As filed with the Securities and Exchange Commission on March 16, 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: Advisors Signature Class, Preferred Class,
Advisors Preferred Class, Select Class, Advisors Select Class, Institutional
Class and Class J 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 15, 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 the Plan and the Combination; Proposal 1
Item 4 Information About the Transaction Letter to Shareholders; Overview of the Plan and the
Combination; The Plan; Additional Information About the
Funds
Item 5 Information About the Registrant Letter to Shareholders; Overview of the Plan and the
Combination; The Plan; Additional Information About the
Funds
Item 6 Information About the Fund Being Letter to Shareholders; Overview of the Plan and the
Acquired Combination; The Plan; Additional Information About the
Funds
Item 7 Voting Information Letter to Shareholders; Voting Information; Appendix B
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 Statement of Additional Information of Principal
Being Acquired Investors Fund, Inc, 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 Investors Fund, Inc.
680 8th Street
Des Moines, Iowa 50392-0200
April 18, 2005
Dear Shareholder:
The Board of Directors of Principal Investors Fund, Inc. ("PIF") has
called a special meeting of the shareholders of one of its series, the High
Quality Long-Term Bond Fund (the "Long-Term Bond Fund"), for May 26, 2005, to
vote on a Plan of Acquisition (the "Plan") which provides for the combination of
that Fund into another series of PIF, the High Quality Intermediate-Term Bond
Fund (the "Intermediate-Term Bond Fund"). If the Plan is approved by
shareholders and implemented, shareholders of the Long-Term Bond Fund will cease
to own shares of the Long-Term Bond Fund and will become the owners of shares of
the same class of the Intermediate-Term Bond Fund equal in value to their shares
of the Long-Term Bond Fund. The Board believes that the proposed change is in
the best interests of both Funds and their shareholders.
The Long-Term Bond Fund and the Intermediate-Term Bond Fund are
relatively small bond funds that have the same investment objective and invest
in the same types of fixed-income securities. The Funds differ in that the
average portfolio duration of the Long-Term Bond Fund is normally greater than
six years, while the average portfolio duration of the Intermediate-Term Bond
Fund is within a three- to six-year time frame. Combining the Funds will result
in a larger fund that may be expected over time to operate with greater
efficiency and lower overall costs. The Intermediate-Term Bond Fund has been
selected as the surviving fund because current market and interest rate
conditions are generally less favorable for longer-term bond funds. The fees and
expenses of shareholders of the Long-Term Bond Fund will not increase as a
result of the combination (and are expected to decrease for holders of Class J
shares).
It is important that you take time to read the accompanying proxy
statement/prospectus. If you have questions regarding the Plan or your account,
please call our shareholder services department toll-free at 1-800-247-4123.
Sincerely,
/s/RALPH C. EUCHER
Ralph C. Eucher
President and Chief Executive Officer
PRINCIPAL INVESTORS FUND, INC.
680 8th Street
Des Moines, Iowa 50392-0200
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 26, 2005
To the Shareholders of the High Quality Long-Term Bond Fund:
Notice is hereby given that a special meeting of the shareholders of
the High Quality Long-Term Bond Fund, a series of Principal Investors Fund, Inc.
("PIF"), will be held at 2:00 p.m. Central Daylight Time on May 26, 2005, at the
offices of Principal Management Corporation, 680 8th Street, Des Moines, Iowa
50392-0200 (the "Meeting"). The Meeting is being held to consider and vote on
the following proposal as well as any other business that may properly come
before the Meeting or any adjournment thereof:
Proposal 1 To approve a Plan of Acquisition (the "Plan") and the transactions contemplated thereby pursuant to
which: (i) the High Quality Intermediate-Term Bond Fund, a series of PIF, will acquire all the
assets and assume all the liabilities of the High Quality Long-Term Bond Fund and issue in exchange
shares of its Advisors Signature Class, Preferred Class, Advisors Preferred Class, Select Class,
Advisors Select Class, Institutional Class and Class J common stock; (ii) the High Quality
Long-Term Bond Fund will distribute those shares to its Advisors Signature Class, Preferred Class,
Advisors Preferred Class, Select Class, Advisors Select Class, Institutional Class and Class J
shareholders in redemption of all its outstanding shares; and (iii) the High Quality Long-Term Bond
Fund will be dissolved.
The Board of Directors recommends that shareholders vote FOR the
Proposal.
Approval of the Proposal 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 High Quality
Long-Term Bond Fund.
Each shareholder of record at the close of business on March 31, 2005
is entitled to receive notice of and to vote at the meeting.
Please read the attached Proxy Statement/Prospectus.
By order of the Board of Directors
/s/ A. S. FILEAN
A. S. Filean
Senior Vice President and Secretary
April 18, 2005
Des Moines, Iowa
PRINCIPAL INVESTORS FUND, INC.
680 8th Street
Des Moines, Iowa 50392-0200
PROXY STATEMENT/PROSPECTUS
Combination of the High Quality Long-Term Bond Fund
into the High Quality Intermediate-Term Bond Fund (together, the "Funds")
This Proxy Statement/Prospectus is being furnished in connection with
the solicitation by the Board of Directors of Principal Investors Fund, Inc.
("PIF") of proxies in connection with a special meeting of the shareholders of
one of its series, the High Quality Long-Term Bond Fund (the "Long-Term Bond
Fund"), to be held at 2:00 p.m. Central Daylight Time on May 26, 2005 at the
offices of Principal Management Corporation, 680 8th Street, Des Moines, Iowa
50392-0200 (the "Meeting").
At the Meeting, shareholders of the Long-Term Bond Fund will vote on a
Plan of Acquisition (the "Plan") providing for the combination of the Long-Term
Bond Fund into the High Quality Intermediate-Term Bond Fund (the
"Intermediate-Term Bond Fund"), another series of PIF (the "Combination"). Under
the Plan, if approved: (i) the Intermediate-Term Bond Fund will acquire all the
assets and assume all the liabilities of the Long-Term Bond Fund and issue in
exchange shares of its Advisors Signature Class, Preferred Class, Advisors
Preferred Class, Select Class, Advisors Select Class, Institutional Class and
Class J common stock; (ii) the Long-Term Bond Fund will distribute those shares
to its Advisors Signature Class, Preferred Class, Advisors Preferred Class,
Select Class, Advisors Select Class, Institutional Class and Class J
shareholders in redemption of all its outstanding shares; and (iii) the
Long-Term Bond Fund will then be dissolved. As a result, a shareholder of the
Long-Term Bond Fund will have the same amount invested in the same share class
of the Intermediate-Term Bond Fund that the shareholder had invested in those
share classes of the Long-Term Bond Fund at the effective time of the
Combination. If approved by shareholders of the Long-Term Bond Fund, the
Combination is expected to become effective as of the close of regularly
scheduled trading on the New York Stock Exchange on May 27, 2005.
The investment advisor to PIF and the Funds, Principal Management
Corporation (the "Manager"), has agreed to pay all expenses incurred by the
Long-Term Bond Fund and the Intermediate-Term Bond Fund in connection with the
Plan and the Combination. The Combination is expected to be a "tax-free"
reorganization for federal income tax purposes.
This Proxy Statement/Prospectus sets forth concisely the information
you should know before voting on the proposed Plan. You should retain it for
future reference. The Annual and Semi-Annual Reports to Shareholders of PIF
contain additional information about the investments of Long-Term Bond Fund and
the Intermediate-Term Bond Fund. Copies of these reports, which contain
discussions of the market conditions and investment strategies that
significantly affected such series during their fiscal years ended October 31,
2004, may be obtained at no charge by telephoning toll free 1-800-247-4123.
The Prospectuses and Statements of Additional Information of the
Long-Term Bond Fund and the Intermediate-Term Bond Fund, dated March 1, 2005,
have been filed with the Securities and Exchange Commission ("SEC") and are
available without charge by writing to PIF or the Manager at their principal
executive offices, 680 8th Street, Des Moines, Iowa 50392-0200 or by telephoning
toll-free 1-800-247-4123. The Prospectus of the Long-Term Bond Fund dated March
1, 2005, and the Statement of Additional Information dated April 18, 2005
relating to this Proxy Statement/Prospectus (the "SAI") are incorporated herein
by reference.
Shareholders who have questions about the Plan or this Proxy
Statement/Prospectus may call our shareholder services department toll-free at
1-800-247-4123.
PIF is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 (the "1940 Act") and
files 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 adequacy of the disclosure in 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....................................................................
Voting
Information.....................................................................
Proposal 1 To Approve a Plan of Acquisition and the Transactions Contemplated
Thereby Providing for the Combination of the High Quality Long-Term
Bond Fund into the High Quality Intermediate-Term Bond Fund..........
Overview of the Plan and the Combination....................................
Reasons for the Proposed Combination........................................
Comparison of Investment Objectives and Policies............................
Fees and Expenses of the Funds..............................................
Investment Advisory and Sub-Advisory Services...............................
Comparison of Main Risks....................................................
Comparative Performance.....................................................
The Plan........................................................................
Plan of Acquisition........................................................
Reasons for the Proposed Combination.......................................
Board Consideration of the Combination.....................................
Description of Securities to Be Issued.....................................
Federal Income Tax Consequences............................................
Capitalization..................................................................
Additional Information About the Funds..........................................
