect the impact of currency contracts, futures
contracts, and swap agreements, if applicable.
See accompanying notes.
</FN>
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
PRINCIPAL COMBINED
MIDCAP MIDCAP PRO FORMA MIDCAP
FUND, INC. BLEND FUND ADJUSTMENTS BLEND FUND
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $443,024,233 $ 77,229,274 $ -- $520,253,507
============ ============ =========== ============
ASSETS
Investment in
securities--at value. $542,366,018/(c)/ $ 86,143,063 $ -- $628,509,081/(c)/
Cash.................. 10,000 10,562 -- 20,562
Receivables:
Capital Shares sold.. 161,283 118,855 -- 280,138
Dividends and
interest............ 268,040 41,826 -- 309,866
Investment securities
sold................ 1,842,158 378,513 -- 2,220,671
Other assets.......... 5,905 -- -- 5,905
Prepaid directors'
expenses............. 291 -- -- 291
------------ ------------ ----------- ------------
Total Assets 544,653,695 86,692,819 -- 631,346,514
LIABILITIES
Accrued management and
investment advisory
fees................. 54,810 10,527 -- 65,337
Accrued administrative
service fees......... -- 266 -- 266
Accrued distribution
fees................. 22,155 7,306 -- 29,461
Accrued service fees.. -- 334 -- 334
Accrued transfer and
administrative fees.. 223,349 32,173 -- 255,522
Accrued other expenses 58,937 9,399 -- 68,336
Payables:
Capital Shares
reacquired.......... 142,173 59,576 -- 201,749
Investment securities
purchased........... 1,584,780 363,756 -- 1,948,536
Collateral obligation
on securities loaned,
at value............. 10,614,000 -- -- 10,614,000
------------ ------------ ----------- ------------
Total Liabilities 12,700,204 483,337 -- 13,183,541
------------ ------------ ----------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $531,953,491 $ 86,209,482 $ -- $618,162,973
============ ============ =========== ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $381,764,604 $ 70,761,975 $ -- $452,526,579
Accumulated
undistributed
(overdistributed) net
investment income
(operating loss)..... 2,058,004 154,609 -- 2,212,613
Accumulated
undistributed
(overdistributed) net
realized gain (loss). 48,789,098 6,379,109 -- 55,168,207
Net unrealized
appreciation
(depreciation) of
investments.......... 99,341,785 8,913,789 -- 108,255,574
------------ ------------ ----------- ------------
Total Net Assets $531,953,491 $ 86,209,482 $ -- $618,162,973
============ ============ =========== ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 100,000,000 225,000,000 -- 225,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 3,083,909 N/A $ 3,083,909
Shares issued and
outstanding.......... 239,052 239,052
Net asset value per
share................ $ 12.90 $ 12.90
============ ============
Advisors Select: Net
Assets............... N/A $ 934,491 N/A $ 934,491
Shares issued and
outstanding.......... 72,719 72,719
Net asset value per
share................ $ 12.85 $ 12.85
============ ============
Class A: Net Assets... $459,207,477 N/A -- $459,207,477
Shares issued and
outstanding.......... 10,710,542 24,886,937 35,597,479
Net asset value per
share................ $ 42.87 -- $ 12.90
Maximum offering
price per share /(a)/ $ 45.49 -- $ 13.69
============ ============
Class B: Net Assets... $ 72,746,014 N/A -- $ 72,746,014
Shares issued and
outstanding.......... 1,782,062 3,857,164 5,639,226
Net asset value per
share /(b)/.......... $ 40.82 -- $ 12.90
============ ============
Class J: Net Assets... N/A $ 75,489,811 N/A $ 75,489,811
Shares issued and
outstanding.......... 5,922,441 5,922,441
Net asset value per
share /(b)/.......... $ 12.75 $ 12.75
============ ============
Institutional: Net
Assets............... N/A $ 11,375 N/A $ 11,375
Shares issued and
outstanding.......... 882 882
Net asset value per
share................ $ 12.90 $ 12.90
============ ============
Preferred: Net Assets. N/A $ 5,514,296 N/A $ 5,514,296
Shares issued and
outstanding.......... 426,843 426,843
Net asset value per
share................ $ 12.92 $ 12.92
============ ============
Select: Net Assets.... N/A $ 1,175,600 N/A $ 1,175,600
Shares issued and
outstanding.......... 90,153 90,153
Net asset value per
share................ $ 13.04 $ 13.04
============ ============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 5.75% of the offering price or 6.10% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
/(c) /Includes fair market value of securities loaned, see "Securities Lending"
in Notes to Financial Statements.
See accompanying notes.
11
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PRINCIPAL COMBINED
MIDCAP MIDCAP PRO FORMA MIDCAP
FUND, INC. BLEND FUND ADJUSTMENTS /(A)/ BLEND FUND
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Dividends............ $ 9,111,960 $1,189,231 $ -- $10,301,191
Interest............. 83,446 22,826 -- 106,272
Securities lending... 10,465 -- -- 10,465
----------- ---------- --------- -----------
Total Income 9,205,871 1,212,057 -- 10,417,928
Expenses:
Management and
investment advisory
fees................ 2,795,240 452,794 67,692 3,315,726
Distribution fees -
Advisors Preferred.. -- 15,039 -- 15,039
Distribution fees -
Advisors Select..... -- 1,082 -- 1,082
Distribution fees -
Class A............. 883,699 -- -- 883,699
Distribution fees -
Class B............. 325,766 -- -- 325,766
Distribution fees -
Class J............. -- 291,195 -- 291,195
Distribution fees -
Select.............. -- 269 -- 269
Administrative
service fees -
Advisors Preferred.. -- 9,023 -- 9,023
Administrative
service fees -
Advisors Select..... -- 722 -- 722
Administrative
service fees -
Preferred........... -- 5,215 -- 5,215
Administrative
service fees -
Select.............. -- 350 -- 350
Registration fees -
Class A............. 20,833 -- -- 20,833
Registration fees -
Class B............. 9,648 -- -- 9,648
Registration fees -
Class J............. -- 14,798 -- 14,798
Service fees -
Advisors Preferred.. -- 10,226 -- 10,226
Service fees -
Advisors Select..... -- 902 -- 902
Service fees -
Preferred........... -- 7,112 -- 7,112
Service fees - Select -- 404 -- 404
Shareholder reports -
Class A............. 55,193 -- -- 55,193
Shareholder reports -
Class B............. 14,090 -- -- 14,090
Shareholder reports -
Class J............. -- 18,374 -- 18,374
Transfer and
administrative fees
- Class A........... 314,251 -- -- 314,251
Transfer and
administrative fees
- Class B........... 83,317 -- -- 83,317
Transfer and
administrative fees
- Class J........... -- 163,222 -- 163,222
Auditing and legal
fees................ 9,932 -- (9,932) --
Custodian fees....... 11,083 -- (11,083) --
Directors' expenses.. 16,737 -- (16,737) --
Registration fees.... 30,530 -- -- 30,530
Transfer and
administrative fees. 832,535 -- 9,747 842,282
Other expenses....... 25,750 -- (25,750) --
Other expenses -
Class J............. -- 2,050 -- 2,050
----------- ---------- --------- -----------
Total Gross Expenses 5,428,604 992,777 13,937 6,435,318
Less: Fees paid
indirectly.......... 6,734 641 (7,375) --
Less: Reimbursement
from Manager - Class
A................... -- -- 393,092 393,092
Less: Reimbursement
from Manager - Class
B................... -- -- 72,968 72,968
----------- ---------- --------- -----------
Total Net Expenses 5,421,870 992,136 (444,748) 5,969,258
----------- ---------- --------- -----------
Net Investment Income
(Operating Loss) 3,784,001 219,921 444,748 4,448,670
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ 49,046,329 7,268,618 -- 56,314,947
Change in unrealized
appreciation/depreciation
of:
Investments........... 17,165,463 1,390,580 -- 18,556,043
----------- ---------- --------- -----------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies 66,211,792 8,659,198 -- 74,870,990
----------- ---------- --------- -----------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $69,995,793 $8,879,119 $ 444,748 $79,319,660
=========== ========== ========= ===========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
27
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- ----------------------------------------------------------------------------------------------------------------------------
Principal MidCap Principal MidCap
MidCap Blend MidCap Blend
Fund, Inc. Fund Combined Fund, Inc. Fund Combined
- ----------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (96.95%)
ADVERTISING AGENCIES (0.79%)
343,760 56,651 400,411 Interpublic Group (1) $4,214,498 $694,541 $4,909,039
AEROSPACE & DEFENSE (1.21%)
110,702 16,980 127,682 Raytheon 4,038,409 619,430 4,657,839
69,243 9,650 78,893 Rockwell Collins 2,456,049 342,286 2,798,335
AEROSPACE & DEFENSE EQUIPMENT (1.24%)
115,553 17,333 132,886 Alliant Techsystems (1) 6,643,142 996,474 7,639,616
AGRICULTURAL OPERATIONS (0.64%)
129,633 20,225 149,858 Delta & Pine Land 3,411,941 532,322 3,944,263
APPAREL MANUFACTURERS (0.83%)
122,100 17,491 139,591 Polo Ralph Lauren 4,509,153 645,943 5,155,096
APPLICATIONS SOFTWARE (0.97%)
113,698 18,308 132,006 Intuit (1) 5,157,341 830,451 5,987,792
AUDIO & VIDEO PRODUCTS (0.36%)
92,444 14,693 107,137 Polycom (1) 1,908,969 303,410 2,212,379
BEVERAGES-NON-ALCOHOLIC (0.44%)
111,453 19,004 130,457 Coca-Cola Enterprises 2,330,482 397,374 2,727,856
BROADCASTING SERVICES & PROGRAMMING (1.44%)
858,634 140,200 998,834 Liberty Media (1) 7,659,015 1,250,584 8,909,599
BUILDING & CONSTRUCTION
PRODUCTS-MISCELLANEOUS (0.95%)
101,265 17,026 118,291 Vulcan Materials 5,040,972 847,554 5,888,526
BUILDING PRODUCTS-WOOD (0.54%)
60,836 9,781 70,617 Rayonier 2,883,626 463,619 3,347,245
CABLE TV (0.24%)
35,956 5,005 40,961 Liberty Media International (1) 1,296,214 180,430 1,476,644
CASINO HOTELS (1.45%)
132,020 21,323 153,343 Harrah's Entertainment 7,725,810 1,247,822 8,973,632
CASINO SERVICES (0.64%)
102,992 16,383 119,375 International Game Technology 3,402,856 541,294 3,944,150
COMMERCIAL BANKS (5.68%)
65,181 10,111 75,292 M&T Bank 6,713,643 1,041,433 7,755,076
77,127 12,819 89,946 Marshall & Ilsley 3,237,020 538,013 3,775,033
140,894 22,835 163,729 North Fork Bancorp 6,213,426 1,007,024 7,220,450
446,985 72,758 519,743 TCF Financial 14,088,967 2,293,332 16,382,299
COMMERCIAL SERVICE-FINANCE (2.20%)
89,913 13,128 103,041 Dun & Bradstreet (1) 5,085,479 742,520 5,827,999
131,096 18,267 149,363 MoneyGram International 2,438,386 339,766 2,778,152
130,526 22,245 152,771 Paychex 4,280,470 729,502 5,009,972
COMMERCIAL SERVICES (3.81%)
188,085 30,303 218,388 Arbitron (1) 6,803,035 1,096,060 7,899,095
85,126 12,472 97,598 Magellan Health Services (1) (2) 3,183,712 466,453 3,650,165
306,513 43,643 350,156 ServiceMaster 3,935,627 560,376 4,496,003
180,508 28,921 209,429 Weight Watchers International (1)2/ 6,483,847 1,038,842 7,522,689
COMPUTER SERVICES (3.01%)
260,136 39,811 299,947 Ceridian (1) 4,487,346 686,740 5,174,086
146,815 23,618 170,433 DST Systems (1) 6,584,653 1,059,267 7,643,920
88,618 13,977 102,595 Sungard Data Systems (1) 2,347,491 370,251 2,717,742
251,144 36,949 288,093 Unisys (1) 2,667,149 392,398 3,059,547
COMPUTERS-INTEGRATED SYSTEMS (2.69%)
148,594 24,749 173,343 Diebold 7,110,223 1,184,240 8,294,463
127,087 21,013 148,100 NCR (1) 7,161,352 1,184,082 8,345,434
COMPUTERS-MEMORY DEVICES (1.72%)
337,341 55,233 392,574 Storage Technology (1) 9,114,954 1,492,396 10,607,350
COMPUTERS-PERIPHERAL EQUIPMENT (0.98%)
62,275 10,617 72,892 Lexmark International (1) 5,175,675 882,379 6,058,054
COSMETICS & TOILETRIES (0.36%)
48,969 8,295 57,264 International Flavors & Fragrances 1,912,239 323,920 2,236,159
DATA PROCESSING & MANAGEMENT (1.29%)
57,180 8,979 66,159 Certegy 2,021,313 317,408 2,338,721
138,191 16,384 154,575 Reynolds & Reynolds 3,400,881 403,210 3,804,091
44,182 7,097 51,279 SEI Investments 1,590,110 255,421 1,845,531
DENTAL SUPPLIES & EQUIPMENT (0.89%)
91,599 14,118 105,717 Dentsply International 4,764,064 734,277 5,498,341
DIVERSIFIED MANUFACTURING OPERATIONS (1.00%)
72,226 11,536 83,762 Dover 2,836,315 453,019 3,289,334
58,418 8,300 66,718 Lancaster Colony 2,510,806 356,734 2,867,540
ELECTRIC-INTEGRATED (1.97%)
130,218 20,320 150,538 Ameren 6,250,464 975,360 7,225,824
67,955 10,426 78,381 Duquesne Light Holdings 1,166,108 178,910 1,345,018
84,097 13,300 97,397 Scana 3,119,998 493,430 3,613,428
ELECTRONIC COMPONENTS-MISCELLANEOUS (2.09%)
338,169 54,073 392,242 Gentex 11,162,959 1,784,950 12,947,909
FOOD-CANNED (0.95%)
472,362 77,903 550,265 Del Monte Foods (1) 5,044,826 832,004 5,876,830
FOOD-DAIRY PRODUCTS (0.43%)
76,978 12,693 89,671 Dean Foods (1) 2,297,793 378,886 2,676,679
FOOD-MISCELLANEOUS/DIVERSIFIED (0.84%)
126,359 20,347 146,706 McCormick 4,476,899 720,894 5,197,793
HEALTH CARE COST CONTAINMENT (0.72%)
242,840 38,494 281,334 First Health Group (1) 3,866,013 612,824 4,478,837
HOME FURNISHINGS (0.75%)
104,056 16,983 121,039 Ethan Allen Interiors (2) 3,963,493 646,882 4,610,375
HOSPITAL BEDS & EQUIPMENT (0.93%)
99,750 16,161 115,911 Hillenbrand Industries 4,965,555 804,495 5,770,050
INSURANCE BROKERS (1.57%)
246,094 38,956 285,050 Aon 5,022,778 795,092 5,817,870
120,989 18,303 139,292 Arthur J. Gallagher (2) 3,399,791 514,314 3,914,105
INVESTMENT MANAGEMENT & ADVISORY
SERVICES (1.69%)
73,217 10,817 84,034 Eaton Vance 3,193,725 471,838 3,665,563
115,022 17,912 132,934 Federated Investors 3,334,488 519,269 3,853,757
79,826 13,092 92,918 Nuveen Investments 2,522,502 413,707 2,936,209
LIFE & HEALTH INSURANCE (1.54%)
99,916 16,269 116,185 Aflac 3,584,986 583,732 4,168,718
85,231 13,654 98,885 Torchmark 4,604,179 737,589 5,341,768
LINEN SUPPLY & RELATED ITEMS (0.93%)
114,562 19,132 133,694 Cintas 4,942,205 825,355 5,767,560
LOTTERY SERVICES (0.94%)
212,258 34,223 246,481 GTECH Holdings (2) 5,024,147 810,058 5,834,205
MEDICAL INFORMATION SYSTEM (1.55%)
390,323 62,661 452,984 IMS Health 8,267,041 1,327,160 9,594,201
MEDICAL INSTRUMENTS (3.54%)
92,458 14,722 107,180 Beckman Coulter 5,501,251 875,959 6,377,210
92,117 14,064 106,181 Biomet 4,300,022 656,508 4,956,530
73,264 12,240 85,504 Edwards Lifesciences (1) 2,504,163 418,363 2,922,526
98,839 16,029 114,868 Guidant 6,584,654 1,067,852 7,652,506
MEDICAL LABORATORY & TESTING SERVICE (1.39%)
161,357 26,650 188,007 Laboratory Corp. of America Holdings (1) 7,390,151 1,220,570 8,610,721
MEDICAL PRODUCTS (1.46%)
92,892 13,393 106,285 Becton Dickinson 4,876,830 703,133 5,579,963
72,629 12,562 85,191 Varian Medical Systems (1) 2,916,054 504,364 3,420,418
MEDICAL-DRUGS (1.39%)
260,333 41,495 301,828 Medimmune (1) 7,398,664 1,179,288 8,577,952
MEDICAL-HMO (0.33%)
21,990 3,198 25,188 Anthem (1) 1,767,996 257,119 2,025,115
MEDICAL-HOSPITALS (0.44%)
114,300 15,877 130,177 Health Management Associates 2,361,438 328,019 2,689,457
METAL-DIVERSIFIED (0.93%)
136,755 22,043 158,798 Freeport-McMoran Copper & Gold 4,953,266 798,397 5,751,663
MISCELLANEOUS INVESTING (3.05%)
99,708 16,806 116,514 AMB Property 3,739,050 630,225 4,369,275
74,917 11,806 86,723 Federal Realty Investment Trust 3,554,811 560,195 4,115,006
102,234 16,377 118,611 Kimco Realty 5,576,865 893,365 6,470,230
85,710 14,303 100,013 Prologis Trust 3,340,976 557,531 3,898,507
MULTI-LINE INSURANCE (0.89%)
79,186 12,309 91,495 Loews 4,743,241 737,309 5,480,550
MULTIMEDIA (1.12%)
141,098 23,249 164,347 Belo 3,280,528 540,539 3,821,067
57,012 8,636 65,648 E.W. Scripps 2,720,613 412,110 3,132,723
NETWORKING PRODUCTS (0.35%)
459,889 68,054 527,943 3Com (1) 1,903,940 281,744 2,185,684
NON-HAZARDOUS WASTE DISPOSAL (2.81%)
337,825 53,695 391,520 Republic Services 10,405,010 1,653,806 12,058,816
159,491 26,059 185,550 Waste Management 4,542,304 742,160 5,284,464
OFFICE AUTOMATION & EQUIPMENT (0.61%)
74,769 11,814 86,583 Pitney Bowes 3,271,144 516,863 3,788,007
OIL COMPANY-EXPLORATION & PRODUCTION (2.88%)
93,023 14,257 107,280 Apache 4,716,266 722,830 5,439,096
19,553 3,898 23,451 Burlington Resources 811,450 161,767 973,217
124,642 20,573 145,215 Pioneer Natural Resources 4,038,401 666,565 4,704,966
172,767 26,473 199,240 XTO Energy 5,766,962 883,669 6,650,631
OIL COMPANY-INTEGRATED (0.93%)
131,259 18,845 150,104 Marathon Oil 5,002,280 718,183 5,720,463
OIL-FIELD SERVICES (1.60%)
105,072 16,073 121,145 BJ Services 5,358,672 819,723 6,178,395
61,247 9,870 71,117 Weatherford International (1) 3,200,768 515,806 3,716,574
PHOTO EQUIPMENT & SUPPLIES (0.74%)
130,844 20,964 151,808 Eastman Kodak 3,961,956 634,790 4,596,746
PIPELINES (2.05%)
75,703 12,177 87,880 Equitable Resources 4,186,376 673,388 4,859,764
139,549 22,063 161,612 Questar 6,698,352 1,059,024 7,757,376
POWER CONVERTER & SUPPLY EQUIPMENT (0.84%)
231,775 36,840 268,615 American Power Conversion 4,468,622 710,275 5,178,897
PROPERTY & CASUALTY INSURANCE (3.50%)
212,641 35,503 248,144 Fidelity National Financial 8,025,071 1,339,883 9,364,954
86,923 14,174 101,097 Leucadia National 5,141,496 838,392 5,979,888
104,707 17,517 122,224 Mercury General 5,385,081 900,900 6,285,981
PUBLISHING-NEWSPAPERS (0.08%)
6,766 466 7,232 Knight Ridder 463,674 31,935 495,609
REAL ESTATE OPERATOR & DEVELOPER (0.95%)
126,776 20,266 147,042 Catellus Development 3,656,220 584,472 4,240,692
25,534 4,299 29,833 Forest City Enterprises 1,403,093 236,230 1,639,323
REINSURANCE (1.61%)
107,807 16,868 124,675 Everest Re Group 8,556,642 1,338,813 9,895,455
RETAIL-APPAREL & SHOE (0.70%)
141,969 22,496 164,465 Ross Stores 3,729,526 590,970 4,320,496
RETAIL-DISCOUNT (1.21%)
266,423 45,054 311,477 TJX 6,388,824 1,080,395 7,469,219
RETAIL-JEWELRY (0.60%)
109,218 17,958 127,176 Tiffany 3,203,364 526,708 3,730,072
RETAIL-REGIONAL DEPARTMENT STORE (0.80%)
70,927 10,714 81,641 Neiman Marcus Group 4,314,489 651,733 4,966,222
RETAIL-RESTAURANTS (1.48%)
180,613 30,120 210,733 Yum! Brands 7,856,666 1,310,220 9,166,886
TELEPHONE-INTEGRATED (2.29%)
673,658 108,987 782,645 Citizens Communications 9,027,017 1,460,426 10,487,443
90,441 14,424 104,865 IDT (1) (2) 1,249,895 199,339 1,449,234
25,500 4,331 29,831 Telephone & Data Systems 1,909,950 324,392 2,234,342
TEXTILE-HOME FURNISHINGS (1.25%)
77,973 12,339 90,312 Mohawk Industries (1) 6,633,943 1,049,802 7,683,745
TOBACCO (1.48%)
193,252 29,302 222,554 UST 7,954,252 1,206,070 9,160,322
TOYS (0.71%)
215,596 35,322 250,918 Mattel 3,775,086 618,488 4,393,574
TRANSPORT-TRUCK (0.67%)
172,842 28,469 201,311 Heartland Express 3,536,347 582,476 4,118,823
TOTAL COMMON STOCKS 517,090,322 82,242,429 599,332,751
COMMERCIAL PAPER (3.00%)
FINANCE-CONSUMER LOANS (2.37%)
14,661,696 - 14,661,696 Investment in Joint Trading Account; 14,661,696 - 14,661,696
Household Finance 1.84%; 11/01/04
FINANCEMORTGAGE LOAN/BANKER (0.63%)
- 3,900,634 3,900,634 Investment in Joint Trading Account; - 3,900,634 3,900,634
Federal Home Loan Bank 1.69%; 11/01/04
TOTAL COMMERCIAL PAPER 14,661,696 3,900,634 18,562,330
REPURCHASE AGREEMENTS (1.72%)
10,615,548 - 10,615,548 Goldman Sachs; 1.75%; 10/24/04 10,614,000 - 10,614,000
(collateralized by U.S. Treasuries;
$10,705,925; 11/18/04-01/15/12)(3)
TOTAL REPURCHASE AGREEMENTS 10,614,000 - 10,614,000
TOTAL PORTFOLIO INVESTMENTS (101.67%) 542,366,018 86,143,063 628,509,081
Liabilities, net of cash, receivables
and other assets (-1.67%) (10,412,527) 66,419 (10,346,108)
TOTAL NET ASSETS $531,953,491 $86,209,482 $618,162,973
====================================================
<FN>
(1) Non-income producing security.
(2) Security or a portion of the security was on loan at the end of the period.
(3) Security was purchased with the cash proceeds from securities loans.
</FN>
UNREALIZED APPRECIATION (DEPRECIATION)
The net federal income tax unrealized appreciation (depreciation) and federal
tax cost of investments held by the fund as of the period end were as follows.
Unrealized Appreciation $108,932,692 $10,935,228 $119,867,920
Unrealized Depreciation (9,815,847) (2,151,751) (11,967,598)
Net Unrealized Appreciation (Depreciation) 99,116,845 8,783,477 107,900,322
Cost for federal income tax purposes $443,249,173 $77,359,586 $520,608,759
INVESTMENTS BY SECTOR (UNAUDITED)
Percentage of Total Value Sector Value
------------------------- ------ --------------------------------------------
23.82% 19.38% 23.21% Financial $129,172,251 $16,694,265 $145,866,516
7.33 7.22 7.32 Energy 39,779,527 6,220,955 46,000,482
11.36 11.29 11.35 Industrial 61,602,891 9,723,954 71,326,845
6.57 6.59 6.57 Communications 35,634,313 5,679,451 41,313,764
20.62 20.50 20.61 Consumer, Non-cyclical 111,838,125 17,661,320 129,499,445
12.07 12.24 12.09 Consumer, Cyclical 65,469,561 10,545,670 76,015,231
1.94 1.91 1.94 Utilities 10,536,571 1,647,700 12,184,271
1.80 1.84 1.80 Basic Materials 9,749,132 1,585,937 11,335,069
13.54 13.52 13.54 Technology 73,442,152 11,644,785 85,086,937
0.95 0.98 0.95 Diversified 5,141,495 838,392 5,979,887
- 4.53 0.62 Government - 3,900,634 3,900,634
--------------------------------------------
TOTAL $542,366,018 $86,143,063 $628,509,081
=============================================
<FN>
Percentages are adjusted to reflect the impact of currency contracts,
futures contracts, and swap agreements, if applicable.
See accompanying notes.
</FN>
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
PRINCIPAL COMBINED
PARTNERS PARTNERS PARTNERS
MIDCAP GROWTH MIDCAP PRO FORMA MIDCAP
FUND, INC. GROWTH FUND ADJUSTMENTS GROWTH FUND
- -----------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $ 28,453,700 $ 39,370,692 $ -- $ 67,824,392
============ ============ =========== ============
ASSETS
Investment in
securities--at value. $ 32,204,834 $ 44,291,857 $ -- $ 76,496,691
Cash.................. 419,919 892,071 -- 1,311,990
Receivables:
Capital Shares sold.. 1,034 9,193 -- 10,227
Dividends and
interest............ 5,225 7,368 -- 12,593
Expense reimbursement
from Manager........ 545 -- -- 545
Investment securities
sold................ 679,469 999,854 -- 1,679,323
Other assets.......... 147 -- -- 147
Prepaid directors'
expenses............. 6 -- -- 6
------------ ------------ ----------- ------------
Total Assets 33,311,179 46,200,343 -- 79,511,522
LIABILITIES
Accrued management and
investment advisory
fees................. 5,444 8,399 -- 13,843
Accrued administrative
service fees......... -- 824 -- 824
Accrued distribution
fees................. 2,833 2,490 -- 5,323
Accrued service fees.. -- 1,005 -- 1,005
Accrued transfer and
administrative fees.. 30,872 10,883 -- 41,755
Accrued other expenses 26,701 6,417 -- 33,118
Payables:
Capital Shares
reacquired.......... 45,763 19,075 -- 64,838
Investment securities
purchased........... 1,170,817 1,645,376 -- 2,816,193
------------ ------------ ----------- ------------
Total Liabilities 1,282,430 1,694,469 -- 2,976,899
------------ ------------ ----------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $ 32,028,749 $ 44,505,874 $ -- $ 76,534,623
============ ============ =========== ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $ 40,269,526 $ 42,258,347 $ -- $ 82,527,873
Accumulated
undistributed
(overdistributed) net
realized gain (loss). (11,991,911) (2,673,638) -- (14,665,549)
Net unrealized
appreciation
(depreciation) of
investments.......... 3,751,134 4,921,165 -- 8,672,299
------------ ------------ ----------- ------------
Total Net Assets $ 32,028,749 $ 44,505,874 $ -- $ 76,534,623
============ ============ =========== ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 100,000,000 225,000,000 -- 225,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 13,412,816 N/A $ 13,412,816
Shares issued and
outstanding.......... 1,751,132 1,751,132
Net asset value per
share................ $ 7.66 $ 7.66
============ ============
Advisors Select: Net
Assets............... N/A $ 6,991,117 N/A $ 6,991,117
Shares issued and
outstanding.......... 932,953 932,953
Net asset value per
share................ $ 7.49 $ 7.49
============ ============
Class A: Net Assets... $ 22,677,674 N/A -- $ 22,677,674
Shares issued and
outstanding.......... 4,402,514 (1,358,531) 3,043,983
Net asset value per
share................ $ 5.15 -- $ 7.45
Maximum offering
price per share /(a)/ $ 5.46 -- $ 7.90
============ ============
Class B: Net Assets... $ 9,351,075 N/A -- $ 9,351,075
Shares issued and
outstanding.......... 1,864,930 (609,752) 1,255,178
Net asset value per
share /(b)/.......... $ 5.01 -- $ 7.45
============ ============
Class J: Net Assets... N/A $ 15,435,946 N/A $ 15,435,946
Shares issued and
outstanding.......... 2,144,812 2,144,812
Net asset value per
share /(b)/.......... $ 7.20 $ 7.20
============ ============
Institutional: Net
Assets............... N/A $ 8,754 N/A $ 8,754
Shares issued and
outstanding.......... 1,175 1,175
Net asset value per
share................ $ 7.45 $ 7.45
============ ============
Preferred: Net Assets. N/A $ 8,532,644 N/A $ 8,532,644
Shares issued and
outstanding.......... 1,112,762 1,112,762
Net asset value per
share................ $ 7.67 $ 7.67
============ ============
Select: Net Assets.... N/A $ 124,597 N/A $ 124,597
Shares issued and
outstanding.......... 16,372 16,372
Net asset value per
share................ $ 7.61 $ 7.61
============ ============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 5.75% of the offering price or 6.10% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See accompanying notes.
14
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
COMBINED
PRINCIPAL PARTNERS PARTNERS
PARTNERS MIDCAP MIDCAP PRO FORMA MIDCAP
GROWTH FUND, INC. GROWTH FUND ADJUSTMENTS /(A)/ GROWTH FUND
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Dividends............ $ 93,533 $ 106,090 $ -- $ 199,623
Interest............. 537 1,982 -- 2,519
----------- ---------- -------- -----------
Total Income 94,070 108,072 -- 202,142
Expenses:
Management and
investment advisory
fees................ 294,085 366,292 32,512 692,889
Distribution fees -
Advisors Preferred.. -- 25,374 -- 25,374
Distribution fees -
Advisors Select..... -- 14,998 -- 14,998
Distribution fees -
Class A............. 58,322 -- -- 58,322
Distribution fees -
Class B............. 86,288 -- -- 86,288
Distribution fees -
Class J............. -- 65,713 -- 65,713
Distribution fees -
Select.............. -- 224 -- 224
Administrative
service fees -
Advisors Preferred.. -- 15,225 -- 15,225
Administrative
service fees -
Advisors Select..... -- 9,998 -- 9,998
Administrative
service fees -
Preferred........... -- 8,916 -- 8,916
Administrative
service fees -
Select.............. -- 291 -- 291
Registration fees -
Class A............. 11,302 -- -- 11,302
Registration fees -
Class B............. 10,511 -- -- 10,511
Registration fees -
Class J............. -- 11,699 -- 11,699
Service fees -
Advisors Preferred.. -- 17,254 -- 17,254
Service fees -
Advisors Select..... -- 12,498 -- 12,498
Service fees -
Preferred........... -- 12,158 -- 12,158
Service fees - Select -- 336 -- 336
Shareholder reports -
Class A............. 5,825 -- -- 5,825
Shareholder reports -
Class B............. 2,340 -- -- 2,340
Shareholder reports -
Class J............. -- 4,790 -- 4,790
Transfer and
administrative fees
- Class A........... 34,754 -- -- 34,754
Transfer and
administrative fees
- Class B........... 14,190 -- -- 14,190
Transfer and
administrative fees
- Class J........... -- 52,593 -- 52,593
Auditing and legal
fees................ 6,491 -- (6,491) --
Custodian fees....... 20,191 -- (20,191) --
Directors' expenses.. 1,217 -- (1,217) --
Registration fees.... 20,862 -- -- 20,862
Transfer and
administrative fees. 131,208 -- 587 131,795
Other expenses....... 2,180 -- (2,180) --
----------- ---------- -------- -----------
Total Gross Expenses 699,766 618,359 3,020 1,321,145
Less: Fees paid
indirectly.......... 24,151 37,644 (61,795) --
Less: Reimbursement
from Manager - Class
A................... 17,594 -- 26,711 44,305
Less: Reimbursement
from Manager - Class
B................... 7,104 -- 9,711 16,815
----------- ---------- -------- -----------
Total Net Expenses 650,917 580,715 28,393 1,260,025
----------- ---------- -------- -----------
Net Investment Income
(Operating Loss) (556,847) (472,643) (28,393) (1,057,883)
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ 2,923,337 (257,608) -- 2,665,729
Change in unrealized
appreciation/depreciation
of:
Investments........... (2,050,663) 1,130,960 -- (919,703)
----------- ---------- -------- -----------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies 872,674 873,352 -- 1,746,026
----------- ---------- -------- -----------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $ 315,827 $ 400,709 $(28,393) $ 688,143
=========== ========== ======== ===========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
30
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Partners Principal Partners
Partners MidCap MidCap Partners MidCap MidCap
Growth Fund, Inc. Growth Fund Combined Growth Fund, Inc. Growth Fund Combined
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (99.95%)
AIRLINES (1.06%)
24,210 Southwest Airlines $381,792 $430,206 $811,998
27,280 51,490
APPAREL MANUFACTURERS (1.47%)
10,250 Coach (1) 477,958
13,880 24,130 647,224 1,125,182
APPLICATIONS SOFTWARE (1.01%)
13,070 Citrix Systems (1) 315,379
19,110 32,180 461,124 776,503
AUDIO & VIDEO PRODUCTS (2.11%)
2,410 Harman International Industries 289,634
3,290 5,700 395,392 685,026
18,810 Polycom (1) 388,426
26,170 44,980 540,411 928,837
BEVERAGES-WINE & SPIRITS (0.65%)
5,360 Constellation Brands (1) 210,273
7,300 12,660 286,379 496,652
BUILDING PRODUCTS-AIR &
HEATING (0.73%)
7,980 American Standard (1) 291,829
7,290 15,270 266,595 558,424
BUILDING-RESIDENTIAL &
COMMERCIAL (0.82%)
5,070 DR Horton 152,100
7,010 12,080 210,300 362,400
1,180 Ryland Group 112,560
1,640 2,820 156,440 269,000
CASINO HOTELS (3.07%)
5,240 MGM Mirage (1) 281,912
7,250 12,490 390,050 671,962
7,700 Station Casinos 392,315
10,250 17,950 522,237 914,552
5,300 Wynn Resorts (1) 308,195
7,900 13,200 459,385 767,580
CASINO SERVICES (0.62%)
9,370 Scientific Games (1) 198,457
12,970 22,340 274,705 473,162
CELLULAR TELECOMMUNICATIONS (1.67%)
4,960 NII Holdings (1) 219,579
6,260 11,220 277,130 496,709
10,640 Western Wireless (1) 310,050
16,200 26,840 472,068 782,118
CHEMICALS-DIVERSIFIED (0.80%)
11,220 Lyondell Chemical 257,836
15,510 26,730 356,420 614,256
CHEMICALS-SPECIALTY (0.44%)
2,940 Eastman Chemical 139,562
4,100 7,040 194,627 334,189
CIRCUIT BOARDS (0.39%)
3,690 Benchmark Electronics (1) 125,349
5,100 8,790 173,247 298,596
COAL (0.50%)
2,540 Peabody Energy 162,001
3,500 6,040 223,230 385,231
COMMERCIAL BANKS (1.86%)
2,830 City National 194,987
3,930 6,760 270,777 465,764
4,260 Silicon Valley Bancshares (1) 170,443
5,880 10,140 235,259 405,702
5,670 UCBH Holdings 244,320
7,190 12,860 309,817 554,137
COMMERCIAL SERVICES (0.81%)
6,460 Alliance Data Systems (1) 273,129
8,140 14,600 344,159 617,288
COMMUNICATIONS SOFTWARE (0.67%)
4,080 Avid Technology (1) 216,158
5,610 9,690 297,218 513,376
COMPUTER SERVICES (1.01%)
10,050 Cognizant Technology Solutions (1) 341,700
12,760 22,810 433,840 775,540
COMPUTERS (2.55%)
8,230 Apple Computer (1) 432,322
11,370 19,600 597,266 1,029,588
4,450 Research In Motion (1) 392,490
6,000 10,450 529,200 921,690
COMPUTERS-PERIPHERAL
EQUIPMENT (0.41%)
1,590 Lexmark International (1) 132,145
2,210 3,800 183,673 315,818
CONSUMER PRODUCTS-
MISCELLANEOUS (0.87%)
5,170 Clorox 282,282
7,050 12,220 384,930 667,212
CONTAINERS-METAL & GLASS (0.56%)
4,720 Ball 188,092
5,960 10,680 237,506 425,598
DATA PROCESSING & MANAGEMENT (2.47%)
7,260 Choicepoint (1) 302,234
9,190 16,450 382,580 684,814
3,610 Fiserv (1) 128,299
5,010 8,620 178,055 306,354
4,510 Global Payments 246,968
6,250 10,760 342,250 589,218
3,650 SEI Investments 131,363
5,060 8,710 182,109 313,472
DENTAL SUPPLIES & EQUIPMENT (0.70%)
6,180 Patterson (1) 231,750
8,200 14,380 307,500 539,250
DIAGNOSTIC KITS (0.59%)
3,360 Dade Behring Holdings (1) 189,134
4,650 8,010 261,749 450,883
DISPOSABLE MEDICAL PRODUCTS (1.58%)
8,910 C.R. Bard 506,088
12,390 21,300 703,752 1,209,840
DISTRIBUTION-WHOLESALE (1.00%)
5,180 CDW 321,315
7,110 12,290 441,033 762,348
DIVERSIFIED MANUFACTURING
OPERATIONS (1.56%)
4,000 Eaton 255,800
5,250 9,250 335,737 591,537
6,780 Pentair 253,436
9,400 16,180 351,372 604,808
E-COMMERCE-SERVICES (1.61%)
18,790 Monster Worldwide (1) 527,059
25,240 44,030 707,982 1,235,041
ELECTRONIC COMPONENTS-
MISCELLANEOUS (0.88%)
35,340 Sanmina (1) 282,720
48,970 84,310 391,760 674,480
ELECTRONIC COMPONENTS-
SEMICONDUCTOR (2.93%)
10,880 Advanced Micro Devices (1) 183,002
15,070 25,950 253,477 436,479
11,500 Micron Technology (1) 140,070
15,920 27,420 193,906 333,976
10,850 National Semiconductor (1) 181,195
15,040 25,890 251,168 432,363
42,840 PMC - Sierra (1) 439,538
58,870 101,710 604,006 1,043,544
ENTERPRISE SOFTWARE & SERVICE (0.72%)
25,360 BEA Systems (1) 205,923
42,500 67,860 345,100 551,023
32 MicroStrategy (1) 4
- 32 - 4
ENTERTAINMENT SOFTWARE (0.58%)
5,740 Take-Two Interactive Software (1) 189,190
7,740 13,480 255,110 444,300
FINANCE-INVESTMENT BANKER &
BROKER (0.76%)
2,580 Bear Stearns 244,455
3,580 6,160 339,205 583,660
FINANCE-MORTGAGE LOAN/BANKER (0.72%)
5,480 Doral Financial 230,050
7,600 13,080 319,048 549,098
FINANCIAL GUARANTEE INSURANCE (0.72%)
3,600 MGIC Investment 231,516
4,970 8,570 319,621 551,137
FOOD-MISCELLANEOUS/DIVERSIFIED (0.72%)
6,660 McCormick 235,964
8,810 15,470 312,138 548,102
FOOD-RETAIL (0.81%)
2,710 Whole Foods Market 220,675
4,860 7,570 395,750 616,425
HOTELS & MOTELS (2.42%)
10,500 Marriott International 572,145
13,290 23,790 724,172 1,296,317
4,960 Starwood Hotels & Resorts Worldwide 236,741
6,690 11,650 319,314 556,055
HUMAN RESOURCES (0.73%)
8,840 Robert Half International 234,525
12,220 21,060 324,197 558,722
INDUSTRIAL AUTOMATION & ROBOTS (1.32%)
10,190 Rockwell International 424,821
14,090 24,280 587,412 1,012,233
INSTRUMENTS-SCIENTIFIC (2.29%)
8,330 Fisher Scientific International (1) 477,809
10,740 19,070 616,047 1,093,856
6,800 Waters (1) 280,772
9,060 15,860 374,087 654,859
INTERNET BROKERS (1.17%)
29,150 E*trade Group (1) 376,035
40,460 69,610 521,934 897,969
INTERNET CONTENT-INFORMATION &
NEWS (1.22%)
4,430 Ask Jeeves (1) 114,205
6,150 10,580 158,547 272,752
34,570 CNET Networks (1) 282,437
46,040 80,610 376,147 658,584
INTERNET INFRASTRUCTURE
SOFTWARE (2.42%)
14,140 Akamai Technologies (1) 195,839
19,270 33,410 266,890 462,729
8,540 F5 Networks (1) 341,173
11,640 20,180 465,018 806,191
25,550 TIBCO Software (1) 248,346
35,260 60,810 342,727 591,073
INTERNET SECURITY (2.62%)
10,070 CheckFree (1) 312,170
13,544 23,614 419,864 732,034
19,830 VeriSign (1) 532,039
27,410 47,240 735,410 1,267,449
INVESTMENT MANAGEMENT & ADVISORY
SERVICES (2.21%)
4,965 Affiliated Managers Group (1) 277,246
6,475 11,440 361,564 638,810
8,350 T. Rowe Price Group 465,679
10,520 18,870 586,700 1,052,379
LASERS-SYSTEMS & COMPONENTS (0.75%)
8,410 Cymer (1) 239,853
11,670 20,080 332,828 572,681
LEISURE & RECREATION PRODUCTS (1.34%)
4,450 Brunswick 208,794
5,970 10,420 280,112 488,906
7,810 WMS Industries (1) 228,443
10,570 18,380 309,173 537,616
MACHINERY-PRINT TRADE (0.59%)
3,570 Zebra Technologies (1) 189,174
4,955 8,525 262,565 451,739
MEDICAL INSTRUMENTS (1.15%)
7,930 Biomet 370,172
10,960 18,890 511,613 881,785
MEDICAL LABORATORY & TESTING SERVICE (0.73%)
5,170 Laboratory Corp. of America Holdings (1) 236,786
7,100 12,270 325,180 561,966
MEDICAL PRODUCTS (2.70%)
3,240 Cooper 227,934
4,490 7,730 315,872 543,806
4,020 Henry Schein (1) 254,185
5,590 9,610 353,456 607,641
7,380 INAMED (1) 392,247
9,850 17,230 523,527 915,774
MEDICAL-BIOMEDICAL/GENE (1.02%)
7,020 Charles River Laboratories International 328,466
9,630 16,650 (1) 450,588 779,054
MEDICAL-DRUGS (2.86%)
6,250 Elan (1) 161,250
8,660 14,910 223,428 384,678
8,590 Medimmune (1) 244,128
11,870 20,460 337,345 581,473
5,370 OSI Pharmaceuticals (1) 348,942
7,320 12,690 475,654 824,596
3,600 Sepracor (1) 165,348
4,990 8,590 229,191 394,539
MEDICAL-HMO (0.97%)
2,090 AMERIGROUP (1) 125,400
2,900 4,990 174,000 299,400
5,360 Pacificare Health Systems (1) 190,923
7,140 12,500 254,327 445,250
MEDICAL-NURSING HOMES (0.47%)
5,190 Manor Care 169,921
5,890 11,080 192,839 362,760
METAL-COPPER (0.48%)
1,760 Phelps Dodge 154,070
2,420 4,180 211,847 365,917
MISCELLANEOUS INVESTING (0.54%)
12,170 Host Marriott (1) 177,074
16,300 28,470 237,165 414,239
MOTION PICTURES & SERVICES (0.73%)
5,980 DreamWorks Animation (1) 233,519
8,290 14,270 323,725 557,244
NETWORKING PRODUCTS (3.20%)
28,290 Juniper Networks (1) 752,797
39,330 67,620 1,046,571 1,799,368
11,230 Network Appliance (1) 274,798
15,430 26,660 377,572 652,370
OIL & GAS DRILLING (0.30%)
-
Transocean Sedco Forex (1)
- 6,380 6,380 - 224,895 224,895
OIL COMPANY-EXPLORATION & PRODUCTION (1.80%)
11,620 Range Resources 182,434
15,010 26,630 235,657 418,091
1,990 Ultra Petroleum (1) 96,714
2,740 4,730 133,164 229,878
9,335 XTO Energy 311,602
12,407 21,742 414,146 725,748
OIL FIELD MACHINERY & EQUIPMENT (0.67%)
3,770 Smith International (1) 218,962
5,010 8,780 290,981 509,943
OIL REFINING & MARKETING (0.66%)
3,680 Ashland 212,042
5,090 8,770 293,286 505,328
OIL-FIELD SERVICES (0.92%)
6,970 Baker Hughes 298,525
9,400 16,370 402,602 701,127
OPTICAL SUPPLIES (1.11%)
5,860 Bausch & Lomb 357,226
8,100 13,960 493,776 851,002
PIPELINES (0.35%)
3,800 Western Gas Resources 111,302
5,220 9,020 152,894 264,196
RADIO (0.38%)
31,070 Sirius Satellite Radio (1) 121,173
42,910 73,980 167,349 288,522
RETAIL-APPAREL & SHOE (2.52%)
5,060 American Eagle Outfitters 206,853
6,960 12,020 284,525 491,378
9,260 Chico's FAS (1) 370,678
12,490 21,750 499,974 870,652
5,850 Urban Outfitters (1) 239,850
8,040 13,890 329,640 569,490
RETAIL-BEDDING (1.54%)
12,110 Bed Bath & Beyond (1) 493,967
16,670 28,780 679,969 1,173,936
RETAIL-CONSUMER ELECTRONICS (0.35%)
RadioShack
- 8,880 8,880 - 265,778 265,778
RETAIL-MAIL ORDER (1.29%)
11,160 Williams-Sonoma (1) 425,977
14,700 25,860 561,099 987,076
RETAIL-RESTAURANTS (2.09%)
4,010 P.F. Chang's China Bistro (1) 203,868
5,380 9,390 273,519 477,387
10,780 Yum! Brands 468,930
14,900 25,680 648,150 1,117,080
SAVINGS & LOANS-THRIFTS (0.62%)
9,760 Sovereign Bancorp 211,304
12,290 22,050 266,079 477,383
SEMICONDUCTOR COMPONENT-INTEGRATED
CIRCUITS (1.10%)
12,390 Marvell Technology Group (1) 353,982
17,120 29,510 489,118 843,100
SEMICONDUCTOR EQUIPMENT (1.77%)
3,270 Kla-Tencor (1) 148,883
4,520 7,790 205,796 354,679
16,530 Lam Research (1) 430,276
22,040 38,570 573,701 1,003,977
STEEL-SPECIALTY (0.66%)
12,520 Allegheny Technologies 210,461
17,190 29,710 288,964 499,425
TELECOMMUNICATION EQUIPMENT (1.00%)
15,590 Comverse Technology (1) 321,778
21,660 37,250 447,062 768,840
TELECOMMUNICATION SERVICES (0.45%)
5,760 Amdocs (1) 144,864
7,990 13,750 200,949 345,813
THERAPEUTICS (1.62%)
1,800 Eyetech Pharmaceuticals (1) 76,392
2,490 4,290 105,676 182,068
7,780 MGI Pharma (1) 207,493
10,820 18,600 288,569 496,062
5,080 Neurocrine Biosciences (1) 236,474
6,850 11,930 318,867 555,341
TRANSPORT-MARINE (0.78%)
5,430 Teekay Shipping 250,866
7,520 12,950 347,424 598,290
TRANSPORT-SERVICES (0.77%)
3,790 Expeditors International of Washington 216,409
6,520 10,310 372,292 588,701
TRANSPORT-TRUCK (0.53%)
3,510 Yellow Roadway (1) 168,445
4,870 8,380 233,711 402,156
WEB HOSTING & DESIGN (0.31%)
3,680 Macromedia (1) 99,875
5,100 8,780 138,414 238,289
TOTAL COMMON STOCKS 32,204,834 44,291,857 76,496,691
TOTAL PORTFOLIO INVESTMENTS (99.95%) 32,204,834 44,291,857 76,496,691
Cash, receivables and other assets,
net of liabilities (0.05%)
(176,085) 214,017 37,932
TOTAL NET ASSETS (100.00%) $32,028,749 $44,505,874 $76,534,623
===============================================
<FN>
(1) Non-income producing security.