Sub-Advisor and Portfolio Managers.........................................
Multiple Classes of Shares/Costs of Investing..............................
Rule 12b-1 Fees............................................................
Purchases, Redemptions and Exchanges of Shares.............................
Frequent Trading and Market Timing (Abusive Trading Practices).............
Dividends and Distributions................................................
Fundamental and Non-Fundamental Investment Restrictions....................
Financial Highlights.......................................................
Legal Matters...................................................................
Financial Statements............................................................
Other...........................................................................
Appendix A - Form of Plan of Acquisition.......................................
Appendix B - Outstanding Shares and Share Ownership............................
Appendix C -- Certain Investment Strategies and Related Risks...................
Appendix D - Debt Security Ratings ............................................
Appendix E - Additional Performance Information................................
INTRODUCTION
The Meeting. We are furnishing this Proxy Statement/Prospectus to you
as a shareholder of the Long-Term Bond Fund in connection with the Meeting to be
held at 2:00 p.m. Central Daylight Time on May 26, 2005 at the offices of
Principal Management Corporation, 680 8th Street, Des Moines, Iowa 50392-0200.
The purpose of the meeting is to vote on the Plan providing for the Combination
of the Long-Term Bond Fund into the Intermediate-Term Bond Fund. A copy of the
Plan is included as Appendix A hereto. This Proxy Statement/Prospectus is first
being furnished to shareholders of the Long-Term Bond Fund on or about April 18,
2005.
The Board of Directors has approved the Plan and recommends that
shareholders of the Long-Term Bond Fund vote FOR the Plan and the transactions
which it contemplates.
PIF. PIF is a Maryland corporation and an open-end management
investment company registered under the 1940 Act. PIF currently offers 54
separate series (the "PIF Funds"), including the Long-Term Bond Fund and the
Intermediate-Term Bond Fund (collectively, the "Funds"). The shares of the Funds
are currently offered in a number of classes mainly to retirement plans and
individual retirement accounts. The sponsor of PIF is Principal Life Insurance
Company ("Principal Life"), the investment advisor to each of the Funds is
Principal Management Corporation (the "Manager") and the principal underwriter
for PIF is Princor Financial Services Corporation ("Princor"). Principal Global
Investors LLC ("Principal Global") is the Sub-Advisor for both 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.
Related PIF Shareholders Meeting. The Board of Directors of PIF, at a
meeting held on February 24, 2005, called a separate 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
Funds include proposals to:
(i) reclassify the investment objective of each of the PIF 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 (see "Proposal 1" and "Additional Information
About the Funds - Fundamental and Non-Fundamental Investment Restrictions");
(ii) amend the PIF Articles of Incorporation to permit the PIF Board of
Directors, without shareholder approval: (a) to approve combinations of 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 "The Plan
- - Description of Securities to Be Issued");
(iii) amend the fundamental investment restriction of each of the PIF Funds with
respect to borrowing to authorize each PIF Fund to borrow to the maximum extent
permitted by the 1940 Act (see "Additional Information About the Funds -
Fundamental and Non-Fundamental Investment Restrictions"); and
(iv) approve a sub-sub-advisory agreement appointing Spectrum Asset Management,
Inc., an affiliate of the Manager and of Principal Global, as a new
Sub-Sub-Advisor to the Intermediate-Term Bond Fund (see "Additional Information
About the Funds - Sub-Advisor and Portfolio Managers").
The impact of these proposals with respect to the Combination are
described in this Proxy Statement/ Prospectus under the captions indicated
above.
VOTING INFORMATION
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 Principal Investors Fund, Inc. 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 31, 2005 (the "Record Date") are entitled to vote. The shareholders of
each class of shares of the Long-Term Bond Fund will vote together on the
proposed Combination (the "Proposal") and any other matter submitted to such
shareholders. You are entitled to one vote on each matter submitted to the
shareholders of the Long-Term Bond Fund for each share of the Fund which you
hold. The Proposal requires for approval the affirmative 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.
The number of votes eligible to be cast at the meeting as of the Record
Date and other share ownership information are set forth in Appendix B 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 Long-Term Bond 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 Proposal 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 the Proposal is not obtained at the Meeting, the persons
named 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 the Proposal or any
other matter will require the affirmative vote of the holders of a majority of
the shares of the Long-Term Bond 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 PIF, 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 PIF for their out-of-pocket expenses.
Expenses of the meetings. The expenses of the Meeting for the Long-Term
Bond Fund will be treated as an expense related to the Combination and will be
paid by the Manager. See "The Plan - Plan of Acquisition" below.
PROPOSAL 1
TO APPROVE A PLAN OF ACQUISITION AND THE TRANSACTIONS CONTEMPLATED
THEREBY PROVIDING FOR THE COMBINATION OF THE HIGH QUALITY LONG-TERM
BOND FUND INTO THE HIGH QUALITY INTERMEDIATE-TERM BOND FUND
The following is a summary of certain information contained or
incorporated by reference in this Proxy Statement/Prospectus. It is qualified in
its entirety by the more detailed information appearing elsewhere or
incorporated by reference in this Proxy Statement/Prospectus.
Overview of the Plan and the Combination
You are being asked to approve the Plan, which provides for the
Combination of the Long-Term Bond Fund into the Intermediate-Term Bond Fund.
Each of the Funds is a series of PIF. Under the Plan, at the effective time on
the closing date, the Intermediate-Term Bond Fund will acquire all the assets
and assume all the liabilities of the Long-Term Bond Fund and issue shares of
its Advisors Signature Class, Preferred Class, Advisors Preferred Class, Select
Class, Advisors Select Class, Institutional Class and Class J common stock
having a value equal to the net assets of the Long-Term Bond Fund attributable
to each share class. Immediately thereafter, the Long-Term Bond Fund will
distribute all the Intermediate-Term Bond Fund shares it receives to its
shareholders who own the corresponding classes of shares and thereby redeem all
of its outstanding shares and will then be dissolved. Each Long-Term Bond Fund
shareholder will receive Intermediate-Term Bond Fund shares equal in value to
the shares of the corresponding class of the Long-Term Bond Fund held by the
shareholder at the effective time.
No gain or loss will be recognized by either Fund or shareholders of
the Long-Term Bond Fund for federal income tax purposes as a result of the
Combination. See "The Plan -- 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 "Additional Information About the Funds - Purchases, Redemptions and
Exchanges of Shares."
The Manager will bear all out-of-pocket fees and expenses incurred by
the Funds in connection with the transactions contemplated by the Plan.
If the Plan is approved by shareholders of the Long-Term Bond Fund, the
proposed Combination is expected to become effective as of the close of
regularly scheduled trading on the New York Stock Exchange on May 27, 2005. The
impact of the Combination on the Long-Term Bond Fund is reflected in the
information provided under "Capitalization" below.
Reasons for the Proposed Combination
The Long-Term Bond Fund and the Intermediate-Term Bond Fund are
relatively small funds, with net assets as of October 31, 2004 of $14,933,524
and $71,108,899, respectively. Both are bond funds that seek to provide current
income by investing in the same types of fixed-income securities, except that
the Long-Term Bond Fund invests in longer term bonds than the Intermediate-Term
Bond Fund. The average portfolio duration of the Long-Term Bond Fund is normally
greater than six years, while the average portfolio duration of the
Intermediate-Term Bond Fund is within a three- to six-year time frame. The Board
of Directors considered these and other factors, and determined that the
proposed Combination is in the best interests of the Long-Term Bond Fund and its
shareholders, that the terms of the Plan are fair and reasonable and that the
interests of the shareholders of the Long-Term Bond Fund will not be diluted as
a result of the Combination. Combining the Funds will result in a larger fund
that may be expected over time to operate with greater efficiency and lower
overall costs. The Intermediate-Term Bond Fund has been selected as the
surviving fund because current market and interest rate conditions are generally
less favorable for longer-term bond funds. The fees and expenses of shareholders
of the Long-Term Bond Fund are expected to remain the same for holders of
Advisors Signature, Preferred, Advisors Preferred, Select, Advisors Select and
Institutional Class shares and to decrease for holders of Class J shares. See
"The Plan - Reasons for the Proposed Combination; -- Board Consideration of the
Proposed Combination" below.
Comparison of Investment Objectives and Policies
The Long-Term Bond Fund and the Intermediate-Term Bond Fund have
substantially the same investment objectives and policies. Both Funds are bond
funds that seek to provide current income by investing primarily in fixed-income
securities rated A or higher by Standard & Poor's Rating Service ("S&P") or
Moody's Investors Service Inc. ("Moody's"). However, while the Long-Term Bond
Fund invests primarily in long-term fixed-income securities, the
Intermediate-Term Bond Fund invests primarily in intermediate-term fixed-income
securities.
Under normal circumstances, both Funds invest at least 80% of their
assets 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 three categories by S&P or Moody's or, if not rated, in
the opinion of the Sub-Advisor, of comparable quality; and
o securities issued or guaranteed by the governments of Canada (provincial or
federal) or the United Kingdom and payable in U.S. dollars.
The rest of each Fund's assets may be invested in: (i) common stock and
preferred stock that may be convertible (may be exchanged for a fixed number of
shares of common stock of the same issuer) or non-convertible; or (ii)
securities rated less than the three highest grades of S&P or Moody's but not
lower than BBB- (S&P) or BAA3 (Moody's) (i.e., less than investment grade).
Under unusual market or economic conditions, both Funds may invest up
to 100% of their assets in cash and cash equivalents.
The principal difference in the investment objectives and policies of
the Funds is that the average portfolio duration of the Long-Term Bond Fund is
normally greater than six years while that of the Intermediate-Term Bond Fund is
normally within a three- to six-year time frame.
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 in the SAI. For an explanation
of debt securities ratings, see Appendix D to this Proxy Statement/Prospectus.
The investment objectives of the Funds are fundamental investment
restrictions which may not be changed without shareholder approval. However, the
Board of Directors has approved a proposal to reclassify the investment
objectives of all the PIF Funds, including the Long-Term Bond Fund and the
Intermediate-Term Bond Fund, 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 shareholders at the PIF Shareholders
Meeting. See "Additional Information About the Funds -- Fundamental and
Non-Fundamental Investment Restrictions" 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 different share classes of the Funds. These fees and
expenses are more fully described under "Additional Information About the Funds
- - Multiple Classes of Shares/Costs of Investing" below. As shown below, if
shareholders of the Long-Term Bond Fund approve the Combination, holders of
Preferred, Advisors Preferred, Select, Advisors Select and Institutional Class
shares will experience higher fees and expenses as a result of the Combination.
Advisors Advisors Advisors Institu-
Signature Preferred Preferred Select Select tional Class J
Maximum sales charge imposed on
purchases (as a % of offering price):
None None None None None None None
Maximum Contingent Deferred Sales
Charge (CDSC) (as a % of dollars
subject to charge): None None None None None None 1.00%(1)
Redemption or Exchange Fee (as a % of
amount redeemed/exchanged): None None None None None None 1.00%(2)
- ---------------------
<FN>
(1) A contingent deferred sales charge of 1.00% applies to certain redemptions
of Class J shares made within 18 months after they are purchased.
(2) Redemption fees or exchange fees are charged on redemptions or exchanges of
$30,000 or more of Class J shares within 30 days after such shares are
purchased.
</FN>
Annual Fund Operating Expenses (as a percentage of average daily net assets):
The operating expenses attributable to each share class of each Fund
(as a percentage of the average daily net assets attributable to the class) for
the fiscal year ended October 31, 2004, were as follows:
Long-Term Bond Fund
Advisors Advisors Advisors Insti-
Signature Preferred Preferred Select Select tutional Class J
Management Fees: 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40%
12b-1 Fees 0.35% None 0.25% 0.10% 0.30% None 0.50%
Other Expenses* 0.53%** 0.26% 0.32% 0.28% 0.45% None 0.46%
Total Operating Expenses 1.28% 0.66% 0.97% 0.78% 1.15% 0.40% 1.36%***
- ---------------
*Other Expenses
Service Fee 0.25% 0.15% 0.17% 0.15% 0.25%
Administrative Service Fee 0.28% 0.11% 0.15% 0.13% 0.20%
<FN>
** Based on estimated expenses for the current year. The SEC effective date
for the Advisors Signature Class was November 1, 2004.
*** The Manager voluntarily agreed to limit the Class J shares expenses and, if
necessary, pay expenses normally payable by that share class through the
period ended February 28, 2006. If such expense limit were reflected in the
table, the Class J shares "Total Operating Expenses" would be 1.30%.
</FN>
Intermediate-Term Bond Fund
Advisors Advisors Advisors Insti-
Signature Preferred Preferred Select Select tutional Class J
Management Fees: 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40%
12b-1 Fees 0.35% None 0.25% 0.10% 0.30% None 0.50%
Other Expenses* 0.53%** 0.26% 0.32% 0.28% 0.45% None 0.36%
Total Operating Expenses 1.28% 0.66% 0.97% 0.78% 1.15% 0.40% 1.26%***
- ---------------
*Other Expenses
Service Fee 0.25% 0.15% 0.17% 0.15% 0.25%
Administrative Service Fee 0.28% 0.11% 0.15% 0.13% 0.20%
<FN>
** Based on estimated expenses for the current year. The SEC effective date
for the Advisors Signature Class was November 1, 2004.
*** The Manager voluntarily agreed to limit the Class J shares expenses and, if
necessary, pay expenses normally payable by that share class through the
period ended February 28, 2006. If such expense limit were reflected in the
table, the Class J shares "Total Operating Expenses" would not be
different.
</FN>
The pro forma expenses of each share class (as a percentage of average
daily net assets attributable to the class) of the Intermediate-Term Bond Fund
assuming that the Combination had taken place at the commencement of the fiscal
year ended October 31, 2004, would be as follows:
Intermediate-Term Bond Fund
(Pro Forma Assuming Combination)
Advisors Advisors Advisors Insti-
Signature Preferred Preferred Select Select tutional Class J
Management Fees: 0.40% 0.40% 0.40% 0.40% 0.40% 0.40% 0.40%
12b-1 Fees 0.35% None 0.25% 0.10% 0.30% None 0.50%
Other Expenses 0.53% 0.26% 0.32% 0.28% 0.45% None 0.32%
Total Operating Expenses 1.28% 0.66% 0.97% 0.78% 1.15% 0.40% 1.22%
- ---------------
*Other Expenses
Service Fee 0.25% 0.15% 0.17% 0.15% 0.25%
Administrative Service Fee 0.28% 0.11% 0.15% 0.13% 0.20%
Examples. The following are examples of the effect of the operating
expenses of each of the Funds as described above. The examples assume (1) a 5%
annual return, and (2) that each Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, you would pay the following
expenses on a $10,000 investment in the shares of the indicated shares classes
of each Fund, based upon these assumptions:
Number of Years You Own
Your Advisor Signature Shares
1 Year 3 Years 5 Years 10 Years
Long-Term Bond Fund......................................... $130 $406 $702 $1,545
Intermediate-Term Bond Fund................................. $130 $406 $702 $1,545
Number of Years You Own
Your Preferred Shares
1 Year 3 Years 5 Years 10 Years
Long-Term Bond Fund......................................... $67 $211 $368 $822
Intermediate-Term Bond Fund................................. $67 $211 $368 $822
Number of Years You Own
Your Advisors Preferred
Shares
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Long-Term Bond Fund......................................... $99 $309 $536 $1,190
Intermediate-Term Bond Fund................................. $99 $309 $536 $1,190
Number of Years You Own
Your Select Shares
------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Long-Term Bond Fund......................................... $80 $249 $433 $966
Intermediate-Term Bond Fund................................. $80 $249 $433 $966
Number of Years You Own
Your Advisors Select Shares
1 Year 3 Years 5 Years 10 Years
Long-Term Bond Fund......................................... $117 $365 $633 $1,398
Intermediate-Term Bond Fund................................. $117 $365 $633 $1,398
Number of Years You Own
Your Institutional Shares
1 Year 3 Years 5 Years 10 Years
Long-Term Bond Fund......................................... $41 $128 $224 $505
Intermediate-Term Bond Fund................................. $41 $128 $224 $505
Number of Years You Own
Your Class J Shares
-------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
If you sell your shares at the end of the period:
Long-Term Bond Fund......................................... $242 $431 $745 $1,635
Intermediate-Term Bond Fund................................. $232 $400 $692 $1,523
If you do not sell your shares at the end of the period:
Long-Term Bond Fund......................................... $138 $431 $745 $1,635
Intermediate-Term Bond Fund................................. $128 $400 $692 $1,523
The following are examples of the effect of the operating expenses of
the Intermediate-Term Bond Fund, assuming that the Combination had taken place
at the commencement of the fiscal year ended October 31, 2004. The examples
assume (1) a 5% annual return, and (2) that the Fund's operating expenses remain
the same. Although your actual costs may be higher or lower, you would pay the
following expenses on a $10,000 investment in shares of the indicated share
classes of the Intermediate-Term Bond Fund, based upon these assumptions:
Number of Years You Own
Your Advisor Signature Shares
1 Year 3 Years 5 Years 10 Years
Intermediate-Term Bond Fund................................. $130 $406 $702 $1,545
Number of Years You Own
Your Preferred Shares
1 Year 3 Years 5 Years 10 Years
Intermediate-Term Bond Fund................................. $67 $211 $368 $822
Number of Years You Own
Your Advisors Preferred Shares
1 Year 3 Years 5 Years 10 Years
Intermediate-Term Bond Fund................................. $99 $309 $536 $1,190
Number of Years You Own
Your Select Shares
1 Year 3 Years 5 Years 10 Years
Intermediate-Term Bond Fund................................. $80 $249 $433 $966
Number of Years You Own
Your Advisors Select Shares
1 Year 3 Years 5 Years 10 Years
Intermediate-Term Bond Fund................................. $117 $365 $633 $1,398
Number of Years You Own
Your Institutional Shares
1 Year 3 Years 5 Years 10 Years
Intermediate-Term Bond Fund................................. $41 $128 $224 $505
Number of Years You Own
Your Class J Shares
-------------------
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
If you sell your shares at the end of the period:
Intermediate-Term Bond Fund................................. $228 $387 $670 $1,477
If you do not sell your shares at the end of the period:
Intermediate-Term Bond Fund................................. $124 $387 $670 $1,477
Investment Advisory and Sub-Advisory Services
Each of the Long-Term Bond Fund and the Intermediate-Term Bond Fund
pays the Manager an investment management fee which is calculated as a
percentage of the Fund's average daily net assets pursuant to the following fee
schedule:
0.40% of the first $500 million;
0.38% of the next $500 million;
0.36% of the next $500 million; and
0.35% of the excess over $1.5 billion of
average daily net assets.