</FN>
UNREALIZED APPRECIATION (DEPRECIATION)
The net federal income tax unrealized appreciation (depreciation) and federal
tax cost of investments held by the fund as of the period end were as follows:
Unrealized Appreciation $4,385,140 $5,601,251 $9,986,391
Unrealized Depreciation (674,095) (771,131) (1,445,226)
Net Unrealized Appreciation (Depreciation) 3,711,045 4,830,120 8,541,165
Cost for federal income tax purposes $28,493,789 $39,461,737 $67,955,526
INVESTMENTS BY SECTOR (UNAUDITED)
Percentage of Total Value Sector Value
- -----------------------------------------------------------------------------------------------------------------------------------
21.13% 21.28% 21.22% Consumer, Cyclical $6,806,001 $9,426,122 $16,232,123
21.05 20.94 20.99 Consumer, Non-cyclical 6,779,340 9,277,040 16,056,380
15.25 15.27 15.26 Communications 4,911,811 6,762,539 11,674,350
15.17 15.25 15.21 Technology 4,883,686 6,753,691 11,637,377
11.32 11.02 11.15 Industrial 3,645,376 4,882,585 8,527,961
8.77 8.51 8.62 Financial 2,823,109 3,767,169 6,590,278
4.29 4.69 4.52 Energy 1,381,540 2,077,568 3,459,108
3.02 3.04 3.03 Basic Materials 973,971 1,345,143 2,319,114
TOTAL $32,204,834 $44,291,857 $76,496,691
==============================================
<FN>
Percentages are adjusted to reflect the impact of currency contracts,
futures contracts, and swap agreements, if applicable.
See accompanying notes.
</FN>
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
PRINCIPAL COMBINED
SMALLCAP SMALLCAP PRO FORMA SMALLCAP
FUND, INC. BLEND FUND ADJUSTMENTS BLEND FUND
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $113,314,514 $ 95,256,243 $ -- $208,570,757
============ ============ =========== ============
ASSETS
Investment in
securities--at value. $119,160,124/(c)/ $104,577,803 $ -- $223,737,927/(c)/
Cash.................. 28,882 16,768 -- 45,650
Receivables:
Capital Shares sold.. 17,758 109,419 -- 127,177
Dividends and
interest............ 28,227 17,465 -- 45,692
Investment securities
sold................ 387,374 975,429 -- 1,362,803
Other assets.......... 767 -- -- 767
------------ ------------ ----------- ------------
Total Assets 119,623,132 105,696,884 -- 225,320,016
LIABILITIES
Accrued management and
investment advisory
fees................. 17,172 14,549 -- 31,721
Accrued administrative
service fees......... -- 246 -- 246
Accrued distribution
fees................. 8,360 7,511 -- 15,871
Accrued directors'
expense.............. 75 -- -- 75
Accrued service fees.. -- 312 -- 312
Accrued transfer and
administrative fees.. 79,769 37,168 -- 116,937
Accrued other expenses 31,716 11,339 -- 43,055
Payables:
Capital Shares
reacquired.......... 59,060 17,360 -- 76,420
Investment securities
purchased........... 2,371,890 2,903,946 -- 5,275,836
Variation margin on
futures contracts... -- 3,500 -- 3,500
Collateral obligation
on securities loaned,
at value............. 10,207,000 -- -- 10,207,000
------------ ------------ ----------- ------------
Total Liabilities 12,775,042 2,995,931 -- 15,770,973
------------ ------------ ----------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $106,848,090 $102,700,953 $ -- $209,549,043
============ ============ =========== ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $117,892,520 $ 87,034,717 $ -- $204,927,237
Accumulated
undistributed
(overdistributed) net
realized gain (loss). (16,890,040) 6,242,023 -- (10,648,017)
Net unrealized
appreciation
(depreciation) of
investments.......... 5,845,610 9,424,213 -- 15,269,823
------------ ------------ ----------- ------------
Total Net Assets $106,848,090 $102,700,953 $ -- $209,549,043
============ ============ =========== ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 100,000,000 225,000,000 -- 225,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 2,563,339 N/A $ 2,563,339
Shares issued and
outstanding.......... 178,529 178,529
Net asset value per
share................ $ 14.36 $ 14.36
============ ============
Advisors Select: Net
Assets............... N/A $ 1,568,048 N/A $ 1,568,048
Shares issued and
outstanding.......... 109,729 109,729
Net asset value per
share................ $ 14.29 $ 14.29
============ ============
Class A: Net Assets... $ 82,730,657 N/A -- $ 82,730,657
Shares issued and
outstanding.......... 9,018,226 (3,265,051) 5,753,175
Net asset value per
share................ $ 9.17 -- $ 14.38
Maximum offering
price per share /(a)/ $ 9.73 -- $ 15.26
============ == ============
Class B: Net Assets... $ 24,117,433 N/A -- $ 24,117,433
Shares issued and
outstanding.......... 2,777,782 (1,100,631) 1,677,151
Net asset value per
share /(b)/.......... $ 8.68 -- $ 14.38
============ == ============
Class J: Net Assets... N/A $ 77,396,158 N/A $ 77,396,158
Shares issued and
outstanding.......... 5,530,234 5,530,234
Net asset value per
share /(b)/.......... $ 14.00 $ 14.00
============ ============
Institutional: Net
Assets............... N/A $ 15,701,438 N/A $ 15,701,438
Shares issued and
outstanding.......... 1,091,900 1,091,900
Net asset value per
share................ $ 14.38 $ 14.38
============ ============
Preferred: Net Assets. N/A $ 5,455,808 N/A $ 5,455,808
Shares issued and
outstanding.......... 375,998 375,998
Net asset value per
share................ $ 14.51 $ 14.51
============ ============
Select: Net Assets.... N/A $ 16,162 N/A $ 16,162
Shares issued and
outstanding.......... 1,122 1,122
Net asset value per
share................ $ 14.40 $ 14.40
============ ============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 5.75% of the offering price or 6.10% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
/(c) /Includes fair market value of securities loaned, see "Securities Lending"
in Notes to Financial Statements.
See accompanying notes.
16
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PRINCIPAL COMBINED
SMALLCAP SMALLCAP PRO FORMA SMALLCAP
FUND, INC. BLEND FUND ADJUSTMENTS /(A)/ BLEND FUND
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Dividends............ $ 768,499 $ 963,418 $ -- $ 1,731,917
Interest............. 37,816 85,549 -- 123,365
Securities lending... 29,859 -- -- 29,859
----------- ---------- --------- -----------
Total Income 836,174 1,048,967 -- 1,885,141
Expenses:
Management and
investment advisory
fees................ 879,267 640,271 (102,010) 1,417,528
Distribution fees -
Advisors Preferred.. -- 5,477 -- 5,477
Distribution fees -
Advisors Select..... -- 3,953 -- 3,953
Distribution fees -
Class A............. 177,732 -- -- 177,732
Distribution fees -
Class B............. 219,573 -- -- 219,573
Distribution fees -
Class J............. -- 319,436 -- 319,436
Distribution fees -
Select.............. -- 15 -- 15
Administrative
service fees -
Advisors Preferred.. -- 3,287 -- 3,287
Administrative
service fees -
Advisors Select..... -- 2,636 -- 2,636
Administrative
service fees -
Preferred........... -- 5,900 -- 5,900
Administrative
service fees -
Select.............. -- 21 -- 21
Registration fees -
Class A............. 10,605 -- -- 10,605
Registration fees -
Class B............. 6,354 -- -- 6,354
Registration fees -
Class J............. -- 19,416 -- 19,416
Service fees -
Advisors Preferred.. -- 3,725 -- 3,725
Service fees -
Advisors Select..... -- 3,294 -- 3,294
Service fees -
Preferred........... -- 8,046 -- 8,046
Service fees - Select -- 24 -- 24
Shareholder reports -
Class A............. 18,254 -- -- 18,254
Shareholder reports -
Class B............. 5,893 -- -- 5,893
Shareholder reports -
Class J............. -- 18,783 -- 18,783
Transfer and
administrative fees
- Class A........... 108,989 -- -- 108,989
Transfer and
administrative fees
- Class B........... 35,605 -- -- 35,605
Transfer and
administrative fees
- Class J........... -- 171,759 -- 171,759
Auditing and legal
fees................ 7,466 -- (7,466) --
Custodian fees....... 12,210 -- (12,210) --
Directors' expenses.. 3,248 -- (3,248) --
Registration fees.... 26,173 -- -- 26,173
Transfer and
administrative fees. 289,406 -- 1,865 291,271
Other expenses....... 6,255 -- (6,255) --
Other expenses -
Class J............. -- 37 -- 37
----------- ---------- --------- -----------
Total Gross Expenses 1,807,030 1,206,080 (129,324) 2,883,786
Less: Fees paid
indirectly.......... 4,709 1,105 -- 5,814
----------- ---------- --------- -----------
Total Net Expenses 1,802,321 1,204,975 (129,324) 2,877,972
----------- ---------- --------- -----------
Net Investment Income
(Operating Loss) (966,147) (156,008) 129,324 (992,831)
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ 19,381,225 6,657,144 -- 26,038,369
Futures contracts.... -- (37,041) -- (37,041)
Change in unrealized
appreciation/depreciation
of:
Investments........... (8,345,060) (186,740) -- (8,531,800)
Futures contracts..... -- (65,993) -- (65,993)
----------- ---------- --------- -----------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies 11,036,165 6,367,370 -- 17,403,535
----------- ---------- --------- -----------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $10,070,018 $6,211,362 $ 129,324 $16,410,704
=========== ========== ========= ===========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
32
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- -----------------------------------------------------------------------------------------------------------------------------------
Principal Principal
SmallCap SmallCap SmallCap SmallCap
Fund Blend Fund Blend
Inc. Fund Combined Inc. Fund Combined
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (94.84%)
AEROSPACE & DEFENSE EQUIPMENT (1.01%)
Moog (1) $ 480,759 $ 255,879 $ 736,638
12,810 6,818 19,628
Orbital Sciences (1) (2)
97,180 15,225 112,405 1,005,813 157,579 1,163,392
United Defense Industries (1)
- 5,140 5,140 - 206,320 206,320
AIRLINES (0.63%)
ExpressJet Holdings (1)
63,532 27,867 91,399 706,476 309,881 1,016,357
Skywest
- 17,604 17,604 - 300,676 300,676
APPAREL MANUFACTURERS (1.18%)
Guess? (1)
48,350 - 48,350 807,445 - 807,445
Kellwood
22,832 - 22,832 718,295 - 718,295
Oxford Industries
18,722 - 18,722 694,399 - 694,399
Quiksilver (1)
- 9,300 9,300 - 253,425 253,425
APPLICATIONS SOFTWARE (0.56%)
Embarcadero Technologies (1)
58,107 - 58,107 472,410 - 472,410
Serena Software (1)
- 22,509 22,509 - 399,310 399,310
SS&C Technologies
- 12,466 12,466 - 294,696 294,696
ATHLETIC FOOTWEAR (0.24%)
Reebok International
- 13,580 13,580 - 502,460 502,460
AUDIO & VIDEO PRODUCTS (0.27%)
Polycom (1)
- 27,238 27,238 - 562,465 562,465
AUTO-MEDIUM & HEAVY DUTY TRUCKS (0.34%)
Oshkosh Truck
- 12,178 12,178 - 717,284 717,284
AUTO/TRUCK PARTS & EQUIPMENT-ORIGINAL (0.63%)
American Axle & Manufacturing Holdings
- 7,090 7,090 - 203,483 203,483
Dana
- 16,631 16,631 - 247,968 247,968
Tenneco Automotive (1)
31,601 36,601 68,202 402,597 466,297 868,894
BATTERIES & BATTERY SYSTEMS (0.66%)
Rayovac (1)
55,829 - 55,829 1,390,700 - 1,390,700
BUILDING & CONSTRUCTION PRODUCTS-
MISCELLANEOUS (0.45%)
Simpson Manufacturing
- 3,298 3,298 - 211,995 211,995
USG (1)
- 32,887 32,887 - 736,340 736,340
BUILDING PRODUCTS-CEMENT & AGGREGATE (1.01%)
Eagle Materials
21,840 8,667 30,507 1,509,362 598,976 2,108,338
BUILDING PRODUCTS-LIGHT FIXTURES (0.14%)
Genlyte Group (1)
- 4,117 4,117 - 302,846 302,846
BUILDING PRODUCTS-WOOD (0.60%)
Universal Forest Products
24,317 9,904 34,221 891,826 363,229 1,255,055
BUILDING-HEAVY CONSTRUCTION (0.16%)
Washington Group International (1)
- 9,898 9,898 - 345,143 345,143
BUILDING-MAINTENANCE & SERVICE (0.15%)
Rollins
- 12,204 12,204 - 321,575 321,575
BUILDING-RESIDENTIAL & COMMERCIAL (1.07%)
Brookfield Homes
- 15,209 15,209 - 393,913 393,913
Hovnanian Enterprises (1)
- 13,860 13,860 - 520,304 520,304
KB Home
- 11,215 11,215 - 922,434 922,434
M/I Schottenstein Homes
- 9,554 9,554 - 410,822 410,822
CABLE TV (0.05%)
Mediacom Communications (1)
- 15,908 15,908 - 104,197 104,197
CASINO SERVICES (0.27%)
Scientific Games (1)
- 26,821 26,821 - 568,069 568,069
CELLULAR TELECOMMUNICATIONS (0.06%)
Boston Communications Group (1)
- 15,023 15,023 - 136,709 136,709
CHEMICALS-DIVERSIFIED (0.80%)
FMC (1)
17,464 20,821 38,285 765,796 913,001 1,678,797
CHEMICALS-SPECIALTY (0.81%)
Albermarle
- 8,354 8,354 - 299,491 299,491
MacDermid
38,221 5,990 44,211 1,206,255 189,044 1,395,299
CIRCUIT BOARDS (1.27%)
Benchmark Electronics (1)
24,174 20,784 44,958 821,191 706,032 1,527,223
SBS Technologies (1)
55,763 - 55,763 743,321 - 743,321
TTM Technologies (1)
42,181 - 42,181 395,025 - 395,025
COMMERCIAL BANKS (6.99%)
Capital Corp of the West
19,109 - 19,109 879,970 - 879,970
City Holding
34,614 5,950 40,564 1,199,375 206,168 1,405,543
City National
- 12,855 12,855 - 885,709 885,709
Columbia Banking Systems
46,408 8,511 54,919 1,136,996 208,519 1,345,515
Commerce Bancshares
16,829 - 16,829 826,304 - 826,304
Community Trust Bancorp
8,732 - 8,732 288,156 - 288,156
Cullen/Frost Bankers
- 3,482 3,482 - 170,618 170,618
CVB Financial
- 6,240 6,240 - 154,752 154,752
First Bancorp.
- 6,301 6,301 - 343,594 343,594
First Midwest Bancorp
- 6,622 6,622 - 231,174 231,174
Frontier Financial
15,116 - 15,116 581,890 - 581,890
Hibernia
- 39,046 39,046 - 1,132,334 1,132,334
Hudson United Bancorp
- 19,968 19,968 - 794,726 794,726
IBERIABANK
8,732 - 8,732 532,827 - 532,827
MB Financial
- 3,640 3,640 - 155,574 155,574
Oriental Financial Group
- 5,200 5,200 - 147,316 147,316
Pacific Capital Bancorp.
27,705 15,991 43,696 881,850 508,994 1,390,844
R&G Financial
- 15,865 15,865 - 596,841 596,841
Signature Bank (1)
18,889 18,889 556,659 - 556,659
UCBH Holdings
- 14,500 14,500 - 624,805 624,805
Vineyard National Bancorp (1) (3) (4)
4,738 - 4,738 19,994 - 19,994
Vineyard National Bancorp.
23,686 - 23,686 692,105 - 692,105
Virginia Commerce Bancorp. (1) (2)
30,453 - 30,453 895,318 - 895,318
COMMERCIAL SERVICE-FINANCE (0.72%)
iPayment (1) (2)
19,104 19,104 856,050 - 856,050
NCO Group (1)
24,459 24,459 654,278 - 654,278
COMMERCIAL SERVICES (0.20%)
Magellan Health Services (1)
- 11,224 11,224 - 419,778 419,778
COMPUTER AIDED DESIGN (0.59%)
ANSYS (1)
38,286 6,364 44,650 1,056,694 175,646 1,232,340
COMPUTER SERVICES (1.14%)
CACI International (1)
12,296 - 12,296 749,687 - 749,687
Cognizant Technology Solutions (1)
12,332 12,332 - 419,288 419,288
Perot Systems (1)
39,696 18,616 58,312 636,327 298,415 934,742
SRA International (1)
- 5,183 5,183 - 278,638 278,638
COMPUTERS (0.22%)
palmOne (1) (2)
15,912 - 15,912 460,971 - 460,971
COMPUTERS-INTEGRATED SYSTEMS (0.11%)
RadiSys (1)
- 17,410 17,410 - 231,205 231,205
COMPUTERS-MEMORY DEVICES (0.11%)
Storage Technology (1)
- 8,740 8,740 - 236,155 236,155
COMPUTERS-PERIPHERAL EQUIPMENT (0.13%)
Electronics for Imaging (1)
- 15,339 15,339 - 276,716 276,716
CONSUMER PRODUCTS-MISCELLANEOUS (0.31%)
Central Garden & Pet (1)
- 5,250 5,250 - 187,530 187,530
Scotts (1)
- 7,310 7,310 - 469,448 469,448
CONTAINERS-METAL & GLASS (1.39%)
Ball
- 17,657 17,657 - 703,632 703,632
Greif Brothers
26,887 - 26,887 1,117,155 - 1,117,155
Silgan Holdings
18,109 5,091 23,200 859,362 241,593 1,100,955
COSMETICS & TOILETRIES (0.12%)
Chattem (1)
- 7,456 7,456 - 249,478 249,478
DATA PROCESSING & MANAGEMENT (0.45%)
Global Payments
11,171 6,235 17,406 611,724 341,429 953,153
DECISION SUPPORT SOFTWARE (0.15%)
Wind River Systems
- 23,972 23,972 - 320,985 320,985
DENTAL SUPPLIES & EQUIPMENT (0.74%)
Sybron Dental Specialties (1)
26,559 21,354 47,913 865,027 695,500 1,560,527
DIAGNOSTIC EQUIPMENT (0.06%)
Gen-Probe (1)
- 3,467 3,467 - 121,484 121,484
DIALYSIS CENTERS (0.17%)
DaVita (1)
- 12,376 12,376 - 366,577 366,577
DIRECT MARKETING (0.16%)
Catalina Marketing
- 12,995 12,995 - 332,802 332,802
DISTRIBUTION-WHOLESALE (1.81%)
Aviall (1)
- 11,939 11,939 - 258,479 258,479
Hiughes Supply
- 26,106 26,106 - 741,671 741,671
Owens & Minor
- 15,888 15,888 - 416,107 416,107
United Stationers (1)
12,491 11,501 23,992 555,850 511,795 1,067,645
Watsco
33,924 12,061 45,985 965,477 343,256 1,308,733
DIVERSIFIED MANUFACTURING OPERATIONS (0.21%)
Caslisle
- 7,630 7,630 - 443,532 443,532
E-MARKETING-INFORMATION (0.88%)
Digital River (1)
16,553 3,736 20,289 551,215 124,409 675,624
Digitas (1)
81,141 49,461 130,602 730,269 445,149 1,175,418
E-SERVICES-CONSULTING (0.26%)
Websense (1)
- 13,619 13,619 - 552,523 552,523
ELECTRIC PRODUCTS-MISCELLANEOUS (0.19%)
Littelfuse (1)
- 12,139 12,139 - 395,974 395,974
ELECTRIC-INTEGRATED (0.93%)
Great Plains Energy
- 4,966 4,966 - 141,481 141,481
MDU Resources Group
- 29,640 29,640 - 760,266 760,266
OGE Energy
- 14,047 14,047 - 356,373 356,373
Sierra Pacific Resources (1) (2)
70,988 - 70,988 681,485 - 681,485
ELECTRONIC COMPONENTS-MISCELLANEOUS (0.32%)
DSP Group (1)
- 20,934 20,934 - 415,121 415,121
Methode Electronics
- 19,047 19,047 - 255,801 255,801
ELECTRONIC COMPONENTS-SEMICONDUCTOR (1.88%)
Cree (1)
- 16,517 16,517 - 570,002 570,002
Fairchild Semiconductor International (1)
- 34,522 34,522 - 496,081 496,081
Microsemi (1)
71,380 36,208 107,588 1,109,245 562,672 1,671,917
PMC - Sierra (1)
- 15,277 15,277 - 156,742 156,742
Semtech (1)
23,246 - 23,246 485,377 - 485,377
Silicon Laboratories (1)
- 6,285 6,285 - 188,362 188,362
SiRF Technology Holdings (1)
31,180 - 31,180 369,171 - 369,171
ELECTRONIC CONNECTORS (0.31%)
Amphenol (1)
- 18,747 18,747 - 643,584 643,584
ELECTRONIC MEASUREMENT INSTRUMENTS (0.13%)
Tektronix
- 9,113 9,113 - 276,397 276,397
ELECTRONIC PARTS DISTRIBUTION (0.23%)
Avent (1)
- 28,033 28,033 - 475,440 475,440
ELECTRONICS-MILITARY (0.92%)
Engineered Support Systems
23,988 15,971 39,959 1,152,384 767,247 1,919,631
ENGINES-INTERNAL COMBUSTION (0.50%)
Briggs & Stratton
9,232 5,238 14,470 662,950 376,141 1,039,091
ENTERPRISE SOFTWARE & SERVICE (1.02%)
Hyperion Solutions (1)
- 18,409 18,409 - 738,753 738,753
MicroStrategy (1) (2)
12,319 10,965 23,284 738,894 657,681 1,396,575
ENTERTAINMENT SOFTWARE (0.30%)
Activision (1)
42,861 - 42,861 620,627 - 620,627
FILTRATION & SEPARATION PRODUCTS (0.24%)
CLARCOR
- 10,203 10,203 - 503,008 503,008
FINANCE-AUTO LOANS (0.17%)
Westcorp
- 6,325 6,325 - 252,494 252,494
WFS Financial (1)
- 2,179 2,179 - 96,007 96,007
FINANCE-CONSUMER LOANS (0.46%)
Collegiate Funding Services (1)
30,810 14,021 44,831 380,504 173,159 553,663
Portfolio Recovery Associates (1)
- 12,216 12,216 - 411,924 411,924
FINANCE-INVESTMENT BANKER & BROKER (0.05%)
Raymond James Financial
- 4,137 4,137 - 107,976 107,976
FINANCE-MORTGAGE LOAN/BANKER (0.24%)
American Home Mortgage Investment
- 18,387 18,387 - 508,033 508,033
FINANCIAL GUARANTEE INSURANCE (0.08%)
Triad Guaranty (1)
- 3,000 3,000 - 163,530 163,530
FOOD-WHOLESALE & DISTRIBUTION (0.53%)
Nash Finch
35,783 - 35,783 1,104,263 - 1,104,263
FOOTWEAR & RELATED APPAREL (0.63%)
Wolverine World Wide
35,295 8,070 43,365 1,074,380 245,651 1,320,031
GARDEN PRODUCTS (0.16%)
Toro
- 4,963 4,963 - 338,725 338,725
GAS-DISTRIBUTION (2.13%)
AGL Resources
- 16,789 16,789 - 523,817 523,817
Energen
22,049 20,069 42,118 1,185,795 1,079,311 2,265,106
ONEOK
- 17,836 17,836 - 478,361 478,361
UGI (6)
21,844 8,981 30,825 843,834 346,936 1,190,770
HEALTH CARE COST CONTAINMENT (0.21%)
First Health Group (1)
- 27,197 27,197 - 432,976 432,976
HOTELS & MOTELS (0.10%)
Choice Hotels International
- 4,156 4,156 - 207,384 207,384
HOME FURNISHINGS (0.29%)
Hooker Furniture
27,127 - 27,127 601,134 - 601,134
HUMAN RESOURCES (1.61%)
Heidrick & Struggles (1)
39,660 - 39,660 1,135,664 - 1,135,664
Korn/Ferry International (1)
- 21,312 21,312 - 370,829 370,829
Labor Ready (1)
89,225 40,407 129,632 1,280,379 579,840 1,860,219
INDEX FUND (0.53%)
Regional Bank HOLDRs Trust
- 8,109 8,109 - 1,101,445 1,101,445
INSTRUMENTS-SCIENTIFIC (0.35%)
Dionex (1)
8,934 4,065 12,999 500,304 227,640 727,944
INTERNET APPLICATION SOFTWARE (0.65%)
eResearch Technology (1)
- 23,140 23,140 - 270,507 270,507
Motive (1)
72,006 - 72,006 1,098,091 - 1,098,091
INTERNET FINANCIAL SERVICES (0.10%)
IndyMac Bancorp
- 6,754 6,754 - 217,884 217,884
INTERNET SECURITY (0.58%)
RSA Security (1)
41,222 18,571 59,793 843,402 379,963 1,223,365
INTERNET TELEPHONY (0.24%)
j2 Global Communications (1)
- 16,343 16,343 - 492,741 492,741
INTIMATE APPAREL (0.09%)
Warnaco Group (1)
- 9,353 9,353 - 190,801 190,801
INVESTMENT COMPANIES (0.66%)
Apollo Investment (1)
101,365 - 101,365 1,378,564 - 1,378,564
INVESTMENT MANAGEMENT & ADVISORY
SERVICES (1.07%)
Calamos Asset Management (1)
115,300 - 115,300 2,248,350 - 2,248,350
LIFE & HEALTH INSURANCE (0.32%)
Stancorp Financial Group
- 6,521 6,521 - 491,553 491,553
Universal American Financial (1)
- 15,566 15,566 - 189,282 189,282
MACHINERY TOOLS & RELATED PRODUCTS (0.39%)
Kennametal
17,464 - 17,464 812,600 - 812,600
MACHINERY-CONSTRUCTION & MINING (0.81%)
Joy Global
- 8,024 8,024 - 271,131 271,131
Terex (1)
22,691 14,582 37,273 862,258 554,116 1,416,374
MACHINERY-GENERAL INDUSTRY (0.80%)
Gardner Denver (1)
47,137 8,998 56,135 1,413,167 269,760 1,682,927
MEDICAL INFORMATION SYSTEM (0.48%)
Dendrite International (1)
54,728 13,669 68,397 801,765 200,251 1,002,016
MEDICAL INSTRUMENTS (1.39%)
dj Orthopedics (1)
57,380 10,457 67,837 978,329 178,292 1,156,621
Kensey Nash (1) (2)
41,059 16,530 57,589 1,174,287 472,758 1,647,045
Techne (1)
- 2,993 2,993 - 107,808 107,808
MEDICAL LASER SYSTEMS (0.36%)
Candela (1)
- 45,491 45,491 - 462,871 462,871
IntraLase (1)
15,454 - 15,454 297,180 - 297,180
MEDICAL PRODUCTS (0.89%)
Cooper
5,458 3,921 9,379 383,971 275,842 659,813
INAMED (1)
15,108 5,898 21,006 802,990 313,479 1,116,469
VNUS Medical Technologies (1)
6,404 - 6,404 96,252 - 96,252
MEDICAL-BIOMEDICAL/GENE (1.67%)
Affymetrix (1)
- 19,466 19,466 - 593,713 593,713
Celera Genomics Group (1)
- 18,641 18,641 - 238,978 238,978
Cell Genesys (1) (2)
61,577 - 61,577 403,945 - 403,945
deCODE genetics (1) (2)
68,236 24,182 92,418 477,652 169,274 646,926
Lexicon Genetics (1) (2)
75,536 33,902 109,438 491,740 220,702 712,442
Maxim Pharmaceuticals (1) (2)
62,146 49,076 111,222 155,365 122,690 278,055
Regeneron Pharmaceutical (1) (2)
85,189 - 85,189 619,324 - 619,324
MEDICAL-DRUGS (1.06%)
Array BioPharma (1) (2)
55,890 - 55,890 390,671 - 390,671
Endo Pharmaceuticals Holdings (1)
- 17,257 17,257 - 376,203 376,203
First Horizon Pharmaceutical (1)
- 13,047 13,047 - 320,695 320,695
Hi-Tech Parmacal (1)
- 8,610 8,610 - 139,568 139,568
Ligand Pharmaceuticals (1)
- 14,225 14,225 - 126,816 126,816
Salix Pharmaceuticals (1)
- 8,843 8,843 - 141,753 141,753
Santarus (1) (2)
72,883 - 72,883 715,711 - 715,711
MEDICAL-HMO (1.10%)
Sierra Health Services (1)
23,618 16,097 39,715 1,127,051 768,149 1,895,200
WellChoice (1)
- 9,999 9,999 - 417,558 417,558
MEDICAL-HOSPITALS (0.51%)
LifePoint Hospitals (1)
- 26,323 26,323 - 853,392 853,392
VCA Antech (1)
- 9,845 9,845 - 220,725 220,725
MEDICAL-OUTPATIENT & HOME MEDICAL CARE (0.86%)
Apria Healthcare Group (1) (6)
29,053 10,320 39,373 794,890 282,355 1,077,245
Select Medical
41,760 - 41,760 717,854 - 717,854
METAL PROCESSORS & FABRICATION (1.37%)
Commercial Metals
34,344 10,011 44,355 1,241,536 361,897 1,603,433
Metals USA (1)
46,571 - 46,571 794,501 - 794,501
Quanex
- 9,251 9,251 - 469,026 469,026
METAL-ALUMINUM (0.21%)
Century Aluminum (1)
- 18,799 18,799 - 435,009 435,009
METAL-IRON (0.38%)
Cleveland-Cliffs (1)
- 8,744 8,744 - 637,438 637,438
Gibraltar Industries
- 4,308 4,308 - 150,823 150,823
MISCELLANEOUS INVESTING (5.52%)
Brandywine Realty Trust
22,081 - 22,081 649,623 - 649,623
CRT Properties
59,942 10,927 70,869 1,328,315 242,142 1,570,457
Entertainment Properties Trust
21,105 13,371 34,476 842,089 533,503 1,375,592
Federal Realty Investment Trust
- 8,618 8,618 - 408,924 408,924
Gramercy Capital (1)
41,694 15,282 56,976 679,612 249,097 928,709
Healthcare Realty Trust
- 9,588 9,588 - 386,876 386,876
New Century Financial
- 6,704 6,704 - 369,725 369,725
Newcastle Investment (2)
48,014 23,108 71,122 1,469,708 707,336 2,177,044
PS Business Parks
21,092 4,899 25,991 926,361 215,164 1,141,525
Redwood Trust
21,135 21,135 1,271,482 1,271,482
SL Green Realty
- 9,141 9,141 - 501,110 501,110
Thornburg Mortgage
- 15,721 15,721 - 449,149 449,149
Ventas
- 12,706 12,706 - 341,791 341,791
MOTION PICTURES & SERVICES (0.26%)
Macrovision (1)
- 18,559 18,559 - 501,835 501,835
Metro-Goldwyn-Mayer (1)
- 4,086 4,086 - 48,297 48,297
MULTI-LEVEL DIRECT SELLING (0.21%)
Nu Skin Enterprises
- 23,094 23,094 - 446,638 446,638
MULTIMEDIA (0.46%)
Journal Communications
35,950 7,750 43,700 579,514 124,930 704,444
Media General
- 4,490 4,490 - 261,767 261,767
OFFICE AUTOMATION & EQUIPMENT (0.16%)
Imagistics International (1)
- 9,725 9,725 - 334,734 334,734
OFFICE FURNISHINGS-ORIGINAL (0.27%)
HNI
- 13,701 13,701 - 553,520 553,520
OFFICE SUPPLIES & FORMS (0.20%)
John H. Harland
- 13,005 13,005 - 419,151 419,151
OIL COMPANY-EXPLORATION & PRODUCTION (2.37%)
Houston Exploration (1)
20,617 7,970 28,587 1,208,156 467,042 1,675,198
KCS Energy (1)
18,964 17,863 36,827 258,100 243,115 501,215
Meridian Resource (1)
76,841 45,550 122,391 618,570 366,678 985,248
Noble Energy
- 13,780 13,780 - 799,240 799,240
Plains Exploration & Production
- 21,597 21,597 - 539,925 539,925
Pogo Producing
- 10,108 10,108 - 463,452 463,452
OIL FIELD MACHINERY & EQUIPMENT (0.24%)
FMC Technologies (1)
- 9,799 9,799 - 296,224 296,224
Universal Compression Holdings (1)
- 6,231 6,231 - 215,468 215,468
OIL REFINING & MARKETING (0.52%)
Tesoro Petroleum (1)
- 35,875 35,875 - 1,086,295 1,086,295
OIL-FIELD SERVICES (0.35%)
Cal Dive International (1)
- 20,885 20,885 - 739,538 739,538
OPTICAL SUPPLIES (0.53%)
Advanced Medical Optics (1)
- 11,596 11,596 - 453,404 453,404
Bausch & Lomb
- 10,591 10,591 - 645,627 645,627
PAPER & RELATED PRODUCTS (0.28%)
Louisiana-Pacific
- 23,958 23,958 - 587,211 587,211
PIPELINES (0.45%)
Equitable Resources
- 7 7 - 387 387
Questar
- 19,695 19,695 - 945,360 945,360
POULTRY (0.27%)
Pilgrims Pride
- 21,183 21,183 - 572,788 572,788
PRINTING-COMMERCIAL (0.35%)
Banta
- 10,319 10,319 - 419,777 419,777
Consolidated Graphics (1)
- 7,209 7,209 - 307,824 307,824
PRIVATE CORRECTIONS (0.31%)
GEO Group (1)
31,989 - 31,989 640,100 - 640,100
PROPERTY & CASUALTY INSURANCE (2.41%)
Arch Capital Group (1)
18,132 12,251 30,383 681,219 460,270 1,141,489
First American
- 9,074 9,074 - 283,018 283,018
Infinity Property & Casualty
43,087 18,898 61,985 1,339,144 587,350 1,926,494
Selective Insurance Group
- 6,215 6,215 - 242,882 242,882
Stewart Information Services
14,871 - 14,871 630,828 - 630,828
W.R. Berkley
- 19,208 19,208 - 820,950 820,950
PUBLISHING-NEWSPAPERS (0.10%)
Journal Register (1)
- 10,764 10,764 - 202,363 202,363
RACETRACKS (0.71%)
Penn National Gaming (1)
24,677 11,034 35,711 1,024,836 458,242 1,483,078
RADIO (0.62%)
Emmis Communications (1)
23,562 32,112 55,674 440,609 600,494 1,041,103
Radio One (1)
- 17,705 17,705 - 260,087 260,087
RECREATIONAL VEHICLES (0.31%)
Thor Industries
23,270 - 23,270 647,139 - 647,139
REINSURANCE (0.70%)
Max Re Capital
32,330 - 32,330 610,067 - 610,067
PXRE Group
34,654 - 34,654 850,409 - 850,409
RENTAL-AUTO & EQUIPMENT (0.31%)
Aaron Rents
24,084 - 24,084 522,623 - 522,623
Rent-A-Center (1)
- 5,354 5,354 - 128,442 128,442
RESORTS & THEME PARKS (0.35%)
Vail Resorts (1)
36,438 - 36,438 730,946 - 730,946
RESPIRATORY PRODUCTS (0.70%)
Respironics (1)
18,814 9,795 28,609 961,207 500,426 1,461,633
RETAIL-APPAREL & SHOE (1.71%)
Claire's Stores (6)
- 34,344 34,344 - 893,631 893,631
Foot Locker
- 27,238 27,238 - 664,607 664,607
Genesco (1)
23,798 - 23,798 609,229 - 609,229
Kenneth Cole Productions
- 14,231 14,231 - 377,121 377,121
Stein Mart (1)
42,024 20,406 62,430 698,439 339,148 1,037,587
RETAIL-AUTO PARTS (0.10%)
CSK Auto (1)
- 14,792 14,792 - 216,555 216,555
RETAIL-BOOKSTORE (0.51%)
Barnes & Noble (1)
- 26,451 26,451 - 880,025 880,025
Borders Group
- 8,189 8,189 - 186,627 186,627
RETAIL-CATALOG SHOPPING (0.18%)
Coldwater Creek (1)
- 16,301 16,301 - 375,249 375,249
RETAIL-COMPUTER EQUIPMENT (0.25%)
Insight Enterprises (1)
28,214 - 28,214 523,511 - 523,511
RETAIL-CONVENIENCE STORE (0.05%)
Pantry (1)
- 4,597 4,597 - 105,685 105,685
RETAIL-HAIR SALONS (0.36%)
Regis
- 17,619 17,619 - 754,093 754,093
RETAIL-JEWELRY (0.10%)
Zale (1)
- 7,703 7,703 - 219,690 219,690
RETAIL-MUSIC STORE (0.37%)
Guitar Center (1)
17,432 - 17,432 777,990 - 777,990
RETAIL-RESTAURANTS (1.27%)
CBRL Group
- 20,442 20,442 - 741,227 741,227
CEC Entertainment (1)
- 6,810 6,810 - 258,916 258,916
McCormick & Schmick's Seafood Restaurants (1)
42,011 - 42,011 584,373 - 584,373
Ruby Tuesday
26,177 17,378 43,555 646,572 429,237 1,075,809
RETAIL-SPORTING GOODS (0.41%)
Big 5 Sporting Goods (1)
33,777 - 33,777 857,598 - 857,598
SAVINGS & LOANS-THRIFTS (1.27%)
Hudson River Bancorp.
39,228 - 39,228 769,261 - 769,261
Independence Community Bank
27,254 8,867 36,121 1,025,568 333,665 1,359,233
PFF Bancorp
- 7,418 7,418 - 292,640 292,640
Sterling Financial (1)
- 6,180 6,180 - 232,183 232,183
SEISMIC DATA COLLECTION (0.53%)
Veritas DGC (1) (2)
52,363 - 52,363 1,104,859 - 1,104,859
SEMICONDUCTOR COMPONENT-INTEGRATED
CIRCUITS (0.39%)
Exar (1)
- 8,927 8,927 - 134,084 134,084
Micrel (1)
39,838 22,036 61,874 447,381 247,464 694,845
SEMICONDUCTOR EQUIPMENT (0.90%)
Brooks Automation (1)
- 4,919 4,919 - 73,195 73,195
MKS Instruments (1)
- 6,950 6,950 - 109,949 109,949
Mykrolis (1)
56,373 8,707 65,080 592,480 91,510 683,990
Varian Semiconductor Equipment Associates (1)
14,967 14,733 29,700 518,008 509,909 1,027,917
STEEL PIPE & TUBE (0.41%)
Maverick Tube (1)
32,291 - 32,291 851,514 - 851,514
STEEL PRODUCERS (0.52%)
Schnitzer Steel Industries
22,212 16,375 38,587 627,489 462,594 1,090,083
TELECOMMUNICATION EQUIPMENT (1.40%)
Comtech Telecommunications (1) (2)
39,012 5,328 44,340 1,069,319 146,040 1,215,359
Ditech Communications (1)
- 29,445 29,445 - 675,468 675,468
Plantronics
- 11,145 11,145 - 484,808 484,808
Tekelec (1)
- 16,984 16,984 - 379,083 379,083
Westell Technologies (1)
- 32,073 32,073 - 179,930 179,930
TELECOMMUNICATION EQUIPMENT-FIBER OPTICS (0.77%)
C-COR.net (1)
166,437 35,939 202,376 1,251,606 270,261 1,521,867
Sycamore Networks (1)
- 24,244 24,244 - 88,976 88,976
THEATERS (0.45%)
Carmike Cinemas
22,951 3,182 26,133 821,646 113,916 935,562
THERAPEUTICS (1.47%)
Dyax (1)
73,135 25,457 98,592 419,795 146,123 565,918
Eyetech Pharmaceuticals (1) (2)
15,902 9,200 25,102 674,881 390,448 1,065,329
Medicines (1)
- 16,887 16,887 - 449,870 449,870
NeoPharm (1) (2)
63,376 14,433 77,809 460,427 104,856 565,283
Onyx Pharmaceuticals (1) (2)
15,719 - 15,719 441,075 - 441,075
TRANSACTIONAL SOFTWARE (0.50%)
Transaction Systems Architects (1)
46,015 17,579 63,594 754,416 288,208 1,042,624
TRANSPORT-SERVICES (0.86%)
Laidlaw International (1)
43,683 - 43,683 728,195 - 728,195
Offshore Logistics (1)
22,974 6,927 29,901 830,740 250,480 1,081,220
TRANSPORT-TRUCK (0.62%)
J.B. Hunt Transport Services
- 6,833 6,833 - 279,196 279,196
USF
17,473 - 17,473 626,232 - 626,232
Yellow Roadway (1)
- 8,247 8,247 - 395,774 395,774
TRUCKING & LEASING (0.11%)
Ryder System (6)
- 4,696 4,696 - 235,270 235,270
VITAMINS & NUTRITION PRODUCTS (0.14%)
USANA Health Sciences (1)
- 10,073 10,073 - 300,478 300,478
WEB PORTALS (0.14%)
United Online (1)
- 30,273 30,273 - 284,263 284,263
WIRE & CABLE PRODUCTS (0.31%)
Encore Wire (1)
52,393 - 52,393 644,958 - 644,958
105,489,255 93,237,174 198,726,429
COMMERCIAL PAPER (7.06%)
FINANCE-CONSUMER LOANS (1.65%)
Investment in Joint Trading Account;
3,463,869 Household Finance 1.84%; 11/01/04
- 3,463,869 3,463,869 - 3,463,869
FINANCE-MORTGAGE LOAN/BANKER (5.41%)
Investment in Joint Trading Account;
Federal Home Loan Bank 1.69%; 11/01/04
- 11,340,629 11,340,629 - 11,340,629 11,340,629
TOTAL COMMERCIAL PAPER 3,463,869 11,340,629 14,804,498
REPURCHASE AGREEMENTS (4.87%)
Goldman Sachs; 1.75%; dated 10/29/04
maturing 11/01/04 (collateralized by U.S.
Treasuries; $10,295,400; 11/18/04 - 01/15/12)(5)
10,208,489 - 10,208,489 10,207,000 - 10,207,000
TOTAL REPURCHASE AGREEMENTS 10,207,000 - 10,207,000
TOTAL PORTFOLIO INVESTMENTS (106.77%) 119,160,124 104,577,803 223,737,927
Liabilities, net of cash, receivables and
other assets (-6.77%) (12,312,034) (1,876,850) (14,188,884)
TOTAL NET ASSETS (100.00%) $106,848,090 $102,700,953 $209,549,043
===============================================
<FN>
(1) Non-income producing security.
(2) Security or a portion of the security was on loan at the end of the period.
(3) Restricted Security - The fund held securities, which were purchased in
private placement transactions and may require registration, or an
exemption therefrom, in order to effect their sale in the ordinary course
of business. At the end of the period, restricted securities totaled
$19,994 or 0.01% of net assets.
(4) Market value is determined in accordance with procedures established in
good faith by the Board of Directors. At the end of the period, the value
of these securities totaled $19,994 or 0.01% of net assets.
(5) Security was purchased with the cash proceeds from securities loans.
(6) Security or a portion of the security was pledged to cover margin
requirements for futures contracts.
</FN>
UNREALIZED APPRECIATION (DEPRECIATION)
The net federal income tax unrealized appreciation (depreciation) and federal
tax cost of investments held by the fund as of the period end were as follows:
Unrealized Appreciation $ 10,932,247 $ 12,792,816 $ 23,725,063
Unrealized Depreciation (5,132,921) (3,481,169) (8,614,090)
-------------------------------------------------
Net Unrealized Appreciation (Depreciation) 5,799,326 9,311,647 15,110,973
Cost for federal income tax purposes $ 113,360,798 $ 95,266,156 $208,626,954
Opening Current Unrealized
Contract Type Commitment Market Value Market Value Gain(Loss)
- -----------------------------------------------------------------------------------------------------------------------------------
FUTURES CONTRACTS
14 Russell 2000 December 2004 Futures Buy $ 3,988,847 $ 4,091,500 $ 102,653
INVESTMENTS BY SECTOR (UNAUDITED)
Percentage of Total Value Sector Value
- ------------------------------------------------------------------------------------------------------------------------------------
32.93% 15.12% 24.44% Financial $39,243,417 $16,430,741 $55,674,158
16.48 14.59 15.58 Consumer, Non-cyclical 19,642,982 15,857,850 35,500,832
12.13 16.23 14.08 Consumer, Cyclical 14,448,330 17,635,144 32,083,474
16.35 11.3 13.94 Industrial 19,484,340 12,280,980 31,765,320
8.75 8.33 8.55 Technology 10,425,176 9,047,200 19,472,376
5.51 6.77 6.11 Communications 6,564,026 7,359,935 13,923,961
- 10.44 4.98 Government - 11,340,629 11,340,629
3.39 5.67 4.48 Energy 4,041,199 6,162,723 10,203,922
2.28 3.39 2.81 Utilities 2,711,114 3,686,545 6,397,659
2.18 3.38 2.75 Basic Materials 2,599,540 3,674,610 6,274,150
- 3.77 1.80 Futures Contracts - 4,091,500 4,091,500
- 1.01 0.48 Funds - 1,101,446 1,101,446
TOTAL $119,160,124 $108,669,303 $227,829,427
================================================
<FN>
Percentages are adjusted to reflect the impact of currency contracts, futures
contracts, and swap agreements, if applicable.
See accompanying notes.