The Manager serves as the investment advisor to both Funds pursuant to
a Management Agreement with PIF. 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 Sub-Advisory Agreements with Principal Global, an affiliate of the
Manager, with respect to the Funds. Under the Sub-Advisory Agreements, Principal
Global has assumed the obligations of the Manager to provide investment advisory
services for the Funds. The Sub-Advisor is compensated by the Manager, not by
the Funds. The Manager compensates Principal Global by paying it a portion of
the investment management fee the Manager receives from each Fund. The Manager
and Principal Global are registered as investment advisers under the Investment
Advisers Act of 1940. See "Additional Information About the Funds - Sub-Advisor
and Portfolio Managers" below.
Comparison of Main Risks
In deciding whether to approve the Combination, you should consider the
amount and character of investment risk involved in the respective investment
objectives and strategies of the Funds. Because both Funds are bond funds that
seek to provide current income by investing primarily in fixed-income securities
rated A or higher by S&P or Moody's, they have substantially the same risks. The
main risks include:
Municipal Principal and interest payments on municipal securities may not be guaranteed by the issuing body
Securities and may be payable only from monies derived from a particular source. If the source does not
Risk: 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.
Portfolio The average portfolio duration for the Intermediate-Term Bond Fund
Duration normally varies within a three- to six-year time frame, and for
Risk: the Long-Term Bond Fund is normally greater than six years, in each
case based on the Sub-Advisor's 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. 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.
Interest Rate The value of fixed-income securities held by the Funds may be affected by factors such as changing
Risk: 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, the Funds'
appreciation may be limited by issuer call options having
more value during times of declining interest rates.
Credit Risk: Lower quality and longer maturity fixed-income
securities will be subject to greater credit risk and price
fluctuations than higher quality and shorter maturity
securities. 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.
Mortgage Backed Both Funds may invest in mortgage backed securities, which are subject to prepayment risk. When
Securities 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.
High Yield Fixed-income securities that are not investment grade are commonly referred to as "junk bonds" or
Securities Risk: "high yield" securities. These securities offer a potentially higher yield than other, higher
rated securities, but they carry a greater degree of risk
and are considered speculative by the major credit rating
agencies.
U.S. The Funds may invest in debt and mortgage-backed securities issued by
Government government-sponsored enterprises such as the Federal Home Loan
Sponsored Mortgage Corporation, the Federal National Mortgage Association and
Securities the Federal Home Loan Banks. Although the issuing agency, instrumentality or
Risk: corporation may be chartered or sponsored by the U.S. government,
their securities are neither issued nor guaranteed by the U.S. Treasury.
Active Both Funds may actively trade securities in an attempt to
Portfolio achieve their investment objective. High turnover rates may
Trading increase the Funds' trading costs and may have an adverse impact on their
Risk: performance.
Additional information about the risks of investing in the Funds is set
forth in Appendix C to this Proxy Statement/Prospectus and in the SAI.
Comparative Performance
The following table shows, for the indicated periods ended December 31,
2004, the annual total return (with maximum sales charges) of each share class
of each of the Funds.
Average Annual Total Returns
with Maximum Sales Charge (%) for periods ended December 31, 2004
Past Past Past 10 Life of Inception
1 Year 5 Years Years Fund Date
High Quality Long-Term Bond Fund
Advisors Signature Class N/A N/A N/A 0.14% 11/01/2004
Preferred Class 4.57% N/A N/A 6.57% 12/06/2000
Advisors Preferred Class 4.24% N/A N/A 6.28% 12/06/2000
Select Class 4.43% N/A N/A 6.49% 12/06/2000
Advisors Select Class 4.05% N/A N/A 6.12% 12/06/2000
Institutional Class 4.92% N/A N/A 6.51% 03/01/2001
Class J (before taxes) 3.94% N/A N/A 5.32% 03/01/2001
(after taxes on distributions)(1) 2.47% N/A N/A 3.58%
(after taxes on distributions and sales 2.74% N/A N/A 3.51%
of shares)
Lehman Brothers Government/Credit Bond Index* 4.19% N/A N/A 7.06% 12/31/2000
Morningstar Long-Term Bond Category Average** 6.09% N/A N/A 7.75% 12/31/2000
<FN>
* Index performance does not reflect deductions for fees, expenses or taxes.
** Category performance reflects deductions for fees, expenses and taxes of
all funds included in the category.
</FN>
High Quality Intermediate-Term Bond Fund
Advisors Signature Class N/A N/A N/A 0.20% 11/01/2004
Preferred Class 3.99% N/A N/A 6.29% 12/06/2000
Advisors Preferred Class 3.78% N/A N/A 5.96% 12/06/2000
Select Class 3.98% N/A N/A 6.16% 12/06/2000
Advisors Select Class 3.60% N/A N/A 5.76% 12/06/2000
Institutional Class 4.33% N/A N/A 6.00% 03/01/2001
Class J (before taxes) 3.44% N/A N/A 4.94% 03/01/2001
(after taxes on distributions)(1) 2.33% N/A N/A 3.34%
(after taxes on distributions and sales 2.30% N/A N/A 3.26%
of shares)
Lehman Brothers Aggregate Bond Index* 4.34% N/A N/A 6.75% 12/31/2000
Morningstar Intermediate-Term Bond Category Average** 3.85% N/A N/A 6.11% 12/31/2000
<FN>
* Index performance does not reflect deductions for fees, expenses or taxes.
** Category performance reflects deductions for fees, expenses and taxes of
all funds included in the category.
- ------------------
(1) 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>
THE PLAN
Plan of Acquisition
The terms of the Plan are summarized below. The summary is qualified in
its entirety by reference to the Form of the Plan, a copy of which is attached
as Appendix A.
Under the Plan, the Intermediate-Term Bond Fund will acquire all the
assets and assume all the liabilities of the Long-Term Bond Fund and will issue
to the Long-Term Bond Fund the number of shares of common stock of each share
class of the Intermediate-Term Bond Fund that has a net asset value equal to the
net asset value attributable to each corresponding share class of the Long-Term
Bond Fund. We expect that the closing date will be May 27, 2005, assuming
shareholder approval of the Plan, and that the effective time will be the close
of regularly scheduled trading on the NYSE (normally 3:00 p.m., Central Time) on
that date. Each Fund will determine its net asset values as of the effective
time using the procedures described in its then current prospectus (the
procedures applicable to the Intermediate-Term Bond Fund and the Long-Term Bond
Fund are identical). The Intermediate-Term Bond Fund will issue to the Long-Term
Bond Fund a number of shares of each share class equal to the value of the net
assets of each corresponding share class of the Long-Term Bond Fund outstanding
at the effective time. The Long-Term Bond Fund will be managed such that at the
effective time it will hold only cash or other securities that are eligible
investments for the Intermediate-Term Bond Fund.
Immediately after the effective time, the Long-Term Bond Fund will
distribute to you its Intermediate-Term Bond Fund shares of the same class as
the Long-Term Bond Fund shares you own in exchange for all your Long-Term Bond
Fund shares of that class. You will receive shares of the Intermediate-Term Bond
Fund that are equal in value to the shares of the Long-Term Bond Fund that you
surrender in the exchange. In connection with the exchange, the
Intermediate-Term Bond Fund will credit on its books an appropriate number of
its shares to the account of each Long-Term Bond Fund shareholder, and the
Long-Term Bond Fund will cancel on its books all its shares registered to the
account of that shareholder. After the effective time, the Long-Term Bond Fund
will be dissolved in accordance with applicable law.
The consummation of the transactions contemplated by the Plan for the
Long-Term Bond Fund is subject to the approval of the Plan by the shareholders
of the Long-Term Bond Fund. The Plan may be amended, but no amendment may be
made to the Plan which in the opinion of the Board of Directors would materially
adversely affect the interests of the shareholders of the Long-Term Bond Fund
after they have approved the Plan. The Board of Directors may terminate the Plan
at any time before the effective time if it believes that consummation of the
transactions contemplated by the Plan would not be in the best interests of the
shareholders.
The Manager will pay all fees and out-of-pocket expenses incurred by
the Funds in connection with the transactions contemplated by the Plan. Such
expenses include, but are not limited to, accountants' fees, legal fees,
registration fees, printing expenses, transfer taxes (if any) and the fees of
banks and transfer agents.
Reasons for the Proposed Combination
The Long-Term Bond Fund and the Intermediate-Term Bond Fund are
relatively small bond funds that seek to provide current income by investing in
the same types of fixed-income securities, except that the Long-Term Bond Fund
invests in longer term bonds than the Intermediate-Term Bond Fund. Combining the
Funds will result in a larger fund that may be expected over time to operate
with greater efficiency and lower overall costs. The Intermediate-Term Bond Fund
has been selected as the surviving fund because current market and interest rate
conditions are generally not favorable to longer-term bond funds. The fees and
expenses of shareholders of the Long-Term Bond Fund are expected to remain the
same for holders of Advisors Signature, Preferred, Advisors Preferred, Select,
Advisors Select and Institutional Class shares and to decrease for holders of
Class J shares following the Combination.
Board Consideration of the Combination
The Board of Directors of PIF, including the Directors who are not
"interested persons" (as defined in the 1940 Act) of the Funds (the "Independent
Directors"), considered the Plan and the Combination at its meeting held on
February 24, 2005. The Board considered information about the Combination
presented by the Manager, and the Independent Directors were assisted by
independent legal counsel. At the February 24, 2005 meeting, the Board
unanimously approved the Plan and the Combination after concluding that the
participation of each Fund in the Combination is in the best interests of each
Fund and its shareholders, and that the interests of the existing shareholders
of each Fund will not be diluted as a result of the Combination.
In determining whether to approve the Combination and recommend its
approval to shareholders of the Long-Term Bond Fund, the Board made inquiry into
a number of matters and considered the following factors, among others: (1)
possible alternatives to the Plan; (2) the terms and conditions of the Plan and
whether the implementation of the Combination would result in dilution of
shareholder interests or involve overreaching by any person concerned; (3) the
advantages to the Long-Term Bond Fund's shareholders of investing in a larger
asset pool with greater diversification; (4) any direct or indirect fees or
expenses incurred by either Fund as a result of the Combination; (5) expense
ratios and available information regarding the fees and expenses of the Funds,
including any change in fees or expenses to be paid or borne by shareholders of
the Long-Term Bond Fund (directly or indirectly) as a result of the Combination;
(6) comparative investment performance of the Funds; (7) the direct or indirect
federal income tax consequences of the Combination to shareholders of the
Long-Term Bond Fund; (8) the continuity of or changes in investment advisory,
sub-advisory and other services to be provided to shareholders following the
Combination; (9) the compatibility of the investment objectives and policies of
the Funds and changes with respect to the investment objectives and policies of
the Long-Term Bond Fund that will result from the Combination; and (10) current
market and interest rate conditions and their expected impact on long-term and
intermediate-term fixed-income securities.
The Board's decision to recommend approval of the Combination was based
on a number of factors, including the following:
1. the investment objectives, policies and risks of the Funds are
substantially the same and the Combination will afford shareholders of the
Long-Term Bond Fund continuity of investment objectives and expectations.
2. the Long-Term Bond Fund in combination with the Intermediate-Term Bond
Fund may expect over time to benefit from a larger fund asset base to achieve
economies of scale and enable greater flexibility in portfolio management and
greater diversification in investments;
3. current market and interest rate conditions are generally less favorable
to the Long-Term Bond Fund and more favorable to the Intermediate-Term Bond
Fund;
4. Principal Global is the Sub-Advisor to both Funds and may be expected to
provide continuity in the quality of its investment advisory services and
personnel;
5. the Funds have the same management fee and management fee structure,
and the expense ratios of the Intermediate-Term Bond Fund are expected to be the
same as (or in the case of Class J shares lower than) the expense ratios of the
Long-Term Bond Fund;
6. over the period since the Funds' inceptions, the Intermediate-Term
Bond Fund has somewhat underperformed the Long-Term Bond Fund mainly because of
prevailing investment conditions, namely declining interest rates, which have
favored longer-duration investments; nevertheless, the Board is cognizant that
interest rates have declined significantly over the past 20 years to
historically low levels and that further significant interest rate declines are
less likely than increases, which increases would tend to result in lower total
future returns for shareholders than if the assets were managed with an
intermediate-duration strategy;
7. the Combination will not result in the dilution of the interests of
existing shareholders; and
8. the Combination 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 of the Funds is a separate series of PIF, and the Advisors
Signature Class, Preferred Class, Advisors Preferred Class, Select Class,
Advisors Select Class, Institutional Class and Class J shares of common stock of
the Intermediate-Term Bond Fund to be issued in connection with the Combination
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. See "Additional Information
About the Funds - Multiple Classes of Shares" and "Rule 12b-1 Fees" below.
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.
They share classes of the Long-Term Bond Fund have the same rights with
respect to the Long-Term Bond Fund that the share classes of the
Intermediate-Term Bond Fund have with respect to the Intermediate-Term Bond
Fund.
With respect to shares of both 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 Long-Term Bond Fund and the Intermediate-Term Bond Fund, will be
asked to approve proposed amendments to the PIF Articles of Incorporation that
will permit the 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 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.
Federal Income Tax Consequences
To be considered a tax-free "reorganization" under Section 368 of the
Code, a reorganization must exhibit a continuity of business enterprise. Because
the Intermediate-Term Bond Fund will use a portion of the Long-Term Bond Fund's
assets in its business and will continue the Long-Term Bond Fund's historic
business, the Combination of the Long-Term Bond Fund with the Intermediate-Term
Bond Fund will exhibit a continuity of business enterprise. Therefore, the
Combination will be considered a tax-free "reorganization" under applicable
provisions of the Code. In the opinions of tax counsel to PIF, no gain or loss
will be recognized by either of the Funds or their shareholders in connection
with the Combination, the tax cost basis of the Intermediate-Term Bond Fund
shares received by shareholders of the Long-Term Bond Fund will equal the tax
cost basis of their shares of the Long-Term Bond Fund, and their holding periods
for the Intermediate-Term Bond Fund shares will include their holding periods
for the Long-Term Bond Fund shares.
Distribution of Income and Gains. Prior to the Combination, the
Long-Term Bond Fund, whose taxable year will end as a result of the Combination,
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 Combination. Such distributions will be made to such
shareholders before the Combination. A Long-Term Bond 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 Combination not occurred.
Moreover, if the Intermediate-Term Bond Fund has realized net
investment income or net capital gains but has not distributed such income or
gains prior to the Combination, and you acquire shares of such Fund in the
Combination, a portion of your subsequent distributions from the
Intermediate-Term Bond Fund will, in effect, be a taxable return of part of your
investment. Similarly, if you acquire Intermediate-Term Bond Fund shares in the
Combination when it holds appreciated securities, you will receive a taxable
return of part of your investment if and when that Fund sells the appreciated
securities and distributes the realized gain.
The foregoing is only a summary of the principal federal income tax
consequences of the Combination 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 the capitalization of each of the Long-Term
Bond Fund and the Intermediate-Term Bond Fund as of October 31, 2004, and the
pro forma combined capitalization of the Intermediate-Term Bond Fund assuming
that the Combination took place as of October 31, 2004:
Net Asset Value Shares
Net Assets Per Share Outstanding
(1) High Quality Long-Term Bond Fund --Advisors Signature $ -- $ -- $ --
--Preferred 1,739,719 10.70 162,623
--Advisors Preferred 189,515 10.70 17,708
--Select 124,344 10.71 11,613
--Advisors Select 2,702,892 10.71 252,391
--Institutional 10,553 10.94 965
--Class J 10,166,503 10.86 936,421
(2) High Quality Intermediate-Term Bond -Advisors Signature -- -- --
Fund --Preferred 11,917,593 10.64 1,120,166
--Advisors Preferred 35,407,408 10.62 3,333,014
--Select 11,905 10.62 1,121
--Advisors Select 1,920,837 10.61 181,037
--Institutional 10,395 10.71 971
--Class J 21,840,761 10.68 2,045,255
(3) High Quality Intermediate-Term Bond -Advisors Signature -- -- --
Fund (pro forma assuming combination of --Preferred 13,657,312 10.64 1,283,582
(1) and (2)) --Advisors Preferred 35,596,923 10.62 3,351,876
--Select 136,249 10.62 12,829
--Advisors Select 4,623,729 10.61 435,790
--Institutional 20,948 10.71 1,956
--Class J 32,007,264 10.68 2,996,935
ADDITIONAL INFORMATION ABOUT THE FUNDS
Sub-Advisor and Portfolio Managers
Principal Global, an indirect wholly owned subsidiary of Principal Life
and an affiliate of the Manager, is the Sub-Advisor to both Funds. As of
December 31, 2004, Principal Global, together with its affiliated asset
management companies, had approximately $137.8 billion in assets under
management.
The portfolio manager for the Long-Term Bond Fund is Martin J. Schafer,
and the portfolio managers for the Intermediate-Term Bond Fund are William C.
Armstrong and Timothy R. Warrick.
Martin J. Schafer. Mr. Schafer is a portfolio manager for Principal
Global specializing in managing mortgage-backed securities and high-quality
short, intermediate and long duration portfolios. Mr. Schafer joined Principal
Global in 1977. In the early 1980s, he developed the firm's secondary mortgage
marketing operation and, in 1984, he assumed portfolio management responsibility
for its residential mortgage portfolio. He began managing mutual fund assets in
1985 and institutional portfolios in 1992. Mr. Schafer holds a Bachelor's degree
in Accounting and Finance from the University of Iowa.
William C. Armstrong, CFA. Mr. Armstrong leads the multi-sector/core
portfolio management group for Principal Global. Mr. Armstrong has been with the
Principal Financial Group since 1992. He earned his Master's degree from the
University of Iowa and his Bachelor's degree from Kearney State College.