</FN>
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
PRINCIPAL
REAL ESTATE COMBINED
SECURITIES REAL ESTATE PRO FORMA REAL ESTATE
FUND, INC. /(C)/ SECURITIES FUND ADJUSTMENTS SECURITIES FUND
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $ 62,953,462 $344,712,934 $ -- $407,666,396
============ ============ ========= ============
ASSETS
Investment in
securities--at value. $ 81,449,149 $418,867,089 $ -- $500,316,238
Cash.................. 20,765 91,921 -- 112,686
Receivables:
Capital Shares sold.. 130,175 548,205 -- 678,380
Dividends and
interest............ 108,707 526,259 -- 634,966
Other assets.......... 199 -- -- 199
Prepaid directors'
expenses............. 61 -- -- 61
------------ ------------ --------- ------------
Total Assets 81,709,056 420,033,474 -- 501,742,530
LIABILITIES
Accrued management and
investment advisory
fees................. 13,909 67,538 -- 81,447
Accrued administrative
service fees......... -- 1,865 -- 1,865
Accrued distribution
fees................. 6,509 10,981 -- 17,490
Accrued service fees.. -- 2,318 -- 2,318
Accrued transfer and
administrative fees.. 36,400 37,788 -- 74,188
Accrued other expenses 20,493 10,769 -- 31,262
Payables:
Capital Shares
reacquired.......... 18,281 22,870 -- 41,151
Investment securities
purchased........... 149,680 804,066 -- 953,746
------------ ------------ --------- ------------
Total Liabilities 245,272 958,195 -- 1,203,467
------------ ------------ --------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $ 81,463,784 $419,075,279 $ -- $500,539,063
============ ============ ========= ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $ 52,314,244 $315,279,476 $ -- $367,593,720
Accumulated
undistributed
(overdistributed) net
investment income
(operating loss)..... 64,950 4,989,581 -- 5,054,531
Accumulated
undistributed
(overdistributed) net
realized gain (loss). 10,588,903 24,652,067 -- 35,240,970
Net unrealized
appreciation
(depreciation) of
investments.......... 18,495,687 74,154,155 -- 92,649,842
------------ ------------ --------- ------------
Total Net Assets $ 81,463,784 $419,075,279 $ -- $500,539,063
============ ============ ========= ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 100,000,000 285,000,000 -- 285,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 24,621,054 N/A $ 24,621,054
Shares issued and
outstanding.......... 1,345,396 1,345,396
Net asset value per
share................ $ 18.30 $ 18.30
============ ============
Advisors Select: Net
Assets............... N/A $ 12,660,317 N/A $ 12,660,317
Shares issued and
outstanding.......... 697,424 697,424
Net asset value per
share................ $ 18.15 $ 18.15
============ ============
Class A: Net Assets... $ 62,361,557 N/A -- $ 62,361,557
Shares issued and
outstanding.......... 3,783,350 (401,487) 3,381,863
Net asset value per
share................ $ 16.48 -- $ 18.44
Maximum offering
price per share /(a)/ $ 17.49 -- $ 19.56
============ == ============
Class B: Net Assets... $ 19,102,227 N/A -- $ 19,102,227
Shares issued and
outstanding.......... 1,166,474 (130,561) 1,035,913
Net asset value per
share /(b)/.......... $ 16.38 -- $ 18.44
============ == ============
Class J: Net Assets... N/A $ 95,695,905 N/A $ 95,695,905
Shares issued and
outstanding.......... 5,236,438 5,236,438
Net asset value per
share /(b)/.......... $ 18.28 $ 18.28
============ ============
Institutional: Net
Assets............... N/A $253,838,212 N/A $253,838,212
Shares issued and
outstanding.......... 13,769,054 13,769,054
Net asset value per
share................ $ 18.44 $ 18.44
============ ============
Preferred: Net Assets. N/A $ 30,865,050 N/A $ 30,865,050
Shares issued and
outstanding.......... 1,694,764 1,694,764
Net asset value per
share................ $ 18.21 $ 18.21
============ ============
Select: Net Assets.... N/A $ 1,394,741 N/A $ 1,394,741
Shares issued and
outstanding.......... 76,613 76,613
Net asset value per
share................ $ 18.21 $ 18.21
============ ============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 5.75% of the offering price or 6.10% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
/(c) /Effective March 1, 2004, Principal Real Estate Fund, Inc. changed its name
to Principal Real Estate Securities Fund, Inc.
See accompanying notes.
15
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PRINCIPAL
REAL ESTATE COMBINED
SECURITIES REAL ESTATE PRO FORMA REAL ESTATE
FUND, INC. SECURITIES FUND ADJUSTMENTS /(A)/ SECURITIES FUND
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Dividends............ $ 2,197,747 $ 9,667,005 $ -- $11,864,752
Interest............. 14,982 96,979 -- 111,961
----------- ----------- -------- -----------
Total Income 2,212,729 9,763,984 -- 11,976,713
Expenses:
Management and
investment advisory
fees................ 598,397 2,459,268 (33,586) 3,024,079
Distribution fees -
Advisors Preferred.. -- 43,349 -- 43,349
Distribution fees -
Advisors Select..... -- 24,673 -- 24,673
Distribution fees -
Class A............. 127,274 -- -- 127,274
Distribution fees -
Class B............. 142,069 -- -- 142,069
Distribution fees -
Class J............. -- 352,456 -- 352,456
Distribution fees -
Select.............. -- 620 -- 620
Administrative
service fees -
Advisors Preferred.. -- 26,010 -- 26,010
Administrative
service fees -
Advisors Select..... -- 16,449 -- 16,449
Administrative
service fees -
Preferred........... -- 27,560 -- 27,560
Administrative
service fees -
Select.............. -- 806 -- 806
Registration fees -
Class A............. 11,708 -- -- 11,708
Registration fees -
Class B............. 7,547 -- -- 7,547
Registration fees -
Class J............. -- 17,643 -- 17,643
Service fees -
Advisors Preferred.. -- 29,478 -- 29,478
Service fees -
Advisors Select..... -- 20,561 -- 20,561
Service fees -
Preferred........... -- 37,582 -- 37,582
Service fees - Select -- 930 -- 930
Shareholder reports -
Class A............. 7,619 -- -- 7,619
Shareholder reports -
Class B............. 2,841 -- -- 2,841
Shareholder reports -
Class J............. -- 23,069 -- 23,069
Transfer and
administrative fees
- Class A........... 48,823 -- -- 48,823
Transfer and
administrative fees
- Class B........... 18,299 -- -- 18,299
Transfer and
administrative fees
- Class J........... -- 192,830 -- 192,830
Auditing and legal
fees................ 6,831 -- (6,831) --
Custodian fees....... 2,412 -- (2,412) --
Directors' expenses.. 2,231 -- (2,231) --
Registration fees.... 29,818 -- -- 29,818
Transfer and
administrative fees. 194,760 -- 1,362 196,122
Other expenses....... 3,684 -- (3,684) --
Other expenses -
Class J............. -- 766 -- 766
----------- ----------- -------- -----------
Total Gross Expenses 1,204,313 3,274,050 (47,382) 4,430,981
Less: Fees paid
indirectly.......... 3,761 11,108 -- 14,869
----------- ----------- -------- -----------
Total Net Expenses 1,200,552 3,262,942 (47,382) 4,416,112
----------- ----------- -------- -----------
Net Investment Income
(Operating Loss) 1,012,177 6,501,042 47,382 7,560,601
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ 10,586,325 24,695,274 -- 35,281,599
Change in unrealized
appreciation/depreciation
of:
Investments........... 6,462,427 48,591,086 -- 55,053,513
----------- ----------- -------- -----------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies 17,048,752 73,286,360 -- 90,335,112
----------- ----------- -------- -----------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $18,060,929 $79,787,402 $ 47,382 $97,895,713
=========== =========== ======== ===========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
31
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- -----------------------------------------------------------------------------------------------------------------------------------
Principal Principal
Real Estate Real Estate Real Estate Real Estate
Securities Securities Securities Securities
Fund, Inc. Fund Combined Fund, Inc. Fund Combined
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (96.12%)
PUBLICLY TRADED INVESTMENT FUND (4.56%)
15,835 124,971 iShares Cohen & Steers Realty Majors Index $ 1,997,585 $ 13,767,506 $ 15,765,091
109,136 Fund
10,300 62,105 iShares Dow Jones US Real Estate Index Fund
51,805 1,169,153 5,880,386 7,049,539
REAL ESTATE INVESTMENT TRUSTS (91.56%)
37,603 227,729 Acadia Realty Trust
190,126 579,086 2,927,940 3,507,026
41,509 250,735 AMB Property
209,226 1,556,588 7,845,975 9,402,563
64,300 392,900 Archstone-Smith Trust
328,600 2,157,265 11,024,530 13,181,795
9,900 60,400 Arden Realty
50,500 337,392 1,721,040 2,058,432
35,900 219,600 AvalonBay Communities
183,700 2,350,373 12,026,839 14,377,212
46,841 282,517 BioMed Realty Trust
235,676 851,569 4,284,590 5,136,159
85,276 508,231 Boston Properties
422,955 5,092,683 25,258,872 30,351,555
11,700 70,400 BRE Properties
58,700 466,830 2,342,130 2,808,960
93,300 557,200 Brookfield Properties
463,900 3,169,401 15,758,683 18,928,084
20,985 126,780 Camden Property Trust
105,795 952,719 4,803,093 5,755,812
29,540 178,100 Capital Automotive
148,560 952,960 4,792,546 5,745,506
19,652 120,303 Catellus Development
100,651 566,764 2,902,775 3,469,539
39,390 233,428 CBL & Associates Properties
194,038 2,582,014 12,719,191 15,301,205
59,436 363,076 CenterPoint Properties Trust
303,640 2,751,887 14,058,532 16,810,419
54,395 333,149 Corporate Office Properties Trust
278,754 1,491,511 7,643,435 9,134,946
75,219 448,519 Developers Diversified Realty
373,300 3,144,154 15,603,940 18,748,094
14,514 77,658 Entertainment Properties Trust
63,144 579,109 2,519,446 3,098,555
75,801 449,039 Equity Office Properties Trust
373,238 2,131,524 10,495,452 12,626,976
65,400 393,900 Equity Residential Properties Trust
328,500 2,181,090 10,955,475 13,136,565
17,100 103,900 Essex Property Trust
86,800 1,341,666 6,810,328 8,151,994
29,673 179,176 Extra Space Storage
149,503 411,268 2,072,111 2,483,379
7,314 41,346 Federal Realty Investment Trust
34,032 347,049 1,614,818 1,961,867
45,196 271,998 General Growth Properties
226,802 1,491,016 7,482,198 8,973,214
36,949 212,273 Highland Hospitality
175,324 421,219 1,998,694 2,419,913
86,400 526,100 Host Marriott (1)
439,700 1,257,120 6,397,635 7,654,755
3,800 23,400 Kilroy Realty
19,600 151,050 779,100 930,150
66,400 406,000 Kimco Realty
339,600 3,622,120 18,525,180 22,147,300
46,596 282,637 LaSalle Hotel Properties
236,041 1,338,237 6,779,097 8,117,334
27,600 163,600 Macerich
136,000 1,649,100 8,126,000 9,775,100
18,400 110,100 Mid-America Apartment Communities
91,700 723,672 3,606,561 4,330,233
39,242 236,899 Mills
197,657 2,175,969 10,960,081 13,136,050
40,870 249,969 Pan Pacific Retail Properties
209,099 2,315,285 11,845,458 14,160,743
78,150 471,450 Prologis Trust
393,300 3,046,287 15,330,834 18,377,121
42,300 258,400 Public Storage
216,100 2,210,175 11,291,225 13,501,400
11,115 66,325 Regency Centers
55,210 543,079 2,697,561 3,240,640
86,460 528,475 Simon Property Group
442,015 5,042,347 25,778,315 30,820,662
48,938 296,945 SL Green Realty
248,007 2,682,781 13,595,744 16,278,525
66,200 395,500 Starwood Hotels & Resorts Worldwide
329,300 3,159,726 15,717,489 18,877,215
10,948 66,165 Summit Properties
55,217 332,053 1,674,732 2,006,785
14,224 84,641 Tanger Factory Outlet Centers
70,417 672,084 3,327,203 3,999,287
32,695 193,138 Taubman Centers
160,443 938,347 4,604,714 5,543,061
47,007 284,915 United Dominion Realty Trust
237,908 990,908 5,015,101 6,006,009
92,176 550,686 Ventas
458,510 2,479,534 12,333,919 14,813,453
41,400 252,900 Vornado Realty Trust
211,500 2,782,080 14,212,800 16,994,880
TOTAL COMMON STOCKS 79,185,829 401,909,274 481,095,103
PREFERRED STOCKS (0.82%)
REAL ESTATE INVESTMENT TRUSTS (0.82%)
9,360 75,180 Simon Property Group (1)
65,820 508,903 3,578,633 4,087,536
TOTAL PREFERRED STOCKS 508,903 3,578,633 4,087,536
COMMERCIAL PAPER (3.02%)
FINANCE-CONSUMER LOANS (.35%)
Investment in Joint Trading Account;
Household Finance
1.84%; 11/01/04
1,754,417 - 1,754,417 1,754,417 - 1,754,417
FINANCE-MORTGAGE LOAN/BANKER (2.67%)
Investment in Joint Trading Account;
Federal Home Loan Bank
- 13,379,182 13,379,182 1.69%; 11/01/2004 - 13,379,182 13,379,182
TOTAL COMMERCIAL PAPER 1,754,417 13,379,182 15,133,599
TOTAL PORTFOLIO INVESTMENTS (99.96%) 81,449,149 418,867,089 500,316,238
Cash, receivables and other assets,
net of liabilities (0.04%) 14,635 208,190 222,825
TOTAL NET ASSETS (100.00%) $ 81,463,784 $419,075,279 $500,539,063
====================================================
<FN>
(1) Non-income producing security.
</FN>
UNREALIZED APPRECIATION (DEPRECIATION)
The net federal income tax unrealized appreciation (depreciation) and federal
tax cost of investments held by the fund as of the period end were as follows:
Unrealized Appreciation $ 18,526,520 $ 74,501,804 $ 93,028,324
Unrealized Depreciation (92,592) (515,317) (607,909)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Unrealized Appreciation (Depreciation) 18,433,928 73,986,487 92,420,415
Cost for federal income tax purposes $ 63,015,221 $ 344,880,602 $ 407,895,823
INVESTMENTS BY REIT TYPE (UNAUDITED)
Percentage of Total Value REIT Type Value
- -----------------------------------------------------------------------------------------------------------------------------------
24.67% 24.12% 24.21% Office & Industrial REITs $20,093,272 $101,013,574 $121,106,846
18.49 18.28 18.32 Mall REITs 15,059,780 76,576,335 91,636,115
14.12 13.91 13.94 Apartment REITs 11,496,576 58,258,788 69,755,364
12.95 12.7 12.75 Shopping Center REITs 10,550,774 53,214,898 63,765,672
9.88 9.59 9.64 Diversified REITs 8,050,314 40,186,249 48,236,563
6.04 7.88 7.58 Other Investments 4,921,154 33,027,074 37,948,228
7.58 7.38 7.41 Hotel REITs 6,176,302 30,892,915 37,069,217
3.22 3.19 3.19 Self Storage REITs 2,621,443 13,363,337 15,984,780
3.05 2.95 2.96 Healthcare REITs 2,479,534 12,333,919 14,813,453
TOTAL $81,449,149 $418,867,089 $500,316,238
==================================================
<FN>
Percentages are adjusted to reflect the impact of currency contracts, futures
contracts, and swap agreements, if applicable.
See accompanying notes.
</FN>
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
PRINCIPAL BOND & MORTGAGE COMBINED
BOND SECURITIES PRO FORMA BOND & MORTGAGE
FUND, INC. FUND ADJUSTMENTS SECURITIES FUND
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $221,865,574 $746,792,111 $ -- $ 968,657,685
============ ============ ======== ==============
ASSETS
Investment in
securities--at value. $227,040,360/(c)/ $755,829,429 $ -- $ 982,869,789/(c)/
Cash.................. 861,531 2,255,366 -- 3,116,897
Receivables:
Capital Shares sold.. 54,364 2,009,173 -- 2,063,537
Dividends and
interest............ 2,179,721 6,071,274 -- 8,250,995
Investment securities
sold................ 2,112,673 2,126,641 -- 4,239,314
Unrealized gain on
swap agreements..... 57,560 111,922 -- 169,482
Other assets.......... 7,164 -- -- 7,164
------------ ------------ -------- --------------
Total Assets 232,313,373 768,403,805 -- 1,000,717,178
LIABILITIES
Accrued management and
investment advisory
fees................. 18,951 66,904 -- 85,855
Accrued administrative
service fees......... -- 2,964 -- 2,964
Accrued distribution
fees................. 2,090 18,384 -- 20,474
Accrued directors'
expense.............. 186 -- -- 186
Accrued service fees.. -- 3,708 -- 3,708
Accrued transfer and
administrative fees.. 94,353 67,807 -- 162,160
Accrued other expenses 43,923 19,585 -- 63,508
Payables:
Capital Shares
reacquired.......... 197,130 46 -- 197,176
Investment securities
purchased........... 21,213,760 82,662,185 -- 103,875,945
Reverse repurchase
agreements.......... -- 45,838,394 -- 45,838,394
Collateral obligation
on securities loaned,
at value............. 505,890 -- -- 505,890
------------ ------------ -------- --------------
Total Liabilities 22,076,283 128,679,977 -- 150,756,260
------------ ------------ -------- --------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $210,237,090 $639,723,828 $ -- $ 849,960,918
============ ============ ======== ==============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $215,728,303 $629,086,367 $ -- $ 844,814,670
Accumulated
undistributed
(overdistributed) net
investment income
(operating loss)..... 96,778 1,032,801 -- 1,129,579
Accumulated
undistributed
(overdistributed) net
realized gain (loss). (10,820,337) 455,420 -- (10,364,917)
Net unrealized
appreciation
(depreciation) of
investments.......... 5,232,346 9,149,240 -- 14,381,586
------------ ------------ -------- --------------
Total Net Assets $210,237,090 $639,723,828 $ -- $ 849,960,918
============ ============ ======== ==============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 200,000,000 258,000,000 -- 258,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 28,547,207 N/A $ 28,547,207
Shares issued and
outstanding.......... 2,628,019 2,628,019
Net asset value per
share................ $ 10.86 $ 10.86
============ ==============
Advisors Select: Net
Assets............... N/A $ 31,801,128 N/A $ 31,801,128
Shares issued and
outstanding.......... 2,934,881 2,934,881
Net asset value per
share................ $ 10.84 $ 10.84
============ ==============
Class A: Net Assets... $178,911,422 N/A -- $ 178,911,422
Shares issued and
outstanding.......... 16,051,354 362,538 16,413,892
Net asset value per
share................ $ 11.15 -- $ 10.90
Maximum offering
price per share /(a)/ $ 11.71 -- $ 11.44
============ == ==============
Class B: Net Assets... $ 31,325,668 N/A -- $ 31,325,668
Shares issued and
outstanding.......... 2,810,736 63,178 2,873,914
Net asset value per
share /(b)/.......... $ 11.15 -- $ 10.90
============ == ==============
Class J: Net Assets... N/A $159,801,323 N/A $ 159,801,323
Shares issued and
outstanding.......... 14,603,315 14,603,315
Net asset value per
share /(b)/.......... $ 10.94 $ 10.94
============ ==============
Institutional: Net
Assets............... N/A $373,879,935 N/A $ 373,879,935
Shares issued and
outstanding.......... 34,288,456 34,288,456
Net asset value per
share................ $ 10.90 $ 10.90
============ ==============
Preferred: Net Assets. N/A $ 43,419,981 N/A $ 43,419,981
Shares issued and
outstanding.......... 3,993,860 3,993,860
Net asset value per
share................ $ 10.87 $ 10.87
============ ==============
Select: Net Assets.... N/A $ 2,274,254 N/A $ 2,274,254
Shares issued and
outstanding.......... 206,902 206,902
Net asset value per
share................ $ 10.99 $ 10.99
============ ==============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 4.75% of the offering price or 4.99% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
/(c) /Includes fair market value of securities loaned, see "Securities Lending"
in Notes to Financial Statements.
See accompanying notes.
2
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PRINCIPAL BOND & MORTGAGE COMBINED
BOND SECURITIES PRO FORMA BOND & MORTGAGE
FUND, INC. FUND ADJUSTMENTS /(A)/ SECURITIES FUND
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Dividends............ $ 4,759 $ 10,275 $ -- $ 15,034
Interest............. 10,408,386 20,991,615 -- 31,400,001
Securities lending... 2,442 -- -- 2,442
----------- ----------- -------- -----------
Total Income 10,415,587 21,001,890 -- 31,417,477
Expenses:
Management and
investment advisory
fees................ 1,007,030 2,688,040 125,057 3,820,127
Distribution fees -
Advisors Preferred.. -- 56,802 -- 56,802
Distribution fees -
Advisors Select..... -- 64,864 -- 64,864
Distribution fees -
Class A............. 356,730 -- -- 356,730
Distribution fees -
Class B............. 254,707 -- -- 254,707
Distribution fees -
Class J............. -- 671,620 -- 671,620
Distribution fees -
Select.............. -- 1,881 -- 1,881
Administrative
service fees -
Advisors Preferred.. -- 34,082 -- 34,082
Administrative
service fees -
Advisors Select..... -- 43,243 -- 43,243
Administrative
service fees -
Preferred........... -- 44,038 -- 44,038
Administrative
service fees -
Select.............. -- 2,445 -- 2,445
Registration fees -
Class A............. 8,556 -- -- 8,556
Registration fees -
Class B............. 7,801 -- -- 7,801
Registration fees -
Class J............. -- 24,576 -- 24,576
Service fees -
Advisors Preferred.. -- 38,625 -- 38,625
Service fees -
Advisors Select..... -- 54,054 -- 54,054
Service fees -
Preferred........... -- 60,051 -- 60,051
Service fees - Select -- 2,821 -- 2,821
Shareholder reports -
Class A............. 18,255 -- -- 18,255
Shareholder reports -
Class B............. 5,478 -- -- 5,478
Shareholder reports -
Class J............. -- 35,772 -- 35,772
Transfer and
administrative fees
- Class A........... 122,634 -- -- 122,634
Transfer and
administrative fees
- Class B........... 39,101 -- -- 39,101
Transfer and
administrative fees
- Class J........... -- 327,398 -- 327,398
Auditing and legal
fees................ 12,781 -- (12,781) --
Custodian fees....... 16,073 -- (16,073) --
Directors' expenses.. 7,019 -- (7,019) --
Registration fees.... 29,743 -- -- 29,743
Transfer and
administrative fees. 327,483 -- 5,357 332,840
Other expenses....... 13,298 -- (13,298) --
Other expenses -
Class J............. -- 33 -- 33
Reverse repurchase
agreement interest
expense............. -- 173,625 173,625
----------- ----------- -------- -----------
Total Gross Expenses 2,226,689 4,323,970 81,243 6,631,902
Less: Reimbursement
from Manager - Class
A................... -- -- 90,817 90,817
Less: Reimbursement
from Manager - Class
B................... -- -- 16,264 16,264
Less: Reimbursement
from Manager - Class
J................... -- 17,524 -- 17,524
----------- ----------- -------- -----------
Total Net Expenses 2,226,689 4,306,446 (25,838) 6,507,297
----------- ----------- -------- -----------
Net Investment Income
(Operating Loss) 8,188,898 16,695,444 25,838 24,910,180
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ 3,318,437 1,778,021 -- 5,096,458
Swap agreements...... 81,839 159,132 -- 240,971
Change in unrealized
appreciation/depreciation
of:
Investments........... (238,072) 7,670,960 -- 7,432,888
Swap agreements....... 57,560 111,922 -- 169,482
----------- ----------- -------- -----------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies 3,219,764 9,720,035 -- 12,939,799
----------- ----------- -------- -----------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $11,408,662 $26,415,479 $ 25,838 $37,849,979
=========== =========== ======== ===========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
18
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
PRINCIPAL
GOVERNMENT GOVERNMENT COMBINED
SECURITIES SECURITIES PRO FORMA GOVERNMENT
INCOME FUND, INC. FUND ADJUSTMENTS SECURITIES FUND
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $366,237,346 $137,869,916 $ -- $504,107,262
============ ============ ========== ============
ASSETS
Investment in
securities--at value. $371,154,743/(c)/ $138,696,274 $ -- $509,851,017/(c)/
Cash.................. 10,609 868,873 -- 879,482
Receivables:
Capital Shares sold.. 125,406 109,060 -- 234,466
Dividends and
interest............ 1,520,045 514,606 -- 2,034,651
Investment securities
sold................ -- 23,544 -- 23,544
Other assets.......... 19,084 -- -- 19,084
------------ ------------ ---------- ------------
Total Assets 372,829,887 140,212,357 -- 513,042,244
LIABILITIES
Accrued management and
investment advisory
fees................. 27,750 9,108 -- 36,858
Accrued administrative
service fees......... -- 497 -- 497
Accrued distribution
fees................. 10,634 10,245 -- 20,879
Accrued directors'
expense.............. 331 -- -- 331
Accrued service fees.. -- 625 -- 625
Accrued transfer and
administrative fees.. 106,117 51,060 -- 157,177
Accrued other expenses 40,409 13,401 -- 53,810
Payables:
Capital Shares
reacquired.......... 200,161 34,166 -- 234,327
Investment securities
purchased........... 32,396,406 20,846,625 -- 53,243,031
Collateral obligation
on securities loaned,
at value............. 11,271,000 -- -- 11,271,000
------------ ------------ ---------- ------------
Total Liabilities 44,052,808 20,965,727 -- 65,018,535
------------ ------------ ---------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $328,777,079 $119,246,630 $ -- $448,023,709
============ ============ ========== ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $331,623,698 $119,521,309 $ -- $451,145,007
Accumulated
undistributed
(overdistributed) net
investment income
(operating loss)..... 231,304 47,822 -- 279,126
Accumulated
undistributed
(overdistributed) net
realized gain (loss). (7,995,320) (1,148,859) -- (9,144,179)
Net unrealized
appreciation
(depreciation) of
investments.......... 4,917,397 826,358 -- 5,743,755
------------ ------------ ---------- ------------
Total Net Assets $328,777,079 $119,246,630 $ -- $448,023,709
============ ============ ========== ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 125,000,000 225,000,000 -- 225,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 2,979,374 N/A $ 2,979,374
Shares issued and
outstanding.......... 288,431 288,431
Net asset value per
share................ $ 10.33 $ 10.33
============ ============
Advisors Select: Net
Assets............... N/A $ 6,095,759 N/A $ 6,095,759
Shares issued and
outstanding.......... 590,247 590,247
Net asset value per
share................ $ 10.33 $ 10.33
============ ============
Class A: Net Assets... $274,875,978 N/A -- $274,875,978
Shares issued and
outstanding.......... 24,173,959 2,332,886 26,506,845
Net asset value per
share................ $ 11.37 -- $ 10.37
Maximum offering
price per share /(a)/ $ 11.94 -- $ 10.89
============ == ============
Class B: Net Assets... $ 53,901,101 N/A -- $ 53,901,101
Shares issued and
outstanding.......... 4,768,574 429,218 5,197,792
Net asset value per
share /(b)/.......... $ 11.30 -- $ 10.37
============ == ============
Class J: Net Assets... N/A $101,936,674 N/A $101,936,674
Shares issued and
outstanding.......... 9,800,360 9,800,360
Net asset value per
share /(b)/.......... $ 10.40 $ 10.40
============ ============
Institutional: Net
Assets............... N/A $ 10,119 N/A $ 10,119
Shares issued and
outstanding.......... 976 976
Net asset value per
share................ $ 10.37 $ 10.37
============ ============
Preferred: Net Assets. N/A $ 7,084,334 N/A $ 7,084,334
Shares issued and
outstanding.......... 684,413 684,413
Net asset value per
share................ $ 10.35 $ 10.35
============ ============
Select: Net Assets.... N/A $ 1,140,370 N/A $ 1,140,370
Shares issued and
outstanding.......... 110,187 110,187
Net asset value per
share................ $ 10.35 $ 10.35
============ ============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 4.75% of the offering price or 4.99% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
/(c) /Includes fair market value of securities loaned, see "Securities Lending"
in Notes to Financial Statements.
See accompanying notes.
5
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PRINCIPAL
GOVERNMENT GOVERNMENT COMBINED
SECURITIES SECURITIES PRO FORMA GOVERNMENT
INCOME FUND, INC. FUND ADJUSTMENTS /(A)/ SECURITIES FUND
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Interest............. $15,917,314 $4,303,266 $ -- $20,220,580
Securities lending... 23,421 -- -- 23,421
----------- ---------- --------- -----------
Total Income 15,940,735 4,303,266 -- 20,244,001
Expenses:
Management and
investment advisory
fees................ 1,507,744 438,596 (127,916) 1,818,424
Distribution fees -
Advisors Preferred.. -- 5,871 -- 5,871
Distribution fees -
Advisors Select..... -- 13,699 -- 13,699
Distribution fees -
Class A............. 531,775 -- -- 531,775
Distribution fees -
Class B............. 530,491 -- -- 530,491
Distribution fees -
Class J............. -- 477,854 -- 477,854
Distribution fees -
Select.............. -- 926 -- 926
Administrative
service fees -
Advisors Preferred.. -- 3,523 -- 3,523
Administrative
service fees -
Advisors Select..... -- 9,133 -- 9,133
Administrative
service fees -
Preferred........... -- 6,850 -- 6,850
Administrative
service fees -
Select.............. -- 1,203 -- 1,203
Registration fees -
Class A............. 16,002 -- -- 16,002
Registration fees -
Class B............. 9,958 -- -- 9,958
Registration fees -
Class J............. -- 22,998 -- 22,998
Service fees -
Advisors Preferred.. -- 3,992 -- 3,992
Service fees -
Advisors Select..... -- 11,416 -- 11,416
Service fees -
Preferred........... -- 9,341 -- 9,341
Service fees - Select -- 1,389 -- 1,389
Shareholder reports -
Class A............. 24,077 -- -- 24,077
Shareholder reports -
Class B............. 7,237 -- -- 7,237
Shareholder reports -
Class J............. -- 27,129 -- 27,129
Transfer and
administrative fees
- Class A........... 137,258 -- -- 137,258
Transfer and
administrative fees
- Class B........... 42,562 -- -- 42,562
Transfer and
administrative fees
- Class J........... -- 222,344 -- 222,344
Auditing and legal
fees................ 13,121 -- (13,121) --
Custodian fees....... 14,743 -- (14,743) --
Directors' expenses.. 10,930 -- (10,930) --
Registration fees.... 31,000 -- -- 31,000
Transfer and
administrative fees. 386,509 -- 9,828 396,337
Other expenses....... 20,090 -- (20,090) --
Other expenses -
Class J............. -- 243 -- 243
----------- ---------- --------- -----------
Total Expenses 3,283,497 1,256,507 (176,972) 4,363,032
----------- ---------- --------- -----------
Net Investment Income
(Operating Loss) 12,657,238 3,046,759 176,972 15,880,969
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ (1,150,972) (26,231) -- (1,177,203)
Change in unrealized
appreciation/depreciation
of:
Investments........... 1,182,444 930,294 -- 2,112,738
----------- ---------- --------- -----------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies 31,472 904,063 -- 935,535
----------- ---------- --------- -----------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $12,688,710 $3,950,822 $ 176,972 $16,816,504
=========== ========== ========= ===========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
21
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Principal
Government Government
Securities Government Securities Government
Income Fund, Securities Income Fund, Securities
Inc. Fund Combined Inc. Fund Combined
- ------------------------------------------------------------------------------------------------------------------------------------
BONDS (18.09%)
FEDERAL & FEDERALLY SPONSORED
CREDIT(1.46%)
Federal Farm Credit Bank
2.63%; 9/17/07 $ - $ 1,481,808 $ 1,481,808
- - 1,500,000 1,500,000
3.00%; 12/15/06
- - 1,000,000 1,000,000 - 1,000,415 1,000,415
4.48%;
3,000,000 1,000,000 4,000,000 08/24/12 3,047,637 1,015,879 4,063,516
FINANCE-MORTGAGE LOAN/BANKER
(15.74%)
Federal Home Loan Bank
System
1.88%;
4,000,000 3,000,000 7,000,000 06/15/06 3,950,080 2,962,560 6,912,640
2.45%;
6,000,000 3,000,000 9,000,000 03/23/07 5,932,086 2,966,043 8,898,129
2.50%;
6,000,000 - 6,000,000 03/15/06 5,994,096 - 5,994,096
3.75%;
6,000,000 - 6,000,000 08/15/08 6,070,674 - 6,070,674
5.80%; 09(2)08
- - 2,500,000 2,500,000 - 2,714,360 2,714,360
Federal Home Loan
Mortgage
4.50%;
8,000,000 - 8,000,000 01/15/13 8,113,592 - 8,113,592
4.63%;
3,000,000 1,000,000 4,000,000 05/28/13 2,997,078 999,026 3,996,104
6.63%;
6,000,000 - 6,000,000 09/15/09 6,792,348 - 6,792,348
Federal National Mortgage
Association
2.13%; 04/15/06
6,000,000 - 6,000,000 (1) 5,963,376 - 5,963,376
2.25%; 05/15/06
- - 1,000,000 1,000,000 - 994,837 994,837
2.63%;
4,000,000 - 4,000,000 11/15/06 3,986,700 - 3,986,700
3.00%; 12/15/06
- - 4,000,000 4,000,000 - 3,982,020 3,982,020
4.13%; 02/17/09
4,000,000 2,000,000 6,000,000 (2) 4,075,760 2,037,880 6,113,640
FINANCE-OTHER SERVICES
(0.89%)
Private Export
Funding
3.38%;
3,000,000 1,000,000 4,000,000 02/15/09 2,988,453 996,151 3,984,604
------------------------------------------
TOTAL BONDS 59,911,880 21,150,979 81,062,859
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) CERTIFICATES (31.66%)
3.50%; 09/15/07
5,000,000 4,000,000 9,000,000 (1) 5,065,350 4,052,280 9,117,630
4.00%; 07/01/10
- - 1,668,385 1,668,385 - 1,668,158 1,668,158
4.50%; 11/01/09
- - 416,851 416,851 - 423,034 423,034
4.50%; 02/01/10
- - 1,666,305 1,666,305 - 1,691,404 1,691,404
4.50%; 06/01/11
2,926,089 975,363 3,901,452 2,968,383 989,461 3,957,844
4.50%; 06/01/18
- - 4,482,894 4,482,894 - 4,506,636 4,506,636
4.50%;
3,500,000 - 3,500,000 04/01/19 3,513,342 - 3,513,342
4.50%; 11/01/19
10,000,000 - 10,000,000 (3) 10,025,000 - 10,025,000
4.60%; 10/01/33 (2)
- - 1,361,972 1,361,972 - 1,352,533 1,352,533
5.00%;
13,405,932 - 13,405,932 10/01/10 13,713,692 - 13,713,692
5.00%;
9,422,105 - 9,422,105 05/01/11 9,636,844 - 9,636,844
5.00%;
7,962,949 2,388,885 10,351,834 05/01/18 8,130,983 2,439,295 10,570,278
5.00%; 12/01/18
- - 3,402,795 3,402,795 - 3,474,601 3,474,601
5.00%; 12/01/32
- - 1,528,225 1,528,225 - 1,528,783 1,528,783
5.00%; 08/01/33
- - 4,623,495 4,623,495 - 4,622,765 4,622,765
5.00%;
9,990,299 2,997,090 12,987,389 09/01/34 9,972,247 2,991,674 12,963,921
5.00%; 11/01/34 (3)
- - 5,000,000 5,000,000 - 4,984,375 4,984,375
5.00%; 12/01/34 (3)
- - 3,000,000 3,000,000 - 2,983,125 2,983,125
5.50%; 05/01/17
- - 321,819 321,819 - 333,605 333,605
5.50%; 09/01/17
- - 580,494 580,494 - 601,751 601,751
5.50%; 02/01/18
- - 679,408 679,408 - 704,288 704,288
5.50%; 12/01/18
- - 19,473 19,473 - 19,867 19,867
5.50%; 01/01/29
- - 48,284 48,284 - 49,355 49,355
5.50%; 03/01/29
- - 20,405 20,405 - 20,863 20,863
5.50%; 05/01/33
- - 989,163 989,163 - 1,009,276 1,009,276
5.50%; 10/01/33
- - 482,094 482,094 - 491,896 491,896
5.50%;
8,863,852 - 8,863,852 12/01/33 9,044,081 - 9,044,081
5.50%; 11/01/34
5,500,000 6,000,000 11,500,000 (3) 5,601,409 6,110,628 11,712,037
5.50%; 12/01/34
6,500,000 2,500,000 9,000,000 (3) 6,603,597 2,539,845 9,143,442
6.00%; 12/01/16
- - 84,910 84,910 - 89,150 89,150
6.00%; 03/01/17
- - 240,316 240,316 - 252,333 252,333
6.00%; 06/01/28
- - 189,288 189,288 - 196,474 196,474
6.00%; 10/01/31
- - 96,266 96,266 - 99,801 99,801
6.00%; 02/01/32
- - 231,925 231,925 - 240,440 240,440
6.00%; 01/01/33
- - 1,754,681 1,754,681 - 1,819,210 1,819,210
6.00%; 02/01/33
- - 1,508,781 1,508,781 - 1,563,999 1,563,999
6.50%; 06/01/17
- - 546,160 546,160 - 578,737 578,737
6.50%; 07/01/19
- - 25,328 25,328 - 26,770 26,770
6.50%; 08/01/22
- - 869,923 869,923 - 918,733 918,733
6.50%; 03/01/29
- - 116,553 116,553 - 122,759 122,759
6.50%; 06/01/31
- - 16,434 16,434 - 17,300 17,300
6.50%; 02/01/32
- - 130,075 130,075 - 136,890 136,890
6.50%; 02/01/32
- - 261,347 261,347 - 275,132 275,132
6.50%; 04/01/32
- - 200,012 200,012 - 210,491 210,491
6.50%; 08/01/32
- - 632,468 632,468 - 665,606 665,606
6.50%; 08/01/32
- - 267,230 267,230 - 281,231 281,231
7.00%; 01/01/31
- - 35,698 35,698 - 37,937 37,937
7.50%; 12/01/30
- - 47,335 47,335 - 50,836 50,836
7.50%; 02/01/31
- - 36,215 36,215 - 38,894 38,894
7.50%; 04/01/32
- - 270,263 270,263 - 289,916 289,916
8.00%; 08/01/30
- - 10,757 10,757 - 11,683 11,683
8.00%; 11/01/30
- - 32,634 32,634 - 35,442 35,442
------------------------------------------
TOTAL FHLMC CERTIFICATES
84,274,928 57,549,262 141,824,190
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(FNMA) CERTIFICATES (14.21%)
4.00%; 09/01/18
- - 1,794,689 1,794,689 - 1,765,869 1,765,869
4.50%; 08/01/09
- - 587,796 587,796 - 595,978 595,978
4.50%; 03/01/10
- - 234,160 234,160 - 237,472 237,472
4.59%; 02/01/33 (2)
- - 5,990,164 5,990,164 - 6,122,468 6,122,468
4.73%; 12/01/33 (2)
- - 928,242 928,242 - 933,147 933,147
5.00%; 01/01/18
- - 1,143,782 1,143,782 - 1,168,800 1,168,800
5.00%; 04/01/19
- - 2,884,315 2,884,315 - 2,947,228 2,947,228
5.00%;
6,348,369 - 6,348,369 12/01/10 6,486,142 - 6,486,142
5.00%; 10/01/33 (2)
- - 806,539 806,539 - 816,599 816,599
5.20%; 12/01/33 (2)
- - 1,636,950 1,636,950 - 1,659,052 1,659,052
5.50%; 09/01/17
- - 870,069 870,069 - 902,584 902,584
5.50%; 09/01/17
- - 203,176 203,176 - 210,769 210,769
5.50%; 03/01/18
- - 759,219 759,219 - 787,591 787,591
5.50%; 06/01/19
- - 283,754 283,754 - 294,200 294,200
5.50%; 06/01/19
- - 262,658 262,658 - 272,327 272,327
5.50%; 07/01/19
- - 764,610 764,610 - 792,757 792,757
5.50%; 07/01/19
- - 554,981 554,981 - 575,412 575,412
5.50%; 07/01/19
- - 112,475 112,475 - 116,615 116,615
5.50%; 07/01/19
- - 278,050 278,050 - 288,286 288,286
5.50%; 07/01/19
- - 314,736 314,736 - 326,323 326,323
5.50%; 08/01/19
- - 1,305,526 1,305,526 - 1,353,586 1,353,586
5.50%; 08/01/19
- - 122,816 122,816 - 127,338 127,338
5.50%; 09/01/19
- - 1,000,100 1,000,100 - 1,036,916 1,036,916
5.50%; 09/01/33
- - 4,516,286 4,516,286 - 4,607,438 4,607,438
5.50%;
6,855,292 2,937,982 9,793,274 06/01/34 6,989,587 2,995,537 9,985,124
6.00%; 04/01/09