Timothy R. Warrick, CFA. Mr. Warrick is co-portfolio manager at
Principal Global with responsibility for the U.S. multi-sector product with
focus on the management of U.S. credit instruments. His prior responsibilities
with the firm include portfolio management for multiple asset class portfolios,
product development and fixed income credit analyst duties. He joined Principal
Global in 1990. In 1996, Mr. Warrick joined ReliaStar Investment Research, Inc.
and was responsible for multiple asset classes, including corporate bonds and
leveraged bank loans. He rejoined Principal Global in 1998 as a portfolio
manager. He received an MBA in Finance from Drake University and a Bachelor's
degree in Accounting and Economics from Simpson College.
The Board of Directors of PIF has unanimously approved a proposed
sub-sub-advisory agreement pursuant to which Spectrum Asset Management, Inc.
("Spectrum") would become a new Sub-Sub-Advisor to the Intermediate-Term Bond
Fund. The proposed agreement will be submitted for approval by shareholders of
the Intermediate-Term Bond Fund at the PIF Shareholders Meeting. Spectrum is an
affiliate of the Manager and Principal Global and a member of the Principal
Financial Group. Its offices are located at 4 High Ridge Park, Stamford,
Connecticut 06905.
Multiple Classes of Shares/Costs of Investing
The Board of Directors of PIF has adopted an 18f-3 Plan for both of the
Funds. Under these plans, each of the Funds currently offers the following seven
classes of shares: Advisors Signature Class, Advisors Select Class, Advisors
Preferred Class, Select Class, Preferred Class, Institutional Class and Class J.
The Advisors Signature Class, Advisors Select Class, Advisors Preferred Class,
Select Class, Preferred Class, Institutional Class and Class J 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. Additional share classes
may be offered in the future.
Fees and Expenses of the Funds
The Advisors Signature, Advisors Select, Advisors Preferred, Select,
Preferred and Institutional Classes are available without any front-end sales
charge or contingent deferred sales charge ("CDSC"). There is no sales charge on
any shares purchased with reinvested dividends or other distributions. These
shares classes are available through employer-sponsored retirement plans which
may impose fees in addition to those charged by the Funds.
The Class J shares are sold without any front-end sales charge. There
is no sales charge on any shares purchased with reinvested dividends or other
distributions. Under certain circumstances, Class J shares may be subject to a
CDSC and to redemption and exchange fees.
If you sell your Class J shares within 18 months of purchase, a CDSC
may be imposed on the shares sold. The CDSC, if any, is determined by
multiplying by 1.00% the lesser of the market value at the time of redemption or
the initial purchase price of the shares sold. The CDSC is not imposed on
shares:
o that were purchased pursuant to the Small Amount Force Out program (SAFO);
o redeemed due to a shareholder's death or disability (as defined in the
Internal Revenue Code);
o redeemed from retirement plans to satisfy minimum distribution rules under
the Internal Revenue Code;
o sold using a periodic withdrawal plan (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 that were purchased through the Principal Income IRA; or
o that were purchased through Principal Passage.
A redemption fee* of 1.00% is charged on redemptions of $30,000 or more
if the Class J 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 the shares are redemption.
An exchange fee* of 1.00% is charged on exchanges of $30,000 or more
among the PIF Funds if the Class J 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 Class J shares
redeemed/exchanged from the Capital Preservation Fund or Money Market Fund.
Ongoing Fees
Each of the share classes of the Funds pays various ongoing fees to the
Manager and others who provide services. Ongoing fees reduce the value of each
share. Because they are ongoing, they increase the cost of investing in the
Funds.
All share classes of the Funds pay the following ongoing fees:
o Management Fee - Through the Management Agreement with the Funds, the
Manager has agreed to provide investment advisory services and
corporate administrative services to the Funds.
o Portfolio Accounting Services - The Manager has entered into an
agreement with the Funds under which the Manager supplies portfolio
accounting services. Currently, there is no charge for these services.
All shares classes of the Funds except the Preferred Class and
Institutional Class pay the following ongoing fees:
o Distribution Fee - Each of the Funds has adopted a distribution plan
under Rule 12b-1 under the 1940 Act for its Advisors Signature Class,
Advisors Select Class, Advisors Preferred Class, Select Class and Class
J shares. Under the plan, each such share class of each Fund pays a
distribution fee based on the average daily net asset value (NAV) of
the Fund. These fees pay distribution expenses for the sale of Fund
shares by Princor (the distributor of the Fund) and other selling
dealers. See "Rule 12b-1 Fees" below.
All shares classes of the Funds except the Institutional Class and
Class J pay the following ongoing fees:
o Service Fee - The Manger has entered into a Services Agreement with
each of the Funds under which the Manager performs personal services to
shareholders.
o Administrative Service Fee - The Manager has entered into an
Administrative Services Agreement with each Fund under which the
Manager provides transfer agent and corporate administrative services
to the Fund. In addition, the Manager has assumed the responsibility
for communications with and recordkeeping services for beneficial
owners of Fund shares.
Class J shares of the Funds pay the following ongoing fee:
o Transfer Agent Fee - The Manager has entered into a Transfer Agency
Agreement with the Fund under which the Manager provides transfer agent
services to the Class J shares of the Fund. These services are
currently provided at cost.
Class J shares of the Funds also pay expenses of registering and
qualifying shares for sale, the cost of producing and distributing reports and
prospectuses to Class J shareholders and the cost of shareholder meetings held
solely for Class J shares.
The Manager registers Class J shares with the states and each of the
Funds pays the cost associated with this activity under the terms of the
Transfer Agency Agreement for Class J Shares.
Rule 12b-1 Fees
PIF has adopted a Distribution Plan under Rule 12b-1 under the 1940 Act
(each, a "12b-1 plan") for the Advisors Signature Class, Advisors Select Class,
Advisors Preferred Class, Select Class and Class J shares of each of the Funds.
For each of the Funds, the 12b-1 plan 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
Advisors Signature Class, Advisors Select Class, Advisors Preferred Class,
Select Class and Class J shares to the public. Each Fund pays Princor a fee
after the end of each month at a rate stated as a annual percentage of the
Fund's average daily net assets attributable to the particular class of shares.
Princor retains such amounts as are appropriate to compensate for actual
expenses incurred in distributing and promoting the sale of the Fund shares but
may remit on a continuous basis some or all such amounts 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. The 12b-1 plans authorize Princor to enter into service agreements
with other selling dealers and with banks and other financial institutions to
provide shareholder services to existing 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. Because they are ongoing, 12b-1 fees may, over time, exceed
other types of sales charges such as front-end charges or contingent deferred
sales charges.
For the affected share classes of each of the Funds, the 12b-1 plans
provide for payments by the Fund to Princor at an annual rate of up to:
Advisors Signature 0.35%
Advisors Select 0.30%
Advisors Preferred 0.25%
Select 0.10%
Class J 0.50%
Purchases, Redemptions and Exchanges of Shares
The purchase, redemption and exchange procedures with respect to shares
of the Funds are the same.
Purchases. Shares of the Funds are offered for sale through Princor, a
broker-dealer that is also the principal underwriter for PIF, or other dealers
which Princor selects.
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 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 both Funds, 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 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.
Redemptions. Shares of both 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. 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 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 both Funds may be exchanged, without payment of a
sales charge or a CDSC, for shares of the same class of other PIF Funds,
provided that, for the Advisors Signature, Preferred, Advisors Preferred, Select
and Advisors Select share classes, such other fund is available through the
employer-sponsored plan. If Class J shares are exchanged for Class J shares of
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 J shares
exchanged is added to the holding period of the Class J shares acquired for
purposes of determining the applicable charge.
Frequent Trading and Market Timing (Abusive Trading Practices)
The PIF Funds are not designed for frequent trading or market timing
activity. The PIF 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.
PIF considers 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 PIF is not able to
identify such abusive trading practices, the abuses described above will
negatively impact the Fund.
PIF has 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 PIF's policies and procedures are
designed to identify and protect against abusive trading practices, there can be
no certainty that PIF will identify and prevent abusive trading in all
instances. When PIF does identify abusive trading, it will apply its policies
and procedures in a fair and uniform manner.
If PIF, or a Fund, deems abusive trading practices to be occurring, PIF
will take action that may include, but is not limited to:
o Rejecting exchange instructions from shareholder or other person
authorized by the shareholder to direct exchanges;
o 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;
o Limiting the dollar amount of an exchange and/or the number of
exchanges during a year;
o 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
o Taking such other action as directed by the Fund.
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, PIF
will reverse the exchange and return the account holdings to the positions held
prior to the exchange. PIF will give you notice in writing in this instance.
Dividends and Distributions
The dividends and distributions procedures with respect to the Funds
are the same.
Each of the Funds pays its net investment income on an annual 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 December.
Immediately prior to the Reorganization, the Long-Term Bond 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 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
Combination (after reduction for any available capital loss carryforward). Such
dividends will be included in the taxable income of the Long-Term Bond Fund's
shareholders.