- - 45,153 45,153 - 47,681 47,681
6.00%; 05/01/09
- - 208,984 208,984 - 220,666 220,666
6.00%; 01/01/17
- - 236,794 236,794 - 248,617 248,617
6.00%; 04/01/17
- - 246,767 246,767 - 259,116 259,116
6.00%; 12/01/22
- - 423,716 423,716 - 441,982 441,982
6.00%; 12/01/31
- - 101,525 101,525 - 105,431 105,431
6.00%; 12/01/31
- - 268,246 268,246 - 278,566 278,566
6.00%; 11/01/32
- - 342,580 342,580 - 355,759 355,759
6.00%; 11/01/34
10,000,000 4,200,000 14,200,000 (3) 10,365,620 4,353,560 14,719,180
6.50%; 04/01/10
- - 43,669 43,669 - 46,396 46,396
6.50%; 06/01/16
- - 83,484 83,484 - 88,584 88,584
6.50%; 09/01/31
- - 239,745 239,745 - 252,578 252,578
6.50%; 12/01/31
- - 72,322 72,322 - 76,193 76,193
6.50%; 04/01/32
- - 126,431 126,431 - 133,163 133,163
6.50%; 06/01/32
- - 489,809 489,809 - 515,888 515,888
7.00%; 05/01/22
- - 273,019 273,019 - 291,129 291,129
7.00%; 02/01/32
- - 72,956 72,956 - 77,531 77,531
7.00%; 02/01/32
- - 73,647 73,647 - 78,239 78,239
7.00%; 02/01/32
- - 142,485 142,485 - 151,422 151,422
7.00%; 04/01/32
- - 291,057 291,057 - 309,204 309,204
7.50%; 01/01/31
- - 26,370 26,370 - 28,281 28,281
7.50%; 05/01/31
- - 48,945 48,945 - 52,493 52,493
7.50%; 08/01/32
- - 427,728 427,728 - 458,205 458,205
------------------------------------------
TOTAL FNMA CERTIFICATES 23,841,349 39,804,976 63,646,325
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GNMA) CERTIFICATES (38.44%)
2.88%; 10/20/30
7,611,865 - 7,611,865 (2) 7,619,439 - 7,619,439
5.00%;
17,276,047 - 17,276,047 05/20/33 17,332,885 - 17,332,885
5.00%;
4,789,465 - 4,789,465 08/15/33 4,817,197 - 4,817,197
5.00%;
8,133,506 - 8,133,506 08/15/33 8,180,599 - 8,180,599
5.50%;
87,449 - 87,449 12/15/13 91,536 - 91,536
5.50%;
399,429 - 399,429 01/15/14 417,860 - 417,860
5.50%;
329,218 - 329,218 01/15/14 344,408 - 344,408
5.50%;
227,056 - 227,056 02/15/14 237,533 - 237,533
5.50%;
388,388 - 388,388 03/15/14 406,309 - 406,309
5.50%;
285,631 - 285,631 07/20/14 297,922 - 297,922
5.50%;
3,570,542 - 3,570,542 03/15/33 3,660,649 - 3,660,649
5.50%;
3,321,474 664,295 3,985,769 04/15/33 3,405,294 681,059 4,086,353
5.50%;
5,832,800 1,296,178 7,128,978 04/15/33 5,983,193 1,329,598 7,312,791
5.50%;
23,749,590 - 23,749,590 05/15/33 24,348,934 - 24,348,934
5.50%; 06/15/33
- - 727,039 727,039 - 745,387 745,387
5.50%;
21,068,045 - 21,068,045 07/20/33 21,560,110 - 21,560,110
6.00%;
2,025,453 - 2,025,453 03/15/17 2,136,091 - 2,136,091
6.00%;
895,845 - 895,845 10/15/23 939,004 - 939,004
6.00%;
7,421,983 - 7,421,983 10/15/23 7,779,552 - 7,779,552
6.00%;
414,482 - 414,482 11/15/23 434,450 - 434,450
6.00%;
196,660 - 196,660 11/15/23 206,134 - 206,134
6.00%;
178,754 - 178,754 12/15/23 187,366 - 187,366
6.00%;
164,876 - 164,876 12/15/23 172,819 - 172,819
6.00%;
15,660 - 15,660 12/15/23 16,415 - 16,415
6.00%;
301,921 - 301,921 01/15/24 316,144 - 316,144
6.00%;
186,837 - 186,837 01/15/24 195,639 - 195,639
6.00%;
300,196 - 300,196 01/15/24 314,338 - 314,338
6.00%;
115,321 - 115,321 01/20/24 120,610 - 120,610
6.00%;
153,379 - 153,379 02/15/24 160,605 - 160,605
6.00%;
220,381 - 220,381 02/15/24 230,763 - 230,763
6.00%;
208,289 - 208,289 02/15/24 218,102 - 218,102
6.00%;
166,699 - 166,699 03/15/24 174,552 - 174,552
6.00%;
104,617 - 104,617 04/15/24 109,545 - 109,545
6.00%;
185,641 - 185,641 04/20/24 194,154 - 194,154
6.00%;
222,865 - 222,865 05/20/24 233,085 - 233,085
6.00%;
116,166 - 116,166 05/20/24 121,493 - 121,493
6.00%;
97,949 - 97,949 10/20/24 102,441 - 102,441
6.00%;
165,547 - 165,547 09/20/25 173,001 - 173,001
6.00%;
89,898 - 89,898 11/20/25 93,945 - 93,945
6.00%;
215,727 - 215,727 03/20/26 225,196 - 225,196
6.00%;
1,746,732 - 1,746,732 04/20/26 1,823,397 - 1,823,397
6.00%;
131,944 - 131,944 05/20/26 137,735 - 137,735
6.00%;
186,053 - 186,053 06/20/26 194,220 - 194,220
6.00%; 10/20/28
- - 137,210 137,210 - 143,116 143,116
6.00%;
3,400,006 - 3,400,006 12/15/31 3,545,401 - 3,545,401
6.00%;
5,070,640 - 5,070,640 07/15/32 5,284,950 - 5,284,950
6.00%;
815,639 - 815,639 08/15/32 850,112 - 850,112
6.00%;
759,942 - 759,942 09/15/32 792,061 - 792,061
6.00%;
2,707,077 - 2,707,077 10/15/32 2,821,491 - 2,821,491
6.00%; 02/15/33
- - 336,001 336,001 - 349,876 349,876
6.50%;
81,989 - 81,989 07/15/08 86,856 - 86,856
6.50%;
55,986 - 55,986 07/15/08 59,310 - 59,310
6.50%;
72,939 - 72,939 07/15/08 77,269 - 77,269
6.50%;
121,620 - 121,620 10/15/08 128,841 - 128,841
6.50%;
66,786 - 66,786 01/15/09 71,037 - 71,037
6.50%;
99,759 - 99,759 03/15/09 105,681 - 105,681
6.50%;
1,208,583 - 1,208,583 07/15/16 1,289,062 - 1,289,062
6.50%;
500,397 - 500,397 07/15/16 533,718 - 533,718
6.50%;
91,400 - 91,400 09/15/23 97,358 - 97,358
6.50%;
129,809 - 129,809 09/15/23 138,271 - 138,271
6.50%;
108,550 - 108,550 09/15/23 115,626 - 115,626
6.50%;
127,262 - 127,262 09/15/23 135,558 - 135,558
6.50%;
134,135 - 134,135 10/15/23 142,878 - 142,878
6.50%;
166,157 - 166,157 10/15/23 176,988 - 176,988
6.50%;
215,263 - 215,263 10/15/23 229,296 - 229,296
6.50%;
84,731 - 84,731 10/15/23 90,254 - 90,254
6.50%;
104,807 - 104,807 10/15/23 111,639 - 111,639
6.50%;
89,849 - 89,849 10/15/23 95,706 - 95,706
6.50%;
88,627 - 88,627 11/15/23 94,405 - 94,405
6.50%;
105,157 - 105,157 11/15/23 112,011 - 112,011
6.50%;
315,691 - 315,691 12/15/23 336,271 - 336,271
6.50%;
330,428 - 330,428 12/15/23 351,968 - 351,968
6.50%;
174,408 - 174,408 12/15/23 185,777 - 185,777
6.50%;
101,891 - 101,891 12/15/23 108,533 - 108,533
6.50%;
18,137 - 18,137 12/15/23 19,320 - 19,320
6.50%;
99,280 - 99,280 12/15/23 105,752 - 105,752
6.50%;
158,270 - 158,270 01/15/24 168,439 - 168,439
6.50%;
82,726 - 82,726 01/15/24 88,041 - 88,041
6.50%;
197,181 - 197,181 01/15/24 209,850 - 209,850
6.50%;
98,576 - 98,576 01/15/24 104,909 - 104,909
6.50%;
155,115 - 155,115 01/15/24 165,082 - 165,082
6.50%;
142,048 - 142,048 01/15/24 151,174 - 151,174
6.50%;
93,168 - 93,168 01/15/24 99,154 - 99,154
6.50%;
381,951 - 381,951 01/15/24 406,492 - 406,492
6.50%;
87,944 - 87,944 01/15/24 93,595 - 93,595
6.50%;
148,958 - 148,958 01/15/24 158,529 - 158,529
6.50%;
117,265 - 117,265 01/15/24 124,800 - 124,800
6.50%;
116,471 - 116,471 03/15/24 123,954 - 123,954
6.50%;
181,190 - 181,190 04/15/24 192,832 - 192,832
6.50%;
90,393 - 90,393 04/15/24 96,201 - 96,201
6.50%;
113,195 - 113,195 04/20/24 120,115 - 120,115
6.50%;
471,742 - 471,742 07/15/24 502,494 - 502,494
6.50%;
77,684 - 77,684 09/20/25 82,355 - 82,355
6.50%;
157,681 - 157,681 10/15/25 167,654 - 167,654
6.50%;
462,501 - 462,501 12/20/25 490,308 - 490,308
6.50%;
103,153 - 103,153 01/15/26 109,583 - 109,583
6.50%;
170,798 - 170,798 02/20/26 180,912 - 180,912
6.50%;
109,235 - 109,235 03/15/26 116,044 - 116,044
6.50%;
113,217 - 113,217 03/15/26 120,274 - 120,274
6.50%;
175,719 - 175,719 03/20/26 186,124 - 186,124
6.50%;
87,341 - 87,341 07/20/26 92,513 - 92,513
6.50%;
141,300 - 141,300 08/20/26 149,667 - 149,667
6.50%;
64,642 - 64,642 03/20/27 68,423 - 68,423
6.50%;
144,673 - 144,673 02/15/28 153,435 - 153,435
6.50%;
295,071 - 295,071 02/15/28 312,942 - 312,942
6.50%; 10/20/28
- - 125,174 125,174 - 132,365 132,365
6.50%; 06/15/31
- - 24,284 24,284 - 25,723 25,723
6.50%;
525,787 35,052 560,839 07/15/31 556,941 37,129 594,070
6.50%; 10/15/31
- - 163,400 163,400 - 173,082 173,082
6.50%; 10/15/31
- - 178,636 178,636 - 189,220 189,220
6.50%;
1,619,557 - 1,619,557 04/15/32 1,715,537 - 1,715,537
6.50%; 07/15/32
- - 313,586 313,586 - 332,170 332,170
6.50%;
1,322,114 - 1,322,114 08/20/33 1,395,126 - 1,395,126
7.00%;
270,592 - 270,592 10/15/22 290,530 - 290,530
7.00%;
50,397 - 50,397 10/15/22 54,110 - 54,110
7.00%;
117,157 - 117,157 11/15/22 125,790 - 125,790
7.00%;
75,036 - 75,036 11/15/22 80,565 - 80,565
7.00%;
281,248 - 281,248 11/15/22 301,971 - 301,971
7.00%;
170,196 - 170,196 11/15/22 182,736 - 182,736
7.00%;
227,221 - 227,221 11/15/22 243,963 - 243,963
7.00%;
101,321 - 101,321 12/15/22 108,786 - 108,786
7.00%;
308,611 - 308,611 12/15/22 331,351 - 331,351
7.00%;
153,973 - 153,973 12/15/22 165,319 - 165,319
7.00%;
62,443 - 62,443 01/15/23 67,024 - 67,024
7.00%;
111,561 - 111,561 01/15/23 119,746 - 119,746
7.00%;
54,494 - 54,494 01/15/23 58,493 - 58,493
7.00%;
127,608 - 127,608 01/15/23 136,971 - 136,971
7.00%;
77,790 - 77,790 01/15/23 83,497 - 83,497
7.00%;
102,523 - 102,523 01/15/23 110,046 - 110,046
7.00%;
75,908 - 75,908 01/15/23 81,478 - 81,478
7.00%;
620,907 - 620,907 02/15/23 666,465 - 666,465
7.00%;
108,269 - 108,269 03/15/23 116,213 - 116,213
7.00%;
60,255 - 60,255 04/15/23 64,676 - 64,676
7.00%;
49,726 - 49,726 07/15/23 53,375 - 53,375
7.00%;
79,808 - 79,808 07/15/23 85,664 - 85,664
7.00%;
54,932 - 54,932 07/15/23 58,962 - 58,962
7.00%;
208,375 - 208,375 07/15/23 223,665 - 223,665
7.00%;
130,691 - 130,691 07/15/23 140,280 - 140,280
7.00%;
37,857 - 37,857 08/15/23 40,635 - 40,635
7.00%;
123,301 - 123,301 08/15/23 132,348 - 132,348
7.00%;
71,115 - 71,115 08/15/23 76,333 - 76,333
7.00%;
83,625 - 83,625 09/15/23 89,761 - 89,761
7.00%;
99,122 - 99,122 10/15/23 106,395 - 106,395
7.00%;
100,569 - 100,569 12/15/23 107,948 - 107,948
7.00%;
118,129 - 118,129 12/15/23 126,796 - 126,796
7.00%;
88,882 - 88,882 01/15/26 95,208 - 95,208
7.00%;
67,901 - 67,901 04/15/26 72,734 - 72,734
7.00%;
97,328 - 97,328 05/15/26 104,255 - 104,255
7.00%;
173,512 - 173,512 12/15/26 185,943 - 185,943
7.00%;
85,528 - 85,528 01/15/27 91,503 - 91,503
7.00%;
43,421 - 43,421 03/15/27 46,455 - 46,455
7.00%;
250,184 - 250,184 11/15/27 267,663 - 267,663
7.00%;
240,345 - 240,345 12/15/27 257,137 - 257,137
7.00%;
196,938 - 196,938 12/15/27 210,697 - 210,697
7.00%;
195,918 - 195,918 12/15/27 209,606 - 209,606
7.00%;
77,365 - 77,365 03/15/28 82,685 - 82,685
7.00%;
103,351 - 103,351 04/15/28 110,459 - 110,459
7.00%;
138,041 - 138,041 04/15/28 147,535 - 147,535
7.00%;
249,774 - 249,774 04/15/28 266,952 - 266,952
7.00%;
279,467 - 279,467 05/15/28 298,687 - 298,687
7.00%;
433,902 - 433,902 02/15/29 463,454 - 463,454
7.00%;
499,981 - 499,981 04/15/29 534,034 - 534,034
7.00%;
759,129 - 759,129 05/15/31 810,550 - 810,550
7.00%;
378,248 - 378,248 05/15/31 403,869 - 403,869
7.00%;
922,043 120,590 1,042,633 05/15/31 984,632 128,776 1,113,408
7.00%;
1,676,912 - 1,676,912 06/15/31 1,790,671 - 1,790,671
7.00%; 07/15/31
- - 4,728 4,728 - 5,049 5,049
7.00%; 07/15/31
- - 31,870 31,870 - 34,029 34,029
7.00%;
1,352,444 - 1,352,444 09/15/31 1,444,279 - 1,444,279
7.00%; 09/15/31
- - 46,038 46,038 - 49,156 49,156
7.00%; 02/15/32
- - 32,391 32,391 - 34,582 34,582
7.25%;
290,770 - 290,770 09/15/25 312,726 - 312,726
7.25%;
39,480 - 39,480 09/15/25 42,461 - 42,461
7.25%;
25,969 - 25,969 09/15/25 27,930 - 27,930
7.25%;
96,554 - 96,554 10/15/25 103,845 - 103,845
7.50%;
21,200 - 21,200 04/15/17 22,938 - 22,938
7.50%;
156,160 - 156,160 04/15/17 168,961 - 168,961
7.50%;
103,325 - 103,325 04/15/17 111,795 - 111,795
7.50%;
35,807 - 35,807 05/15/17 38,743 - 38,743
7.50%;
19,424 - 19,424 05/15/17 21,017 - 21,017
7.50%;
47,142 - 47,142 07/15/18 51,030 - 51,030
7.50%;
40,390 - 40,390 12/15/21 43,780 - 43,780
7.50%;
46,397 - 46,397 12/15/21 50,290 - 50,290
7.50%;
51,314 - 51,314 12/15/21 55,621 - 55,621
7.50%;
79,652 - 79,652 02/15/22 86,413 - 86,413
7.50%;
27,071 - 27,071 03/15/22 29,369 - 29,369
7.50%;
25,455 - 25,455 03/15/22 27,615 - 27,615
7.50%;
38,618 - 38,618 03/15/22 41,896 - 41,896
7.50%;
27,908 - 27,908 04/15/22 30,277 - 30,277
7.50%;
41,597 - 41,597 04/15/22 45,127 - 45,127
7.50%;
45,307 - 45,307 04/15/22 49,152 - 49,152
7.50%;
44,718 - 44,718 04/15/22 48,514 - 48,514
7.50%;
44,589 - 44,589 04/15/22 48,374 - 48,374
7.50%;
16,516 - 16,516 04/15/22 17,917 - 17,917
7.50%;
115,958 - 115,958 05/15/22 125,800 - 125,800
7.50%;
28,457 - 28,457 07/15/22 30,872 - 30,872
7.50%;
144,480 - 144,480 07/15/22 156,743 - 156,743
7.50%;
13,619 - 13,619 08/15/22 14,775 - 14,775
7.50%;
27,259 - 27,259 08/15/22 29,573 - 29,573
7.50%;
40,860 - 40,860 08/15/22 44,328 - 44,328
7.50%;
76,586 - 76,586 08/15/22 83,087 - 83,087
7.50%;
41,323 - 41,323 08/15/22 44,830 - 44,830
7.50%;
59,761 - 59,761 08/15/22 64,834 - 64,834
7.50%;
40,742 - 40,742 08/15/22 44,200 - 44,200
7.50%;
39,037 - 39,037 08/15/22 42,350 - 42,350
7.50%;
181,142 - 181,142 08/15/22 196,517 - 196,517
7.50%;
78,652 - 78,652 08/15/22 85,328 - 85,328
7.50%;
120,366 - 120,366 08/15/22 130,582 - 130,582
7.50%;
10,192 - 10,192 08/15/22 11,058 - 11,058
7.50%;
86,415 - 86,415 11/15/22 93,749 - 93,749
7.50%;
46,613 - 46,613 02/15/23 50,548 - 50,548
7.50%;
62,386 - 62,386 02/15/23 67,653 - 67,653
7.50%;
21,012 - 21,012 02/15/23 22,786 - 22,786
7.50%;
65,353 - 65,353 05/15/23 70,870 - 70,870
7.50%;
72,746 - 72,746 05/15/23 78,888 - 78,888
7.50%;
23,409 - 23,409 05/15/23 25,385 - 25,385
7.50%;
10,952 - 10,952 05/15/23 11,876 - 11,876
7.50%;
93,153 - 93,153 05/15/23 101,018 - 101,018
7.50%;
49,720 - 49,720 06/15/23 53,918 - 53,918
7.50%;
46,221 - 46,221 08/15/23 50,123 - 50,123
7.50%;
39,385 - 39,385 09/15/23 42,710 - 42,710
7.50%;
47,257 - 47,257 10/15/23 51,246 - 51,246
7.50%;
212,549 - 212,549 11/15/23 230,493 - 230,493
7.50%;
57,071 - 57,071 01/15/24 61,746 - 61,746
7.50%;
12,734 - 12,734 06/15/24 13,777 - 13,777
7.50%;
29,552 - 29,552 08/15/24 31,973 - 31,973
7.50%;
122,423 - 122,423 12/15/25 132,286 - 132,286
7.50%;
29,407 - 29,407 02/15/27 31,742 - 31,742
7.50%;
171,351 - 171,351 03/15/27 184,957 - 184,957
7.50%;
69,456 - 69,456 04/15/27 74,971 - 74,971
7.50%;
176,221 - 176,221 05/15/27 190,214 - 190,214
7.50%;
60,081 - 60,081 05/15/27 64,851 - 64,851
7.50%;
41,447 - 41,447 06/15/27 44,738 - 44,738
7.50%;
80,482 - 80,482 06/15/27 86,873 - 86,873
7.50%;
574,575 - 574,575 08/15/29 618,890 - 618,890
7.50%;
391,887 - 391,887 09/15/29 422,112 - 422,112
7.50%;
1,229,908 - 1,229,908 08/15/30 1,324,710 - 1,324,710
7.50%;
335,210 - 335,210 10/15/30 361,018 - 361,018
7.50%; 11/15/30
- - 57,974 57,974 - 62,438 62,438
7.50%;
763,811 - 763,811 12/15/30 822,619 - 822,619
7.50%;
365,894 - 365,894 12/15/30 394,065 - 394,065
7.50%; 01/15/31
- - 11,820 11,820 - 12,730 12,730
7.50%;
384,114 - 384,114 05/15/31 413,705 - 413,705
8.00%;
124,174 - 124,174 08/15/16 136,122 - 136,122
8.00%;
12,172 - 12,172 09/15/16 13,344 - 13,344
8.00%;
34,639 - 34,639 11/15/16 37,973 - 37,973
8.00%;
36,654 - 36,654 12/15/16 40,181 - 40,181
8.00%;
95,717 - 95,717 04/15/17 105,448 - 105,448
8.00%;
203,457 - 203,457 04/15/17 224,140 - 224,140
8.00%;
19,200 - 19,200 04/15/17 21,152 - 21,152
8.00%;
32,106 - 32,106 04/15/17 35,370 - 35,370
8.00%;
56,069 - 56,069 04/15/17 61,770 - 61,770
8.00%;
78,483 - 78,483 04/15/17 86,462 - 86,462
8.00%;
45,890 - 45,890 05/15/17 50,556 - 50,556
8.00%;
25,738 - 25,738 05/15/17 28,354 - 28,354
8.00%;
32,792 - 32,792 06/15/17 36,126 - 36,126
8.00%;
38,632 - 38,632 06/15/17 42,559 - 42,559
8.00%;
63,832 - 63,832 06/15/17 70,322 - 70,322
8.00%;
59,830 - 59,830 06/15/17 65,913 - 65,913
8.00%;
31,137 - 31,137 07/15/17 34,303 - 34,303
8.00%;
31,761 - 31,761 04/15/21 34,979 - 34,979
8.00%;
7,078 - 7,078 11/15/21 7,795 - 7,795
8.00%;
131,127 - 131,127 02/15/22 144,381 - 144,381
8.00%;
351,651 - 351,651 12/15/29 383,558 - 383,558
8.00%;
243,060 - 243,060 10/15/30 265,070 - 265,070
8.00%;
579,408 96,568 675,976 12/15/30 631,876 105,313 737,189
8.00%;
59,971 - 59,971 04/15/31 65,389 - 65,389
----------------------------------------------
TOTAL GNMA CERTIFICATES 167,652,784 4,570,798 172,223,582
COMMERCIAL PAPER (8.88%)
FINANCE-MORTGAGE LOAN/BANKER (8.88%)
Federal Home Loan Mortgage
1.53%;
10,000,000 4,000,000 14,000,000 11/08/04 9,997,025 3,998,810 13,995,835
Federal National Mortgage Association
1.75%;
5,000,000 4,000,000 9,000,000 11/15/04 4,996,597 3,997,278 8,993,875
1.79%;
5,000,000 5,000,000 10,000,000 11/19/04 4,995,525 4,995,525 9,991,050
Investment in Joint Trading Account;
Federal Home Loan Bank
1.69%;
4,213,655 2,628,646 6,842,301 11/01/04 4,213,655 2,628,646 6,842,301
----------------------------------------------
TOTAL COMMERCIAL PAPER 24,202,802 15,620,259 39,823,061
REPURCHASE AGREEMENTS (2.52%)
Goldman Sachs; 1.75%; dated 10/29/04
maturing 11/01/04
11,282,644 - 11,282,644 (collateralized by U.S. Treasuries;
$11,368,615; 11/18/04 - 01/15/12)(4) 11,271,000 - 11,271,000
----------------------------------------------
TOTAL REPURCHASE AGREEMENTS 11,271,000 - 11,271,000
TOTAL PORTFOLIO INVESTMENTS (113.80%) 371,154,743 138,696,274 509,851,017
Liabilities, net of cash, receivables
and other assets (-13.80%) (42,377,664) (19,449,644) (61,827,308)
----------------------------------------------
TOTAL NET ASSETS (100.00%) $328,777,079 $119,246,630 $448,023,709
==============================================
<FN>
(1) Security or a portion of the security was on loan at the end of the period.
(2) Variable rate.
(3) Security or a portion of the security was purchased in a "to-be-announced"
("TBA") transaction. See Notes to Financial Statements.
(4) Security was purchased with the cash proceeds from securities loans.
</FN>
UNREALIZED APPRECIATION (DEPRECIATION)
The net federal income tax unrealized appreciation (depreciation) and federal
tax cost of investments held by the fund as of the period end were as follows:
Unrealized Appreciation $5,653,756 $ 1,135,092 $ 6,788,848
Unrealized Depreciation (736,359) (308,734) (1,045,093)
----------------------------------------------
Net Unrealized Appreciation (Depreciation) 4,917,397 826,358 5,743,755
Cost for federal income tax purposes $366,237,346 $137,869,916 $ 504,107,262
Coupon Distribution (unaudited)
Percentage of Total Value Sector Value
- -----------------------------------------------------------------------------------------------------------------------------------
22.37% 24.56% 22.97% Less than 4% $ 83,044,057 34,056,374 $117,100,431
4.00-4.99%
9.36 17.55 11.59 4.00-4.99% 34,740,792 24,338,945 59,079,737
5.00-5.99%
45.07 44.45 44.90 5.00-5.99% 167,263,010 61,655,755 228,918,765
6.00-6.99%
16.48 11.75 15.19 6.00-6.99% 61,165,666 16,301,917 77,467,583
7.00-7.99%
6.01 1.58 4.81 7.00-7.99% 22,318,078 2,190,846 24,508,924
8.00% and over
0.71 0.11 0.54 8.00% and over 2,623,140 152,437 2,775,577
--------------------------------------------------
TOTAL $371,154,743 $138,696,274 $509,851,017
==================================================
<FN>
Percentages are adjusted to reflect the impact of currency contracts, futures
contracts, and swap agreements, if applicable.
See accompanying notes.
</FN>
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL DIVERSIFIED COMBINED
INTERNATIONAL INTERNATIONAL INTERNATIONAL PRO FORMA DIVERSIFIED
FUND, INC. SMALLCAP FUND, INC. FUND/(D)/ ADJUSTMENTS INTERNATIONAL FUND
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT IN SECURITIES--AT COST ...... $239,656,951 $ 55,546,231 $ 95,988,689 $ -- $391,191,871
============ ============ ============ =========== ============
FOREIGN CURRENCY--AT COST .............. $ 151,354 $ -- $ 114,016 $ -- $ 265,370
============ ============ ============ =========== ============
ASSETS
Investment in securities--at value...... $262,650,479/(c)/ $65,896,401/(c)/ $105,105,412 $ -- $433,652,292/(c)/
Foreign currency--at value.............. 151,947 -- 114,347 -- 266,294
Cash.................................... 12,877 24,607 24,022 -- 61,506
Receivables:
Capital Shares sold.................... 15,924 54,806 94,851 -- 165,581
Dividends and interest................. 385,383 97,337 155,129 -- 637,849
Expense reimbursement from Manager..... -- 791 -- -- 791
Investment securities sold............. 777,406 922,622 317,639 -- 2,017,667
Other assets............................ 4,454 394 -- -- 4,848
Prepaid directors' expenses............. 75 25 -- -- 100
------------ ------------ ------------ ----------- ------------
Total Assets 263,998,545 66,996,983 105,811,400 -- 436,806,928
LIABILITIES
Accrued management and investment
advisory fees.......................... 38,848 13,962 17,864 -- 70,674
Accrued administrative service fees..... -- -- 693 -- 693
Accrued distribution fees............... 4,431 4,715 6,745 -- 15,891
Accrued service fees.................... -- -- 859 -- 859
Accrued transfer and administrative fees 128,973 50,351 32,362 -- 211,686
Accrued other expenses.................. 122,654 36,931 10,214 -- 169,799
Payables:
Capital Shares reacquired.............. 145,893 40,503 -- -- 186,396
Investment securities purchased........ 2,626,058 687,716 1,251,291 -- 4,565,065
Collateral obligation on securities
loaned, at value....................... 21,397,848 5,088,215 -- -- 26,486,063
------------ ------------ ------------ ----------- ------------
Total Liabilities 24,464,705 5,922,393 1,320,028 -- 31,707,126
------------ ------------ ------------ ----------- ------------
NET ASSETS APPLICABLE TO OUTSTANDING
SHARES ................................ $239,533,840 $ 61,074,590 $104,491,372 $ -- $405,099,802
============ ============ ============ =========== ============
NET ASSETS CONSIST OF:
Capital Shares and additional
paid-in-capital........................ $289,721,297 $ 54,238,949 $ 95,342,363 $ -- $439,302,609
Accumulated undistributed
(overdistributed) net investment income
(operating loss)....................... 1,665,403 (66,566) 466,782 -- 2,065,619
Accumulated undistributed
(overdistributed) net realized gain
(loss)................................. (74,835,513) (3,447,766) (442,902) -- (78,726,181)
Net unrealized appreciation
(depreciation) of investments.......... 22,993,528 10,350,170 9,116,723 -- 42,460,421
Net unrealized appreciation
(depreciation) on translation of assets
and liabilities in foreign currencies.. (10,875) (197) 8,406 -- (2,666)
------------ ------------ ------------ ----------- ------------
Total Net Assets $239,533,840 $ 61,074,590 $104,491,372 $ -- $405,099,802
============ ============ ============ =========== ============
CAPITAL STOCK (PAR VALUE: $.01 A SHARE):
Shares authorized....................... 325,000,000 100,000,000 465,000,000 -- 465,000,000
NET ASSET VALUE PER SHARE:
Advisors Preferred: Net Assets.......... N/A N/A $ 8,156,551 N/A $ 8,156,551
Shares issued and outstanding......... 876,205 876,205
Net asset value per share............. $ 9.31 $ 9.31
============ ============
Advisors Select: Net Assets............. N/A N/A $ 5,572,585 N/A $ 5,572,585
Shares issued and outstanding......... 602,167 602,167
Net asset value per share............. $ 9.25 $ 9.25
============ ============
Class A: Net Assets..................... $212,752,278 $ 47,716,565 N/A -- $260,468,843
Shares issued and outstanding......... 29,623,397 3,202,418 (4,878,514) 27,947,301
Net asset value per share............. $ 7.18 $ 14.90 -- $ 9.32
Maximum offering price per share /(a)/ $ 7.62 $ 15.81 -- $ 9.89
============ ============ == ============
Class B: Net Assets..................... $ 26,781,562 $ 13,358,025 N/A -- $ 40,139,587
Shares issued and outstanding......... 3,804,914 945,417 (443,509) 4,306,822
Net asset value per share /(b)/ ...... $ 7.04 $ 14.13 -- $ 9.32
============ ============ == ============
Class J: Net Assets..................... N/A N/A $ 63,380,482 N/A $ 63,380,482
Shares issued and outstanding......... 6,837,443 6,837,443
Net asset value per share /(b)/ ...... $ 9.27 $ 9.27
============ ============
Institutional: Net Assets............... N/A N/A $ 15,830,592 N/A $ 15,830,592
Shares issued and outstanding......... 1,698,991 1,698,991
Net asset value per share............. $ 9.32 $ 9.32
============ ============
Preferred: Net Assets................... N/A N/A $ 10,120,430 N/A $ 10,120,430
Shares issued and outstanding......... 1,085,412 1,085,412
Net asset value per share............. $ 9.32 $ 9.32
============ ============
Select: Net Assets...................... N/A N/A $ 1,430,732 N/A $ 1,430,732
Shares issued and outstanding......... 151,769 151,769
Net asset value per share............. $ 9.43 $ 9.43
============ ============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 5.75% of the offering price or 6.10% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
/(c) /Includes fair market value of securities loaned, see "Securities Lending"
in Notes to Financial Statements.
/(d) /Effective March 1, 2005, International Fund I changed its name to
Diversified International Fund.
See accompanying notes.
8
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PRINCIPAL COMBINED
PRINCIPAL INTERNATIONAL DIVERSIFIED DIVERSIFIED
INTERNATIONAL SMALLCAP INTERNATIONAL PROFORMA INTERNATIONAL
FUND, INC. FUND, INC. FUND ADJUSTMENTS /(A)/ FUND
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (OPERATING LOSS)
Income:
Dividends...................................... $ 5,745,636 $ 1,209,101 $ 2,000,491 $ -- $ 8,955,228
Withholding tax on foreign dividends........... (685,911) (116,644) (247,905) -- (1,050,460)
Interest....................................... 29,017 4,217 33,767 -- 67,001
Securities lending............................. 194,272 46,443 -- -- 240,715
----------- ----------- ----------- --------- -----------
Total Income 5,283,014 1,143,117 1,786,353 -- 8,212,484
Expenses:
Management and investment advisory fees........ 2,023,299 656,321 745,729 (47,347) 3,378,002
Distribution fees - Advisors Preferred......... -- -- 16,810 -- 16,810
Distribution fees - Advisors Select............ -- -- 15,327 -- 15,327
Distribution fees - Class A.................... 359,610 106,391 -- (34,084) 431,917
Distribution fees - Class B.................... 157,067 112,817 -- (44,881) 225,003
Distribution fees - Class J.................... -- -- 241,922 -- 241,922
Distribution fees - Select..................... -- -- 1,184 -- 1,184
Administrative service fees - Advisors
Preferred..................................... -- -- 10,086 -- 10,086
Administrative service fees - Advisors Select.. -- -- 10,218 -- 10,218
Administrative service fees - Preferred........ -- -- 10,059 -- 10,059
Administrative service fees - Select........... -- -- 1,539 -- 1,539
Registration fees - Class A.................... 5,418 4,533 -- (4,533) 5,418
Registration fees - Class B.................... 9,223 6,393 -- (6,393) 9,223
Registration fees - Class J.................... -- -- 16,838 -- 16,838
Service fees - Advisors Preferred.............. -- -- 11,430 -- 11,430
Service fees - Advisors Select................. -- -- 12,772 -- 12,772
Service fees - Preferred....................... -- -- 13,716 -- 13,716
Service fees - Select.......................... -- -- 1,776 -- 1,776
Shareholder reports - Class A.................. 32,756 7,879 -- -- 40,635
Shareholder reports - Class B.................. 6,749 3,253 -- -- 10,002
Shareholder reports - Class J.................. -- -- 17,362 -- 17,362
Transfer and administrative fees - Class A..... 191,490 50,960 -- (450) 242,000
Transfer and administrative fees - Class B..... 45,773 20,358 -- (450) 65,681
Transfer and administrative fees - Class J..... -- -- 155,648 -- 155,648
Auditing and legal fees........................ 12,155 9,941 -- (22,096) --
Custodian fees................................. 215,650 71,517 -- (287,167) --
Directors' expenses............................ 8,064 1,785 -- (9,849) --
Registration fees.............................. 23,986 26,671 -- (26,671) 23,986
Transfer and administrative fees............... 422,817 182,052 -- 6,233 611,102
Other expenses................................. 14,605 3,392 -- (17,997) --
Other expenses - Class J....................... -- -- 824 -- 824
----------- ----------- ----------- --------- -----------
Total Gross Expenses 3,528,662 1,264,263 1,283,240 (495,685) 5,580,480
Less: Fees paid indirectly..................... 26,557 9,566 5,806 (6,928) 35,001
Less: Reimbursement from Manager - Class A..... -- 20,303 -- (20,303) --
Less: Reimbursement from Manager - Class B..... -- 8,022 -- (8,022) --
----------- ----------- ----------- --------- -----------
Total Net Expenses 3,502,105 1,226,372 1,277,434 (460,432) 5,545,479
----------- ----------- ----------- --------- -----------
Net Investment Income (Operating Loss) 1,780,909 (83,255) 508,919 460,432 2,667,005
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES
Net realized gain (loss) from:
Investment transactions........................ 39,436,940 13,301,320 11,858,385 -- 64,596,645
Foreign currency transactions.................. (90,617) (12,447) (39,299) -- (142,363)
Change in unrealized appreciation/depreciation
of:
Investments.................................... (4,432,625) (1,147,175) (804,737) -- (6,384,537)
Translation of assets and liabilities in
foreign currencies............................ (2,561) 578 (2,788) -- (4,771)
----------- ----------- ----------- --------- -----------
Net Realized and Unrealized Gain (Loss) on
Investments and
Foreign Currencies 34,911,137 12,142,276 11,011,561 -- 58,064,974
----------- ----------- ----------- --------- -----------
Net Increase (Decrease) in Net Assets Resulting
from Operations $36,692,046 $12,059,021 $11,520,480 $ 460,432 $60,731,979
=========== =========== =========== ========= ===========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
24
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- -----------------------------------------------------------------------------------------------------------------------------------
Principal Principal
Principal Int'l Principal Int'l
Int'l SmallCap Diversified Int'l SmallCap Diversified
Fund, Fund, Int'l Fund, Fund, Int'l
Inc. Inc. Fund Combined Inc. Inc. Fund Combined
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (97.68%)
ADVERTISING AGENCIES (0.11%)
3,787 9,653 1,528 14,968 Asatsu-DK $ 107,344 $ 273,618 $ 43,312 $ 424,274
ADVERTISING SALES (0.16%)
25,014 50,302 10,364 85,680 Telefonica Publicidad e Informacion 183,596 369,203 76,069 628,868
AEROSPACE & DEFENSE-EQUIPMENT (0.44%)
43,553 - 18,828 62,381 European Aeronautic Defense &
Space (1) 1,238,225 - 535,286 1,773,511
AGRICULTURAL OPERATIONS (0.16%)
284,751 708,054 114,847 1,107,652 Chaoda Modern Agriculture (1) 96,949 241,070 39,102 377,121
80,000 32,846 112,846 IOI Berhad 200,000 82,115 282,115
- AIRLINES (0.07%)
5,496 13,785 2,277 21,558 Austrian Airlines (2) 74,526 186,925 30,876 292,327
AIRPORT DEVELOPMENT &
MAINTENANCE (0.13%)
805 2,027 333 3,165 Kobenhavns Lufthavne 134,642 339,031 55,697 529,370
APPLICATIONS SOFTWARE (0.05%)
3,235 - 1,067 4,302 Infosys Technologies 135,946 - 70,955 206,901
APPLICATIONS SOFTWAREN (0.02%)
2,576 - - 2,576 TATA Consultancy Services (2) 65,548 - - 65,548
ATHLETIC FOOTWEAR (0.26%)
1,060 2,678 436 4,174 Puma (1) 264,632 668,569 108,848 1,042,049
AUDIO & VIDEO PRODUCTS (0.16%)
1,209 3,059 487 4,755 Bang & Olufsen 71,613 181,195 28,847 281,655
23,000 66,333 9,293 98,626 Sansui Electric (2) 6,931 19,989 2,800 29,720
232,779 586,597 93,359 912,735 Skyworth Digital Holdings 80,002 201,602 32,086 313,690
AUTO-CARS & LIGHT TRUCKS (2.05%)
3,555 - 1,454 5,009 Hyundai Motor 172,431 - 70,525 242,956
21,810 - 8,897 30,707 Renault 1,819,967 - 742,423 2,562,390
- 9,768 9,768 Tata Motors (2) 90,354 90,354
97,207 - 42,101 139,308 Toyota Motor 3,780,628 - 1,637,415 5,418,043
AUTO-MEDIUM & HEAVY DUTY
TRUCKS (0.45%)
34,318 - 14,225 48,543 Volvo (1) 1,295,401 - 536,951 1,832,352
AUTO/TRUCK PARTS & EQUIPMENT-
ORIGINAL (0.20%)
4,998 12,658 2,014 19,670 Exedy 84,202 213,252 33,930 331,384
7,103 18,145 2,975 28,223 Keihin 117,257 299,540 49,112 465,909
BEVERAGES-NON-ALCOHOLIC (0.34%)
3,275 8,230 1,320 12,825 Asahi Soft Drinks 27,880 70,062 11,237 109,179
5,548 14,052 2,234 21,834 Calpis 34,221 86,676 13,780 134,677
33,375 17,069 50,444 Coca-Cola Hellenic Bottling 740,409 - 378,668 1,119,077
BICYCLE MANUFACTURING (0.01%)
8,000 - 7,000 15,000 Giant Manufacturing 11,639 - 10,184 21,823
BREWERY (0.55%)
3,044 - 1,263 4,307 Efes Breweries International (2) 84,471 - 35,048 119,519
1,735 - - 1,735 Quilmes Industrial 28,385 - 28,385
78,145 - 36,292 114,437 SABMiller 1,125,435 - 522,673 1,648,108
BREWERY (continued)
6,018 15,158 2,492 23,668 Wolverhampton & Dudley Breweries 100,674 253,577 41,689 395,940
BUILDING & CONSTRUCTION PRODUCTS-
MISCELLANEOUS (0.60%)
658 680 259 1,597 Geberit 427,184 441,466 168,147 1,036,797
26,244 66,903 10,873 104,020 Kingspan Group 205,309 523,389 85,061 813,759
235 589 97 921 Sika 144,155 361,308 59,502 564,965
BUILDING & CONSTRUCTION-
MISCELLANEOUS (0.13%)
4,957 12,834 2,054 19,845 Abengoa 45,905 118,849 19,021 183,775
21,798 54,902 9,027 85,727 Carillion 86,371 217,541 35,768 339,680
BUILDING PRODUCTS-CEMENT &
AGGREGATE (1.03%)
167,603 429,415 70,417 667,435 Adelaide Brighton 206,565 529,240 86,787 822,592
104,735 - 48,785 153,520 BPB 805,526 375,209 1,180,735
17,152 43,337 7,106 67,595 Cementir 76,146 192,393 31,547 300,086
18,842 - - 18,842 Gujarat Ambuja Cements Ltd. (2) 142,026 142,026
34,048 36,499 15,168 85,715 Italcementi 521,461 558,999 232,305 1,312,765
29,818 - 12,552 42,370 Italcementi 307,991 - 129,650 437,641
BUILDING PRODUCTS-DOORS &
WINDOWS (0.24%)
76,091 - 30,714 106,805 Asahi Glass 697,925 - 281,716 979,641
BUILDING-HEAVY CONSTRUCTION (1.58%)
65,430 - 27,465 92,895 Actividades de Construccion y
Servicios (1) 1,264,267 - 530,691 1,794,958
4,180 10,492 1,730 16,402 Daelim Industrial 179,223 449,858 74,176 703,257
77,194 - 31,698 108,892 IJM 95,477 - 39,205 134,682
17,347 7,573 7,281 32,201 Vinci (1) 2,059,883 899,262 864,588 3,823,733
BUILDING-RESIDENTIAL &
COMMERCIAL (1.55%)
94,565 - 39,177 133,742 Corporacion GEO (2) 147,594 - 61,147 208,741
82,027 - 33,691 115,718 Daiwa House Industry 837,341 - 343,922 1,181,263
16,590 - 6,810 23,400 Hyundai Development 222,287 - 91,246 313,533
17,653 44,601 7,218 69,472 McCarthy & Stone 187,766 474,398 76,774 738,938
163,193 63,394 70,379 296,966 Persimmon 1,844,945 716,688 795,655 3,357,288
2,651 6,675 1,098 10,424 Token (2) 118,333 297,952 49,011 465,296
CASINO SERVICES (0.19%)
29,840 75,949 12,363 118,152 Aristocrat Leisure (1) 191,462 487,312 79,325 758,099
CELLULAR TELECOMMUNICATIONS (2.34%)
43,696 - 17,898 61,594 Advanced Info Service Public (3) 99,490 - 40,751 140,241
172,246 - 70,675 242,921 America Telecom (2) 418,191 - 171,590 589,781
225,700 - 92,300 318,000 Far EasTone Telecommunications 241,206 - 98,641 339,847
108,197 - 44,398 152,595 Maxis Communications 244,867 - 100,480 345,347
1,117,271 - 459,666 1,576,937 mm02 (2) 2,154,653 - 886,464 3,041,117
2,447 6,109 1,014 9,570 Mobistar (2) 183,027 456,932 75,844 715,803
2,207 - 840 3,047 Vimpel Communications (2) 251,598 - 95,760 347,358
1,076,751 - 459,666 1,536,417 Vodafone Group 2,757,172 - 1,177,039 3,934,211
CHEMICALS-DIVERSIFIED (1.94%)
25,424 - 10,702 36,126 BASF 1,586,306 - 667,741 2,254,047
343,296 173,859 148,037 665,192 Mitsubishi Gas Chemical 1,467,713 743,309 632,911 2,843,933
3,517 8,883 7,740 20,140 NOF 12,122 30,617 26,677 69,416
204,378 - 93,632 298,010 Sumitomo Chemical (1) 989,267 - 453,214 1,442,481
201,167 - 83,344 284,511 Tosoh 850,588 - 352,401 1,202,989
CHEMICALS-SPECIALTY (1.07%)
76,241 57,868 32,411 166,520 Clariant 1,028,011 780,275 437,020 2,245,306
58,421 43,418 32,914 134,753 Methanex 917,206 681,660 516,748 2,115,614
CIRCUIT BOARDS (0.04%)
182,000 - 76,000 258,000 Unimicron Technology 117,683 - 49,142 166,825
COAL (0.04%)
93,779 - 37,913 131,692 Yanzhou Coal Mining 123,498 - 49,928 173,426
COATINGS & PAINT (0.20%)
35,419 90,938 14,912 141,269 Kansai Paint (1) 203,128 521,530 85,520 810,178
COMMERCIAL BANKS (6.88%)
35,979 - 13,862 49,841 ABSA Group 391,489 - 150,833 542,322
511 1,287 212 2,010 Amagerbanken 63,073 158,856 26,167 248,096
122,628 - 51,161 173,789 Anglo Irish Bank 2,324,234 - 969,682 3,293,916
77,293 53,069 33,011 163,373 Banca Popolare di Lodi 832,775 571,779 355,669 1,760,223
25,715 - 10,581 36,296 Banco do Brasil 257,510 - 105,958 363,468
16,012 - 7,009 23,021 Bank Austria Creditanstalt 1,181,551 - 517,205 1,698,756
127,850 - 52,458 180,308 Bank Leumi Le-Israel 266,680 - 109,421 376,101
30,463 78,618 12,753 121,834 Bank of Kyoto (1) (2) 223,761 577,475 93,675 894,911
8,472 20,710 3,417 32,599 Bank of Piraeus 109,492 267,656 44,161 421,309
1,077,500 - 442,000 1,519,500 Bank Rakyat 230,893 - 94,714 325,607
9,303 - 3,862 13,165 BBVA Banco Frances 60,469 - 25,103 85,572
124,000 - 54,000 178,000 Chiba Bank 795,216 - 346,304 1,141,520
142,887 - 58,788 201,675 Chinatrust Financial Holding 162,969 - 67,051 230,020
4,000 - 1,944 5,944 CorpBanca (3) (4) 105,820 - 51,429 157,249
8,240 - 3,373 11,613 Credicorp 118,656 - 48,571 167,227
36,200 - 14,850 51,050 Daegu Bank 216,650 - 88,875 305,525
14,164 35,845 5,899 55,908 Dah Sing Financial 101,907 257,898 42,442 402,247
201,660 - 96,016 297,676 DnB Holding (1) 1,703,676 - 811,168 2,514,844
1,883 - 773 2,656 E.Sun Financial Holding (2) (4) 32,130 - 13,190 45,320
207,000 - 85,000 292,000 E.Sun Financial Holding 141,284 - 58,015 199,299
88,190 - 36,200 124,390 EON Capital 139,247 - 57,158 196,405
7,640 - 3,170 10,810 Hana Bank 190,744 - 79,144 269,888
14,243 - 5,844 20,087 Hansabank 143,131 - 58,727 201,858
369,562 - 168,400 537,962 IntesaBci 1,509,025 - 687,624 2,196,649
16,059 9,434 6,877 32,370 Jyske Bank (2) 516,853 303,630 221,334 1,041,817
528 1,331 219 2,078 Natexis Banques Populaires 63,034 158,897 26,145 248,076
51,465 - 20,768 72,233 National Bank of Greece 1,432,396 - 578,030 2,010,426
219,376 - 95,707 315,083 Nordea 1,889,006 - 824,115 2,713,121
6,254 - 2,566 8,820 OTP Bank 157,626 - 64,673 222,299
11 29 5 45 Sapporo Hokuyo Holdings 71,890 189,528 32,677 294,095
126,218 - 55,207 181,425 Shinsei Bank (1) 820,138 - 358,723 1,178,861
94,803 - 41,412 136,215 Shizuoka Bank 789,207 - 344,743 1,133,950
- - 8,787 8,787 Toronto-Dominion Bank - - 352,849 352,849
- - 28,332,532 8,332,532 Turkiye Garanti Bankasi (2) - - 75,707 75,707
- - 28,272,120 8,272,120 Turkiye Is Bankasi - - 116,962 116,962
17,222 43,376 7,133 67,731 Wing Hang Bank 117,824 296,756 48,800 463,380
COMMUNICATIONS SOFTWARE (0.08%)
38,475 96,905 15,933 151,313 Telelogic (2) 81,676 205,713 33,823 321,212
COMPUTER SERVICES (0.08%)
2,116 5,395 877 8,388 ALTEN (1) (2) 45,758 116,666 18,965 181,389
5,066 13,018 2,042 20,126 EDB Business Partner (1) (2) 33,764 86,762 13,609 134,135
COMPUTERS (0.07%)
46,000 - 18,000 64,000 High Tech Computer 191,408 - 74,899 266,307
COMPUTERS-INTEGRATED SYSTEMS (0.55%)
22,500 - 9,803 32,303 Itochu Techno-Science 906,865 - 395,111 1,301,976
92 233 98,795 99,120 NIWS 233,054 590,235 98,795 922,084
COMPUTERS-PERIPHERAL EQUIPMENT(0.71%)
198,000 - 72,348 270,348 Lite-On Technology 176,632 - 72,348 248,980
25,675 9,069 529,862 564,606 Logitech International (2) 1,328,146 469,132 529,862 2,327,140
1,684 4,222 34,509 40,415 Roland (1) 83,257 208,734 34,509 326,500
CONSULTING SERVICES (0.31%)
8,384 21,053 26,138 55,575 Savills 63,099 158,448 26,138 247,685
20,593 52,721 104,625 177,939 WS Atkins 249,224 638,048 104,625 991,897
CONTAINERS-METAL & GLASS (0.27%)
98,231 - 335,005 433,236 Rexam 776,201 - 335,005 1,111,206
COSMETICS & TOILETRIES (0.40%)
23,985 61,089 30,361 115,435 Body Shop International 73,283 186,649 30,361 290,293
240 - 19,563 19,803 Pacific 46,950 - 19,563 66,513
18,251 - 351,966 370,217 Uni-Charm (1) 921,229 - 351,966 1,273,195
CRUISE LINES (0.57%)
30,577 - 706,907 737,484 Carnival 1,615,237 - 706,907 2,322,144
DISTRIBUTION-WHOLESALE (0.73%)
2,900 7,250 38,817 48,967 Doshisha (1) 96,130 240,324 38,817 375,271
4,207 10,602 47,203 62,012 Inchcape 113,931 287,117 47,203 448,251
88,399 - 631,757 720,156 Wolseley 1,527,410 - 631,757 2,159,167
DIVERSIFIED FINANCIAL SERVICES(0.50%)
62,271 - 78,012 140,283 RMB Holdings 190,125 - 78,012 268,137
94,836 - 484,279 579,115 Sampo Ojy (1) 1,126,741 - 484,279 1,611,020
4,500 - 36,635 41,135 Shinhan Financial Group 88,633 - 36,635 125,268
DIVERSIFIED MANUFACTURING
OPERATIONS (0.22%)
22,611 57,734 33,718 114,063 Charter (2) 81,410 207,869 33,718 322,997
12,940 - 75,789 88,729 Cheil Industries 182,628 - 75,789 258,417
3,249 8,342 30,748 42,339 NKT Holding 76,201 195,651 30,748 302,600
DIVERSIFIED MINERALS (1.66%)
23,206 - 186,297 209,503 Anglo American 504,634 - 186,297 690,931
10,745 - 83,240 93,985 Antofagasta 196,487 - 83,240 279,727
190,251 - 832,742 1,022,993 BHP Billiton 1,929,484 - 832,742 2,762,226
11,225 28,376 71,876 111,477 Inmet Mining (2) 173,471 438,522 71,876 683,869
34,273 - 356,560 390,833 Teck Cominco 818,787 - 356,560 1,175,347
50,848 - 338,768 389,616 Xstrata 784,947 - 338,768 1,123,715
DIVERSIFIED OPERATIONS (1.22%)
57,285 - 92,315 149,600 Alfa 222,777 - 92,315 315,092
13,693 - 78,054 91,747 Barloworld 190,245 - 78,054 268,299
47,661 - 780,467 828,128 Brascan (1) 1,695,047 - 780,467 2,475,514
China Merchants Holdings
85,882 - 53,103 138,985 International 126,891 - 53,103 179,994
30,000 - 30,681 60,681 Citic Pacific 76,702 - 30,681 107,383
13,220 - 119,375 132,595 Imperial Holdings (2) 196,556 - 119,375 315,931
3,879 9,798 18,766 32,443 Ordina 45,297 114,415 18,766 178,478
233,000 - 101,000 334,000 Wharf Holdings 766,349 - 332,194 1,098,543
ELECTRIC PRODUCTS-
MISCELLANEOUS (1.09%)
92,528 - 39,865 132,393 Casio Computer (1) 1,097,022 - 472,643 1,569,665
308,856 - 124,735 433,591 Hitachi 1,939,984 - 783,485 2,723,469
1,580 - 650 2,230 LG Electronics 89,197 - 36,695 125,892
ELECTRIC-GENERATION (0.39%)
101,000 - 42,000 143,000 China Power International Holding(2) 39,578 - 16,458 56,036
36,351 - 15,730 52,081 Electric Power Development (2) 948,227 - 410,322 1,358,549
63,553 - 25,340 88,893 Electricity Generating Public (3) 102,143 - 40,727 142,870
ELECTRIC-INTEGRATED (3.83%)
32,636 82,408 13,516 128,560 ASM Brescia 99,220 250,536 41,091 390,847
29,773 - 12,997 42,770 E.ON 2,423,855 - 1,058,101 3,481,956
133,269 - 59,033 192,302 Enel (1) 1,201,930 - 532,409 1,734,339
127,177 - 51,493 178,670 Fortum 1,941,305 - 786,020 2,727,325
71,275 180,222 29,529 281,026 International Power (2) 210,915 533,307 87,381 831,603
48,339 - 20,295 68,634 RWE 2,551,818 - 1,071,374 3,623,192
238,762 - 100,246 339,008 Scottish Power 1,922,741 - 807,277 2,730,018
ELECTRONIC COMPONENTS-
MISCELLANEOUS (0.67%)
1,048 2,640 434 4,122 Funkwerk 45,059 113,507 18,660 177,226
2,192 5,521 908 8,621 LG Micron 100,642 253,488 41,689 395,819
4,090 10,377 1,651 16,118 Nihon Dempa Kogyo 86,468 219,384 34,904 340,756
2,640 - 1,090 3,730 Samsung Electronics 1,036,427 - 427,919 1,464,346
1,090 - 440 1,530 Samsung SDI 98,339 - 39,696 138,035
7,182 18,088 2,974 28,244 Star Micronics (1) 58,773 148,022 24,338 231,133
ELECTRONIC COMPONENTS-
SEMICONDUCTOR (0.14%)
21,980 - 9,020 31,000 Hynix Semiconductor (2) 249,349 102,326 351,675
5,324 13,992 2,206 21,522 Kontron (2) 48,558 127,615 20,120 196,293
ELECTRONIC MEASUREMENT
INSTRUMENTS (0.10%)
3,277 8,396 1,358 13,031 Techem (2) 103,796 265,935 43,013 412,744
ENERGY-ALTERNATE SOURCES (0.05%)
764 1,930 316 3,010 SolarWorld 46,649 117,843 19,294 183,786
ENTERPRISE SOFTWARE & SERVICE (0.03%)
2,380 6,160 986 9,526 Unit 4 Agresso (2) 34,816 90,112 14,424 139,352
EXTENDED SERVICE CONTRACTS (0.09%)
202,335 509,901 83,794 796,030 Accord Customer Care Solutions (1)(2) 93,558 235,775 38,746 368,079
FINANCE-CONSUMER LOANS (0.79%)
14,321 - 6,067 20,388 Aiful 1,426,841 - 604,472 2,031,313
13,755 34,074 5,851 53,680 Lopro (1) 88,859 220,122 37,798 346,779
8,919 - 5,611 14,530 Sanyo Shinpan Finance 498,906 - 313,865 812,771
FINANCE-CREDIT CARD (0.25%)
22,757 - 9,226 31,983 Credit Saison (1) 726,492 - 294,530 1,021,022
FINANCE-INVESTMENT BANKER &
BROKER (0.81%)
196,833 - 86,223 283,056 Daiwa Securities Group 1,204,835 - 527,780 1,732,615
13,561 33,045 5,470 52,076 Ichiyoshi Securities 101,653 247,705 41,003 390,361
57,733 - 24,240 81,973 Mediobanca 797,550 - 334,862 1,132,412
FINANCE-LEASING COMPANY (0.24%)
3,938 9,930 1,589 15,457 Ricoh Leasing (1) 96,420 243,130 38,906 378,456
3,987 10,246 1,680 15,913 Sumisho Lease 153,938 395,599 64,865 614,402
FINANCE-OTHER SERVICES (0.32%)
7,806 19,093 3,163 30,062 Aktiv Kapital (1) 130,673 319,618 52,949 503,240
224,000 - 92,000 316,000 Fubon Financial Holding 211,226 - 86,754 297,980
21,664 55,436 8,976 86,076 SFE (1) (2) 133,986 342,858 55,514 532,358
FINANCIAL GUARANTEE INSURANCE (0.16%)
2,691 6,830 1,115 10,636 Euler Hermes (2) 165,369 419,722 68,520 653,611
FOOD-CONFECTIONERY (0.06%)
5 12 2 19 Lindt & Spruengli 64,505 154,813 25,802 245,120
FOOD-DAIRY PRODUCTS (0.07%)
16,889 42,495 6,929 66,313 Morinaga Milk Industry 67,276 169,276 27,601 264,153
FOOD-FLOUR & GRAIN (0.49%)
92,651 67,318 38,038 198,007 Nisshin Seifun Group 923,980 671,342 379,341 1,974,663
FOOD-MISCELLANEOUS/DIVERSIFIED(1.12%)
Global Bio-Chem Technology
89,048 - 30,865 119,913 Group - warrants (2) 6,178 - 2,141 8,319
6,440 16,603 2,668 25,711 IAWS Group 85,279 219,857 35,330 340,466
17,104 43,203 7,084 67,391 J-Oil Mills 64,267 162,332 26,618 253,217
64,441 - 26,276 90,717 Kikkoman (1) 565,581 - 230,617 796,198
37,090 - 14,968 52,058 Orkla 1,053,190 - 425,024 1,478,214
31,116 - 14,761 45,877 Royal Numico (2) 1,045,732 - 496,081 1,541,813
6,861 - 2,814 9,675 Tiger Brands 96,606 - 39,622 136,228
FOOD-RETAIL (1.13%)
5,100 2,100 7,200 Cencosud (2) (4) 113,333 - 46,667 160,000
2,119 5,290 870 8,279 Colruyt 306,206 764,430 125,719 1,196,355
987 2,493 409 3,889 Groupe Bourbon 48,337 122,092 20,030 190,459
6,861 - 2,814 9,675 SPAR Group (2) 23,065 - 9,460 32,525
391,006 - 170,779 561,785 Tesco 2,057,975 - 898,858 2,956,833
FOOTWEAR & RELATED APPAREL (0.04%)
10,041 - 4,147 14,188 Grendene (2) 121,680 - 50,255 171,935
FORESTRY (0.18%)
33,082 84,267 13,706 131,055 Great Southern Plantations (1) 83,522 212,748 34,603 330,873
2,597 6,558 1,076 10,231 West Fraser Timber 102,198 258,073 42,343 402,614
GAS-DISTRIBUTION (0.13%)
3,600 - 1,490 5,090 Korea Gas 109,656 - 45,385 155,041
7,153 - 2,968 10,121 OAO Gazprom 267,022 - 110,796 377,818
HOME FURNISHINGS (0.07%)
37,200 - 15,500 52,700 Lewis Group (2) 193,023 - 80,426 273,449
HOTELS & MOTELS (0.63%)
146,191 - 60,869 207,060 InterContinental Hotels Group 1,786,665 - 743,907 2,530,572
HOUSEWARES (0.02%) -
- - 28,542,000 8,542,000 Turk Sise ve Cam Fabrikalari - - 69,685 69,685
HUMAN RESOURCES (0.52%)
37,711 95,356 15,624 148,691 Capita Group 243,224 615,017 100,770 959,011
38,704 97,865 16,035 152,604 Michael Page International 122,155 308,875 50,609 481,639
4,821 12,181 1,997 18,999 Ranstad Holding 161,961 409,219 67,089 638,269
IMPORT & EXPORT (0.48%)
113,042 - 46,606 159,648 Mitsubishi (1) 1,246,560 - 513,943 1,760,503
247,722 - 101,282 349,004 Testrite International 137,932 - 56,394 194,326
INDUSTRIAL AUTOMATION & ROBOTS(0.13%)
23,615 59,648 9,780 93,043 CKD 136,544 344,890 56,549 537,983
INSTRUMENTS-SCIENTIFIC (0.04%)
1,277 3,226 515 5,018 As One (1) 36,919 93,265 14,889 145,073
INTERNET SECURITY (0.08%)
9,654 - 3,988 13,642 Check Point Software Technologies(2) 218,383 - 90,213 308,596
INVESTMENT COMPANIES (0.12%)
58,848 148,688 24,382 231,918 Macquarie Airports 124,397 314,307 51,540 490,244
INVESTMENT MANAGEMENT & ADVISORY
SERVICES (0.15%)
2,151 5,402 891 8,444 Muenchmeyer Petersen Capital 149,943 376,564 62,110 588,617
LEISURE & RECREATION PRODUCTS (0.12%)
3,218 8,128 1,333 12,679 Mars Engineering 120,611 304,637 49,961 475,209
LIFE & HEALTH INSURANCE (0.05%)
97,742 - 40,535 138,277 New Africa Capital 140,482 - 58,260 198,742
MACHINERY-ELECTRICAL (0.54%)
5,500 - 2,400 7,900 Nidec 594,595 - 259,460 854,055
14,424 - 5,739 20,163 Schneider Electric 952,263 - 378,885 1,331,148
MACHINERY-FARM (0.44%)
278,351 - 117,023 395,374 Kubota 1,266,066 - 532,273 1,798,339
MACHINERY-GENERAL INDUSTRY (1.00%)
6 15 2 23 Harmonic Drive Systems 39,552 98,880 13,184 151,616
48,818 21,658 19,846 90,322 MAN 1,690,332 749,912 687,171 3,127,415
33,358 84,010 13,821 131,189 Okuma (2) 126,282 318,034 52,322 496,638
1,429 3,600 592 5,621 Saurer (2) 75,527 190,270 31,289 297,086
MEDICAL INSTRUMENTS (0.19%)
3,331 8,426 1,377 13,134 Sysmex 129,865 328,502 53,685 512,052
5,249 13,211 2,115 20,575 Topcon (2) 66,088 166,335 26,629 259,052
MEDICAL PRODUCTS (1.02%)
26,646 12,979 14,078 53,703 Phonak Holding (1) 831,683 405,104 439,407 1,676,194
3,421 2,171 2,002 7,594 Straumann Holding 706,153 448,132 413,247 1,567,532
25,134 10,577 35,711 Terumo (1) 624,859 262,956 887,815
MEDICAL-BIOMEDICAL/GENE (0.18%)
6,703 17,115 2,777 26,595 Crucell (2) 65,910 168,291 27,306 261,507
3,758 8,993 1,517 14,268 Genmab (2) 53,076 127,013 21,425 201,514
5,744 14,654 2,380 22,778 GPC Biotech (2) 71,971 183,610 29,821 285,402
MEDICAL-DRUGS (4.05%)
20,606 - 8,458 29,064 AstraZeneca 842,345 - 345,751 1,188,096
5,109 12,890 2,054 20,053 Axcan Pharmaceuticals 76,860 193,918 30,900 301,678
21,030 - 8,848 29,878 Eisai 604,026 - 254,133 858,159
4,201 10,689 1,693 16,583 Fujirebio 53,091 135,085 21,396 209,572
31,403 - 11,332 42,735 GlaxoSmithKline 660,556 - 238,366 898,922
21,224 - 8,556 29,780 Merck 1,179,812 - 475,616 1,655,428
31,507 - 13,550 45,057 Novartis 1,497,399 - 643,976 2,141,375
17,957 - 7,956 25,913 Ono Pharmaceutical 840,440 - 372,364 1,212,804
12,807 32,255 5,304 50,366 Orion OYJ 182,786 460,356 75,701 718,843
23,370 - 9,601 32,971 Roche Holding 2,380,863 - 978,120 3,358,983
31,500 - 13,300 44,800 Sankyo 652,604 - 275,544 928,148
28,733 - 11,699 40,432 Sanofi-Synthelabo (1) 2,094,303 - 852,722 2,947,025
MEDICAL-NURSING HOMES (0.10%)
7,571 19,090 3,170 29,831 Extendicare (2) 104,029 262,307 43,557 409,893
MEDICAL-WHOLESALE DRUG
DISTRIBUTION (0.34%)
75,503 - 35,867 111,370 Alliance Unichem 920,681 - 437,361 1,358,042
METAL PROCESSORS & FABRICATION(0.20%)
36,156 91,064 14,974 142,194 KITZ 207,355 522,252 85,876 815,483
METAL-ALUMINUM (0.01%) -
- - 2,160 2,160 Hindalco Industries - - 55,728 55,728
METAL-IRON (0.09%)
49,654 126,612 20,572 196,838 Portman 90,126 229,812 37,340 357,278
MISCELLANEOUS MANUFACTURERS (0.08%)
4,098 10,452 1,698 16,248 Balda 42,120 107,427 17,453 167,000
167,730 424,080 67,551 659,361 IDT International 39,436 99,708 15,882 155,026
MONEY CENTER BANKS (6.70%)
190,126 - 79,237 269,363 Banco Bilbao Vizcaya Argentaria (1) 2,974,751 - 1,239,759 4,214,510
161,670 - 63,923 225,593 Barclays 1,580,377 - 624,868 2,205,245
54,314 - 23,496 77,810 BNP Paribas (1) 3,685,956 - 1,594,529 5,280,485
139,816 - 58,302 198,118 DBS Group Holdings 1,309,791 - 546,171 1,855,962
127,631 - 52,839 180,470 HSBC Holdings 2,056,784 - 851,505 2,908,289
16,788 - 7,309 24,097 KBC Bancassurance Holding 1,226,854 - 534,136 1,760,990
257 - 112 369 Mitsubishi Tokyo Financial Group 2,178,171 - 949,242 3,127,413
MONEY CENTER BANKS (continued)
83,437 - 35,578 119,015 Standard Chartered 1,491,361 - 635,924 2,127,285
35,920 - 14,704 50,624 UBS 2,580,129 - 1,056,186 3,636,315
MORTGAGE BANKS (1.27%)
5,254 13,363 2,191 20,808 Home Capital Group (2) 115,224 293,060 48,050 456,334
59,565 20,398 25,905 105,868 Hypo Real Estate Holding (2) 2,223,838 761,552 967,154 3,952,544
13,237 33,470 5,484 52,191 Northern Rock 179,845 454,741 74,509 709,095
MULTI-LINE INSURANCE (1.81%)
44,441 - 18,707 63,148 AXA 953,681 - 401,442 1,355,123
33,874 - 13,667 47,541 Fondiaria-SAI 776,902 - 313,453 1,090,355
46,096 - 20,042 66,138 ING Groep 1,216,705 - 529,009 1,745,714
148,214 - 64,311 212,525 Storebrand 1,124,616 - 487,978 1,612,594
10,681 6,906 4,427 22,014 Topdanmark (2) 750,612 485,322 311,110 1,547,044
MULTIMEDIA (1.27%)
2,561 6,676 1,061 10,298 NRJ Group 52,905 137,913 21,918 212,736
183,673 - 76,358 260,031 Publishing & Broadcasting 2,007,156 - 834,431 2,841,587
54,250 - 23,543 77,793 Vivendi Universal (2) 1,477,476 - 641,184 2,118,660
NON-FERROUS METALS (0.09%)
59,911 - 24,582 84,493 Grupo Mexico (2) 246,756 - 101,246 348,002
NON-HOTEL GAMBLING (0.69%)
Greek Organisation of Football
40,270 - 16,202 56,472 Prognostics 818,582 - 329,344 1,147,926
11,095 28,353 4,597 44,045 Paddy Power 146,638 374,730 60,756 582,124
31,398 79,102 13,004 123,504 William Hill 281,037 708,025 116,396 1,105,458
OFFICE AUTOMATION & EQUIPMENT (1.10%)
56,521 24,242 80,763 Canon 2,783,735 - 1,193,951 3,977,686
1,795 4,526 744 7,065 Neopost (1) 124,213 313,197 51,484 488,894
OIL COMPANY-EXPLORATION &
PRODUCTION (2.20%)
1,954 4,937 809 7,700 Acclaim Energy Trust (2) 22,828 57,678 9,451 89,957
62,837 - 25,056 87,893 Canadian Natural Resources 2,641,756 - 1,053,389 3,695,145
6,049 - 6,049 Oil & Natural Gas 105,093 - 105,093
67,809 171,329 28,094 267,232 Paladin Resources 204,385 516,409 84,679 805,473
27,666 - 12,206 39,872 Petrokazakhstan 1,020,676 - 450,314 1,470,990
57,799 - 23,699 81,498 PTT Public (3) 239,275 - 98,109 337,384
49,789 125,967 20,628 196,384 TAP OIL (2) 62,851 159,014 26,040 247,905
458,338 198,820 190,804 847,962 Tullow Oil 1,182,037 512,749 492,076 2,186,862
OIL COMPANY-INTEGRATED (5.77%)
304,130 - 132,661 436,791 BP Amoco 2,939,534 - 1,282,220 4,221,754
859,937 - 353,971 1,213,908 China Petroleum & Chemical 325,926 - 134,159 460,085
109,956 - 46,003 155,959 ENI 2,489,676 - 1,041,622 3,531,298
3,627 - 1,506 5,133 LUKOIL 453,375 - 188,250 641,625
2,958 - 1,214 4,172 MOL Magyar Olaj-es Gazipari 165,028 - 67,729 232,757
19,277 - 8,028 27,305 Petro-Canada 1,050,654 - 437,550 1,488,204
499,982 - 205,991 705,973 PetroChina 261,766 - 107,847 369,613
15,186 - 6,288 21,474 Petroleo Brasileiro 539,255 - 223,287 762,542
91,634 - 39,421 131,055 Repsol YPF (1) 1,980,405 - 851,971 2,832,376
11,445 - 4,696 16,141 Sasol 225,833 - 92,662 318,495
132,152 - 55,073 187,225 Shell Transport & Trading 1,038,790 - 432,905 1,471,695
3,891 - 1,631 5,522 Surgutneftegaz 153,694 - 64,424 218,118
23,343 - 9,618 32,961 TotalFinaElf 4,840,032 - 1,994,235 6,834,267
OIL REFINING & MARKETING (0.78%)
25,595 - 10,502 36,097 Polski Koncern Naftowy Orlen 275,624 - 113,093 388,717
129,252 - 60,178 189,430 Statoil 1,865,422 - 868,515 2,733,937
OIL-FIELD SERVICES (0.24%)
35,687 90,185 15,922 141,794 Stolt Offshore (2) 176,429 445,856 78,715 701,000
4,445 - 1,792 6,237 Tenaris 199,003 - 80,228 279,231
OPTICAL SUPPLIES (0.44%)
12,000 - 5,200 17,200 HOYA 1,229,494 - 532,781 1,762,275
PAPER & RELATED PRODUCTS (0.04%)
36,684 - 15,231 51,915 Kimberly-Clark de Mexico 109,771 - 45,576 155,347
PETROCHEMICALS (0.16%)
7,600 - 3,120 10,720 Honam Petrochemical 297,347 - 122,069 419,416
500,060 - 205,328 705,388 SINOPEC Shanghai Petrochemical 175,073 - 71,886 246,959
PHOTOGRAPHIC EQUIPMENT &
SUPPLIES (0.07%)
2,119 5,360 854 8,333 Tamron (1) 74,232 187,769 29,917 291,918
PROPERTY & CASUALTY INSURANCE (1.11%)
7,537 18,980 3,120 29,637 Admiral Group (2) 40,498 101,984 16,764 159,246
47,339 120,996 19,613 187,948 Amlin 126,856 324,238 52,558 503,652
8,750 22,600 3,630 34,980 Dongbu Insurance 50,022 129,200 20,752 199,974
1,823 4,608 737 7,168 Northbridge Financial 36,468 92,179 14,743 143,390
46,661 116,564 19,332 182,557 Promina Group 158,235 395,286 65,558 619,079
132,901 - 57,052 189,953 QBE Insurance Group (1) 1,362,982 - 585,104 1,948,086
76,708 - 32,198 108,906 Sompo Japan Insurance 667,466 - 280,167 947,633
PROPERTY TRUST (0.20%)
207,196 528,731 85,844 821,771 Commonwealth Property Office Fund 201,195 513,416 83,357 797,968
PUBLIC THOROUGHFARES (0.17%)
7,615 19,369 3,155 30,139 Autostrada Torino 173,875 442,258 72,039 688,172
PUBLISHING-BOOKS (0.05%)
10,127 25,148 4,196 39,471 Bloomsbury Publishing 47,688 118,422 19,759 185,869
PUBLISHING-NEWSPAPERS (0.27%)
22,866 57,756 9,470 90,092 Gruppo Editoriale L'Espresso (1) 122,164 308,568 50,595 481,327
234 589 97 920 Spir Communication 41,762 105,118 17,311 164,191
10,010 25,211 4,146 39,367 Trinity Mirror 118,118 297,490 48,923 464,531
PUBLISHING-PERIODICALS (0.84%)
233,144 60,794 93,286 387,224 United Business Media 2,038,764 531,623 815,754 3,386,141
QUARRYING (0.12%)
1,619 4,093 671 6,383 Eramet 124,597 314,993 51,639 491,229
REAL ESTATE MANAGEMENT &
SERVICES (0.69%)
6,839 17,275 2,832 26,946 Corio 340,761 860,747 141,107 1,342,615
1,907 4,802 790 7,499 Goldcrest 118,705 298,910 49,175 466,790
2,677 6,862 1,080 10,619 Iida Home Max 65,041 166,719 26,240 258,000
418,283 1,056,536 173,231 1,648,050 Midland Realty Holdings 185,404 468,311 76,785 730,500
REAL ESTATE OPERATOR &
DEVELOPER (2.43%)
25,468 16,151 10,173 51,792 Inmobiliaria Colonial (1) 880,862 558,615 351,854 1,791,331
10,990 27,223 4,553 42,766 Inmobiliaria Urbis (1) 129,873 321,703 53,804 505,380
1,499 - 592 2,091 IRSA Inversiones y
Representaciones (2) 14,255 - 5,630 19,885
154,619 148,279 63,872 366,770 Kerry Properties 297,978 285,760 123,093 706,831
55,179 - 24,653 79,832 Land Securities Group 1,206,177 - 538,899 1,745,076
52,093 - 20,797 72,890 Liberty International 821,347 - 327,905 1,149,252
120,230 - 49,704 169,934 Mitsui Fudosan 1,273,743 - 526,575 1,800,318
34,866 88,093 14,445 137,404 NHP 154,123 389,409 63,853 607,385
1,308,999 - 506,777 1,815,776 Sino Land (1) 1,118,386 - 432,981 1,551,367
REINSURANCE (0.36%)
16,740 - 7,047 23,787 Swiss Reinsurance 1,024,088 - 431,108 1,455,196
RENTAL-AUTO & EQUIPMENT (0.10%)
7,214 18,398 2,989 28,601 Northgate 98,344 250,807 40,747 389,898
RETAIL-APPAREL & SHOE (1.43%)
4,056 10,407 1,636 16,099 Aoki International 45,453 116,624 18,333 180,410
11,228 4,606 15,834 Edgars Consolidated Stores 390,222 160,079 550,301
89,654 30,364 37,198 157,216 Next 2,743,360 929,121 1,138,237 4,810,718
1,992 5,037 803 7,832 Right On 59,841 151,307 24,115 235,263
RETAIL-AUTOMOBILE (0.05%)
152,460 - 62,482 214,942 Astra International 131,518 - 53,899 185,417
RETAIL-BUILDING PRODUCTS (0.22%)
24,580 62,475 10,184 97,239 Grafton Group (2) 222,777 566,233 92,301 881,311
RETAIL-CONSUMER ELECTRONICS (0.32%)
87,920 222,561 36,850 347,331 Carphone Warehouse 269,030 681,024 112,759 1,062,813
22,820 57,735 9,455 90,010 JB Hi-Fi 61,023 154,388 25,283 240,694
RETAIL-DISCOUNT (0.04%)
94,700 - 38,900 133,600 Siam Makro (3) 102,621 - 42,154 144,775
RETAIL-DRUG STORE (0.05%)
1,987 5,038 802 7,827 Tsuruha 49,025 124,301 19,788 193,114
RETAIL-HYPERMARKETS (0.06%)
50,068 - 20,579 70,647 Organizacion Soriana 160,674 - 66,041 226,715
RETAIL-MAJOR DEPARTMENT STORE (0.37%)
21,812 - 9,449 31,261 Metro 1,036,311 - 448,932 1,485,243
RETAIL-MISCELLANEOUS/
DIVERSIFIED (0.61%)
114,015 - 47,999 162,014 Coles Myer 812,460 - 342,036 1,154,496
18,050 - 7,469 25,519 Massmart Holdings 125,463 - 51,916 177,379
12,400 9,475 4,604 26,479 Ryohin Keikaku 553,498 422,935 205,509 1,181,942
RETAIL-MUSIC STORE (0.29%)
185,146 - 77,935 263,081 HMV Group 815,032 343,078 1,158,110
RETAIL-PUBS (0.53%) -
129,106 31,477 51,054 211,637 Punch Taverns 1,308,774 319,089 517,545 2,145,408
RETAIL-SPORTING GOODS (0.02%)
2,909 7,180 1,205 11,294 Blacks Leisure Group 23,453 57,886 9,715 91,054
RUBBER & PLASTIC PRODUCTS (0.02%)
18,000 - 7,000 25,000 Taiwan Green Point Enterprises 49,573 - 19,279 68,852
RUBBER-TIRES (1.27%)
48,047 14,026 19,585 81,658 Continental 2,615,857 763,627 1,066,280 4,445,764
20,323 51,008 8,420 79,751 Sumitomo Rubber Industries (1) 172,819 433,753 71,601 678,173
SEMICONDUCTOR COMPONENT-INTEGRATED
CIRCUITS (0.09%)
75,000 - 31,000 106,000 Realtek Semiconductor 74,764 - 30,903 105,667
179,000 - 73,000 252,000 Taiwan Semiconductor Manufacturing 234,702 - 95,716 330,418
SHIP BUILDING (0.06%)
32,120 - 13,180 45,300 Samsung Heavy Industries 173,870 - 71,345 245,215
SOAP & CLEANING PRODUCTS (0.45%)
64,775 164,501 26,837 256,113 McBride 182,185 462,672 75,481 720,338
27,292 - 12,676 39,968 Reckitt Benckiser 746,607 - 346,768 1,093,375
STEEL PRODUCERS (1.83%)
68,133 - 29,359 97,492 Arcelor (1) 1,268,828 - 546,747 1,815,575
2,601 - 1,079 3,680 Cherepovets MK Severstal (2) (3) 104,221 - 43,235 147,456
108,265 - 44,280 152,545 China Steel 108,897 - 44,538 153,435
8,410 21,258 3,480 33,148 Dongkuk Steel Mill 101,040 255,400 41,810 398,250
13,260 33,566 5,474 52,300 Gerdau AmeriSteel (2) 64,031 162,085 26,433 252,549
8,470 21,420 3,510 33,400 INI Steel 89,656 226,733 37,154 353,543
STEEL PRODUCERS (continued)
6,717 16,981 2,783 26,481 IPSCO 179,304 453,291 74,289 706,884
27,097 - 11,246 38,343 Iscor 237,635 - 98,625 336,260
29,500 - 12,900 42,400 JFE Holdings 790,352 - 345,612 1,135,964
301,426 - 131,402 432,828 Nippon Steel 703,961 - 306,881 1,010,842
26,658 67,388 11,045 105,091 OneSteel 52,369 132,382 21,698 206,449
7,524 - 2,653 10,177 POSCO 281,322 - 99,196 380,518
9,706 24,559 3,967 38,232 Russel Metals 103,923 262,956 42,475 409,354
16,741 - 16,741 Tata Iron & Steel 106,151 - 106,151
STORAGE & WAREHOUSING (0.05%)
6,855 17,267 2,839 26,961 Westshore Terminals 53,952 135,899 22,344 212,195
TELECOMMUNICATION EQUIPMENT (0.73%)
17,845 44,941 7,394 70,180 GN Store Nord 180,243 453,926 74,683 708,852
1,423 2,481 590 4,494 Option (2) 38,646 67,380 16,023 122,049
517,015 - 225,264 742,279 Telefonaktiebolaget LM Ericsson (2) 1,497,299 - 652,375 2,149,674
TELECOMMUNICATION SERVICES (1.12%)
323,789 - 131,906 455,695 China Telecom 104,000 - 42,368 146,368
17,084 - 8,442 25,526 Mahanagar Telephone 134,963 - 66,692 201,655
15,689 - 6,465 22,154 SK Telecom 309,544 - 127,554 437,098
35,995 - 14,798 50,793 Telekom Malaysia 108,932 - 44,783 153,715
366,966 - 150,968 517,934 Telekomunikasi Indonesia 175,418 - 72,166 247,584
292,373 - 124,540 416,913 Telenor 2,321,383 - 988,823 3,310,206
TELEPHONE-INTEGRATED (0.14%)
91,500 - 37,500 129,000 Carso Global Telecom (2) 140,827 - 57,716 198,543
13,877 - 5,773 19,650 Philippine Long Distance
Telephone (2) 348,313 - 144,902 493,215
TELEVISION (0.87%)
2,758 6,969 1,143 10,870 Antena 3 Television (2) 176,644 446,348 73,206 696,198
176,553 - 74,577 251,130 Mediaset 2,007,782 - 848,099 2,855,881
TOBACCO (1.10%)
86,637 - 38,366 125,003 Imperial Tobacco Group 2,017,649 - 893,488 2,911,137
39,253 - 15,878 55,131 Korea Tobacco & Ginseng 1,086,952 - 439,677 1,526,629
TRANSPORT-MARINE (1.36%)
155,699 - 63,880 219,579 China Shipping Development (1) 130,026 - 53,347 183,373
5,473 13,458 2,268 21,199 Dampskibsselskabet Torm 174,741 429,685 72,412 676,838
26,197 66,189 10,854 103,240 Kawasaki Kisen Kaisha 174,416 440,678 72,265 687,359
31,890 - 13,096 44,986 Malaysia International Shipping 111,615 - 45,836 157,451
211,542 - 90,875 302,417 Mitsui O.S.K. Lines 1,251,044 - 537,428 1,788,472
170,366 - 66,770 237,136 Nippon Yusen Kabushiki Kaisha 855,119 - 335,139 1,190,258
32,710 82,647 13,552 128,909 Orient Overseas International 118,932 300,500 49,274 468,706
252,500 - 103,600 356,100 Wan Hai Lines 242,636 - 99,553 342,189
TRANSPORT-RAIL (0.48%)
261 - 110 371 East Japan Railway 1,369,027 - 576,985 1,946,012
TRANSPORT-SERVICES (0.18%)
21,661 54,090 8,975 84,726 Toll Holdings 191,244 477,558 79,240 748,042
VENTURE CAPITAL (0.04%)
10,887 28,550 4,837 44,274 Japan Asia Investment 40,804 107,005 18,129 165,938
WATER (0.87%)
179,944 88,685 75,349 343,978 Kelda Group 1,841,439 907,549 771,076 3,520,064
WEB PORTALS (0.15%)
97 245 40 382 eAccess (1) (2) 85,956 217,106 35,446 338,508
2,559 6,520 1,060 10,139 Iliad 72,786 185,449 30,150 288,385
WIRELESS EQUIPMENT (0.72%)
107,000 - 44,000 151,000 Gemtek Technology 251,444 103,398 354,842
7,500 19,519 3,026 30,045 Hitachi Kokusai Electric 51,912 135,102 20,945 207,959
63,564 - 27,695 91,259 Nokia 977,555 425,923 1,403,478
10,795 27,333 4,409 42,537 Uniden 233,304 590,726 95,288 919,318
TOTAL COMMON STOCKS 235,813,687 59,309,499 100,590,378 395,713,564
PREFERRED STOCKS (0.70%)
AIRLINES (0.06%)
16,206 - 6,642 22,848 Gol Linhas Aereas Inteligentes (2) 167,394 - 68,606 236,000
COMMERCIAL BANKS (0.08%)
3,694 - 1,532 5,226 Banco Bradesco 223,373 - 92,639 316,012
DIVERSIFIED MINERALS (0.14%)
671,724 - 278,287 950,011 Caemi Mineracao e Metalurgica (2) 402,188 - 166,621 568,809
FOOD-MEAT PRODUCTS (0.07%)
113,879 - 47,199 161,078 Sadia 206,146 - 85,441 291,587
MACHINERY-GENERAL INDUSTRY (0.05%)
60,872 - 25,000 85,872 WEG 158,148 - 64,951 223,099
PETROCHEMICALS (0.04%)
2,603,684 - 1,078,947 3,682,631 Braskem (2) 95,724 - 39,667 135,391
STEEL PRODUCERS (0.08%)
2,636,255 - 1,073,544 3,709,799 Cia Siderurgica de Tubarao 106,429 - 43,340 149,769
7,400 - 3,000 10,400 Usinas Siderurgicas de Minas Gerais 112,062 - 45,431 157,493
TELEVISION (0.18%)
10,490 26,504 4,346 41,340 ProSiebenSat.1 Media (1) 187,480 473,687 77,673 738,840
TOTAL PREFERRED STOCKS 1,658,944 473,687 684,369 2,817,000
COMMERCIAL PAPER (2.13%)
AEROSPACE & DEFENSE EQUIPMENT (1.19%)
United Technologies
3,780,000 1,025,000 - 4,805,000 1.85%; 11/01/04 3,780,000 1,025,000 - 4,805,000
FINANCE-MORTGAGE LOAN/BANKER (0.94%)
Investment in Joint Trading Account;
Federal Home Loan Bank
- - 3,830,665 3,830,665 1.69%; 11/01/04 - - 3,830,665 3,830,665
TOTAL COMMERCIAL PAPER 3,780,000 1,025,000 3,830,665 8,635,665
REPURCHASE AGREEMENTS (6.54%)
Washington Mutual Capital; 1.95%;
date 10/29/04 maturing 11/01/04
21,401,325 5,089,042 - 26,490,367 (collateralized by U.S. Government
Agency Securities; $27,015,784;
08/01/19 - 11/01/34) (5) 21,397,848 5,088,215 26,486,063
TOTAL REPURCHASE AGREEMENTS 21,397,848 5,088,215 - 26,486,063
TOTAL PORTFOLIO INVESTMENTS (107.05%) 262,650,479 65,896,401 105,105,412 433,652,292
Liabilities, net of cash,
receivables and
other assets (-7.05%) (23,116,639) (4,821,811) (614,040)(28,552,490)
TOTAL NET ASSETS (100.00%) $239,533,840 $ 61,074,590$104,491,372$405,099,802
==================================================
<FN>
(1) Security of a portion of the security was on loan at the end of the period.
(2) Non-income producing security.
(3) Market value is determined in accordance with procedures established in
good faith by the Board of Directors. At the end of the period, the value
of these securities totaled $1,069,975 or 2.49% of net assets.
(4) Security exempt from registration uner Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the end of the
period, the value of these securities totaled $362,569 or 0.09% of net
assets.
(5) Security was purchased with the cash proceeds from securities loans.
</FN>
UNREALIZED APPRECIATION (DEPRECIATION)
The net federal income tax unrealized appreciation (depreciation) and federal
tax cost of investments held by the fund as of the period end were as follows.
Unrealized Appreciation $27,311,096 $11,100,458 $10,038,396 $48,449,950
Unrealized Depreciation (4,485,129) (827,212) (1,126,526) (6,438,867)
Net Unrealized Appreciation (Depreciation) 22,825,967 10,273,246 8,911,870 42,011,083
Cost for federal income tax purposes $239,824,512 $55,623,155 $96,193,542 $391,641,209
INVESTMENTS BY COUNTRY (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
Percentage of Total Value Country Value
- -------------------------------------------------------------------------------------------------------------------------------
0.11% - 0.10% 0.09% Argentina $ 287,857 $ - $ 105,331 $ 393,188
2.19 5.99 2.29 2.7893 Australia 5,739,572 3,948,320 2,407,856 12,095,748
0.48 0.28 0.52 0.4591 Austria 1,256,077 186,925 548,081 1,991,083
0.67 1.95 0.71 0.8752 Belgium 1,754,733 1,288,742 751,722 3,795,197
0.07 0.71 0.07 0.1685 Bermuda 185,404 468,311 76,785 730,500
0.91 - 0.94 0.7785 Brazil 2,389,909 - 986,196 3,376,105
3.49 4.99 4.16 3.8838 Canada 9,176,414 3,291,628 4,374,340 16,842,382
0.04 0.37 0.04 0.0870 Cayman Islands 96,949 241,070 39,102 377,121
0.08 - 0.09 0.0732 Chile 219,153 - 98,095 317,248
0.34 - 0.35 0.2906 China 892,791 - 367,239 1,260,030
0.77 4.06 0.80 1.2770 Denmark 2,021,055 2,674,308 842,422 5,537,785
1.61 0.70 1.69 1.4898 Finland 4,228,388 460,356 1,771,923 6,460,667
7.09 4.21 7.40 6.7270 France 18,622,322 2,773,309 7,776,171 29,171,802
6.19 7.15 6.51 6.4147 Germany 16,268,335 4,709,851 6,839,361 27,817,547
1.18 0.41 1.27 1.0835 Greece 3,100,880 267,656 1,330,203 4,698,739
1.19 2.19 1.21 1.3447 Hong Kong 3,117,660 1,442,223 1,271,432 5,831,315
0.12 - 0.13 0.1149 Hungary 322,653 - 132,403 455,056
0.26 - 0.27 0.2245 India 689,728 - 283,729 973,457
0.21 - 0.21 0.1849 Indonesia 537,828 - 220,780 758,608
1.14 2.56 1.18 1.3632 Ireland 2,984,238 1,684,210 1,243,130 5,911,578
0.18 - 0.19 0.1579 Israel 485,064 - 199,634 684,698
4.16 3.53 4.44 4.1305 Italy 10,916,498 2,324,533 4,670,965 17,911,996
17.48 19.04 18.59 17.9831 Japan 45,897,723 12,544,567 19,542,039 77,984,329
2.05 1.99 2.08 2.0470 Korea 5,372,909 1,314,678 2,189,218 8,876,805
0.55 0.68 0.59 0.5803 Luxemburg 1,445,257 445,856 625,462 2,516,575
0.34 - 0.35 0.2928 Malaysia 900,138 - 369,577 1,269,715
0.55 - 0.57 0.4709 Mexico 1,446,591 - 595,630 2,042,221
1.61 2.49 1.77 1.7850 Netherlands 4,233,878 1,642,784 1,864,116 7,740,778
3.13 0.62 3.47 2.8334 Norway 8,232,724 406,380 3,648,067 12,287,171
0.05 - 0.05 0.0386 Peru 118,656 - 48,571 167,227
0.13 - 0.14 0.1137 Phillipines 348,313 - 144,902 493,215
0.11 - 0.11 0.0896 Poland 275,624 - 113,092 388,716
0.30 - 0.30 0.2515 Russia 776,535 - 314,215 1,090,750
0.53 - 0.56 0.5129 Singapore 1,403,349 235,775 584,917 2,224,041
0.91 0.36 0.97 0.7882 South Africa 2,400,744 - 1,017,325 3,418,069
2.96 - 3.10 2.9630 Spain 7,779,432 1,814,719 3,255,103 12,849,254
1.81 2.75 1.95 1.6180 Sweden 4,763,381 205,713 2,047,264 7,016,358
4.90 0.31 5.28 4.9984 Switzerland 12,872,790 3,250,500 5,552,434 21,675,724
0.91 4.93 0.93 0.7762 Taiwan 2,386,127 - 980,004 3,366,131
0.21 - 0.21 0.1765 Thailand 543,530 - 221,741 765,271
- - 0.25 0.0605 Turkey - - 262,354 262,354
19.23 18.45 20.33 19.3802 United Kingdom 50,513,792 12,160,772 21,367,936 84,042,500
9.76 9.28 3.83 8.2516 United States 25,645,478 6,113,215 4,024,545 35,783,238
$262,650,479 $ 65,896,401 $105,105,412 $433,652,292
===============================================================
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
COMBINED
PRINCIPAL HIGH QUALITY HIGH QUALITY
LIMITED TERM SHORT-TERM PRO FORMA SHORT-TERM
BOND FUND, INC. BOND FUND ADJUSTMENTS BOND FUND
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $140,647,221 $ 51,781,529 $ -- $192,428,750
============ ============ ========= ============
ASSETS
Investment in
securities--at value. $141,368,101/(c)/ $ 51,815,540 $ -- $193,183,641/(c)/
Cash.................. 13,038 20,873 -- 33,911
Receivables:
Capital Shares sold.. 457,572 22,490 -- 480,062
Dividends and
interest............ 1,191,843 448,583 -- 1,640,426
Investment securities
sold................ 2,751 -- -- 2,751
Other assets.......... 362 -- -- 362
Prepaid directors'
expenses............. 135 -- -- 135
------------ ------------ --------- ------------
Total Assets 143,033,802 52,307,486 -- 195,341,288
LIABILITIES
Accrued management and
investment advisory
fees................. 13,015 3,953 -- 16,968
Accrued administrative
service fees......... -- 144 -- 144
Accrued distribution
fees................. 5,059 4,377 -- 9,436
Accrued service fees.. -- 189 -- 189
Accrued transfer and
administrative fees.. 30,530 17,645 -- 48,175
Accrued other expenses 22,819 7,155 -- 29,974
Payables:
Capital Shares
reacquired.......... 243,349 66 -- 243,415
Investment securities
purchased........... 2,512,542 523,600 -- 3,036,142
Collateral obligation
on securities loaned,
at value............. 241,600 -- -- 241,600
------------ ------------ --------- ------------
Total Liabilities 3,068,914 557,129 -- 3,626,043
------------ ------------ --------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $139,964,888 $ 51,750,357 $ -- $191,715,245
============ ============ ========= ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $143,773,864 $ 51,722,032 $ -- $195,495,896
Accumulated
undistributed
(overdistributed) net
investment income
(operating loss)..... (1,540,809) 44,212 -- (1,496,597)
Accumulated
undistributed
(overdistributed) net
realized gain (loss). (2,989,047) (49,898) -- (3,038,945)
Net unrealized
appreciation
(depreciation) of
investments.......... 720,880 34,011 -- 754,891
------------ ------------ --------- ------------
Total Net Assets $139,964,888 $ 51,750,357 $ -- $191,715,245
============ ============ ========= ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 100,000,000 225,000,000 -- 225,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 959,506 N/A $ 959,506
Shares issued and
outstanding.......... 93,320 93,320
Net asset value per
share................ $ 10.28 $ 10.28
============ ============
Advisors Select: Net
Assets............... N/A $ 88,757 N/A $ 88,757
Shares issued and
outstanding.......... 8,700 8,700
Net asset value per
share................ $ 10.20 $ 10.20
============ ============
Class A: Net Assets... $122,451,392 N/A -- $122,451,392
Shares issued and
outstanding.......... 12,888,188 (918,355) 11,969,833
Net asset value per
share................ $ 9.50 -- $ 10.23
Maximum offering
price per share /(a)/ $ 9.64 -- $ 10.39
============ ============
Class B: Net Assets... $ 17,513,496 N/A -- $ 17,513,496
Shares issued and
outstanding.......... 1,814,500 (102,526) 1,711,974
Net asset value per
share /(b)/.......... $ 9.65 -- $ 10.23
============ ============
Class J: Net Assets... N/A $ 45,293,791 N/A $ 45,293,791
Shares issued and
outstanding.......... 4,423,841 4,423,841
Net asset value per
share /(b)/.......... $ 10.24 $ 10.24
============ ============
Institutional: Net
Assets............... N/A $ 9,996 N/A $ 9,996
Shares issued and
outstanding.......... 977 977
Net asset value per
share................ $ 10.23 $ 10.23
============ ============
Preferred: Net Assets. N/A $ 5,387,114 N/A $ 5,387,114
Shares issued and
outstanding.......... 527,077 527,077
Net asset value per
share................ $ 10.22 $ 10.22
============ ============
Select: Net Assets.... N/A $ 11,193 N/A $ 11,193
Shares issued and
outstanding.......... 1,104 1,104
Net asset value per
share................ $ 10.14 $ 10.14
============ ============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 1.50% of the offering price or 1.52% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
/(c) /Includes fair market value of securities loaned, see "Securities Lending"
in Notes to Financial Statements.
See accompanying notes.