Fundamental and Non-Fundamental Investment Restrictions
Fundamental Restrictions
Each of the following restrictions for the Intermediate-Term Bond Fund
and the Long-Term Bond Fund is matter of "fundamental" policy and may not be
changed without shareholder approval. Each of the Funds may not:
o issue any senior securities as defined in the 1940 Act, as
amended. 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.
o 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.
o invest in real estate, although it may invest in securities that
are secured by real estate and securities of issuers that invest
or deal in real estate.
o borrow money, except that it may a) borrow from banks (as defined
in the 1940 Act, as amended) or other financial institutions or
through reverse repurchase agreements in amounts up to 33 1/3% of
its total assets (including the amount borrowed); b) to the
extent permitted by applicable law, borrow up to an additional 5%
of its total assets for temporary purposes; c) obtain short-term
credits as may be necessary for the clearance of purchases and
sales of portfolio securities; and d) purchase 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).
o 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. This limit does not apply to purchases of debt securities
or commercial paper.
o 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.
o act as an underwriter of securities, except to the extent that
the series may be deemed to be an underwriter in connection with
the sale of securities held in its portfolio.
o concentrate its investments in any particular industry, except
that the Fund may invest up to 25% of the value of its total
assets in a single industry, provided that, when the Fund has
adopted a temporary defensive posture, there shall be no
limitation on the purchase of obligations issued or guaranteed by
the U.S. Government or its agencies or instrumentalities.
o 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 Board of Directors has unanimously approved a proposal to amend the
fundamental restriction of each Fund with respect to borrowing and has directed
that the proposal be submitted to shareholders of the 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 Funds to borrow
money to the maximum extent permitted by the 1940 Act.
Non-Fundamental Restrictions
The Intermediate-Term Bond Fund and the Long-Term Bond Fund have also
adopted the following restrictions that are "non-fundamental" policies and that
may be changed by the Board of Directors without shareholder approval. It is
contrary to the policies of each of the Funds to:
o invest more than 15% of its net assets in illiquid securities and
in repurchase agreements maturing in more than seven days except
to the extent permitted by applicable law.
o pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. The deposit of underlying securities and
other assets in escrow and other collateral arrangements in
connection with transactions in put or call options, futures
contracts and options on futures contracts are not deemed to be
pledges or other encumbrances.
o invest in companies for the purpose of exercising control or
management.
o invest more than 25% of its assets in foreign securities.
o invest more than 5% of its total assets in real estate limited
partnership interests.
o acquire securities of other investment companies in reliance on
Section 12(d) (1) (F) or (G) of the 1940 Act.
Each Fund has also adopted a non-fundamental restriction which requires
it, under normal circumstances, to invest at least 80% of its net assets in the
type of securities, industry, or geographic region suggested by the name of the
Fund.
Financial Highlights
The following financial highlights of the Long-Term Bond Fund and the
Intermediate-Term Bond Fund are derived from audited financial statements.
FINANCIAL HIGHLIGHTS
PRINCIPAL INVESTORS FUND, INC.
-------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
ENDED OCTOBER 31 (EXCEPT AS NOTED):
2004 2003 2002 2001/(D)/
---- ---- ---- ----
HIGH QUALITY LONG-TERM BOND FUND
- --------------------------------
ADVISORS PREFERRED
- ------------------
SHARES
------
Net Asset Value,
Beginning of Period.. $10.59 $10.51 $10.66 $10.03
Income from Investment
Operations:
Net Investment Income
(Operating Loss)
/(a)/ .............. 0.41 0.48 0.51 0.52
Net Realized and
Unrealized Gain
(Loss) on
Investments......... 0.16 0.05 (0.08) 0.63
---- ---- ----- ----
Total From Investment
Operations 0.57 0.53 0.43 1.15
Less Dividends and
Distributions:
Dividends from Net
Investment Income... (0.41) (0.45) (0.49) (0.52)
Distributions from
Realized Gains...... (0.05) -- (0.09) --
---- ----- -----
Total Dividends and
Distributions (0.46) (0.45) (0.58) (0.52)
----- ----- ----- -----
Net Asset Value, End
of Period............ $10.70 $10.59 $10.51 $10.66
====== ====== ====== ======
Total Return.......... 5.53% 5.08% 4.34% 10.91%/(e)/
Ratio/Supplemental
Data:
Net Assets, End of
Period (in
thousands).......... $190 $105 $2,230 $2,667
Ratio of Expenses to
Average Net Assets.. 0.97% 0.97% 0.97% 0.97%/(f)/
Ratio of Net
Investment Income to
Average Net Assets.. 3.87% 4.15% 4.88% 5.44%/(f)/
Portfolio Turnover
Rate................ 51.0% 38.8% 94.1% 101.3%/(f)/
2004 2003 2002 2001/(D)/
---- ---- ---- ----
HIGH QUALITY LONG-TERM BOND FUND
- --------------------------------
ADVISORS SELECT SHARES
- ----------------------
Net Asset Value,
Beginning of Period.. $10.59 $10.51 $10.66 $10.03
Income from Investment
Operations:
Net Investment Income
(Operating Loss)
/(a)/ .............. 0.39 0.43 0.49 0.50
Net Realized and
Unrealized Gain
(Loss) on
Investments......... 0.18 0.08 (0.08) 0.64
---- ---- ----- ----
Total From Investment
Operations 0.57 0.51 0.41 1.14
Less Dividends and
Distributions:
Dividends from Net
Investment Income... (0.40) (0.43) (0.47) (0.51)
Distributions from
Realized Gains...... (0.05) -- (0.09) --
---- ----- -----
Total Dividends and
Distributions (0.45) (0.43) (0.56) (0.51)
----- ----- ----- -----
Net Asset Value, End
of Period............ $10.71 $10.59 $10.51 $10.66
====== ====== ====== ======
Total Return.......... 5.44% 4.90% 4.15% 10.76%/(e)/
Ratio/Supplemental
Data:
Net Assets, End of
Period (in
thousands).......... $2,703 $2,094 $2,229 $2,667
Ratio of Expenses to
Average Net Assets.. 1.15% 1.15% 1.15% 1.15%/(f)/
Ratio of Net
Investment Income to
Average Net Assets.. 3.69% 3.85% 4.70% 5.26%/(f)/
Portfolio Turnover
Rate................ 51.0% 38.8% 94.1% 101.3%/(f)/
2004 2003 2002 2001/(G)/
---- ---- ---- ----
HIGH QUALITY LONG-TERM BOND FUND
- --------------------------------
CLASS J SHARES
- --------------
Net Asset Value,
Beginning of Period.. $10.72 $10.64 $10.77 $10.40
Income from Investment
Operations:
Net Investment Income
(Operating Loss)
/(a)/ .............. 0.38 0.39 0.46 0.33
Net Realized and
Unrealized Gain
(Loss) on
Investments......... 0.18 0.10 (0.05) 0.38
---- ---- ----- ----
Total From Investment
Operations 0.56 0.49 0.41 0.71
Less Dividends and
Distributions:
Dividends from Net
Investment Income... (0.37) (0.41) (0.45) (0.34)
Distributions from
Realized Gains...... (0.05) -- (0.09) --
---- ----- -----
Total Dividends and
Distributions (0.42) (0.41) (0.54) (0.34)
----- ----- ----- -----
Net Asset Value, End
of Period............ $10.86 $10.72 $10.64 $10.77
====== ====== ====== ======
Total Return /(b)/ ... 5.31% 4.60% 4.09% 6.63%/(e)/
Ratio/Supplemental
Data:
Net Assets, End of
Period (in
thousands).......... $10,166 $9,419 $5,545 $1,214
Ratio of Expenses to
Average Net Assets.. 1.30% 1.40% 1.35% 1.32%/(f)/
Ratio of Gross
Expenses to Average
Net Assets /(c)/ ... 1.36% 1.67% -- --
Ratio of Net
Investment Income to
Average Net Assets.. 3.54% 3.59% 4.44% 4.97%/(f)/
Portfolio Turnover
Rate................ 51.0% 38.8% 94.1% 101.3%/(f)/
2004 2003 2002 2001/(G)/
---- ---- ---- ----
HIGH QUALITY LONG-TERM BOND FUND
- --------------------------------
INSTITUTIONAL SHARES
- --------------------
Net Asset Value,
Beginning of Period.. $10.81 $10.72 $10.77 $10.40
Income from Investment
Operations:
Net Investment Income
(Operating Loss)
/(a)/ .............. 0.48 0.50 0.57 0.41
Net Realized and
Unrealized Gain
(Loss) on
Investments......... 0.18 0.10 0.02 0.37
---- ---- ---- ----
Total From Investment
Operations 0.66 0.60 0.59 0.78
Less Dividends and