10
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
COMBINED
PRINCIPAL HIGH QUALITY HIGH QUALITY
LIMITED TERM SHORT-TERM PRO FORMA SHORT-TERM
BOND FUND, INC. BOND FUND ADJUSTMENTS /(A)/ BOND FUND
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Interest............. $ 4,397,705 $1,655,370 $ -- $ 6,053,075
Securities lending... 2,586 -- -- 2,586
----------- ---------- --------- -----------
Total Income 4,400,291 1,655,370 -- 6,055,661
Expenses:
Management and
investment advisory
fees................ 604,169 199,011 (112,146) 691,034
Distribution fees -
Advisors Preferred.. -- 8,863 -- 8,863
Distribution fees -
Advisors Select..... -- 651 -- 651
Distribution fees -
Class A............. 158,247 -- -- 158,247
Distribution fees -
Class B............. 80,745 -- -- 80,745
Distribution fees -
Class J............. -- 209,083 -- 209,083
Distribution fees -
Select.............. -- 11 -- 11
Administrative
service fees -
Advisors Preferred.. -- 5,318 -- 5,318
Administrative
service fees -
Advisors Select..... -- 434 -- 434
Administrative
service fees -
Preferred........... -- 4,568 -- 4,568
Administrative
service fees -
Select.............. -- 15 -- 15
Registration fees -
Class A............. 16,946 -- -- 16,946
Registration fees -
Class B............. 8,497 -- -- 8,497
Registration fees -
Class J............. -- 19,452 -- 19,452
Service fees -
Advisors Preferred.. -- 6,026 -- 6,026
Service fees -
Advisors Select..... -- 543 -- 543
Service fees -
Preferred........... -- 6,229 -- 6,229
Service fees - Select -- 18 -- 18
Shareholder reports -
Class A............. 5,546 -- -- 5,546
Shareholder reports -
Class B............. 1,556 -- -- 1,556
Shareholder reports -
Class J............. -- 8,478 -- 8,478
Transfer and
administrative fees
- Class A........... 38,970 -- -- 38,970
Transfer and
administrative fees
- Class B........... 10,378 -- -- 10,378
Transfer and
administrative fees
- Class J........... -- 88,126 -- 88,126
Auditing and legal
fees................ 10,126 -- (10,126) --
Custodian fees....... 7,547 -- (7,547) --
Directors' expenses.. 4,088 -- (4,088) --
Registration fees.... 31,101 -- -- 31,101
Transfer and
administrative fees. 135,714 -- 8,908 144,622
Other expenses....... 6,715 -- (6,715) --
Other expenses -
Class J............. -- 893 -- 893
----------- ---------- --------- -----------
Total Expenses 1,120,345 557,719 (131,714) 1,546,350
----------- ---------- --------- -----------
Net Investment Income
(Operating Loss) 3,279,946 1,097,651 131,714 4,509,311
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ (119,536) 50,179 -- (69,357)
Change in unrealized
appreciation/depreciation
of:
Investments........... (1,145,154) (396,544) -- (1,541,698)
----------- ---------- --------- -----------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies (1,264,690) (346,365) -- (1,611,055)
----------- ---------- --------- -----------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $ 2,015,256 $ 751,286 $ 131,714 $ 2,898,256
=========== ========== ========= ===========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
26
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- -----------------------------------------------------------------------------------------------------------------------------------
Principal High Quality Principal High Quality
Limited Term Short-Term Limited Term Short-Term Bond
Bond Fund, Inc. Bond Fund Combined Bond Fund, Inc. Fund Combined
- ----------------------------------------------------------------------------------------------------------------------------------
BONDS (89.94%)
AEROSPACE & DEFENSE (0.22%)
Northrop Grumman
4.08%; 11/16/06 $ 132,304 $ 40,709 $ 173,013
130,000 40,000 170,000
Raytheon
6.75%; 08/15/07
125,000 100,000 225,000 136,535 109,228 245,763
AEROSPACE & DEFENSE EQUIPMENT (0.20%)
General Dynamics
3.00%; 05/15/08
155,000 30,000 185,000 152,883 29,590 182,473
United Technologies
4.88%; 11/01/06
150,000 40,000 190,000 155,929 41,581 197,510
AGRICULTURAL OPERATIONS (0.12%)
Bunge Limited Finance
4.38%; 12/15/08
160,000 70,000 230,000 161,716 70,751 232,467
AIRLINES (0.12%)
Southwest Airlines
5.50%; 11/01/06
125,000 50,000 175,000 130,217 52,087 182,304
8.00%; 03/01/05
- 50,000 50,000 - 50,779 50,779
ASSET BACKED SECURITIES (0.67%)
Bear Stearns Asset Backed Securities (1)
2.53%; 03/25/34
400,000 165,000 565,000 399,981 164,992 564,973
Chase Funding Mortgage Loan
4.88%; 08/25/28
- 130,000 130,000 - 131,502 131,502
Countrywide Asset Backed Certificates
3.61%; 04/25/30
590,000 - 590,000 592,538 - 592,538
AUTO-CARS & LIGHT TRUCKS (0.36%)
Daimler Chrysler Holding
2.34%; 05/24/06 (1)
370,000 50,000 420,000 371,914 50,259 422,173
7.25%; 01/18/06
125,000 125,000 250,000 131,394 131,394 262,788
AUTOMOBILE SEQUENTIAL (7.52%)
BMW Vehicle Owner Trust
1.88%; 10/25/06
125,000 - 125,000 124,666 - 124,666
Capital Auto Receivables Asset Trust
2.64%; 03/17/08
850,000 250,000 1,100,000 850,218 250,064 1,100,282
3.05%; 09/15/05
22,136 22,136 44,272 22,157 22,157 44,314
3.58%; 10/16/06
1,125,000 900,000 2,025,000 1,133,742 906,994 2,040,736
3.82%; 07/15/05
5,134 1,483 6,617 5,138 1,484 6,622
4.16%; 07/16/07
639,709 119,946 759,655 643,774 120,708 764,482
Chase Manhattan Auto Owner Trust
2.06%; 12/15/09
725,000 700,000 1,425,000 711,400 686,869 1,398,269
4.21%; 01/15/09
1,050,000 - 1,050,000 1,063,537 - 1,063,537
4.24%; 09/15/08
167,869 - 167,869 169,505 - 169,505
DaimlerChrysler Auto Trust
2.88%; 10/08/09
200,000 - 200,000 199,963 - 199,963
3.09%; 01/08/08
100,000 250,000 350,000 100,498 251,244 351,742
6.70%; 03/08/06
460,431 236,688 697,119 460,972 236,966 697,938
Ford Credit Auto Owner Trust
2.70%; 06/15/07
450,000 475,000 925,000 450,278 475,293 925,571
4.01%; 03/15/06
334,645 113,872 448,517 335,972 114,324 450,296
4.72%; 12/15/05
850,466 373,940 1,224,406 852,874 374,999 1,227,873
Honda Auto Receivables Owner Trust
2.70%; 03/17/08
475,000 - 475,000 474,870 - 474,870
4.49%; 09/17/07
500,000 100,000 600,000 506,337 101,267 607,604
M&I Auto Loan Trust
3.04%; 10/20/08
500,000 - 500,000 502,318 - 502,318
Nissan Auto Receivables Owner Trust
1.89%; 12/15/06
109,274 72,850 182,124 109,032 72,688 181,720
2.70%; 12/17/07
1,000,000 - 1,000,000 998,348 - 998,348
3.33%; 01/15/08
200,000 350,000 550,000 201,527 352,673 554,200
Toyota Auto Receivables Owner Trust
4.72%; 09/15/08
408,361 116,675 525,036 409,700 117,057 526,757
BEVERAGES-NON-ALCOHOLIC (0.11%)
Coca-Cola Enterprises
5.25%; 05/15/07
150,000 50,000 200,000 157,776 52,592 210,368
BEVERAGES-WINE & SPIRITS (0.15%)
Diageo Capital
3.38%; 03/20/08
100,000 15,000 115,000 99,945 14,992 114,937
Diageo Finance
3.00%; 12/15/06
115,000 65,000 180,000 114,995 64,997 179,992
BROADCASTING SERVICES & PROGRAMMING (0.10%)
Liberty Media
3.50%; 09/25/06
160,000 40,000 200,000 160,159 40,040 200,199
BUILDING PRODUCTS-CEMENT & AGGREGATE(0.19%)
Hanson Overseas
6.75%; 09/15/05
250,000 100,000 350,000 258,517 103,407 361,924
CABLE TV (0.38%)
Comcast Cable Communications
6.38%; 01/30/06
295,000 115,000 410,000 307,714 119,956 427,670
Cox Communications
6.88%; 06/15/05
120,000 30,000 150,000 122,866 30,717 153,583
TCI Communications
7.61%; 10/04/05
100,000 50,000 150,000 103,615 51,807 155,422
CELLULAR TELECOMMUNICATIONS (0.89%)
360 Communications
7.50%; 03/01/06
140,000 90,000 230,000 148,729 95,612 244,341
AT&T Wireless Services
6.88%; 04/18/05
25,000 50,000 75,000 25,494 50,987 76,481
7.35%; 03/01/06
180,000 65,000 245,000 190,655 68,848 259,503
Cingular Wireless
5.63%; 12/15/06
125,000 45,000 170,000 131,425 47,313 178,738
Telus
7.50%; 06/01/07
210,000 60,000 270,000 230,743 65,926 296,669
Verizon Wireless Capital
5.38%; 12/15/06
325,000 130,000 455,000 340,643 136,257 476,900
Vodafone Group
7.63%; 02/15/05
105,000 70,000 175,000 106,551 71,034 177,585
CHEMICALS-DIVERSIFIED (0.30%)
Chevron Phillips Chemical
5.38%; 06/15/07
110,000 35,000 145,000 115,285 36,682 151,967
Dow Chemical
7.00%; 08/15/05
140,000 50,000 190,000 144,626 51,652 196,278
E. I. Du Pont de Nemours
3.38%; 11/15/07
150,000 75,000 225,000 151,245 75,622 226,867
COATINGS & PAINT (0.13%)
Valspar
6.00%; 05/01/07
175,000 60,000 235,000 186,008 63,774 249,782
COMMERCIAL BANKS (0.33%)
AmSouth Bank
2.82%; 11/03/06
115,000 50,000 165,000 114,571 49,814 164,385
Crestar Financial
8.75%; 11/15/04
- 75,000 75,000 - 75,166 75,166
Marshall & Ilsley Bank
4.13%; 09/04/07
150,000 50,000 200,000 153,347 51,116 204,463
Union Planters Bank
5.13%; 06/15/07
120,000 65,000 185,000 126,584 68,566 195,150
COMMERCIAL SERVICE-FINANCE (0.05%)
Equifax
4.95%; 11/01/07
65,000 25,000 90,000 68,101 26,193 94,294
COMPUTER SERVICES (0.10%)
Computer Sciences
7.50%; 08/08/05
130,000 50,000 180,000 134,324 51,663 185,987
COMPUTERS (0.26%)
Hewlett-Packard
5.50%; 07/01/07
185,000 110,000 295,000 195,745 116,389 312,134
International Business Machines
4.25%; 09/15/09
135,000 45,000 180,000 138,516 46,172 184,688
COSMETICS & TOILETRIES (0.19%)
Gillette
2.50%; 06/01/08
55,000 - 55,000 53,927 - 53,927
4.00%; 06/30/05
110,000 45,000 155,000 111,031 45,422 156,453
Procter & Gamble
4.75%; 06/15/07
125,000 25,000 150,000 130,406 26,081 156,487
CREDIT CARD ASSET BACKED SECURITIES (7.85%)
Bank One Issuance Trust
2.94%; 06/16/08
1,350,000 450,000 1,800,000 1,354,736 451,579 1,806,315
3.35%; 03/15/11
1,100,000 245,000 1,345,000 1,097,789 244,507 1,342,296
3.86%; 06/15/11
100,000 - 100,000 101,375 - 101,375
CREDIT CARD ASSET BACKED SECURITIES (con
Capital One Master Trust
5.30%; 06/15/09
700,000 220,000 920,000 729,311 229,212 958,523
5.45%; 03/16/09
750,000 150,000 900,000 775,468 155,094 930,562
Capital One Multi-Asset Execution Trust(1)
2.09%; 12/15/09
255,000 150,000 405,000 255,158 150,093 405,251
Chase Credit Card Master Trust
2.07%; 05/15/09 (1)
300,000 150,000 450,000 299,981 149,991 449,972
5.50%; 11/17/08
100,000 700,000 800,000 104,384 730,687 835,071
Citibank Credit Card Issuance Trust
2.70%; 01/15/08
400,000 675,000 1,075,000 400,214 675,361 1,075,575
6.90%; 10/15/07
1,550,000 - 1,550,000 1,613,383 - 1,613,383
Citibank Credit Card Master Trust I
5.88%; 03/10/11
500,000 200,000 700,000 545,145 218,058 763,203
Discover Card Master Trust I
5.15%; 10/15/09
923,000 - 923,000 968,574 - 968,574
6.05%; 08/18/08
855,000 230,000 1,085,000 891,419 239,797 1,131,216
MBNA Credit Card Master Note Trust
3.65%; 03/15/11
1,200,000 400,000 1,600,000 1,206,976 402,325 1,609,301
MBNA Master Credit Card Trust
6.90%; 01/15/08
700,000 330,000 1,030,000 724,225 341,420 1,065,645
DATA PROCESSING & MANAGEMENT (0.10%)
First Data
3.38%; 08/01/08
155,000 35,000 190,000 154,179 34,815 188,994
DIVERSIFIED FINANCIAL SERVICES (1.35%)
General Electric Capital
0.70%; 03/10/40 (1) (2)
3,300,140 - 3,300,140 101,218 - 101,218
1.84%; 02/02/09 (1)
120,000 55,000 175,000 120,253 55,116 175,369
3.75%; 12/15/09
150,000 - 150,000 149,320 - 149,320
4.25%; 01/15/08
950,000 150,000 1,100,000 976,685 154,213 1,130,898
5.00%; 06/15/07
130,000 290,000 420,000 136,107 303,623 439,730
John Deere Capital
3.63%; 05/25/07
50,000 25,000 75,000 50,512 25,256 75,768
4.50%; 08/22/07
95,000 25,000 120,000 98,234 25,851 124,085
NiSource Finance
3.20%; 11/01/06
135,000 20,000 155,000 134,817 19,973 154,790
7.63%; 11/15/05
150,000 75,000 225,000 157,221 78,610 235,831
DIVERSIFIED MANUFACTURING OPERATIONS(0.33%)
Cooper Industries
5.25%; 07/01/07
80,000 60,000 140,000 83,994 62,996 146,990
Dover
6.45%; 11/15/05
100,000 - 100,000 103,595 - 103,595
Honeywell International
6.13%; 07/01/05
175,000 50,000 225,000 178,880 51,109 229,989
Tyco International Group (3)
6.13%; 01/15/09
125,000 15,000 140,000 136,378 16,365 152,743
ELECTRIC-DISTRIBUTION (0.06%)
Detroit Edison
5.05%; 10/01/05
75,000 40,000 115,000 76,640 40,875 117,515
ELECTRIC-INTEGRATED (2.08%)
Alabama Power
2.80%; 12/01/06
60,000 25,000 85,000 59,790 24,913 84,703
Appalachian Power
4.80%; 06/15/05
140,000 60,000 200,000 141,970 60,844 202,814
Commonwealth Edison
6.40%; 10/15/05
230,000 120,000 350,000 237,918 124,131 362,049
Conectiv
5.30%; 06/01/05
45,000 55,000 100,000 45,589 55,720 101,309
Consolidated Edison
3.63%; 08/01/08
110,000 45,000 155,000 109,824 44,928 154,752
Dominion Resources
2.01%; 05/15/06 (1)
120,000 55,000 175,000 120,258 55,118 175,376
7.63%; 07/15/05
105,000 70,000 175,000 108,638 72,425 181,063
Duke Energy
3.75%; 03/05/08
85,000 - 85,000 85,661 - 85,661
FPL Group Capital
1.88%; 03/30/05
75,000 - 75,000 74,851 - 74,851
3.25%; 04/11/06
125,000 60,000 185,000 125,850 60,408 186,258
Georgia Power (1)
1.90%; 02/17/09
130,000 65,000 195,000 129,966 64,983 194,949
MidAmerican Energy Holdings
4.63%; 10/01/07
245,000 70,000 315,000 251,050 71,729 322,779
Niagara Mohawk Power
7.75%; 05/15/06
160,000 45,000 205,000 171,469 48,226 219,695
Oncor Electric Delivery
5.00%; 09/01/07
95,000 - 95,000 99,009 - 99,009
Pacific Gas & Electric
3.60%; 03/01/09
185,000 60,000 245,000 183,675 59,570 243,245
Pepco Holdings
5.50%; 08/15/07
105,000 25,000 130,000 110,318 26,266 136,584
Potomac Electric Power
6.50%; 09/15/05
150,000 - 150,000 155,015 - 155,015
Progress Energy
6.75%; 03/01/06
290,000 100,000 390,000 304,098 104,862 408,960
Public Service Company of Colorado
4.38%; 10/01/08
155,000 35,000 190,000 158,830 35,865 194,695
SCANA (1)
2.16%; 11/15/06
125,000 50,000 175,000 125,265 50,106 175,371
Tennessee Valley Authority
6.38%; 06/15/05
175,000 55,000 230,000 179,539 56,427 235,966
FEDERAL & FEDERALLY SPONSORED CREDIT(1.98%)
Federal Farm Credit Bank
3.00%; 04/15/08
2,775,000 1,040,000 3,815,000 2,759,599 1,034,228 3,793,827
FIDUCIARY BANKS (0.15%)
Bank of New York
4.14%; 08/02/07
100,000 30,000 130,000 101,349 30,405 131,754
5.20%; 07/01/07
70,000 85,000 155,000 73,612 89,385 162,997
FINANCE-AUTO LOANS (2.16%)
American Honda Finance (1) (2)
1.86%; 02/20/07
120,000 55,000 175,000 120,043 55,020 175,063
Ford Motor Credit
6.13%; 01/09/06
340,000 325,000 665,000 351,303 335,804 687,107
6.50%; 01/25/07
550,000 200,000 750,000 577,860 210,131 787,991
7.50%; 03/15/05
500,000 - 500,000 508,861 - 508,861
General Motors Acceptance
3.33%; 10/20/05 (1)
220,000 55,000 275,000 220,904 55,226 276,130
4.38%; 12/10/07
95,000 75,000 170,000 95,060 75,047 170,107
5.13%; 05/09/08 (3)
135,000 - 135,000 137,085 137,085
6.13%; 08/28/07
160,000 85,000 245,000 166,889 88,660 255,549
6.75%; 01/15/06
670,000 250,000 920,000 693,404 258,733 952,137
Toyota Motor Credit
2.80%; 01/18/06
150,000 35,000 185,000 150,339 35,079 185,418
FINANCE-COMMERCIAL (0.55%)
CIT Group
1.91%; 02/15/07 (1)
130,000 65,000 195,000 129,981 64,990 194,971
7.38%; 04/02/07
470,000 165,000 635,000 514,776 180,719 695,495
Textron Financial
5.88%; 06/01/07
125,000 25,000 150,000 133,164 26,633 159,797
FINANCE-CONSUMER LOANS (1.40%)
American General Finance
5.88%; 07/14/06
495,000 195,000 690,000 518,934 204,428 723,362
Household Finance
1.86%; 02/09/07 (1)
170,000 55,000 225,000 170,203 55,066 225,269
3.38%; 02/21/06
210,000 120,000 330,000 211,662 120,950 332,612
6.50%; 01/24/06
695,000 190,000 885,000 726,453 198,599 925,052
SLM (1)
4.19%; 03/02/09
350,000 125,000 475,000 356,104 127,180 483,284
FINANCE-CREDIT CARD (0.26%)
American Express
3.75%; 11/20/07
150,000 60,000 210,000 152,103 60,841 212,944
Capital One Bank
6.88%; 02/01/06
175,000 90,000 265,000 183,668 94,458 278,126
FINANCE-INVESTMENT BANKER & BROKER (3.68%)
Banque Paribas
8.35%; 06/15/07
140,000 70,000 210,000 157,922 78,961 236,883
Bear Stearns
3.00%; 03/30/06
130,000 135,000 265,000 130,465 135,483 265,948
6.50%; 05/01/06
325,000 45,000 370,000 342,665 47,446 390,111
Citigroup
6.75%; 12/01/05
1,315,000 520,000 1,835,000 1,372,425 542,708 1,915,133
Credit Suisse First Boston
5.75%; 04/15/07
365,000 185,000 550,000 387,370 196,338 583,708
Goldman Sachs Group
1.98%; 07/23/09 (1)
125,000 50,000 175,000 125,198 50,079 175,277
7.63%; 08/17/05
400,000 150,000 550,000 416,164 156,061 572,225
FINANCE-INVESTMENT BANKER & BROKER (conued)
Lehman Brothers Holdings
6.25%; 05/15/06
530,000 225,000 755,000 556,801 236,378 793,179
Merrill Lynch
1.95%; 02/06/09 (1)
120,000 55,000 175,000 120,004 55,002 175,006
4.15%; 03/02/09 (1)
130,000 65,000 195,000 131,201 65,601 196,802
6.00%; 11/15/04
400,000 130,000 530,000 400,512 130,166 530,678
6.15%; 01/26/06
- 80,000 80,000 - 83,365 83,365
Morgan Stanley
1.84%; 02/15/07 (1)
130,000 65,000 195,000 130,050 65,025 195,075
7.75%; 06/15/05
595,000 315,000 910,000 614,380 325,260 939,640
FINANCE-LEASING COMPANY (0.39%)
Boeing Capital
5.75%; 02/15/07
260,000 100,000 360,000 275,261 105,869 381,130
International Lease Finance
2.41%; 01/15/10 (1)
150,000 50,000 200,000 149,462 49,821 199,283
5.80%; 08/15/07
140,000 25,000 165,000 149,059 26,618 175,677
FINANCE-MORTGAGE LOAN/BANKER (24.42%)
Countrywide Home Loan
1.87%; 02/17/06 (1)
320,000 65,000 385,000 319,906 64,981 384,887
2.88%; 02/15/07
120,000 130,000 250,000 118,782 128,680 247,462
4.50%; 01/25/33
140,790 93,860 234,650 140,858 93,905 234,763
Federal Home Loan Bank
2.88%; 09/15/06
8,300,000 3,075,000 1,375,000 8,323,755 3,083,801 11,407,556
Federal Home Loan Mortgage
1.50%; 08/15/05
2,850,000 1,050,000 3,900,000 2,831,341 1,043,126 3,874,467
5.25%; 01/15/06
5,225,000 1,950,000 7,175,000 5,393,705 2,012,961 7,406,666
5.75%; 03/15/09
2,600,000 900,000 3,500,000 2,838,446 982,539 3,820,985
Federal National Mortgage Association
4.13%; 02/17/09 (1)
400,000 190,000 590,000 407,576 193,599 601,175
4.25%; 05/15/09
2,700,000 1,000,000 3,700,000 2,779,399 1,029,407 3,808,806
5.25%; 04/15/07
5,200,000 1,950,000 7,150,000 5,481,528 2,055,573 7,537,101
7.00%; 07/15/05
5,300,000 1,950,000 7,250,000 5,472,891 2,013,611 7,486,502
FINANCE-OTHER SERVICES (0.74%)
Caterpillar Financial Services
3.00%; 02/15/07
170,000 60,000 230,000 169,656 59,878 229,534
4.69%; 04/25/05
80,000 50,000 130,000 80,967 50,605 131,572
Mellon Funding
4.88%; 06/15/07
120,000 80,000 200,000 125,133 83,422 208,555
National Rural Utilities
6.00%; 05/15/06
255,000 70,000 325,000 267,106 73,323 340,429
Verizon Global Funding
6.75%; 12/01/05
355,000 125,000 480,000 370,765 130,551 501,316
FOOD-MEAT PRODUCTS (0.16%)
Tyson Foods
6.75%; 06/01/05
150,000 50,000 200,000 152,627 50,876 203,503
7.25%; 10/01/06
100,000 - 100,000 107,326 - 107,326
FOOD-MISCELLANEOUS/DIVERSIFIED (0.77%)
Campbell Soup
5.50%; 03/15/07
265,000 100,000 365,000 278,436 105,070 383,506
General Mills
5.13%; 02/15/07
85,000 30,000 115,000 88,496 31,234 119,730
Kellogg
6.00%; 04/01/06
165,000 55,000 220,000 172,274 57,425 229,699
Kraft Foods
4.63%; 11/01/06
220,000 70,000 290,000 226,434 72,047 298,481
Sara Lee
2.75%; 06/15/08
60,000 20,000 80,000 59,049 19,683 78,732
5.95%; 01/20/05
125,000 40,000 165,000 125,828 40,265 166,093
Unilever Capital
6.88%; 11/01/05
155,000 35,000 190,000 161,482 36,463 197,945
FOOD-RETAIL (0.19%)
Safeway
2.50%; 11/01/05
105,000 100,000 205,000 104,665 99,681 204,346
3.80%; 08/15/05
150,000 - 150,000 151,172 - 151,172
GAS-DISTRIBUTION (0.08%)
Sempra Energy
4.75%; 05/15/09
135,000 15,000 150,000 138,651 15,406 154,057
HOME EQUITY-OTHER (0.15%)
Argent Securities (1)
2.15%; 02/25/34
130,000 65,000 195,000 129,736 64,868 194,604
Specialty Underwriting & Residential
Finance (1)
2.44%; 02/25/35
60,000 25,000 85,000 59,997 24,999 84,996
HOME EQUITY-SEQUENTIAL (0.96%)
Ameriquest Mortgage Securities
2.13%; 04/25/34 (1)
300,000 150,000 450,000 299,987 149,993 449,980
3.02%; 10/25/33
75,000 - 75,000 74,642 - 74,642
3.64%; 01/25/34
750,000 - 750,000 754,769 - 754,769
New Century Home Equity Loan Trust
3.56%; 11/25/33
400,000 160,000 560,000 401,094 160,438 561,532
INDUSTRIAL GASES (0.14%)
Praxair
4.75%; 07/15/07
115,000 45,000 160,000 119,271 46,671 165,942
6.85%; 06/15/05
50,000 50,000 100,000 51,265 51,265 102,530
INSURANCE BROKERS (0.28%)
Aon
6.70%; 01/15/07 (1)
110,000 60,000 170,000 115,492 62,996 178,488
8.65%; 05/15/05
140,000 - 140,000 143,042 - 143,042
Marsh & McLennan
3.63%; 02/15/08
145,000 75,000 220,000 140,347 72,593 212,940
INVESTMENT MANAGEMENT & ADVISORY
SERVICES (0.08%)
AMVESCAP
6.60%; 05/15/05
105,000 50,000 155,000 107,082 50,991 158,073
LIFE & HEALTH INSURANCE (0.32%)
Lincoln National
5.25%; 06/15/07
110,000 50,000 160,000 115,246 52,384 167,630
ReliaStar Financial
8.63%; 02/15/05
115,000 60,000 175,000 116,909 60,996 177,905
Torchmark
6.25%; 12/15/06
160,000 85,000 245,000 170,443 90,548 260,991
MEDICAL PRODUCTS (0.08%)
Baxter International
5.25%; 05/01/07
130,000 20,000 150,000 136,021 20,926 156,947
MEDICAL-DRUGS (0.20%)
Eli Lilly
5.50%; 07/15/06
116,000 60,000 176,000 121,192 62,685 183,877
GlaxoSmithKline Capital
2.38%; 04/16/07
130,000 65,000 195,000 128,206 64,103 192,309
MEDICAL-HMO (0.42%)
Anthem
3.50%; 09/01/07
150,000 50,000 200,000 148,977 49,659 198,636
4.88%; 08/01/05
165,000 40,000 205,000 166,920 40,465 207,385
UnitedHealth Group
3.30%; 01/30/08
175,000 65,000 240,000 173,660 64,502 238,162
3.38%; 08/15/07
130,000 40,000 170,000 129,531 39,856 169,387
METAL-ALUMINUM (0.21%)
Alcan
6.25%; 11/01/08
95,000 25,000 120,000 103,440 27,221 130,661
Alcoa
4.25%; 08/15/07
195,000 75,000 270,000 200,503 77,117 277,620
METAL-DIVERSIFIED (0.09%)
Rio Tinto Finance
2.63%; 09/30/08
150,000 35,000 185,000 144,869 33,803 178,672
MISCELLANEOUS INVESTING (0.65%)
Archstone-Smith Operating Trust
3.00%; 06/15/08
150,000 30,000 180,000 146,271 29,254 175,525
Camden Property Trust
5.88%; 06/01/07
120,000 25,000 145,000 127,203 26,501 153,704
Developers Diversified Realty
3.88%; 01/30/09
120,000 65,000 185,000 118,204 64,027 182,231
Duke Realty
3.35%; 01/15/08
115,000 60,000 175,000 113,868 59,409 173,277
HRPT Properties Trust
6.70%; 02/23/05
150,000 - 150,000 151,853 - 151,853
New Plan Excel Realty Trust
5.88%; 06/15/07
125,000 50,000 175,000 131,892 52,757 184,649
Simon Property Group
3.75%; 01/30/09
165,000 60,000 225,000 162,929 59,247 222,176
MONEY CENTER BANKS (1.06%)
Bank of America
4.75%; 10/15/06
640,000 215,000 855,000 662,485 222,553 885,038
JP Morgan Chase
3.13%; 12/11/06
130,000 160,000 290,000 130,393 160,484 290,877
5.25%; 05/30/07
385,000 105,000 490,000 403,779 110,121 513,900
5.35%; 03/01/07
180,000 - 180,000 188,934 - 188,934
6.50%; 08/01/05
150,000 - 150,000 154,308 - 154,308
MORTGAGE BACKED SECURITIES (9.99%)
Banc of America Commercial Mortgage
7.11%; 11/15/31
- 506,314 506,314 - 547,656 547,656
Bear Stearns Commercial Mortgage Securities
0.65%; 05/11/39 (1) (2)
2,550,199 1,275,099 3,825,298 72,232 36,116 108,348
3.97%; 11/11/35
422,502 - 422,502 425,740 - 425,740
6.08%; 02/15/35
426,554 - 426,554 452,321 - 452,321
7.64%; 02/15/32
526,592 126,158 652,750 567,447 135,945 703,392
Chase Commercial Mortgage Securities
7.03%; 01/15/32
301,552 150,776 452,328 324,282 162,141 486,423
7.56%; 10/15/32
500,000 - 500,000 581,390 - 581,390
Chase Manhattan Bank-First Union National
` Bank Commercial Mortgage Trust
7.13%; 08/15/31
1,126,135 215,576 1,341,711 1,201,259 229,957 1,431,216
Commercial Mortgage Acceptance
6.79%; 06/15/31
48,964 - 48,964 52,158 - 52,158
Commercial Mortgage Pass-Through Cert (2)
3.25%; 06/10/38
93,594 187,189 280,783 91,018 182,037 273,055
CS First Boston Mortgage Securities
4.39%; 07/15/06
24,826 9,800 34,626 24,849 9,809 34,658
6.25%; 12/16/35
400,000 100,000 500,000 432,110 108,027 540,137
6.38%; 12/16/35
100,000 - 100,000 111,378 - 111,378
DLJ Commercial Mortgage
6.14%; 02/18/31
111,111 - 111,111 111,776 - 111,776
First Union Commercial Mortgage Securities
7.38%; 04/18/29
493,204 164,401 657,605 531,407 177,136 708,543
First Union Nat'l Bank Commercial Mortgage
5.59%; 02/12/34
- 42,308 42,308 - 44,842 44,842
First Union - Lehman Brothers - Bank of
America Commercial Mortgage Trust
6.56%; 11/18/35
- 150,000 150,000 - 163,192 163,192
GE Capital Commercial Mortgage
3.35%; 08/11/36
275,765 81,708 357,473 276,789 82,011 358,800
5.99%; 12/10/35
130,000 - 130,000 141,052 - 141,052
6.32%; 01/15/33
93,219 - 93,219 97,953 - 97,953
GMAC Commercial Mortgage Securities
4.32%; 10/15/38
113,675 - 113,675 115,712 - 115,712
6.57%; 09/15/33
149,941 41,234 191,175 153,352 42,172 195,524
JP Morgan Chase Commercial Mortgage Sec.
3.48%; 06/12/41
765,610 - 765,610 765,065 - 765,065
4.37%; 10/12/37
461,505 184,602 646,107 471,182 188,473 659,655
4.47%; 11/15/35
197,802 153,846 351,648 200,550 155,984 356,534
4.55%; 05/12/34
405,112 144,683 549,795 413,003 147,501 560,504
6.04%; 11/15/35
- 550,000 550,000 - 591,627 591,627
JP Morgan Commercial Mortgage Finance
7.16%; 09/15/29
- 155,000 155,000 - 169,717 169,717
LB-UBS Commercial Mortgage Trust
1.23%; 03/15/36 (1) (2)
1,691,618 676,647 2,368,265 88,201 35,280 123,481
2.60%; 05/15/27
85,724 85,724 - 84,051 84,051
3.63%; 10/15/29
1,200,000 200,000 1,400,000 1,205,906 200,984 1,406,890
4.19%; 08/15/29
220,000 - 220,000 223,363 - 223,363
4.90%; 06/15/26 (2)
1,235,000 370,000 1,605,000 1,284,425 384,807 1,669,232
5.40%; 03/15/26
385,139 157,557 542,696 397,330 162,544 559,874
5.97%; 03/15/26
295,000 295,000 - 315,565 315,565
6.06%; 06/15/20
595,318 176,391 771,709 635,451 188,282 823,733
Merrill Lynch Mortgage Investors
7.12%; 06/18/29
289,432 - 289,432 309,430 - 309,430
7.80%; 12/26/25 (1)
200,000 50,000 250,000 206,440 51,610 258,050
Midland Realty Acceptance
7.23%; 01/25/29
- 35,832 35,832 - 38,028 38,028
Morgan Stanley Capital I
4.57%; 12/18/32 (2)
505,339 87,885 593,224 513,068 89,229 602,297
5.33%; 12/18/32
500,000 75,000 575,000 522,552 78,383 600,935
6.54%; 02/15/31 (2)
185,000 95,000 280,000 202,038 103,749 305,787
NationsLink Funding
7.03%; 06/20/31
45,329 62,328 107,657 48,310 66,427 114,737
7.23%; 06/20/31
100,000 230,000 330,000 111,654 256,805 368,459
PNC Mortgage Acceptance
7.11%; 12/10/32
241,518 - 241,518 260,390 - 260,390
Wachovia Bank Commercial
Mortgage Trust(1)(2)
0.33%; 01/15/41
23,363,978 - 3,363,978 308,007 - 308,007
MULTI-LINE INSURANCE (0.46%)
Allstate
5.38%; 12/01/06
135,000 45,000 180,000 141,316 47,105 188,421
7.88%; 05/01/05
90,000 25,000 115,000 92,366 25,657 118,023
Hartford Financial Services Group
4.70%; 09/01/07
155,000 55,000 210,000 158,877 56,376 215,253
MetLife
3.91%; 05/15/05
150,000 - 150,000 151,197 - 151,197
5.25%; 12/01/06
150,000 50,000 200,000 156,272 52,091 208,363
MULTIMEDIA (0.86%)
AOL Time Warner
6.13%; 04/15/06
305,000 120,000 425,000 318,845 125,447 444,292
Gannett
5.50%; 04/01/07
120,000 25,000 145,000 126,827 26,422 153,249
Thomson
5.75%; 02/01/08
145,000 40,000 185,000 154,823 42,710 197,533
Viacom
7.15%; 05/20/05
80,000 - 80,000 82,059 - 82,059
7.75%; 06/01/05
260,000 170,000 430,000 268,225 175,378 443,603
Walt Disney
7.30%; 02/08/05
235,000 80,000 315,000 238,080 81,049 319,129
OIL COMPANY-EXPLORATION & PRODUCTION (0.47%)
Kerr-McGee
5.38%; 04/15/05
170,000 70,000 240,000 172,035 70,838 242,873
PennzEnergy
10.25%; 11/01/05
175,000 60,000 235,000 186,255 63,859 250,114
Petroleos Mexicanos
6.50%; 02/01/05
260,000 140,000 400,000 262,600 141,400 404,000
OIL COMPANY-INTEGRATED (0.38%)
BP Canada Finance
3.63%; 01/15/09
145,000 70,000 215,000 144,910 69,957 214,867
ChevronTexaco Capital
3.38%; 02/15/08
125,000 30,000 155,000 125,611 30,146 155,757
Marathon Oil
5.38%; 06/01/07
125,000 25,000 150,000 131,471 26,294 157,765
Occidental Petroleum
4.00%; 11/30/07
150,000 40,000 190,000 152,841 40,758 193,599
OIL FIELD MACHINERY & EQUIPMENT (0.12%)
Cooper Cameron
2.65%; 04/15/07
165,000 60,000 225,000 162,144 58,962 221,106
OIL REFINING & MARKETING (0.08%)
Valero Energy
6.13%; 04/15/07
120,000 20,000 140,000 128,164 21,361 149,525
OIL-FIELD SERVICES (0.09%)
Halliburton (1)
3.57%; 10/17/05
120,000 55,000 175,000 120,976 55,447 176,423
PAPER & RELATED PRODUCTS (0.34%)
Champion International
7.10%; 09/01/05
125,000 50,000 175,000 128,888 51,555 180,443
Union Camp
7.00%; 08/15/06
179,000 70,000 249,000 190,876 74,644 265,520
Weyerhaeuser
5.50%; 03/15/05
31,000 21,000 52,000 31,324 21,219 52,543
6.13%; 03/15/07
125,000 25,000 150,000 133,288 26,658 159,946
PHOTO EQUIPMENT & SUPPLIES (0.10%)
Eastman Kodak
3.63%; 05/15/08
160,000 35,000 195,000 157,040 34,353 191,393
PIPELINES (0.63%)
Duke Energy Field Services
7.50%; 08/16/05
240,000 110,000 350,000 248,886 114,073 362,959
Enbridge Energy Partners
4.00%; 01/15/09
150,000 50,000 200,000 149,191 49,730 198,921
Kinder Morgan
6.65%; 03/01/05
375,000 100,000 475,000 379,888 101,303 481,191
Kinder Morgan Energy Partners
5.35%; 08/15/07
100,000 25,000 125,000 104,831 26,208 131,039
8.00%; 03/15/05
25,000 - 25,000 25,472 - 25,472
PROPERTY & CASUALTY INSURANCE (0.37%)
ACE
6.00%; 04/01/07
150,000 50,000 200,000 157,454 52,485 209,939
Chubb
6.15%; 08/15/05
50,000 - 50,000 51,219 - 51,219
St. Paul
6.74%; 07/18/05
- 25,000 25,000 - 25,608 25,608
7.88%; 04/15/05
200,000 105,000 305,000 204,613 107,422 312,035
Travelers Property Casualty
3.75%; 03/15/08
105,000 - 105,000 104,510 - 104,510
PUBLISHING-BOOKS (0.20%)
Reed Elsevier Capital
6.13%; 08/01/06
115,000 50,000 165,000 120,848 52,543 173,391
7.00%; 05/15/05
150,000 50,000 200,000 153,580 51,193 204,773
REAL ESTATE OPERATOR & DEVELOPER (0.19%)
EOP Operating
7.75%; 11/15/07
175,000 65,000 240,000 195,664 72,675 268,339
ERP Operating
4.75%; 06/15/09
80,000 15,000 95,000 82,408 15,452 97,860
REGIONAL AUTHORITY (0.72%)
New Brunswick
3.50%; 10/23/07
40,000 40,000 80,000 40,461 40,461 80,922
Province of Manitoba
2.75%; 01/17/06
155,000 50,000 205,000 155,707 50,228 205,935
Province of Ontario
3.50%; 09/17/07
435,000 225,000 660,000 438,662 226,894 665,556
Province of Quebec
5.50%; 04/11/06
315,000 90,000 405,000 327,582 93,595 421,177
REGIONAL BANKS (2.57%)
Bank One
7.63%; 08/01/05
625,000 310,000 935,000 649,044 321,926 970,970
Fifth Third Bancorp
3.38%; 08/15/08
130,000 15,000 145,000 129,270 14,916 144,186
First Union
7.55%; 08/18/05
565,000 250,000 815,000 587,373 259,899 847,272
FleetBoston Financial
7.25%; 09/15/05
350,000 155,000 505,000 363,758 161,093 524,851
KeyCorp
4.63%; 05/16/05
160,000 45,000 205,000 161,706 45,480 207,186
Korea Development Bank
3.88%; 03/02/09
120,000 55,000 175,000 120,019 55,009 175,028
7.25%; 05/15/06
160,000 40,000 200,000 170,731 42,683 213,414
PNC Funding
5.75%; 08/01/06
220,000 100,000 320,000 230,401 104,728 335,129
SunTrust Banks
2.50%; 11/01/06
55,000 - 55,000 54,543 - 54,543
5.05%; 07/01/07
70,000 - 70,000 73,261 - 73,261
U.S. Bancorp
6.75%; 10/15/05
202,000 115,000 317,000 209,364 119,192 328,556
Wells Fargo
5.90%; 05/21/06
730,000 275,000 1,005,000 766,498 288,749 1,055,247
REINSURANCE (0.07%)
Berkshire Hathaway
3.38%; 10/15/08
100,000 40,000 140,000 99,656 39,862 139,518
RENTAL-AUTO & EQUIPMENT (0.08%)
Hertz
4.70%; 10/02/06
100,000 50,000 150,000 101,641 50,820 152,461
RETAIL-DISCOUNT (0.42%)
Costco Wholesale
5.50%; 03/15/07
140,000 50,000 190,000 147,524 52,687 200,211
Target
5.40%; 10/01/08
150,000 70,000 220,000 159,979 74,657 234,636
Wal-Mart Stores
4.38%; 07/12/07
260,000 100,000 360,000 268,774 103,375 372,149
RETAIL-DRUG STORE (0.10%)
CVS
3.88%; 11/01/07
150,000 45,000 195,000 152,516 45,755 198,271
RETAIL-MAJOR DEPARTMENT STORE (0.09%)
May Department Stores (2)
3.95%; 07/15/07
130,000 50,000 180,000 131,342 50,516 181,858
RETAIL-RESTAURANTS (0.08%)
McDonald's
5.38%; 04/30/07
113,000 30,000 143,000 118,952 31,580 150,532
SAVINGS & LOANS-THRIFTS (0.32%)
Golden West Financial
4.13%; 08/15/07
150,000 50,000 200,000 153,712 51,238 204,950
Washington Mutual
1.97%; 11/03/05 (1)
140,000 60,000 200,000 140,246 60,105 200,351
4.00%; 01/15/09
140,000 60,000 200,000 140,766 60,328 201,094
SOVEREIGN (1.31%)
Finland Government
4.75%; 03/06/07
150,000 45,000 195,000 156,272 46,882 203,154
Italy Government
4.38%; 10/25/06
1,195,000 430,000 1,625,000 1,228,774 442,153 1,670,927
Mexico Government
8.50%; 02/01/06
435,000 165,000 600,000 464,580 176,220 640,800
SPECIAL PURPOSE BANKS (0.26%)
Kreditanstalt fuer Wiederaufbau
2.38%; 09/25/06
250,000 245,000 495,000 249,495 244,505 494,000
SPECIAL PURPOSE ENTITY (0.09%)
Fondo Latinoamericano de Reservas (2)
3.00%; 08/01/06
115,000 60,000 175,000 115,337 60,176 175,513
SUPRANATIONAL BANK (1.46%)
Asian Development Bank
2.38%; 03/15/06
345,000 130,000 475,000 344,806 129,927 474,733
Corp Andina de Fomento
6.75%; 03/15/05
180,000 100,000 280,000 182,598 101,443 284,041
8.88%; 06/01/05
75,000 - 75,000 77,669 - 77,669
European Investment Bank
4.63%; 03/01/07
1,370,000 525,000 1,895,000 1,422,752 545,215 1,967,967
TELEPHONE-INTEGRATED (1.50%)
ALLTEL
6.75%; 09/15/05
130,000 - 130,000 134,725 - 134,725
BellSouth
5.00%; 10/15/06
225,000 100,000 325,000 233,714 103,873 337,587
British Telecommunications (1)
7.88%; 12/15/05
345,000 145,000 490,000 364,439 153,170 517,609
Deutsche Telekom International Finance (1)
8.25%; 06/15/05
170,000 95,000 265,000 175,828 98,257 274,085
France Telecom (1)
7.95%; 03/01/06
175,000 50,000 225,000 186,173 53,192 239,365
NYNEX Capital Funding
8.75%; 12/01/04
25,000 - 25,000 25,118 - 25,118
SBC Communications
5.75%; 05/02/06
325,000 120,000 445,000 339,186 125,238 464,424
Sprint Capital
7.13%; 01/30/06
335,000 200,000 535,000 352,354 210,361 562,715
Telecom Italia Capital
4.00%; 11/15/08
260,000 60,000 320,000 261,731 60,399 322,130
TEXTILE-HOME FURNISHINGS (0.10%)
Mohawk Industries
6.50%; 04/15/07
125,000 55,000 180,000 133,663 58,812 192,475
TOOLS-HAND HELD (0.09%)
Stanley Works
3.50%; 11/01/07
150,000 25,000 175,000 151,052 25,175 176,227
TRANSPORT-RAIL (0.60%)
Burlington Northern Santa Fe
6.38%; 12/15/05
230,000 80,000 310,000 238,295 82,885 321,180
CSX
6.25%; 10/15/08
120,000 55,000 175,000 130,640 59,877 190,517
Norfolk Southern
8.38%; 05/15/05
325,000 75,000 400,000 334,781 77,257 412,038
Union Pacific
7.60%; 05/01/05
175,000 50,000 225,000 179,251 51,215 230,466
TRANSPORT-SERVICES (0.07%)
FedEx
1.88%; 04/01/05
85,000 45,000 130,000 85,047 45,025 130,072
TOTAL BONDS 125,554,075 46,878,708 172,432,783
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) CERTIFICATES (4.29%)
4.50%; 10/01/09
250,127 100,051 350,178 253,837 101,535 355,372
4.50%; 11/01/09
- 234,479 234,479 - 237,957 237,957
4.50%; 12/01/09
388,031 166,299 554,330 393,787 168,766 562,553
4.50%; 01/01/10
145,325 87,195 232,520 147,514 88,508 236,022
4.50%; 02/01/10
774,915 - 774,915 786,588 - 786,588
4.50%; 04/01/10
321,921 - 321,921 326,770 - 326,770
4.50%; 09/01/10
285,531 224,346 509,877 289,832 227,725 517,557
4.50%; 10/01/10
664,883 300,008 964,891 674,898 304,527 979,425
4.50%; 11/01/10
333,468 1,042,087 1,375,555 338,491 1,057,784 1,396,275
4.50%; 04/01/11
232,468 - 232,468 236,023 - 236,023
4.50%; 06/01/11
682,754 - 682,754 692,623 - 692,623
4.50%; 07/01/11
246,039 - 246,039 249,801 - 249,801
4.50%; 10/01/11
300,000 100,000 400,000 304,587 101,529 406,116
5.00%; 09/01/09
151,580 - 151,580 155,047 - 155,047
5.50%; 12/01/08
44,793 14,931 59,724 46,069 15,356 61,425
5.50%; 02/01/09
93,662 31,107 124,769 96,332 31,994 128,326
5.50%; 03/01/09
52,992 17,664 70,656 54,502 18,168 72,670
5.50%; 04/01/09
118,762 19,794 138,556 122,148 20,358 142,506
6.00%; 08/01/06
- 139,634 139,634 - 143,121 143,121
6.50%; 04/01/09
33,170 - 33,170 35,183 - 35,183
6.50%; 04/01/15
13,775 83,265 97,040 14,687 88,255 102,942
7.00%; 12/01/22
178,559 - 178,559 190,805 - 190,805
7.25%; 12/01/07
39,157 - 39,157 40,563 - 40,563
7.50%; 12/01/29
5,905 - 5,905 6,345 - 6,345
8.00%; 12/01/11
18,142 - 18,142 19,079 - 19,079
8.00%; 10/01/22
73,468 - 73,468 80,716 - 80,716
8.25%; 01/01/12
7,293 - 7,293 7,889 - 7,889
9.00%; 09/01/09
50,430 - 50,430 52,566 - 52,566
TOTAL FHLMC CERTIFICATES 5,616,682 2,605,583 8,222,265
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(FNMA) CERTIFICATES (2.28%)
4.00%; 05/01/10
554,043 200,197 754,240 553,323 199,937 753,260
4.00%; 06/01/10
254,882 109,509 364,391 254,551 109,366 363,917
4.00%; 07/01/10
359,637 119,878 479,515 359,169 119,723 478,892
4.00%; 08/01/10
245,385 81,795 327,180 245,066 81,689 326,755
4.50%; 12/01/09
- 51,161 51,161 - 51,873 51,873
4.50%; 03/01/10
352,523 - 352,523 357,510 - 357,510
4.50%; 05/01/10
- 158,115 158,115 - 160,351 160,351
4.50%; 08/01/11
631,450 - 631,450 640,513 - 640,513
4.50%; 09/01/11
297,932 - 297,932 302,208 - 302,208
5.50%; 02/01/09
291,622 101,406 393,028 299,542 104,160 403,702
5.50%; 05/01/09
- 16,708 16,708 - 17,162 17,162
5.50%; 10/01/09
189,501 - 189,501 194,648 - 194,648
6.00%; 07/01/28
115,936 - 115,936 120,523 - 120,523
7.50%; 10/01/29
48,298 - 48,298 51,831 - 51,831
8.00%; 10/01/06
6,204 - 6,204 6,361 - 6,361
8.00%; 05/01/27
21,311 - 21,311 23,240 - 23,240
8.50%; 05/01/22
96,410 - 96,410 106,770 - 106,770
9.00%; 02/01/25
14,105 - 14,105 15,828 - 15,828
TOTAL FNMA CERTIFICATES 3,531,083 844,261 4,375,344
TREASURY BONDS (1.96%)
U.S. Treasury Inflation-Indexed
Obligations
3.38%; 01/15/07
1,315,677 478,428 1,794,105 1,409,933 512,703 1,922,636
U.S. Treasury Strip
0.00%; 08/15/09 (4)
1,550,000 600,000 2,150,000 1,323,260 512,229 1,835,489
TOTAL TREASURY BONDS 2,733,193 1,024,932 3,758,125
COMMERCIAL PAPER (2.17%)
FINANCE-CONSUMER LOANS (2.17%)
Investment in Joint Trading Account;
Household Finance 1.84%;
3,691,468 - 3,691,468 11/01/04 3,691,468 - 3,691,468
Investment in Joint Trading Account;
Federal home Loan Bank 1.69%; 11/01/04
- 462,056 462,056 462,056 462,056
TOTAL COMMERCIAL PAPER 3,691,468 462,056 4,153,524
REPURCHASE AGREEMENTS (0.13%)
Bear Stearns; 1.85%; dated 10/29/04
maturing 11/01/04
241,637 - 241,637 (collateralized by FNMA; $246,432;
11/17/11) (5) 241,600 - 241,600
TOTAL REPURCHASE AGREEMENTS 241,600 - 241,600
TOTAL PORTFOLIO INVESTMENTS (101.77%) 141,368,101 51,815,540 193,183,641
Liabilities, net of cash and
receivables (-0.77%) (1,403,213) (65,183) (1,468,396)
TOTAL NET ASSETS (100.00%) $139,964,888 $51,750,357 $191,715,245
===================================================
<FN>
(1) Variable rate.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the end of the
period, the value of these securities totaled $4,023,859 or 2.10% of net
assets.
(3) Security or a portion of the security was on loan at the end of the period.
(4) Non-income producing security.
(5) Security was purchased with the cash proceeds from securities loans.
</FN>
UNREALIZED APPRECIATION (DEPRECIATION)
The net federal income tax unrealized appreciation (depreciation) and federal
tax cost of investments held by the fund as of the period end were as follows:
Unrealized Appreciation $ 794,090 $ 258,041 $ 1,052,131
Unrealized Depreciation (1,655,645) (224,030) (1,879,675)
--------------------------------------------------
Net Unrealized Appreciation (Depreciation) (861,555) 34,011 (827,544)
Cost for federal income tax purposes $ 142,229,656 $ 51,781,529 $ 194,011,185
INVESTMENTS BY SECTOR (UNAUDITED)
Percentage of Total Value Sector Value
- ----------------------------------------------------------------------------------------------------------------------------------
31.36% 32.70% 31.72% Government $ 44,331,585 $ 16,942,969 $ 61,274,554
19.78 18.30 19.38 Financial 27,960,020 9,482,879 37,442,899
17.05 16.93 17.02 Asset Backed Securities 24,107,708 8,773,836 32,881,544
16.42 16.93 16.56 Mortgage Securities 23,219,213 8,769,703 31,988,916
4.09 4.38 4.17 Communications 5,775,915 2,268,280 8,044,195
2.57 2.33 2.50 Consumer, Non-cyclical 3,631,833 1,206,789 4,838,622
2.34 2.15 2.29 Utilities 3,306,372 1,114,958 4,421,330
1.85 1.68 1.80 Industrial 2,615,122 870,336 3,485,458
1.76 1.60 1.72 Energy 2,495,275 830,771 3,326,046
1.24 1.35 1.27 Consumer, Cyclical 1,746,275 701,900 2,448,175
1.10 1.17 1.12 Basic Materials 1,556,018 604,080 2,160,098
0.44 0.48 0.45 Technology 622,765 249,039 871,804
$ 141,368,101 $ 51,815,540 $ 193,183,641
=================================================
<FN>
Percentages are adjusted to reflect the impact of currency contracts, futures
contracts, and swap agreements, if applicable.
See accompanying notes.
</FN>
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
PRINCIPAL CASH MONEY PRO FORMA COMBINED MONEY
MANAGEMENT FUND, INC. MARKET FUND ADJUSTMENTS MARKET FUND
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $ 321,030,366 $224,105,649 $ -- $545,136,015
============== ============ ======= ============
ASSETS
Investment in
securities--at value. $ 321,030,366 $224,105,649 $ -- $545,136,015
Cash.................. 3,483 7,145 -- 10,628
Receivables:
Capital Shares sold.. 1,406,509 -- -- 1,406,509
Dividends and
interest............ 182,459 50,593 -- 233,052
Expense reimbursement
from Manager........ -- 1,426 -- 1,426
Other assets.......... 26,439 -- -- 26,439
Prepaid directors'
expenses............. 254 -- -- 254
-------------- ------------ ------- ------------
Total Assets 322,649,510 224,164,813 -- 546,814,323
LIABILITIES
Accrued management and
investment advisory
fees................. 27,280 16,857 -- 44,137
Accrued administrative
service fees......... -- 894 -- 894
Accrued distribution
fees................. 135 13,518 -- 13,653
Accrued service fees.. -- 1,124 -- 1,124
Accrued transfer and
administrative fees.. 151,614 95,576 -- 247,190
Accrued other expenses 53,071 35,356 -- 88,427
Payables:
Capital Shares
reacquired.......... 6,286 5,283,676 -- 5,289,962
-------------- ------------ ------- ------------
Total Liabilities 238,386 5,447,001 -- 5,685,387
-------------- ------------ ------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $ 322,411,124 $218,717,812 $ -- $541,128,936
============== ============ ======= ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $ 322,411,124 $218,717,812 $ -- $541,128,936
-------------- ------------ ------- ------------
Total Net Assets $ 322,411,124 $218,717,812 $ -- $541,128,936
============== ============ ======= ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 2,000,000,000 765,000,000 -- 765,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 7,413,337 N/A $ 7,413,337
Shares issued and
outstanding.......... 7,413,337 7,413,337
Net asset value per
share................ $ 1.000 $ 1.000
============ ============
Advisors Select: Net
Assets............... N/A $ 6,393,823 N/A $ 6,393,823
Shares issued and
outstanding.......... 6,393,823 6,393,823
Net asset value per
share................ $ 1.000 $ 1.000
============ ============
Class A: Net Assets... $ 317,339,972 N/A -- $317,339,972
Shares issued and
outstanding.......... 317,339,972 -- 317,339,972
Net asset value per
share................ $ 1.000 -- $ 1.000
============== ============
Class B: Net Assets... $ 5,071,152 N/A -- $ 5,071,152
Shares issued and
outstanding.......... 5,071,152 -- 5,071,152
Net asset value per
share /(a)/.......... $ 1.000 -- $ 1.000
============== ============
Class J: Net Assets... N/A $132,550,498 N/A $132,550,498
Shares issued and
outstanding.......... 132,550,498 132,550,498
Net asset value per
share /(a)/.......... $ 1.000 $ 1.000
============ ============
Institutional: Net
Assets............... N/A $ 56,277,419 N/A $ 56,277,419
Shares issued and
outstanding.......... 56,277,419 56,277,419
Net asset value per
share................ $ 1.000 $ 1.000
============ ============
Preferred: Net Assets. N/A $ 14,598,771 N/A $ 14,598,771
Shares issued and
outstanding.......... 14,598,771 14,598,771
Net asset value per
share................ $ 1.000 $ 1.000
============ ============
Select: Net Assets.... N/A $ 1,483,964 N/A $ 1,483,964
Shares issued and
outstanding.......... 1,483,964 1,483,964
Net asset value per
share................ $ 1.000 $ 1.000
============ ============
/(a) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See accompanying notes.
4
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PRINCIPAL CASH MONEY PRO FORMA COMBINED MONEY
MANAGEMENT FUND, INC. MARKET FUND ADJUSTMENTS /(A)/ MARKET FUND
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Interest............. $4,215,226 $2,269,582 $ -- $6,484,808
Expenses:
Management and
investment advisory
fees................ 1,481,866 715,144 (136,031) 2,060,979
Distribution fees -
Advisors Preferred.. -- 16,360 -- 16,360
Distribution fees -
Advisors Select..... -- 26,849 -- 26,849
Distribution fees -
Class B............. 13,088 -- -- 13,088
Distribution fees -
Class J............. -- 559,299 -- 559,299
Distribution fees -
Select.............. -- 890 -- 890
Administrative
service fees -
Advisors Preferred.. -- 9,816 -- 9,816
Administrative
service fees -
Advisors Select..... -- 17,899 -- 17,899
Administrative
service fees -
Preferred........... -- 13,072 -- 13,072
Administrative
service fees -
Select.............. -- 1,158 -- 1,158
Registration fees -
Class A............. 33,840 -- -- 33,840
Registration fees -
Class B............. 5,156 -- -- 5,156
Registration fees -
Class J............. -- 30,857 -- 30,857
Service fees -
Advisors Preferred.. -- 11,124 -- 11,124
Service fees -
Advisors Select..... -- 22,374 -- 22,374
Service fees -
Preferred........... -- 17,825 -- 17,825
Service fees - Select -- 1,335 -- 1,335
Shareholder reports -
Class A............. 28,787 -- -- 28,787
Shareholder reports -
Class B............. 516 -- -- 516
Shareholder reports -
Class J............. -- 48,202 -- 48,202
Transfer and
administrative fees
- Class A........... 317,435 -- -- 317,435
Transfer and
administrative fees
- Class B........... 4,628 -- -- 4,628
Transfer and
administrative fees
- Class J........... -- 516,831 -- 516,831
Auditing and legal
fees................ 9,597 -- (9,597) --
Custodian fees....... 10,444 -- (10,444) --
Directors' expenses.. 10,571 -- (10,571) --
Registration fees.... 43,383 -- -- 43,383
Transfer and
administrative fees. 356,740 -- 21,000 377,740
Other expenses....... 18,993 -- (18,993) --
Other expenses -
Class J............. -- 49 -- 49
---------- ---------- --------- ----------
Total Gross Expenses 2,335,044 2,009,084 (164,636) 4,179,492
Less: Reimbursement
from Manager -
Advisors Select..... -- 3,054 -- 3,054
Less: Reimbursement
from Manager - Class
B................... 4,543 -- (4,543) --
Less: Reimbursement
from Manager - Class
J................... -- 293,260 -- 293,260
---------- ---------- --------- ----------
Total Net Expenses 2,330,501 1,712,770 (160,093) 3,883,178
---------- ---------- --------- ----------
Net Investment Income
(Operating Loss) $1,884,725 $ 556,812 $ 169,093 2,601,630
========== ========== ========= ==========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
20
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Cash Principal Cash
Management Money Market Management Money Market
Fund, Inc. Fund Combined Fund, Inc. Fund Combined
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (97.64%)
ASSET BACKED SECURITIES (10.45%)
CAFCO
1.58%; 11/05/04
- - 900,000 900,000 $ - $ 899,842 $ 899,842
1.66%; 11/18/04
- - 1,000,000 1,000,000 - 999,216 999,216
1.83%; 12/06/04
- - 1,300,000 1,300,000 - 1,297,687 1,297,687
1.89%; 12/16/04
2,600,000 - 2,600,000 2,593,857 - 2,593,857
1.90%; 12/17/04
1,045,000 - 1,045,000 1,042,463 - 1,042,463
2.02%; 01/07/05
3,500,000 1,300,000 4,800,000 3,486,842 1,295,113 4,781,955
CXC
1.45%; 11/15/04
2,600,000 1,000,000 3,600,000 2,598,534 999,436 3,597,970
1.61%; 11/04/04
- - 1,000,000 1,000,000 - 999,866 999,866
1.85%; 12/16/04
2,000,000 1,300,000 3,300,000 1,995,375 1,296,994 3,292,369
1.90%; 02/25/05
2,300,000 - 2,300,000 2,285,919 - 2,285,919
1.98%; 01/10/05
- - 1,400,000 1,400,000 - 1,394,610 1,394,610
FCAR Owner Trust I
1.63%; 11/02/04
2,700,000 - 2,700,000 2,699,878 - 2,699,878
1.66%; 11/16/04
- - 1,100,000 1,100,000 - 1,099,239 1,099,239
1.70%; 11/03/04
- - 100,000 100,000 - 99,991 99,991
1.73%; 12/03/04
2,000,000 1,000,000 3,000,000 1,996,924 998,462 2,995,386
1.79%; 12/08/04
- - 885,000 885,000 - 883,372 883,372
1.81%; 12/09/04
1,280,000 1,280,000 - 1,277,554 1,277,554
1.83%; 12/10/04
2,600,000 1,200,000 3,800,000 2,594,845 1,197,621 3,792,466
1.89%; 01/06/05
2,400,000 1,300,000 3,700,000 2,391,684 1,295,496 3,687,180
1.90%; 12/16/04
- - 1,200,000 1,200,000 - 1,197,150 1,197,150
2.05%; 01/19/05
960,000 - 960,000 955,681 - 955,681
Windmill Funding
1.60%; 11/03/04
- - 900,000 900,000 - 899,920 899,920
1.71%; 11/24/04
2,000,000 1,100,000 3,100,000 1,997,815 1,098,798 3,096,613
1.78%; 12/01/04
2,200,000 - 2,200,000 2,196,737 - 2,196,737
1.86%; 12/22/04
- - 1,500,000 1,500,000 - 1,496,048 1,496,048
1.87%; 12/15/04
1,945,000 1,095,000 3,040,000 1,940,555 1,092,497 3,033,052
1.97%; 01/05/05
- - 1,450,000 1,450,000 - 1,444,842 1,444,842
2.00%; 01/12/05
2,500,000 2,500,000 2,490,000 - 2,490,000
BREWERY (0.70%)
Anheuser-Busch
1.77%; 11/22/04
2,500,000 1,300,000 3,800,000 2,497,419 1,298,658 3,796,077
CHEMICALS-DIVERSIFIED (2.04%)
E. I. Du Pont de Nemours
1.75%; 11/05/04
- - 1,500,000 1,500,000 - 1,499,708 1,499,708
1.87%; 12/27/04
2,700,000 1,400,000 4,100,000 2,692,146 1,395,928 4,088,074
1.90%; 12/28/04
2,800,000 2,611,000 5,411,000 2,791,577 2,603,145 5,394,722
COATINGS & PAINT (0.22%)
Sherwin-Williams
1.80%; 12/13/04
- - 1,200,000 1,200,000 - 1,197,480 1,197,480
COMMERCIAL BANKS (7.16%)
Calyon North America
1.78%; 12/08/04
2,100,000 - 2,100,000 2,096,169 - 2,096,169
Nordea North America
1.63%; 11/12/04
2,000,000 900,000 2,900,000 1,999,004 899,552 2,898,556
1.72%; 11/29/04
3,130,000 1,100,000 4,230,000 3,125,667 1,098,528 4,224,195
1.74%; 11/18/04
2,205,000 - 2,205,000 2,203,188 - 2,203,188
1.78%; 11/29/04
- - 490,000 490,000 - 489,322 489,322
1.80%; 11/30/04
1,445,000 1,560,000 3,005,000 1,442,858 1,557,738 3,000,596
1.88%; 12/29/04
- - 1,300,000 1,300,000 - 1,296,062 1,296,062
1.97%; 01/31/05
2,000,000 1,400,000 3,400,000 1,990,041 1,393,028 3,383,069
1.99%; 01/31/05
- - 1,500,000 1,500,000 - 1,492,455 1,492,455
Svenska Handelsbanken
1.60%; 11/04/04
2,000,000 900,000 2,900,000 1,999,733 899,640 2,899,373
1.60%; 11/10/04
2,200,000 - 2,200,000 2,199,021 - 2,199,021
1.62%; 11/04/04
2,200,000 - 2,200,000 2,199,703 - 2,199,703
1.65%; 11/22/04
2,000,000 - 2,000,000 1,998,081 - 1,998,081
1.69%; 11/10/04
1,100,000 - 1,100,000 1,099,535 1,099,535
1.82%; 12/03/04
1,200,000 1,200,000 - 1,198,059 1,198,059
1.85%; 12/08/04
2,525,000 - 2,525,000 2,520,199 - 2,520,199
1.86%; 12/13/04
- - 1,400,000 1,400,000 - 1,396,962 1,396,962
2.04%; 01/31/05
995,000 1,000,000 1,995,000 989,869 994,843 1,984,712
CONSUMER PRODUCTS-MISCELLANEOUS (0.44%)
Fortune Brands
1.87%; 11/17/04
2,390,000 - 2,390,000 2,388,088 - 2,388,088
DIVERSIFIED FINANCIAL SERVICES (5.35%)
Amstel Funding
1.76%; 12/27/04
- - 1,000,000 1,000,000 - 997,262 997,262
1.92%; 12/29/04
3,000,000 1,500,000 4,500,000 2,990,720 1,495,360 4,486,080
2.05%; 02/17/05
1,500,000 1,500,000 - 1,490,775 1,490,775
2.11%; 02/22/05
1,700,000 1,200,000 2,900,000 1,688,741 1,192,052 2,880,793
General Electric Capital
1.60%; 11/01/04
2,055,000 795,000 2,850,000 2,055,000 795,000 2,850,000
1.62%; 11/05/04
- - 900,000 900,000 - 899,838 899,838
1.65%; 11/02/04
- - 1,000,000 1,000,000 - 999,954 999,954
1.65%; 11/17/04
2,100,000 1,000,000 3,100,000 2,098,460 999,267 3,097,727
1.72%; 11/09/04
1,400,000 - 1,400,000 1,399,465 - 1,399,465
1.73%; 12/07/04
1,915,000 - 1,915,000 1,911,687 - 1,911,687
1.73%; 12/20/04
2,200,000 - 2,200,000 2,194,819 - 2,194,819
1.75%; 12/06/04
1,500,000 1,100,000 2,600,000 1,497,448 1,098,129 2,595,577
- - 1,500,000 1,500,000 1.92%; 12/31/04 1,495,200 1,495,200
- - 1,600,000 1,600,000 2.05%; 01/07/05 1,592,073 1,592,073
FINANCE-AUTO LOANS (3.97%)
Paccar Financial
1.62%; 11/04/04
- - 800,000 800,000 - 799,892 799,892
1.63%; 11/15/04
- - 1,100,000 1,100,000 - 1,099,303 1,099,303
1.63%; 11/18/04
2,600,000 1,000,000 3,600,000 2,597,999 999,230 3,597,229
1.95%; 01/07/05
1,355,000 1,355,000 - 1,350,083 1,350,083
Toyota Motor Credit
1.66%; 11/15/04
- - 1,155,000 1,155,000 - 1,154,254 1,154,254
1.77%; 11/03/04
1,550,000 - 1,550,000 1,549,848 - 1,549,848
1.77%; 11/05/04
- - 1,200,000 1,200,000 - 1,199,764 1,199,764
1.77%; 11/08/04
1,655,000 - 1,655,000 1,654,430 - 1,654,430
1.77%; 11/19/04
2,800,000 1,450,000 4,250,000 2,797,438 1,448,710 4,246,148
1.80%; 12/07/04
- - 1,460,000 1,460,000 - 1,457,372 1,457,372
2.08%; 01/28/05
1,900,000 1,500,000 3,400,000 1,890,339 1,492,373 3,382,712
FINANCE-COMMERCIAL (3.49%)
CIT Group
1.62%; 11/10/04
2,000,000 1,000,000 3,000,000 1,999,190 999,595 2,998,785
1.67%; 11/12/04
2,000,000 900,000 2,900,000 1,998,980 899,541 2,898,521
1.71%; 12/02/04
- - 1,000,000 1,000,000 - 998,528 998,528
1.80%; 12/02/04
- - 805,000 805,000 - 803,752 803,752
1.87%; 12/17/04
- - 1,000,000 1,000,000 - 997,611 997,611
2.00%; 01/04/05
2,100,000 1,400,000 3,500,000 2,092,533 1,395,022 3,487,555
2.04%; 01/13/05
2,700,000 - 2,700,000 2,688,831 - 2,688,831
2.10%; 03/02/05
2,600,000 1,500,000 4,100,000 2,581,648 1,489,412 4,071,060
FINANCE-CONSUMER LOANS (3.62%)
American General Finance
1.74%; 11/19/04
- - 1,000,000 1,000,000 - 999,130 999,130
1.76%; 11/09/04
2,540,000 2,540,000 2,539,007 - 2,539,007
1.95%; 12/21/04
- - 1,600,000 1,600,000 - 1,595,667 1,595,667
2.07%; 02/02/05
- - 1,500,000 1,500,000 - 1,491,979 1,491,979
Household Finance
1.63%; 11/02/04
- - 900,000 900,000 - 899,959 899,959
1.65%; 11/04/04
2,000,000 - 2,000,000 1,999,725 - 1,999,725
1.66%; 11/29/04
- - 645,000 645,000 - 644,167 644,167
1.71%; 11/30/04
- - 1,000,000 1,000,000 - 998,622 998,622
1.73%; 11/16/04
3,000,000 775,000 3,775,000 2,997,837 774,441 3,772,278
1.81%; 11/22/04
2,200,000 - 2,200,000 2,197,677 - 2,197,677
1.86%; 12/09/04
- - 1,480,000 1,480,000 - 1,477,094 1,477,094
2.04%; 01/27/05
950,000 950,000 - 945,317 945,317
FINANCE-INVESTMENT BANKER & BROKER (12.09%)
Bear Stearns
1.79%; 12/10/04
- - 1,300,000 1,300,000 - 1,297,479 1,297,479
1.80%; 12/07/04
3,000,000 1,300,000 4,300,000 2,994,600 1,297,660 4,292,260
1.81%; 11/30/04
2,000,000 1,300,000 3,300,000 1,997,084 1,298,105 3,295,189
1.83%; 12/03/04
2,500,000 1,300,000 3,800,000 2,495,933 1,297,885 3,793,818
2.04%; 01/21/05
2,200,000 1,400,000 3,600,000 2,189,902 1,393,574 3,583,476
2.07%; 02/03/05
1,700,000 1,300,000 3,000,000 1,690,812 1,292,974 2,983,786
Citigroup Global Markets Holdings
1.62%; 11/03/04
- - 1,075,000 1,075,000 - 1,074,903 1,074,903
1.67%; 12/07/04
- - 1,000,000 1,000,000 - 998,330 998,330
1.69%; 11/18/04
- - 1,000,000 1,000,000 - 999,202 999,202
1.69%; 11/23/04
2,000,000 1,025,000 3,025,000 1,997,935 1,023,866 3,021,801
1.72%; 11/08/04
1,790,000 - 1,790,000 1,789,401 - 1,789,401
1.76%; 11/04/04
- - 1,500,000 1,500,000 - 1,499,780 1,499,780
1.76%; 11/12/04
- - 1,200,000 1,200,000 - 1,199,355 1,199,355
1.76%; 11/15/04
4,500,000 - 4,500,000 4,496,920 - 4,496,920
1.79%; 11/17/04
2,335,000 - 2,335,000 2,333,142 - 2,333,142
2.05%; 01/11/05
1,500,000 - 1,500,000 1,493,935 - 1,493,935
2.05%; 01/25/05
- - 1,000,000 1,000,000 - 995,160 995,160
Goldman Sachs Group
1.60%; 11/08/04
- - 2,975,000 2,975,000 - 2,974,074 2,974,074
1.60%; 11/09/04
- - 870,000 870,000 - 869,691 869,691
1.62%; 11/16/04
2,600,000 - 2,600,000 2,598,245 - 2,598,245
1.62%; 11/19/04
2,500,000 900,000 3,400,000 2,497,975 899,271 3,397,246
1.64%; 11/23/04
1,000,000 1,000,000 2,000,000 998,998 998,992 1,997,990
ING U.S. Funding
1.65%; 11/04/04
- - 1,100,000 1,100,000 - 1,099,849 1,099,849
1.70%; 11/22/04
- - 970,000 970,000 - 969,038 969,038
1.80%; 12/14/04
1,900,000 1,000,000 2,900,000 1,895,926 997,856 2,893,782
1.83%; 11/24/04
2,350,000 - 2,350,000 2,347,253 - 2,347,253
1.83%; 12/01/04
- - 1,000,000 1,000,000 - 998,475 998,475
1.84%; 12/15/04
- - 1,300,000 1,300,000 - 1,297,076 1,297,076
1.97%; 01/06/05
- - 1,525,000 1,525,000 - 1,519,492 1,519,492
Morgan Stanley
1.94%; 12/03/04
- - 1,500,000 1,500,000 - 1,497,413 1,497,413
1.95%; 12/07/04
- - 1,950,000 1,950,000 - 1,946,198 1,946,198
FINANCE-LEASING COMPANY (1.73%)
International Lease Finance
1.65%; 11/10/04
- - 1,000,000 1,000,000 - 999,588 999,588
1.66%; 11/16/04
- - 1,100,000 1,100,000 - 1,099,239 1,099,239
1.71%; 11/05/04
2,770,000 - 2,770,000 2,769,474 - 2,769,474
1.89%; 12/09/04
2,200,000 - 2,200,000 2,195,611 - 2,195,611
1.91%; 12/14/04
2,335,000 - 2,335,000 2,329,673 - 2,329,673
FINANCE-MORTGAGE LOAN/BANKER (6.56%)
Federal Home Loan Mortgage
1.51%; 11/01/04
3,000,000 1,000,000 4,000,000 3,000,000 1,000,000 4,000,000
1.60%; 11/04/04
- - 900,000 900,000 - 899,880 899,880
1.63%; 12/06/04
475,000 995,000 1,470,000 474,247 993,423 1,467,670
1.68%; 11/23/04
- - 1,000,000 1,000,000 - 998,973 998,973
1.86%; 12/14/04
- - 2,200,000 2,200,000 - 2,195,112 2,195,112
1.87%; 12/21/04
2,645,000 1,250,000 3,895,000 2,638,130 1,246,754 3,884,884
Federal National Mortgage Association
1.52%; 11/03/04
2,045,000 955,000 3,000,000 2,044,827 954,919 2,999,746
1.58%; 11/03/04
1,100,000 1,100,000 2,200,000 1,099,904 1,099,904 2,199,808
1.67%; 11/17/04
- - 1,100,000 1,100,000 - 1,099,184 1,099,184
1.68%; 12/13/04
2,600,000 700,000 3,300,000 2,594,904 698,628 3,293,532
1.70%; 11/17/04
- - 1,000,000 1,000,000 - 999,244 999,244
1.81%; 11/24/04
2,600,000 1,300,000 3,900,000 2,596,994 1,298,497 3,895,491
1.81%; 11/24/04
- - 1,060,000 1,060,000 - 1,058,862 1,058,862
1.90%; 12/31/04
2,035,000 - 2,035,000 2,028,556 - 2,028,556
1.91%; 12/29/04
- - 1,000,000 1,000,000 - 996,923 996,923
1.98%; 01/24/05
2,090,000 1,400,000 3,490,000 2,080,344 1,393,532 3,473,876
FINANCE-OTHER SERVICES (9.15%)
ABN-AMRO North America Finance
2.00%; 01/31/05
2,000,000 - 2,000,000 1,989,383 - 1,989,383
FINANCE-OTHER SERVICES (continued)
Caterpillar Financial Services
1.46%; 11/08/04
2,310,000 - 2,310,000 2,309,344 - 2,309,344
Commoloco
1.68%; 11/08/04
- - 1,225,000 1,225,000 - 1,224,600 1,224,600
1.79%; 11/19/04
- - 1,305,000 1,305,000 - 1,303,832 1,303,832
1.81%; 12/01/04
- - 1,300,000 1,300,000 - 1,298,039 1,298,039
1.82%; 11/22/04
- - 1,400,000 1,400,000 - 1,398,514 1,398,514
1.83%; 11/29/04
- - 1,300,000 1,300,000 - 1,298,150 1,298,150
1.83%; 12/07/04
1,815,000 - 1,815,000 1,811,570 - 1,811,570
1.90%; 12/10/04
2,200,000 - 2,200,000 2,195,472 - 2,195,472
1.90%; 12/20/04
2,665,000 1,500,000 4,165,000 2,658,108 1,496,121 4,154,229
CRC Funding
1.75%; 12/02/04
- - 1,000,000 1,000,000 - 998,493 998,493
1.78%; 12/02/04
- - 1,200,000 1,200,000 - 1,198,161 1,198,161
1.97%; 01/10/05
2,300,000 1,100,000 3,400,000 2,291,190 1,095,786 3,386,976
2.00%; 01/19/05
2,400,000 1,400,000 3,800,000 2,389,467 1,393,855 3,783,322
2.03%; 01/06/05
3,000,000 1,400,000 4,400,000 2,988,835 1,394,790 4,383,625
2.05%; 01/20/05
2,700,000 1,400,000 4,100,000 2,687,700 1,393,622 4,081,322
2.08%; 01/06/05
1,340,000 - 1,340,000 1,334,890 - 1,334,890
Private Export Funding
1.68%; 11/18/04
- - 990,000 990,000 - 989,214 989,214
1.70%; 12/09/04
1,825,000 700,000 2,525,000 1,821,725 698,744 2,520,469
1.88%; 12/28/04
2,500,000 - 2,500,000 2,492,558 - 2,492,558
2.10%; 03/09/05
2,320,000 1,455,000 3,775,000 2,302,677 1,444,136 3,746,813
2.10%; 04/05/05
1,590,000 - 1,590,000 1,575,624 - 1,575,624
FOOD-MISCELLANEOUS/DIVERSIFIED(0.28%)
Unilever Capital
1.77%; 11/16/04
- - 1,500,000 1,500,000 - 1,498,894 1,498,894
INSURANCE BROKERS (1.24%)
Marsh & McLennan
1.81%; 11/23/04
2,830,000 1,500,000 4,330,000 2,826,870 1,498,341 4,325,211
1.89%; 12/21/04
2,400,000 - 2,400,000 2,393,700 - 2,393,700
MEDICAL-DRUGS (0.22%)
Pfizer
1.64%; 11/17/04
- - 1,200,000 1,200,000 - 1,199,125 1,199,125
MONEY CENTER BANKS (9.31%)
Bank of America
1.71%; 12/01/04
2,000,000 1,000,000 3,000,000 1,997,150 998,575 2,995,725
1.75%; 12/22/04
2,400,000 1,300,000 3,700,000 2,393,642 1,296,556 3,690,198
1.83%; 12/15/04
1,700,000 1,400,000 3,100,000 1,696,198 1,396,868 3,093,066
1.85%; 12/10/04
2,200,000 1,500,000 3,700,000 2,195,591 1,496,994 3,692,585
2.04%; 02/04/05
2,500,000 - 2,500,000 2,486,542 - 2,486,542
4.00%; 11/01/04
- - 1,000,000 1,000,000 - 1,000,000 1,000,000
BNP Paribas Finance
1.80%; 12/02/04
2,000,000 - 2,000,000 1,996,891 - 1,996,891
1.87%; 12/28/04
- - 1,200,000 1,200,000 - 1,196,447 1,196,447
1.90%; 12/30/04
2,200,000 - 2,200,000 2,193,164 2,193,164
Citicorp
1.66%; 11/22/04
- - 1,000,000 1,000,000 - 999,032 999,032
1.90%; 12/22/04
- - 1,330,000 1,330,000 - 1,326,420 1,326,420
2.04%; 01/25/05
2,900,000 1,400,000 4,300,000 2,886,032 1,395,650 4,281,682
HBOS Treasury Services
1.60%; 11/05/04
2,350,000 - 2,350,000 2,349,582 - 2,349,582
1.63%; 11/09/04
- - 1,000,000 1,000,000 - 999,638 999,638
1.69%; 11/09/04
- - 1,100,000 1,100,000 - 1,099,587 1,099,587
1.70%; 12/09/04
1,400,000 1,000,000 2,400,000 1,397,488 998,205 2,395,693
1.75%; 12/02/04
2,000,000 - 2,000,000 1,996,986 - 1,996,986
1.83%; 11/30/04
1,965,000 - 1,965,000 1,962,040 - 1,962,040
1.84%; 12/03/04
1,905,000 - 1,905,000 1,901,884 - 1,901,884
1.87%; 12/08/04
- - 1,200,000 1,200,000 - 1,197,694 1,197,694
1.88%; 12/14/04
- - 1,500,000 1,500,000 - 1,496,631 1,496,631
2.00%; 02/02/05
680,000 - 680,000 676,486 - 676,486
2.03%; 02/01/05
- - 1,300,000 1,300,000 - 1,293,256 1,293,256
2.05%; 01/24/05
- - 1,400,000 1,400,000 - 1,393,320 1,393,320
2.05%; 02/02/05
2,700,000 - 2,700,000 2,685,701 - 2,685,701
OIL COMPANY-INTEGRATED (1.62%)
Shell Finance
1.77%; 12/06/04
1,590,000 1,400,000 2,990,000 1,587,264 1,397,591 2,984,855
1.78%; 12/08/04
2,000,000 1,205,000 3,205,000 1,996,300 1,202,796 3,199,096
1.97%; 01/28/05
1,335,000 1,265,000 2,600,000 1,328,571 1,258,908 2,587,479
REGIONAL BANKS (0.26%)
Wells Fargo Bank
2.02%; 01/18/05
- - 1,400,000 1,400,000 - 1,400,000 1,400,000
RETAIL-DISCOUNT (1.18%)
Wal-Mart Stores
1.59%; 11/02/04
4,300,000 2,100,000 6,400,000 4,299,810 2,099,907 6,399,717
SPECIAL PURPOSE BANKS (1.51%)
KFW International Finance
1.66%; 12/02/04
2,600,000 - 2,600,000 2,596,283 2,596,283
- - 1,500,000 1,500,000 1.75%; 11/01/04 1,500,000 1,500,000
1.97%; 01/24/05
2,700,000 1,400,000 4,100,000 2,687,589 1,393,565 4,081,154
SPECIAL PURPOSE ENTITY (10.74%)
Barclays U.S. Funding
1.81%; 12/08/04
- - 1,200,000 1,200,000 - 1,197,768 1,197,768
1.92%; 12/20/04
- - 1,500,000 1,500,000 - 1,496,080 1,496,080
1.95%; 01/27/05
1,600,000 - 1,600,000 1,592,460 - 1,592,460
- - 1,900,000 1,900,000 1.96%; 12/17/04 1,895,242 1,895,242
1.96%; 12/27/04
2,000,000 - 2,000,000 1,993,918 1,993,918
Compass Securitization
1.81%; 12/15/04
- - 960,000 960,000 - 957,876 957,876
1.82%; 11/26/04
2,555,000 1,200,000 3,755,000 2,551,771 1,198,483 3,750,254
2.02%; 01/18/05
- - 1,620,000 1,620,000 - 1,612,910 1,612,910
Grampian Funding
1.71%; 11/29/04
2,000,000 1,000,000 3,000,000 1,997,340 998,670 2,996,010
1.84%; 12/21/04
1,900,000 1,200,000 3,100,000 1,895,144 1,196,933 3,092,077
1.85%; 12/06/04
5,175,000 - 5,175,000 5,165,692 - 5,165,692
1.89%; 12/23/04
2,000,000 1,200,000 3,200,000 1,994,540 1,196,724 3,191,264
- - 1,420,000 1,420,000 2.05%; 01/26/05 1,413,046 1,413,046
Ranger Funding
1.72%; 12/01/04
2,100,000 1,100,000 3,200,000 2,096,990 1,098,423 3,195,413
1.81%; 11/18/04
2,400,000 - 2,400,000 2,397,949 - 2,397,949
1.97%; 01/03/05
- - 1,400,000 1,400,000 - 1,395,174 1,395,174
1.99%; 01/12/05
2,800,000 1,300,000 4,100,000 2,788,856 1,294,826 4,083,682
Receivables Capital
1.62%; 11/01/04
- - 670,000 670,000 - 670,000 670,000
Sheffield Receivables
2.07%; 01/06/05
- - 1,500,000 1,500,000 - 1,494,308 1,494,308
Tulip Funding
1.81%; 11/19/04
2,700,000 - 2,700,000 2,697,557 - 2,697,557
1.95%; 01/04/05
- - 1,485,000 1,485,000 - 1,479,852 1,479,852
Yorktown Capital
1.81%; 12/13/04
- - 1,330,000 1,330,000 - 1,327,191 1,327,191
1.85%; 01/18/05
2,000,000 1,400,000 3,400,000 1,991,333 1,393,933 3,385,266
2.00%; 12/17/04
4,380,000 1,325,000 5,705,000 4,369,646 1,321,868 5,691,514
SUPRANATIONAL BANK (2.26%)
Corp Andina de Fomento
1.77%; 11/09/04
2,000,000 1,200,000 3,200,000 1,999,214 1,199,528 3,198,742
1.78%; 11/12/04
2,000,000 1,000,000 3,000,000 1,998,912 999,456 2,998,368
1.80%; 11/03/04
1,800,000 - 1,800,000 1,799,820 - 1,799,820
1.80%; 11/05/04
2,880,000 - 2,880,000 2,879,424 - 2,879,424
1.91%; 12/16/04
1,400,000 - 1,396,657 1,396,657
TELEPHONE COMMUNICATION (0.70%)
Telstra
1.95%; 12/30/04
2,600,000 1,190,000 3,790,000 2,591,691 1,186,197 3,777,888
TELEPHONE-INTEGRATED (1.35%)
BellSouth
1.93%; 12/20/04
- - 1,400,000 1,400,000 - 1,396,322 1,396,322
1.95%; 12/23/04
2,000,000 - 2,000,000 1,994,367 1,994,367
SBC Communications
2.04%; 01/10/05
2,400,000 1,500,000 3,900,000 2,390,480 1,494,050 3,884,530
-----------------------------------------------------
TOTAL COMMERCIAL PAPER
307,159,365 221,180,524 528,339,889
BONDS (3.10%)
AEROSPACE & DEFENSE EQUIPMENT (0.43%)
United Technologies
6.63%; 11/15/04
2,000,000 300,000 2,300,000 2,003,844 300,576 2,304,420
FINANCE-INVESTMENT BANKER & BROKER
(0.85%)
Bear Stearns
6.65%; 12/01/04
1,292,000 500,000 1,792,000 1,297,644 502,184 1,799,828
Goldman Sachs Group
7.50%; 01/28/05
- - 175,000 175,000 - 177,316 177,316
Lehman Brothers Holdings
7.75%; 01/15/05
2,000,000 600,000 2,600,000 2,026,140 607,842 2,633,982
FINANCE-MORTGAGE LOAN/BANKER (0.29%)
Federal Home Loan Bank
1.66%; 05/16/05
1,300,000 300,000 1,600,000 1,300,000 300,000 1,600,000
FINANCE-OTHER SERVICES (2.06%)
Newcourt Credit Group
6.88%; 02/16/05
1,300,000 500,000 1,800,000 1,320,737 507,976 1,828,713
Verizon Global Funding
1.98%; 12/15/04
4,000,000 - 4,000,000 4,000,000 - 4,000,000
MULTIMEDIA (0.45%)
Gannett
4.95%; 04/01/05
1,900,000 523,000 2,423,000 1,922,636 529,231 2,451,867
-----------------------------------------------
TOTAL BONDS 13,871,001 2,925,125 16,796,126
-----------------------------------------------
TOTAL PORTFOLIO INVESTMENTS (100.74%) 321,030,366 224,105,649 545,136,015
Cash, receivables and other assets,
net of liabilities (-0.74%) 1,380,758 (5,387,837) (4,007,079)
-----------------------------------------------
TOTAL NET ASSETS (100.00%) 322,411,124 218,717,812 541,128,936
===============================================
INVESTMENTS BY SECTOR (UNAUDITED)
Percentage of Total Value Sector Value
- ---------------------------------------------------------------------------------------------------------------------
71.25% 70.71% 71.03% Financial $228,743,789 $158,453,902 $387,197,691
10.36 10.38 10.37 Asset Backed Securities 33,267,109 23,263,754 56,530,863
8.89 9.29 9.06 Government 28,535,275 20,829,476 49,364,751
2.77 2.06 2.86 Communications 8,899,174 6,696,261 15,595,435
1.71 2.99 1.85 Basic Materials 5,483,723 4,605,800 10,089,523
1.53 1.72 1.63 Energy 4,912,135 3,996,677 8,908,812
1.52 1.78 1.60 Consumer, Non-cyclical 4,885,507 3,859,295 8,744,802
1.34 0.94 1.17 Consumer, Cyclical 4,299,810 2,099,907 6,399,717
0.63 0.13 0.43 Industrial 2,003,844 300,577 2,304,421
-------------------------------------------------
TOTAL $321,030,366 $224,105,649 $545,136,015
=================================================
<FN>
Percentages are adjusted to reflect the impact of currency contracts,
futures contracts, and swap agreements, if applicable.
See accompanying notes.
</FN>
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
PRINCIPAL COMBINED
INTERNATIONAL INTERNATIONAL INTERNATIONAL
EMERGING EMERGING EMERGING
MARKETS MARKETS PRO FORMA MARKETS
FUND, INC. FUND ADJUSTMENTS FUND
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $ 37,571,539 $ 31,670,456 $ -- $ 69,241,995
============ ============ ========= ============
FOREIGN CURRENCY--AT
COST ................ $ 623,552 $ 497,789 $ -- $ 1,121,341
============ ============ ========= ============
ASSETS
Investment in
securities--at value. $43,928,742/(c)/ $ 35,730,678 $ -- $79,659,420/(c)/
Foreign currency--at
value................ 626,739 499,573 -- 1,126,312
Cash.................. 17,487 129,365 -- 146,852
Receivables:
Capital Shares sold.. 2,422 75,506 -- 77,928
Dividends and
interest............ 80,055 56,768 -- 136,823
Investment securities
sold................ 601,534 475,788 -- 1,077,322
Other assets.......... 215 -- -- 215
------------ ------------ --------- ------------
Total Assets 45,257,194 36,967,678 -- 82,224,872
LIABILITIES
Accrued management and
investment advisory
fees................. 10,422 9,183 -- 19,605
Accrued administrative
service fees......... -- 280 -- 280
Accrued distribution
fees................. 2,830 2,713 -- 5,543
Accrued directors'
expense.............. 3 -- -- 3
Accrued service fees.. -- 343 -- 343
Accrued transfer and
administrative fees.. 29,458 15,422 -- 44,880
Accrued other expenses 41,187 4,848 -- 46,035
Payables:
Capital Shares
reacquired.......... 51,577 -- -- 51,577
Indebtedness......... 217,000 -- -- 217,000
Investment securities
purchased........... 702,923 891,901 -- 1,594,824
Collateral obligation
on securities loaned,
at value............. 250,000 -- -- 250,000
------------ ------------ --------- ------------
Total Liabilities 1,305,400 924,690 -- 2,230,090
------------ ------------ --------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $ 43,951,794 $ 36,042,988 $ -- $ 79,994,782
============ ============ ========= ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $ 34,969,354 $ 29,404,704 $ -- $ 64,374,058
Accumulated
undistributed
(overdistributed) net
realized gain (loss). 2,625,527 2,577,150 -- 5,202,677
Net unrealized
appreciation
(depreciation) of
investments.......... 6,357,203 4,060,222 -- 10,417,425
Net unrealized
appreciation
(depreciation) on
translation of assets
and liabilities in
foreign currencies... (290) 912 -- 622
------------ ------------ --------- ------------
Total Net Assets $ 43,951,794 $ 36,042,988 $ -- $ 79,994,782
============ ============ ========= ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 100,000,000 225,000,000 -- 225,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... N/A $ 3,142,557 N/A $ 3,142,557
Shares issued and
outstanding.......... 208,213 208,213
Net asset value per
share................ $ 15.09 $ 15.09
============ ============
Advisors Select: Net
Assets............... N/A $ 1,928,447 N/A $ 1,928,447
Shares issued and
outstanding.......... 128,165 128,165
Net asset value per
share................ $ 15.05 $ 15.05
============ ============
Class A: Net Assets... $ 37,803,720 N/A -- $ 37,803,720
Shares issued and
outstanding.......... 3,173,817 (680,168) 2,493,649
Net asset value per
share................ $ 11.91 -- $ 15.16
Maximum offering
price per share /(a)/ $ 12.64 -- $ 16.08
============ == ============
Class B: Net Assets... $ 6,148,074 N/A -- $ 6,148,074
Shares issued and
outstanding.......... 541,202 (135,656) 405,546
Net asset value per
share /(b)/.......... $ 11.36 -- $ 15.16
============ == ============
Class J: Net Assets... N/A $ 25,631,162 N/A $ 25,631,162
Shares issued and
outstanding.......... 1,719,930 1,719,930
Net asset value per
share /(b)/.......... $ 14.90 $ 14.90
============ ============
Institutional: Net
Assets............... N/A $ 14,646 N/A $ 14,646
Shares issued and
outstanding.......... 966 966
Net asset value per
share................ $ 15.16 $ 15.16
============ ============
Preferred: Net Assets. N/A $ 3,430,030 N/A $ 3,430,030
Shares issued and
outstanding.......... 226,056 226,056
Net asset value per
share................ $ 15.17 $ 15.17
============ ============
Select: Net Assets.... N/A $ 1,896,146 N/A $ 1,896,146
Shares issued and
outstanding.......... 125,109 125,109
Net asset value per
share................ $ 15.16 $ 15.16
============ ============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 5.75% of the offering price or 6.10% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
/(c) /Includes fair market value of securities loaned, see "Securities Lending"
in Notes to Financial Statements.
See accompanying notes.
7
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PRINCIPAL COMBINED
INTERNATIONAL INTERNATIONAL INTERNATIONAL
EMERGING EMERGING EMERGING
MARKETS MARKETS PRO FORMA MARKETS
FUND, INC. FUND ADJUSTMENTS /(A)/ FUND
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Dividends............ $ 1,155,332 $ 727,432 $ -- $ 1,882,764
Withholding tax on
foreign dividends... (122,573) (74,186) -- (196,759)
Interest............. 249 9,051 -- 9,300
Securities lending... 12,877 -- -- 12,877
----------- ---------- --------- -----------
Total Income 1,045,885 662,297 -- 1,708,182
Expenses:
Management and
investment advisory
fees................ 499,421 357,526 39,619 896,566
Distribution fees -
Advisors Preferred.. -- 6,899 -- 6,899
Distribution fees -
Advisors Select..... -- 5,325 -- 5,325
Distribution fees -
Class A............. 79,579 -- -- 79,579
Distribution fees -
Class B............. 67,420 -- -- 67,420
Distribution fees -
Class J............. -- 85,997 -- 85,997
Distribution fees -
Select.............. -- 1,761 -- 1,761
Administrative
service fees -
Advisors Preferred.. -- 4,139 -- 4,139
Administrative
service fees -
Advisors Select..... -- 3,550 -- 3,550
Administrative
service fees -
Preferred........... -- 3,273 -- 3,273
Administrative
service fees -
Select.............. -- 2,289 -- 2,289
Registration fees -
Class A............. 8,527 -- -- 8,527
Registration fees -
Class B............. 7,337 -- -- 7,337
Registration fees -
Class J............. -- 10,919 -- 10,919
Service fees -
Advisors Preferred.. -- 4,691 -- 4,691
Service fees -
Advisors Select..... -- 4,437 -- 4,437
Service fees -
Preferred........... -- 4,463 -- 4,463
Service fees - Select -- 2,641 -- 2,641
Shareholder reports -
Class A............. 5,316 -- -- 5,316
Shareholder reports -
Class B............. 1,729 -- -- 1,729
Shareholder reports -
Class J............. -- 6,801 -- 6,801
Transfer and
administrative fees
- Class A........... 29,362 -- -- 29,362
Transfer and
administrative fees
- Class B........... 10,154 -- -- 10,154
Transfer and
administrative fees
- Class J........... -- 76,985 -- 76,985
Auditing and legal
fees................ 9,875 -- (9,875) --
Custodian fees....... 118,392 -- (118,392) --
Directors' expenses.. 1,408 -- (1,408) --
Registration fees.... 24,377 -- -- 24,377
Transfer and
administrative fees. 121,787 -- 521 122,308
Other expenses....... 3,408 -- (3,408) --
Other expenses -
Class J............. -- 198 -- 198
----------- ---------- --------- -----------
Total Gross Expenses 988,092 581,894 (92,943) 1,477,043
Less: Fees paid
indirectly.......... 8,423 1,931 (4,462) 5,892
----------- ---------- --------- -----------
Total Net Expenses 979,669 579,963 (88,481) 1,471,151
----------- ---------- --------- -----------
Net Investment Income
(Operating Loss) 66,216 82,334 88,481 237,031
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ 7,899,968 3,361,475 -- 11,261,443
Foreign currency
transactions........ (87,911) (48,935) -- (136,846)
Change in unrealized
appreciation/depreciation
of:
Investments........... (1,903,719) 145,798 -- (1,757,921)
Translation of assets
and liabilities in
foreign currencies... 4,688 2,475 -- 7,163
----------- ---------- --------- -----------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies 5,913,026 3,460,813 -- 9,373,839
----------- ---------- --------- -----------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $ 5,979,242 $3,543,147 $ 88,481 $ 9,610,870
=========== ========== ========= ===========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
23
SCHEDULE OF INVESTMENTS
October 31, 2004
(unaudited)
Principal Amount or Number of Shares Market Value
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Principal
International International International International
Emerging Emerging Emerging Emerging
Markets Fund, Markets Markets Fund, Markets
Inc. Fund Combined Inc. Fund Combined
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (91.49%)
AGRICULTURAL OPERATIONS (0.91%)
165,677 292,474 IOI Berhad $414,192 $316,993 $731,185
126,797
APPLICATIONS SOFTWARE (0.63%)
6,624 12,011 Infosys Technologies 278,364 504,745
5,387 226,381
APPLICATIONS SOFTWAREN (0.28%)
5,085 8,887 TATA Consultancy Services (1) 129,392 226,137
3,802 96,745
AUTO-CARS & LIGHT TRUCKS (0.77%)
7,180 12,720 Hyundai Motor 348,257 616,968
5,540 268,711
AUTO/TRUCK PARTS & EQUIPMENT-
REPLACEMENT (0.00%) 0
5 Hyundai Mobis 256
- 5 - 256
BICYCLE MANUFACTURING (0.03%)
7,000 19,000 Giant Manufacturing 10,184 27,642
12,000 17,458
BREWERY (0.52%)
6,240 11,240 Efes Breweries International (1) 173,160 311,910
5,000 138,750
3,346 6,184 Quilmes Industrial 54,741 101,171
2,838 46,430
BUILDING PRODUCTS-CEMENT &
AGGREGATE (0.70%)
42,469 74,492 Gujarat Ambuja Cements Ltd. (1) 320,121 561,502
32,023 241,381
BUILDING-HEAVY CONSTRUCTION (0.46%)
159,956 296,793 IJM 197,840 367,086
136,837 169,246
BUILDING-RESIDENTIAL &
COMMERCIAL (1.76%)
192,743 345,980 Corporacion GEO (1) 300,828 539,996
153,237 239,168
36,680 64,547 Hyundai Development 491,469 864,855
27,867 373,386
CELLULAR TELECOMMUNICATIONS (5.74%)
90,174 169,190 Advanced Info Service Public (2) (3) 205,315 385,225
79,016 179,910
351,695 629,629 America Telecom (1) 853,869 1,528,656
277,934 674,787
458,700 844,500 Far EasTone Telecommunications 490,214 902,519
385,800 412,305
222,196 386,559 Maxis Communications 502,865 874,845
164,363 371,980
4,416 7,919 Vimpel Communications (1) 503,424 902,766
3,503 399,342
CIRCUIT BOARDS (0.55%)
373,000 674,000 Unimicron Technology 241,185 435,815
301,000 194,630
COAL (0.51%)
144,132 308,381 Yanzhou Coal Mining 189,808 406,108
164,249 216,300
COMMERCIAL BANKS (14.00%)
68,519 123,519 ABSA Group 745,558 1,344,015
55,000 598,457
52,137 92,137 Banco do Brasil 522,100 922,660
40,000 400,560
260,609 470,328 Bank Leumi Le-Israel 543,600 981,050
209,719 437,450
2,362,542 4,264,204 Bank Rakyat 506,259 913,758
1,901,662 407,499
19,027 34,420 BBVA Banco Frances 123,676 223,730
15,393 100,054
291,390 539,489 Chinatrust Financial Holding 332,344 615,313
248,099 282,969
8,194 14,001 CorpBanca (2) (3) 216,772 370,396
5,807 153,624
16,162 29,494 Credicorp 232,733 424,714
13,332 191,981
73,610 133,010 Daegu Bank 440,542 796,040
59,400 355,498
3,811 6,736 E.Sun Financial Holding (1) (2) 65,028 114,938
2,925 49,910
419,000 740,000 E.Sun Financial Holding 285,981 505,074
321,000 219,093
178,196 314,793 EON Capital 281,362 497,041
136,597 215,679
15,670 28,220 Hana Bank 391,225 704,555
12,550 313,330
24,308 44,290 Hansabank 244,276 445,079
19,982 200,803
12,687 22,465 OTP Bank 319,763 566,207
9,778 246,444
154,646,091 268,121,043 Turkiye Garanti Bankasi (1) 413,229 716,445
113,474,952 303,216
141,594,083 256,514,412 Turkiye Is Bankasi 585,774 1,061,199
114,920,329 475,425
COMPUTERS (0.87%)
94,000 168,000 High Tech Computer 391,139 699,057
74,000 307,918
COMPUTERS-PERIPHERAL EQUIPMENT (0.81%)
407,000 723,800 Lite-On Technology 363,077 645,689
316,800 282,612
COSMETICS & TOILETRIES (0.22%)
490 880 Pacific 95,855 172,148
390 76,293
DIVERSIFIED FINANCIAL SERVICES (1.27%)
127,013 225,578 RMB Holdings 387,794 688,731
98,565 300,937
9,214 16,591 Shinhan Financial Group 181,482 326,782
7,377 145,300
DIVERSIFIED MANUFACTURING
OPERATIONS (0.84%)
26,520 47,770 Cheil Industries 374,289 674,200
21,250 299,911
DIVERSIFIED MINERALS (3.13%)
45,498 82,098 Anglo American 989,392 1,785,290
36,600 795,898
22,003 39,483 Antofagasta 402,355 722,000
17,480 319,645
DIVERSIFIED OPERATIONS (3.80%)
116,705 208,839 Alfa 453,857 812,159
92,134 358,302
27,942 50,827 Barloworld 388,216 706,172
22,885 317,956
174,266 318,117 China Merchants Holdings International 257,478 470,019
143,851 (4) 212,541
79,980 137,966 Citic Pacific 204,487 352,741
57,986 148,254
26,868 47,222 Imperial Holdings (1) 399,475 702,099
20,354 302,624
ELECTRIC PRODUCTS-MISCELLANEOUS (0.36%)
3,022 5,061 LG Electronics 170,603 285,712
2,039 115,109
ELECTRIC-GENERATION (0.57%)
121,800 212,800 Electricity Generating 195,758 342,014
91,000 146,256
83,500 83,500 National Thermal Power (1) (3) 114,119 114,119
- -
ELECTRONIC COMPONENTS-
MISCELLANEOUS (5.18%)
5,400 9,653 Samsung Electronics 2,119,964 3,789,632
4,253 1,669,668
2,150 3,950 Samsung SDI 193,971 356,365
1,800 162,394
ELECTRONIC COMPONENTS-
SEMICONDUCTOR (1.16%)
44,750 81,480 Hynix Semiconductor (1) 507,660 924,338
36,730 416,678
FINANCE-OTHER SERVICES (0.95%)
455,000 803,000 Fubon Financial Holding 429,053 757,207
348,000 328,154
FOOD-MISCELLANEOUS/DIVERSIFIED (0.47%)
44,296 73,093 Global Bio-Chem Technology Group
- warrants 3,073 5,071
28,797 (1) 1,998
14,070 26,358 Tiger Brands 198,111 371,131
12,288 173,020
FOOD-RETAIL (0.53%)
7,832 15,212 Cencosud (1) (2) 174,044 338,044
7,380 164,000
14,070 26,358 SPAR Group (1) 47,300 88,609
12,288 41,309
FOOTWEAR & RELATED APPAREL (0.57%)
20,628 37,392 Grendene (1) 249,977 453,129
16,764 203,152
GAS-DISTRIBUTION (1.74%)
7,360 13,310 Korea Gas 224,186 405,423
5,950 181,237
14,626 26,415 OAO Gazprom (2)(3) 545,988 986,072
11,789 440,084
HOME FURNISHINGS (0.89%)
76,100 136,600 Lewis Group (1) 394,867 708,789
60,500 313,922
HOUSEWARES (0.78%)
140,614,000 254,370,000 Turk Sise ve Cam Fabrikalari 343,310 621,046
113,756,000 277,736
IMPORT & EXPORT (0.65%)
507,257 931,869 Testrite International 282,442 518,867
424,612 236,425
INTERNET SECURITY (1.03%)
19,930 36,502 Check Point Software Technologies (1) 450,837 825,712
16,572 374,875
LIFE & HEALTH INSURANCE (0.65%)
200,095 359,935 New Africa Capital 287,591 517,325
159,840 229,734
NON-FERROUS METALS (1.14%)
122,358 222,270 Grupo Mexico (1) 503,957 915,465
99,912 411,508
OIL COMPANY-EXPLORATION &
PRODUCTION (1.67%)
15,217 28,350 Oil & Natural Gas 264,373 492,540
13,133 228,167
118,316 202,852 PTT Public (3) 489,802 839,762
84,536 349,960
OIL COMPANY-INTEGRATED (9.72%)
1,738,058 3,097,975 China Petroleum & Chemical 658,744 1,174,169
1,359,917 515,425
7,250 13,143 LUKOIL 906,250 1,642,875
5,893 736,625
5,997 11,313 MOL Magyar Olaj-es Gazipari 334,575 631,156
5,316 296,581
1,134,992 1,915,651 PetroChina 594,225 1,002,939
780,659 408,714
30,932 55,719 Petroleo Brasileiro 1,098,395 1,978,581
24,787 880,186
23,220 41,005 Sasol 458,178 809,112
17,785 350,934
7,900 13,600 Surgutneftegaz 312,050 537,200
5,700 225,150
OIL REFINING & MARKETING (1.56%)
52,520 92,557 Polski Koncern Naftowy Orlen 565,570 996,715
40,037 431,145
141,000 254,300 Thai Oil Public (1) (3) 139,060 250,801
113,300 111,741
OIL-FIELD SERVICES (0.91%)
9,396 16,273 Tenaris 420,659 728,542
6,877 307,883
PAPER & RELATED PRODUCTS (0.51%)
75,115 135,933 Kimberly-Clark de Mexico 224,770 406,759
60,818 181,989
PETROCHEMICALS (2.00%)
14,610 26,670 Honam Petrochemical 571,611 1,043,454
12,060 471,843
831,210 1,584,753 SINOPEC Shanghai Petrochemical 291,010 554,828
753,543 263,818
REAL ESTATE OPERATOR & DEVELOPER (1.05%)
10,280 18,395 IRSA Inversiones y Representaciones 97,763 174,937
8,115 (1) 77,174
196,242 345,030 Kerry Properties 378,193 664,934
148,788 286,741
RETAIL-APPAREL & SHOE (1.78%)
23,158 41,009 Edgars Consolidated Stores 804,842 1,425,242
17,851 620,400
RETAIL-AUTOMOBILE (0.63%)
311,427 584,452 Astra International 268,649 504,171
273,025 235,522
RETAIL-DISCOUNT (0.52%)
199,560 384,330 Siam Makro (3) 216,253 416,479
184,770 200,226
RETAIL-HYPERMARKETS (0.73%)
102,922 182,986 Organizacion Soriana 330,289 587,224
80,064 256,935
RETAIL-MISCELLANEOUS/DIVERSIFIED (0.57%)
36,856 65,652 Massmart Holdings 256,181 456,338
28,796 200,157
RUBBER & PLASTIC PRODUCTS (0.22%)
36,000 64,000 Taiwan Green Point Enterprises 99,147 176,261
28,000 77,114
SEMICONDUCTOR COMPONENT-INTEGRATED
CIRCUITS (1.38%)
152,000 269,000 Realtek Semiconductor 151,522 268,154
117,000 116,632
364,097 635,494 Taiwan Semiconductor 477,397 833,248
271,397 Manufacturing 355,851
SHIP BUILDING (0.81%)
65,950 119,830 Samsung Heavy Industries 356,996 648,655
53,880 291,659
STEEL PRODUCERS (3.61%)
5,325 9,611 Cherepovets MK Severstal (1) (3) 213,370 385,108
4,286 171,738
219,000 383,000 China Steel 220,278 385,235
164,000 164,957
55,465 100,233 Iscor 486,417 879,023
44,768 392,606
12,679 22,966 POSCO 474,068 858,699
10,287 384,631
34,103 60,161 Tata Iron & Steel 216,240 381,469
26,058 165,229
TELECOMMUNICATION SERVICES (3.83%)
698,204 1,296,326 China Telecom 224,261 416,375
598,122 192,114
87,829 157,691 Mahanagar Telephone Nigam 266,982 479,348
69,862 212,366
32,096 56,934 SK Telecom 633,254 1,123,308
24,838 490,054
74,100 137,200 Telekom Malaysia 224,250 415,210
63,100 190,960
742,000 1,318,000 Telekomunikasi Indonesia 354,692 630,033
576,000 275,341
TELEPHONE-INTEGRATED (2.19%)
185,497 334,190 Carso Global Telecom (1) 285,498 514,351
148,693 228,853
27,143 49,751 Philippine Long Distance Telephone 677,009 1,240,904
22,608 (1) 563,895
TOBACCO (0.19%)
2,850 5,610 Korea Tobacco & Ginseng 78,919 155,346
2,760 76,427
TRANSPORT-MARINE (1.96%)
228,983 501,649 China Shipping Development (4) 191,226 418,932
272,666 227,706
657 1,165 Evergreen Marine 566 1,004
508 438
61,442 110,600 Malaysia International Shipping 215,047 387,100
49,158 172,053
429,950 788,850 Wan Hai Lines 413,154 758,033
358,900 344,879
WIRELESS EQUIPMENT (1.18%)
218,827 401,077 Gemtek Technology 514,232 942,510
182,250 428,278
TOTAL COMMON STOCKS 40,737,124 73,189,822
32,452,698
PREFERRED STOCKS (6.67%)
AIRLINES (0.79%)
33,195 61,096 Gol Linhas Aereas Inteligentes 342,876 631,069
27,901 (1) 288,193
COMMERCIAL BANKS (1.03%)
7,562 13,603 Banco Bradesco 457,268 822,563
6,041 365,295
DIVERSIFIED MINERALS (1.78%)
1,276,434 2,394,017 Caemi Mineracao e Metalurgica (1) 764,251 1,433,392
1,117,583 669,141
FOOD-MEAT PRODUCTS (0.94%)
232,667 413,477 Sadia 421,179 748,486
180,810 327,307
MACHINERY-GENERAL INDUSTRY (0.72%)
123,028 217,759 WEG 319,632 565,747
94,731 246,115
PETROCHEMICALS (0.44%)
5,325,790 9,514,211 Braskem 195,801 349,787
4,188,421 153,986
STEEL PRODUCERS (0.97%)
5,283,248 9,573,426 Cia Siderurgica de Tubarao 213,291 386,490
4,290,178 173,199
15,011 25,960 Usinas Siderurgicas de Minas 227,320 393,127
10,949 Gerais 165,807
TOTAL PREFERRED STOCKS 2,941,618 5,330,661
2,389,043
COMMERCIAL PAPER (1.11%)
FINANCE-MORTGAGE LOAN/BANKER (1.11%)
888,937 Investment in Joint Trading Account;
Federal Home Loan Bank 888,937
- 888,937 1.69%; 11/01/04 - 888,937
TOTAL COMMERCIAL PAPER 888,937
- 888,937
REPURCHASE AGREEMENTS (0.31%)
Washington Mutual Capital; 1.95%;
dated 10/29/04 maturing 11/01/04
250,041 (collateralized by U.S.Government
Agency Securities; $255,000; 250,000
250,041 - 08/01/19 - 11/01/34) (5) 250,000 -
TOTAL REPURCHASE AGREEMENTS 250,000
250,000 -
TOTAL PORTFOLIO INVESTMENTS (99.58%) 43,928,742 79,659,420
35,730,678
Cash, receivables and other assets,
net of liabilities (0.42%) 23,052 312,310 335,362
TOTAL NET ASSETS (100.00%) $43,951,794 $36,042,988 $79,994,782
===============================================
<FN>
(1) Non-income producing security.
(2) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the end of the
period, the value of these securities totaled $2,194,675 or 2.74% of net
assets.
(3) Market value is determined in accordance with procedures established in
good faith by the Board of Directors. At the end of the period, the value
of these securities totaled 3,747,962 or 4.69% of net assets
(4) Security or a portion of the security was on loan at the end of the period
(5) Security was purchased with the cash proceeds from securities loans.
</FN>
UNREALIZED APPRECIATION (DEPRECIATION)
The net federal income tax unrealized appreciation (depreciation) and federal
tax cost of investments held by the fund as of the period end were as follows.
Unrealized Appreciation $6,784,451 $4,430,475 $11,214,926
Unrealized Depreciation (459,519) (397,001) (856,520)
---------------------------------------------
Net Unrealized Appreciation (Depreciation) 6,324,932 4,033,474 10,358,406
Cost for federal income tax purposes $37,603,810 $31,697,204 $69,301,014
INVESTMENTS BY COUNTRY (UNAUDITED)
Percentage of Total Value Country Value
- ------------------------------------------------------------------------------------------------------------------------------------
1.36% 1.27% 1.32% Argentina $599,075 $454,367 $1,053,442
10.95 10.84 10.90 Brazil 4,812,090 3,872,941 8,685,031
0.89 0.89 0.89 Chilie 390,817 317,624 708,441
3.95 3.96 3.96 China 1,735,206 1,415,664 3,150,870
2.86 2.96 2.91 Hong Kong 1,257,301 1,057,948 2,315,249
1.49 1.52 1.50 Hungary 654,337 543,026 1,197,363
3.62 3.27 3.46 India 1,589,590 1,170,268 2,759,858
2.57 2.57 2.57 Indonesia 1,129,600 918,361 2,047,961
2.26 2.27 2.27 Israel 994,437 812,325 1,806,762
17.42 17.05 17.26 Korea 7,654,350 6,092,384 13,746,734
4.18 4.02 4.11 Malaysia 1,835,556 1,436,911 3,272,467
6.72 6.58 6.66 Mexico 2,953,068 2,351,542 5,304,610
0.39 0.39 0.39 Netherlands 173,160 138,750 311,910
0.53 0.54 0.53 Peru 232,733 191,981 424,714
1.54 1.58 1.56 Philippines 677,009 563,896 1,240,905
1.29 1.21 1.25 Poland 565,570 431,145 996,715
3.59 3.46 3.53 Russia 1,574,833 1,236,313 2,811,146
11.05 10.75 10.92 South Africa 4,854,529 3,842,057 8,696,586
0.56 0.56 0.56 Spain 244,276 200,803 445,079
10.85 10.69 10.78 Taiwan 4,766,944 3,819,624 8,586,568
2.84 2.77 2.80 Thailand 1,246,188 988,093 2,234,281
3.06 2.96 3.01 Turkey 1,342,313 1,056,376 2,398,689
3.17 3.12 3.15 United Kingdom 1,391,747 1,115,543 2,507,290
2.86 4.77 3.71 United States 1,254,013 1,702,736 2,956,749
TOTAL $43,928,742 $35,730,678 $79,659,420
=============================================
<FN>
Percentages are adjusted to reflect the impact of currency contracts, futures
contracts, and swap agreements, if applicable.
See accompanying notes.
</FN>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
-------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUNDS
Bond & Mortgage Securities Fund, Disciplined LargeCap Blend Fund, Diversified
International Fund, Government Securities Fund, High Quality Short-Term Bond
Fund, International Emerging Markets Fund, LargeCap Growth Fund, LargeCap S&P
500 Index Fund, LargeCap Value Fund, MidCap Blend Fund, Money Market Fund,
Partners LargeCap Blend Fund, Partners LargeCap Blend Fund I, Partners MidCap
Growth Fund, Real Estate Securities Fund and SmallCap Blend Fund (the "Acquiring
Funds"), are series of Principal Investors Fund, Inc. (the "Fund"). The Fund is
registered under the Investment Company Act of 1940, as amended, as an open-end
management investment company.
2. BASIS OF COMBINATION
On February 24, 2005, the Board of Directors of Principal Balanced Fund, Inc.,
Principal Bond Fund, Inc., Principal Capital Value Fund, Inc., Principal Cash
Management Fund, Inc., Principal Government Securities Income Fund, Inc.,
Principal Growth Fund, Inc., Principal International Emerging Markets Fund,
Inc., Principal International Fund, Inc., Principal International SmallCap Fund,
Inc. Principal LargeCap Stock Index Fund, Inc., Principal Limited Term Bond
Fund, Inc., Principal MidCap Fund, Inc., Principal Partners Blue Chip Fund,
Inc., Principal Partners LargeCap Blend Fund, Inc., Principal Partners MidCap
Growth Fund, Inc., Principal Real Estate Securities Fund, Inc. and Principal
SmallCap Fund, Inc. (the "Acquired Funds") each approved an Agreement and Plan
of Reorganization whereby, subject to approval by the shareholders of each
Acquired Fund, Principal Investors Fund, Inc. will acquire all the assets of
each Acquired Fund subject to the liabilities of such Acquired Fund, in exchange
for a number of shares equal to the pro rata net assets of shares of the
Acquiring Funds (the "Reorganization"), as set forth below.
ACQUIRED FUND ACQUIRING FUND
Principal Balanced Fund, Inc. Disciplined LargeCap Blend Fund
Principal Bond Fund, Inc. Bond & Mortgage Securities Fund
Principal Capital Value Fund, Inc. LargeCap Value Fund
Principal Cash Management Fund, Inc. Money Market Fund
Principal Government Securities Income Fund, Government Securities Fund
Inc.
Principal Growth Fund, Inc. LargeCap Growth Fund
Principal International Emerging Markets International Emerging Markets
Fund, Inc. Fund
Principal International Fund, Inc. Diversified International Fund
Principal International SmallCap Fund, Inc. Diversified International Fund
Principal LargeCap Stock Index Fund, Inc. LargeCap S&P 500 Index Fund
Principal Limited Term Bond Fund, Inc. High Quality Short-Term Bond
Fund
Principal MidCap Fund, Inc. MidCap Blend Fund
Principal Partners Blue Chip Fund, Inc. Partners LargeCap Blend Fund I
Principal Partners LargeCap Blend Fund, Inc. Partners LargeCap Blend Fund
Principal Partners MidCap Growth Fund, Inc. Partners MidCap Growth Fund
Principal Real Estate Securities Fund, Inc. Real Estate Securities Fund
Principal SmallCap Fund, Inc. SmallCap Blend Fund
The Reorganization will be accounted for as a tax-free reorganization of
investment companies. The pro forma combined financial statements are presented
for the information of the reader and may not necessarily be representative of
what the actual combined financial statements would have been had the
Reorganization occurred at October 31, 2004. The unaudited pro forma schedules
of investments and statements of assets and liabilities reflect the financial
position of the Acquired Funds and the Acquiring Funds at October 31, 2004. The
unaudited pro forma statements of operations reflect the results of operations
of the Acquired Funds and the Acquiring Funds for the twelve months ended
October 31, 2004. The statements have been derived from the Funds' respective
books and records utilized in calculating daily net asset value at the dates
indicated above for the Acquired Funds and the Acquiring Funds under U.S.
generally accepted accounting principles. The historical cost of investment
securities will be carried forward to the surviving entity and results of
operations of the Acquiring Funds for pre-combination periods will not be
restated.
The pro forma schedules of investments and statements of assets and liabilities
and operations should be read in conjunction with the historical financial
statements of the Funds incorporated by reference in the Statements of
Additional Information.
3. SECURITY VALUATION
The Acquired and Acquiring Funds (with the exception of Principal Cash
Management Fund, Inc. and Money Market Fund) value securities for which market
quotations are readily available at market value, which is determined using the
last reported sale price. If no sales are reported, as is regularly the case for
some securities traded over-the-counter, securities are valued using the last
reported bid price or an evaluated bid price provided by a pricing service.
Pricing services use electronic modeling techniques that incorporate security
characteristics, market conditions and dealer-supplied valuations to determine
an evaluated bid price. When reliable market quotations are not considered to be
readily available, which may be the case, for example, with respect to
restricted securities, certain debt securities, preferred stocks and foreign
securities, the investments are valued at their fair value as determined in good
faith by the Manager under procedures established and periodically reviewed by
each Fund's Board of Directors.
33
(UNAUDITED)
-------------------------------------------------------------------------------
3. SECURITY VALUATION (CONTINUED)
The value of foreign securities used in computing the net asset value per share
is generally determined as of the close of the foreign exchange where the
security is principally traded. Events that occur after the close of the
applicable foreign market or exchange but prior to the calculation of the fund's
net asset value are ordinarily not reflected in the fund's net asset value. If
events that occur after the close of the applicable foreign market or exchange
but prior to the calculation of the fund's net asset value are determined to
materially affect the value of a foreign security, then the security is valued
at its fair value as determined in good faith by Principal Management
Corporation under procedures established and periodically reviewed by each
Fund's Board of Directors. Many factors are reviewed in the course of making a
good faith determination of a security's fair value, including, but not limited
to, price movements in ADRs, futures contracts, industry indices, general
indices and foreign currencies.
To the extent each 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 weekends and other customary national U.S. holidays, each
fund's net asset value could be significantly affected on days when shareholders
cannot purchase or redeem shares.
Certain securities issued by companies in emerging market countries may have
more than one quoted valuation at any given point in time, sometimes referred to
as a "local" price and a "premium" price. The premium price is often a
negotiated price, which may not consistently represent a price at which a
specific transaction can be effected. It is the policy of the Funds to value
such securities at prices at which it is expected those shares may be sold, and
the Manager or any sub-advisor is authorized to make such determinations subject
to such oversight by each Fund's Board of Directors as may occasionally be
necessary.
Short-term securities are valued at amortized cost, which approximates market.
Principal Cash Management Fund, Inc. and Money Market Fund value their
securities at amortized cost as permitted under Rule 2a-7 of the Investment
Company Act of 1940. Under the amortized cost method, a security is valued by
applying a constant yield to maturity of the difference between the principal
amount due at maturity and the cost of the security to the fund.
4. CAPITAL SHARES
The pro forma net asset value per share assumes issuance of shares of the
Acquiring Funds that would have been issued at October 31, 2004, in connection
with the Reorganization. The number of shares assumed to be issued is equal to
the net assets of the Acquired Funds, as of October 31, 2004, divided by the net
asset value per share of the Acquiring Funds as of October 31, 2004. The pro
forma number of shares outstanding, by class, for the combined fund can be found
on the statements of assets and liabilities.
5. PRO FORMA ADJUSTMENTS
The accompanying pro forma financial statements reflect changes in fund shares
as if the Reorganization had taken place on October 31, 2004. The expenses of
the Acquired Funds were adjusted assuming the fee structure of the Acquiring
Funds was in effect for the twelve months ended October 31, 2004.
6. DISTRIBUTIONS
No provision for federal income taxes is considered necessary because each fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year substantially all of its net investment
income and realized capital gains to shareholders.
The Acquired Funds will distribute substantially all of their net investment
income and any realized gains prior to the reorganization date.
7. SUBSEQUENT EVENTS
Effective November 1, 2004, initial purchases of Advisors Signature shares of
the Acquiring Funds were made by Principal Life Insurance Company. The pro forma
financial statements do not reflect the addition of Advisors Signature shares.
34
(UNAUDITED)
-------------------------------------------------------------------------------
7. SUBSEQUENT EVENTS (CONTINUED)
Effective January 1, 2005, certain of the Acquiring Funds implemented management
and investment advisory fee schedules as follows:
NET ASSETS OF FUNDS (IN MILLIONS)
----------------------------------
FIRST NEXT NEXT OVER
$500 $500 $500 $1.5 BILLION
------ ------ ------ --------------
Bond & Mortgage Securities Fund .55% .53% .51% .50%
Disciplined LargeCap Blend Fund .60 .58 .56 .55
Diversified International Fund .90 .88 .86 .85
Government Securities Fund .40 .38 .36 .35
High Quality Short-Term Bond Fund .40 .38 .36 .35
International Emerging Markets Fund 1.35 1.33 1.31 1.30
LargeCap Growth Fund .55 .53 .51 .50
LargeCap Value Fund .45 .43 .41 .40
MidCap Blend Fund .65 .63 .61 .60
Money Market Fund .40 .38 .37 .36
Partners LargeCap Blend Fund .75 .73 .71 .70
Partners LargeCap Blend Fund I .45 .43 .41 .40
Partners MidCap Growth Fund 1.00 .98 .96 .95
Real Estate Securities Fund .85 .83 .81 .80
SmallCap Blend Fund .75 .73 .71 .70
PART C
OTHER INFORMATION
Item 15. Indemnification
Under Section 2-418 of the Maryland General Corporation Law, with
respect to any proceedings against a present or former director, officer, agent
or employee (a "corporate representative") of the Registrant, the Registrant may
indemnify the corporate representative against judgments, fines, penalties, and
amounts paid in settlement, and against expenses, including attorneys' fees, if
such expenses were actually incurred by the corporate representative in
connection with the proceeding, unless it is established that:
(i) The act or omission of the corporate representative was material to
the matter giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate dishonesty; or
(ii) The corporate representative actually received an improper personal
benefit in money, property, or services; or
(iii) In the case of any criminal proceeding, the corporate representative
had reasonable cause to believe that the act or omission was unlawful.
If a proceeding is brought by or on behalf of the Registrant, however,
the Registrant may not indemnify a corporate representative who has been
adjudged to be liable to the Registrant. Under the Registrant's Articles of
Incorporation and Bylaws, directors and officers of the Registrant are entitled
to indemnification by the Registrant to the fullest extent permitted under
Maryland law and the Investment Company Act of 1940. Reference is made to
Article VI, Section 7 of the Registrant's Articles of Incorporation, Article 12
of the Registrant's Bylaws and Section 2-418 of the Maryland General Corporation
Law.
The Registrant has agreed to indemnify, defend and hold the
Distributor, its officers and directors, and any person who controls the
Distributor within the meaning of Section 15 of the Securities Act of 1933, free
and harmless from and against any and all claims, demands, liabilities and
expenses (including the cost of investigating or defending such claims, demands
or liabilities and any counsel fees incurred in connection therewith) which the
Distributor, its officers, directors or any such controlling person may incur
under the Securities Act of 1933, or under common law or otherwise, arising out
of or based upon any untrue statement of a material fact contained in the
Registrant's registration statement or prospectus or arising out of or based
upon any alleged omission to state a material fact required to be stated in
either thereof or necessary to make the statements in either thereof not
misleading, except insofar as such claims, demands, liabilities or expenses
arise out of or are based upon any such untrue statement or omission made in
conformity with information furnished in writing by the Distributor to the
Registrant for use in the Registrant's registration statement or prospectus:
provided, however, that this indemnity agreement, to the extent that it might
require indemnity of any person who is also an officer or director of the
Registrant or who controls the Registrant within the meaning of Section 15 of
the Securities Act of 1933, shall not inure to the benefit of such officer,
director or controlling person unless a court of competent jurisdiction shall
determine, or it shall have been determined by controlling precedent that such
result would not be against public policy as expressed in the Securities Act of
1933, and further provided, that in no event shall anything contained herein be
so construed as to protect the Distributor against any liability to the
Registrant or to its security holders to which the Distributor would otherwise
be subject by reason of willful misfeasance, bad faith, or gross negligence, in
the performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement. The Registrant's agreement to indemnify the
Distributor, its officers and directors and any such controlling person as
aforesaid is expressly conditioned upon the Registrant being promptly notified
of any action brought against the Distributor, its officers or directors, or any
such controlling person, such notification to be given by letter or telegram
addressed to the Registrant.
Item 16. Exhibits.
* Unless otherwise stated, all filing references are to File No. 33-59474
1 (1) a. Articles of Amendment and Restatement (filed 4/12/96)
b. Articles of Amendment and Restatement (filed 9/22/00)
c. Articles of Amendment and Restatement dated 6/14/02
(filed 12/30/02)
(2) Articles of Amendment (filed 9/12/97)
(3) a. Certificate of Correction dated 9/14/00 (filed 9/22/00)
b. Certificate of Correction dated 12/13/00 (filed 10/12/01)
(4) a. Articles Supplementary dated 12/11/00 (filed 10/12/01)
b. Articles Supplementary dated 3/12/01 (filed 10/12/01)
c. Articles Supplementary dated 4/16/02 (filed 12/30/02)
d. Articles Supplementary dated 9/25/02 (filed 12/30/02)
e. Articles Supplementary dated 2/5/03 (filed 02/26/03)
f. Articles Supplementary dated 4/30/03 (filed 9/11/03)
g. Articles Supplementary dated 6/10/03 (filed 9/11/03)
h. Articles Supplementary dated 9/9/03 (filed 9/11/03)
i. Articles Supplementary dated 11/6/03 (filed 12/15/03)
j. Articles Supplementary dated 1/29/04 (filed 2/26/04)
k. Articles Supplementary dated 3/8/04 (filed 7/27/04)
l. Articles Supplementary dated 6/14/04 (filed 9/27/04)
m. Articles Supplementary dated 9/13/04 (filed 12/13/04)
n. Articles Supplementary dated 10/1/04 (filed 12/13/04)
o. Articles Supplementary dated 12/13/04 (filed 2/28/05)
2 By-laws (filed 9/11/03)
3 Not Applicable
4 Form of Agreement and Plan of Reorganization
(filed herewith as Exhibit A to the Proxy Statement/Prospectus).
5 Included in Exhibits 1 and 2 hereto.
6 (1) a. Management Agreement (filed 9/12/97)
b. 1st Amendment to the Management Agreement (filed 9/22/00)
c. Management Agreement (filed 12/5/00)
d. Amendment to Management Agreement dated 9/9/02 (filed 12/30/02)
e. Amendment to Management Agreement dated 3/11/02 (filed 02/26/03)
f. Amendment to Management Agreement dated 12/10/02 (filed 02/26/03)
g. Amendment to Management Agreement dated 10/22/03 (filed 12/15/03)
h. Amendment to Management Agreement dated 3/8/04 (filed 6/1/04)
i. Amendment to Management Agreement dated 6/14/04 (filed 9/27/04)
j. Amendment to Management Agreement dated 7/29/04 (filed 9/27/04)
k. Amendment to Management Agreement dated 9/13/04 (filed 9/27/04)
l. Amendment to Management Agreement dated 12/13/04 (filed 2/28/05)
m. Amendment to Management Agreement dated 1/1/05 (filed 2/28/05)
(2) a. Invista Sub-Advisory Agreement (filed 9/12/97)
b. 1st Amendment to the Invista Sub-Advisory Agreement (filed
2/25/02)
c. 2nd Amendment to the Invista Sub-Advisory Agreement (filed
2/25/02)
(3) a. American Century Sub-Advisory Agreement (filed 12/5/00)
b. Amended &Restated Sub-Advisory Agreement with Amer. Century
(filed 9/11/03)
c. Amended &Restated Sub-Advisory Agreement with Amer. Century
(filed 9/27/04)
(4) a. Bernstein Sub-Advisory Agreement (filed 12/5/00)
b. Amendment to Bernstein Sub-Advisory Agreement dated 3/28/03
(filed 9/11/03)
c. Amended &Restated Bernstein Sub-Advisory Agreement dated
7/1/04 (filed 9/27/04)
(5) a. BT Sub-Advisory Agreement (filed 9/22/00)
(6) a. Federated Sub-Advisory Agreement (filed 12/5/00)
b. Federated Amended &Restated Sub-Advisory Agreement dated
10/31/03 (filed 12/15/03)
(7) a. Neuberger Berman Sub-Advisory Agreement (filed 12/5/00)
b. Amended &Restated Sub-AdvisoryAgreement with Neuberger Berman
(filed 9/11/03)
c. Amended &Restated Sub-Advisory Agreement with Neuberger Berman
dated 10/31/03 (filed 12/15/03)
d. Amended &Restated Sub-Advisory Agreement with Neuberger
Berman dated 7/1/04 (filed 2/28/05)
(8) a. Morgan Stanley Sub-Advisory Agreement-PLCGI (filed 12/5/00)
b. Amended &Restated Sub-Advisory Agreement with MSAM dated
11/25/03 (filed 7/27/04)
c. Amended &Restated Sub-Advisory Agreement with MSAM dated
6/30/04 (filed 2/28/05)
(9) a. Principal Capital Income Investors Sub-Advisory Agreement
(filed 2/27/01)
b. 1st Amendment to the PCII Sub-Advisory Agreement
(filed 10/12/01)
c. 2nd Amendment to the PCII Sub-Advisory Agreement
(filed 10/12/01)
d. 3rd Amendment to the PCII Sub-Advisory Agreement
(filed 10/12/01)
(10) a. Principal Capital Real Estate Investors Sub-Advisory
Agreement (filed 2/27/01)
b. 1st Amendment to the PCREI Sub-Advisory Agreement
(filed 10/12/01)
c. 2nd Amendment to the PCREI Sub-Advisory Agreement
(filed 10/12/01)
d. Amended & Restated Sub-Advisory Agreement with PCREI
(filed 9/11/03)
(11) a. Turner Sub-Advisory Agreement (filed 12/5/00)
(12) a. PCII Cash Management Sub-Advisory Agreement (filed 2/27/01)
b. Amendment to PCII Cash Management Sub-Advisory Agreement
(filed 12/30/02)
c. Amended &Restated Cash Management Sub-Advisory Agreement
dated 10/23/03 (filed 12/15/03)
(13) a. Ark Asset Management Sub-Advisory Agreement (filed 2/27/01)
b. Amended &Restated Sub-Advisory Agreement with Ark
(filed 9/11/03)
(14) a. Morgan Stanley Sub-Advisory Agreement - PMCB (filed 2/27/01)
b. Amended &Restated Sub-Advisory Agreement with MSAM dated
11/25/03 (filed 7/27/04)
(15) a. Spectrum Sub-Advisory Agreement (filed 04/29/02)
b. Amended &Restated Sub-Advisory Agreement with Spectrum (filed
9/11/03)
(16) a. UBS Global Asset Management Sub-Advisory Agreement (filed
04/29/02)
b. Amended &Restated Sub-Advisory Agreement with UBS
(filed 9/11/03)
c. Amended &Restated Sub-Advisory Agreement with UBS dated
4/1/04 filed 6/1/04)
(17) a. Dreyfus Sub-Advisory Agreement(filed 12/30/02)
b. Amended Dreyfus Sub-Advisory Agreement dated 11/25/03 (filed
12/15/03)
c. Amended Dreyfus Sub-Advisory Agreement dated 6/30/04
(filed 2/28/05)
(18) a. JP Morgan Sub-Advisory Agreement (filed 12/30/02)
b. Amended &Restated Sub-Advisory Agreement with JP Morgan
(filed 9/11/03)
(19) a. Principal Global Investors Sub-Advisory Agreement (filed
12/30/02)
b. Amended and Restated PGI Sub-Advisory Agreement
(filed 02/26/03)
c. Amended &Restated Sub-Advisory Agreement with
PGI (filed 9/11/03)
d. Amended &Restated Sub-Advisory Agreement
with PGI (filed 6/1/04)
e. Amended &Restated Sub-Advisory Agreement with PGI dtd 7-04
(filed 9/27/04)
f. Amended &Restated Sub-Advisory Agreement with PGI dtd 9-13-04
(filed 12/13/04)
(20) a. Putnam Sub-Advisory Agreement(filed 12/30/02)
b. Amended &Restated Sub-Advisory Agreement with Putnam (filed
9/11/03)
(21) a. Goldman Sachs Sub-Advisory Agreement(filed 12/30/02)
b. Amended &Restated Sub-Advisory Agreement with Goldman Sachs
(filed 9/11/03)
c. Amended &Restated Goldman Sachs Sub-Advisory Agreement dated
11/20/03 (filed 12/15/03)
d. Amended &Restated Goldman Sachs Sub-Advisory Agreement
dated 6/30/04 (filed 2/28/05)
(22) a. Wellington Sub-Advisory Agreement (filed 12/30/02)
b. Amended &Restated Sub-Advisory Agreement with Wellington
(filed 9/11/03)
(23) a. Fidelity Sub-Advisory Agreement (filed 2/26/04)
b. Fidelity Sub-Sub-Advisory Agreement (filed 12/15/03)
c. Amended &Restated Fidelity Sub-Advisory Agreement dated
12/29/04 (filed on 2/28/05)
(24) a. T. Rowe Price Sub-Advisory Agreement (filed 6/1/04)
b. Amended &Restated Sub-Advisory Agreement with T. Rowe Price
(filed 9/27/04)
(25) a. Grantham, Mayo, Van Otterloo Sub-Advisory Agreement
(filed 6/1/04)
(26) a. Mazama Capital Management Sub-Advisory Agreement
(filed 6/1/04)
(27) a. Dimensional Fund Advisors Sub-Advisory Agreement
(filed 6/1/04)
(28) a. Emerald Advisors, Inc. Sub-Advisory Agreement (filed 9/27/04)
(29) a. Los Angeles Capital Management Sub-Advisory Agreement (filed
9/27/04)
(30) a. Post Advisory Group Sub-Advisory Agreement dated 12/29/04
(filed 2/28/05)
(31) a. Mellon Equity Associates LLP Sub-Advisory Agreement dated
12/21/04 (filed 2/28/05)
7 (1) a. Distribution Agreement (filed 4/12/96)
b. 1st Amendment to the Distribution Agreement (filed 9/22/00)
c. Distribution Agreement (filed 9/22/00)
d. Distribution Plan and Agreement (Select Class)
(filed 12/30/02)
e. Amended and Restated Distribution Plan and Agreement
(Select Class)(filed 12/30/02)
f. Amended and Restated Distribution Plan and Agreement
(Advisors Select Class)(filed 12/30/02)
g. Amended and Restated Distribution Plan and Agreement
(Advisors Preferred Class)(filed 12/30/02)
h. Amended and Restated Distribution Plan and Agreement
(Class J)(filed 12/30/02)
i. Amended and Restated Distribution Agreement (filed 12/30/02)
j. Amendment to Distribution Plan and Agreement (Advisors
Preferred Class) (filed 02/26/03)
k. Amendment to Distribution Plan and Agreement (Advisors Select
Class) (filed 02/26/03)
l. Amendment to Distribution Plan and Agreement (Select Class)
(filed 02/26/03)
m. Amendment to Distribution Agreement dated 03/02
(filed 02/26/03)
n. Amendment to Distribution Agreement dated 12/02
(filed 02/26/03)
o. Amended &Restated Distribution Agreement dated 10/22/03
(filed 12/15/03)
p. Amended &Restated Distribution Agreement dated 6/14/04
(filed 9/27/04)
(2) a. Selling Agreement--Advantage Classes (filed 9/11/03)
b. Selling Agreement--J Shares (filed 9/11/03)
8 Not Applicable
9 (1) a. Domestic Portfolio Custodian Agreement with Bank of New York
(filed 4/12/96)
b. Domestic Funds Custodian Agreement with Bank of New York
filed 12/5/00)
(2) a. Global Portfolio Custodian Agreement with Chase Manhattan
Bank (filed 4/12/96)
b. Global Funds Custodian Agreement with Chase Manhattan Bank
(filed 12/5/00)
10 Rule 12b-1 Plan
(1) Advisors Preferred Plan (filed 9/22/2000)
a. Amended &Restated dated 9/9/02 (filed 12/30/02)
b. Amended &Restated dated 3/11/04 (filed 3/14/04)
c. Amended &Restated dated 6/14/04 (filed 9/27/04)
d. Amended &Restated dated 9/13/04 (filed 9/27/04)
e. Amended &Restated dated 12/13/04 (filed 2/28/05)
(2) Advisors Select Plan (filed 9/22/2000)
a. Amended &Restated dated 9/9/02 (filed 12/30/02)
b. Amended &Restated dated 3/11/04 (filed 3/14/04)
c. Amended &Restated dated 6/14/04 (filed 9/27/04)
d. Amended &Restated dated 9/13/04 (filed 9/27/04)
e. Amended &Restated dated 12/13/04 (filed 2/28/05)
(3) Select Plan (filed 12/30/02)
a. Amended &Restated dated 9/9/02 (filed 12/30/02)
b. Amended &Restated dated 3/11/04 (filed 3/14/04)
c. Amended &Restated dated 6/14/04 (filed 9/27/04)
d. Amended &Restated dated 9/13/04 (filed 9/27/04)
e. Amended & Restated dated 12/13/04 (filed 2/28/05)
(4) Class J Plan (filed 12/30/02)
a. Amended &Restated dated 9/9/02 (filed 12/30/02)
b. Amended &Restated dated 9/13/04 (filed 9/27/04)
c. Amended &Restated dated 12/13/04 (filed 2/28/05)
(5) Advisors Signature Plan (filed 12/13/04)
a. Amended &Restated dated 9/13/04 (filed 9/27/04)
b. Amended &Restated dated 12/13/04 (filed 2/28/05)
(6) Class A Plan (filed 2/28/05)
(7) Class B Plan (filed 2/28/05)
(n) Rule 18f-3 Plan (filed 9/27/04)
11 Opinion and Consent of Michael D. Roughton, regarding
legality of issuance of shares and other matters- *
12 Forms of Opinions and Consents of counsel on tax matters
(a)(i) Form of Opinion of Randy Bergstrom- *
(a)(ii) Form of Opinion of Carolyn Kolks- *
(b)(i) Form of Opinion of Randy Bergstrom- *
(b)(ii) Form of Opinion of Carolyn Kolks- *
(c)(i) Form of Opinion of Randy Bergstrom- *
(c)(ii) Form of Opinion of Carolyn Kolks- *
(d) Consent of Randy Bergstrom- *
(e) Consent of Carolyn Kolks- *
13 Not Applicable
14 Consent of Independent Registered Public Accountants
15 Not Applicable
16 (a) Powers of Attorney - previously filed.
17 (a) Prospectus of Principal Investors Fund, Inc. dated April__, 2005
(filed ______).
(b) Statement of Additional Information of Principal Investors Fund, Inc.
dated March 1, 2005 (filed _________)
(c) Annual Report of Principal Investors Fund, Inc. for the fiscal year
ended October 31, 2004 (filed 12/28/04)
(d) Prospectuses of the Acquired Funds (Principal Mutual Funds) dated
March 1, 2005 (filed _____)
(e) Statements of Additional Information of the Acquired Funds (Principal
Mutual Funds) dated March 1, 2005 (filed -------)
(f) Annual Reports of the Acquired Funds (Principal Mutual Funds) for the
fiscal years ended October 31, 2004 (filed 12/28/04)
* Filed Herewith.
Item 17. Undertakings
(a) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus which is
a part of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of 1933,
the reoffering prospectus will contain the information called for by the
applicable registration form for re-offerings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(b) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as part of an amendment to the
Registration Statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, each
post-effective amendment shall be deemed to be a new registration statement for
the securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Principal Investors Fund, Inc., has duly caused this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Des Moines and State of Iowa, on the 10th day of March, 2005.
Principal Investors Fund, Inc.
(Registrant)
By /s/ R. C. Eucher
R. C. Eucher
Director, President and
Chief Executive Officer
Attest: /s/ A. S. Filean
A. S. Filean
Senior Vice President and Secretary
Pursuant to the requirement of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
Signature Title Date
/s/ R. C. Eucher Director, President and March 10,2005
R. C. Eucher Chief Executive Officer
(Principal Executive Officer)
(L. D. Zimpleman)* Director and Chairman March 10,2005
L. D. Zimpleman of the Board
/s/ J. R. Brown Vice President and March 10,2005
J. R. Brown Chief Financial Officer
(Principal Accounting Officer)
(J. E. Aschenbrenner)* Director March 10,2005
J. E. Aschenbrenner
(E. Ballantine)* Director March 10,2005
E. Ballantine
(J. D. Davis)* Director March 10,2005
J. D. Davis
(R. W. Gilbert)* Director March 10,2005
R. W. Gilbert
(M. A. Grimmett)* Director March 10,2005
M. A. Grimmett
(W. C. Kimball)* Director March 10,2005
W. C. Kimball
(B. A. Lukavsky)* Director March 10,2005
B. A. Lukavsky
*By /s/ R. C. Eucher
R. C. Eucher
Director, President and Chief Executive Officer
Pursuant to Powers of Attorney previously filed or filed herewith.
EXHIBIT INDEX
Exhibit No. Description
4 Form of Agreement and Plan of Reorganization (filed
herewith as Appendix A to the Proxy Statement/Prospectus)
11 Opinion and Consent of Michael D. Roughton regarding
legality of issuance of shares and other matters.
12 Forms of Opinions and Consents of counsel on tax matters.
(a)(i) Form of Opinion of Randy Bergstrom
(a)(ii) Form of Opinion of Carolyn Kolks
(b)(i) Form of Opinion of Randy Bergstrom
(b)(ii) Form of Opinion of Carolyn Kolks
(c)(i) Form of Opinion of Randy Bergstrom
(c)(ii) Form of Opinion of Carolyn Kolks
(d) Consent of Randy Bergstrom
(e) Consent of Carolyn Kolks
14 Consent of Independent Registered Public Accountants.
The fee schedule described above is reflected in the pro forma statements of
operations.
Effective February 28, 2005, Principal LargeCap Stock Index Fund, Inc. and
Principal Limited Term Bond Fund, Inc. exchanged all Class B shares into Class A
shares. The pro forma financial statements do not reflect the discontinuation of
Class B shares.
Effective March 1, 2005, International Fund I and LargeCap Blend Fund I changed
their names to Diversified International Fund and Disciplined LargeCap Blend
Fund, respectively.
35