Distributions:
Dividends from Net
Investment Income... (0.48) (0.51) (0.55) (0.41)
Distributions from
Realized Gains...... (0.05) -- (0.09) --
---- ----- -----
Total Dividends and
Distributions (0.53) (0.51) (0.64) (0.41)
----- ----- ----- -----
Net Asset Value, End
of Period............ $10.94 $10.81 $10.72 $10.77
====== ====== ====== ======
Total Return.......... 6.19% 5.66% 5.81% 7.28%/(e)/
Ratio/Supplemental
Data:
Net Assets, End of
Period (in
thousands).......... $11 $10 $10 $10
Ratio of Expenses to
Average Net Assets.. 0.40% 0.40% 0.40% 0.40%/(f)/
Ratio of Net
Investment Income to
Average Net Assets.. 4.45% 4.62% 5.45% 5.94%/(f)/
Portfolio Turnover
Rate................ 51.0% 38.8% 94.1% 101.3%/(f)/
2004 2003 2002 2001/(D)/
---- ---- ---- ----
HIGH QUALITY LONG-TERM BOND FUND
- --------------------------------
PREFERRED SHARES
- ----------------
Net Asset Value,
Beginning of Period.. $10.58 $10.50 $10.65 $10.03
Income from Investment
Operations:
Net Investment Income
(Operating Loss)
/(a)/ .............. 0.44 0.46 0.53 0.51
Net Realized and
Unrealized Gain
(Loss) on
Investments......... 0.18 0.10 (0.07) 0.65
---- ---- ----- ----
Total From Investment
Operations 0.62 0.56 0.46 1.16
Less Dividends and
Distributions:
Dividends from Net
Investment Income... (0.45) (0.48) (0.52) (0.54)
Distributions from
Realized Gains...... (0.05) -- (0.09) --
---- ----- -----
Total Dividends and
Distributions (0.50) (0.48) (0.61) (0.54)
----- ----- ----- -----
Net Asset Value, End
of Period............ $10.70 $10.58 $10.50 $10.65
====== ====== ====== ======
Total Return.......... 5.96% 5.41% 4.66% 10.96%/(e)/
Ratio/Supplemental
Data:
Net Assets, End of
Period (in
thousands).......... $1,740 $3,080 $2,246 $2,662
Ratio of Expenses to
Average Net Assets.. 0.66% 0.66% 0.66% 0.66%/(f)/
Ratio of Net
Investment Income to
Average Net Assets.. 4.19% 4.37% 5.19% 5.74%/(f)/
Portfolio Turnover
Rate................ 51.0% 38.8% 94.1% 101.3%/(f)/
2004 2003 2002 2001/(D)/
---- ---- ---- ----
HIGH QUALITY LONG-TERM BOND FUND
- --------------------------------
SELECT SHARES
- -------------
Net Asset Value,
Beginning of Period.. $10.60 $10.51 $10.66 $10.03
Income from Investment
Operations:
Net Investment Income
(Operating Loss)
/(a)/ .............. 0.43 0.51 0.53 0.53
Net Realized and
Unrealized Gain
(Loss) on
Investments......... 0.16 0.05 (0.08) 0.63
---- ---- ----- ----
Total From Investment
Operations 0.59 0.56 0.45 1.16
Less Dividends and
Distributions:
Dividends from Net
Investment Income... (0.43) (0.47) (0.51) (0.53)
Distributions from
Realized Gains...... (0.05) -- (0.09) --
---- ----- -----
Total Dividends and
Distributions (0.48) (0.47) (0.60) (0.53)
----- ----- ----- -----
Net Asset Value, End
of Period............ $10.71 $10.60 $10.51 $10.66
====== ====== ====== ======
Total Return.......... 5.73% 5.38% 4.53% 11.07%/(e)/
Ratio/Supplemental
Data:
Net Assets, End of
Period (in
thousands).......... $124 $20 $2,230 $2,667
Ratio of Expenses to
Average Net Assets.. 0.78% 0.78% 0.77% 0.78%/(f)/
Ratio of Net
Investment Income to
Average Net Assets.. 4.06% 4.35% 5.08% 5.63%/(f)/
Portfolio Turnover
Rate................ 51.0% 38.8% 94.1% 101.3%/(f)/
FINANCIAL HIGHLIGHTS (CONTINUED)
PRINCIPAL INVESTORS FUND, INC.
-------------------------------------------------------------------------------
/(a) /Effective November 1, 2002, calculated based on average shares outstanding
during the period.
/(b) /Total return is calculated without the contingent deferred sales charge.
/(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary
expense limit began on November 1, 2002. Expense limits were decreased on
March 1, 2004.
/(d) /Period from December 6, 2000, date shares first offered, through October
31, 2001. Advisors Preferred, Advisors Select, Preferred, and Select
classes of shares each recognized $.01 of net investment income per share
and incurred an unrealized gain of $.02 per share from November 27, 2000
through December 5, 2000.
/(e) /Total return amounts have not been annualized.
/(f) /Computed on an annualized basis.
/(g) /Period from March 1, 2001, date shares first offered, through October 31,
2001. Class J and Institutional shares each recognized $.01 of net
investment income per share and incurred an unrealized gain of $.03 per
share from February 27, 2001 through February 28, 2001.
FINANCIAL HIGHLIGHTS
PRINCIPAL INVESTORS FUND, INC.
-------------------------------------------------------------------------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR
ENDED OCTOBER 31 (EXCEPT AS NOTED):
2004 2003 2002 2001/(D)/
---- ---- ---- ----
HIGH QUALITY INTERMEDIATE-TERM BOND FUND
- ----------------------------------------
ADVISORS PREFERRED
- ------------------
SHARES
------
Net Asset Value,
Beginning of Period.. $10.55 $10.54 $10.65 $10.04
Income from Investment
Operations:
Net Investment Income
(Operating Loss)
/(a)/ .............. 0.30 0.39 0.49 0.51
Net Realized and
Unrealized Gain
(Loss) on
Investments......... 0.18 0.02 (0.03) 0.61
---- ---- ----- ----
Total From Investment
Operations 0.48 0.41 0.46 1.12
Less Dividends and
Distributions:
Dividends from Net
Investment Income... (0.33) (0.40) (0.48) (0.51)
Distributions from
Realized Gains...... (0.08) -- (0.09) --
----- ----- -----
Total Dividends and
Distributions (0.41) (0.40) (0.57) (0.51)
----- ----- ----- -----
Net Asset Value, End
of Period............ $10.62 $10.55 $10.54 $10.65
====== ====== ====== ======
Total Return.......... 4.68% 3.97% 4.61% 10.99%/(e)/
Ratio/Supplemental
Data:
Net Assets, End of
Period (in
thousands).......... $35,407 $818 $1,932 $2,662
Ratio of Expenses to
Average Net Assets.. 1.01% 0.97% 0.97% 0.97%/(f)/
Ratio of Net
Investment Income to
Average Net Assets.. 2.88% 3.73% 4.67% 5.33%/(f)/
Portfolio Turnover
Rate................ 152.5% 71.3% 60.8% 80.3%/(f)/
2004 2003 2002 2001/(D)/
---- ---- ---- ----
HIGH QUALITY INTERMEDIATE-TERM BOND FUND
- ----------------------------------------
ADVISORS SELECT SHARES
- ----------------------
Net Asset Value,
Beginning of Period.. $10.54 $10.54 $10.65 $10.04
Income from Investment
Operations:
Net Investment Income
(Operating Loss)
/(a)/ .............. 0.29 0.38 0.48 0.49
Net Realized and
Unrealized Gain
(Loss) on
Investments......... 0.18 0.01 (0.04) 0.61
---- ---- ----- ----
Total From Investment
Operations 0.47 0.39 0.44 1.10
Less Dividends and
Distributions:
Dividends from Net
Investment Income... (0.32) (0.39) (0.46) (0.49)
Distributions from
Realized Gains...... (0.08) -- (0.09) --
----- ----- -----
Total Dividends and
Distributions (0.40) (0.39) (0.55) (0.49)
----- ----- ----- -----
Net Asset Value, End
of Period............ $10.61 $10.54 $10.54 $10.65
====== ====== ====== ======
Total Return.......... 4.50% 3.69% 4.43% 10.84%/(e)/
Ratio/Supplemental
Data:
Net Assets, End of
Period (in
thousands).......... $1,921 $802 $1,668 $2,881
Ratio of Expenses to
Average Net Assets.. 1.19% 1.15% 1.15% 1.15%/(f)/
Ratio of Net
Investment Income to
Average Net Assets.. 2.78% 3.55% 4.51% 5.15%/(f)/
Portfolio Turnover
Rate................ 152.5% 71.3% 60.8% 80.3%/(f)/
2004 2003 2002 2001/(G)/
---- ---- ---- ----
HIGH QUALITY INTERMEDIATE-TERM BOND FUND
- ----------------------------------------
CLASS J SHARES
- --------------
Net Asset Value,
Beginning of Period.. $10.59 $10.58 $10.69 $10.33
Income from Investment
Operations:
Net Investment Income
(Operating Loss)
/(a)/ .............. 0.28 0.35 0.43 0.33
Net Realized and
Unrealized Gain
(Loss) on
Investments......... 0.18 0.02 (0.01) 0.37
---- ---- ----- ----
Total From Investment
Operations 0.46 0.37 0.42 0.70
Less Dividends and
Distributions:
Dividends from Net
Investment Income... (0.29) (0.36) (0.44) (0.34)
Distributions from
Realized Gains...... (0.08) -- (0.09) --
----- ----- -----
Total Dividends and
Distributions (0.37) (0.36) (0.53) (0.34)
----- ----- ----- -----
Net Asset Value, End
of Period............ $10.68 $10.59 $10.58 $10.69
====== ====== ====== ======
Total Return /(b)/ ... 4.42% 3.55% 4.20% 6.67%/(e)/
Ratio/Supplemental
Data:
Net Assets, End of
Period (in
thousands).......... $21,841 $17,476 $9,630 $1,334
Ratio of Expenses to
Average Net Assets.. 1.30% 1.39% 1.35% 1.33%/(f)/
Ratio of Gross
Expenses to Average
Net Assets /(c)/ ... 1.30% 1.50% -- --
Ratio of Net
Investment Income to
Average Net Assets.. 2.69% 3.31% 4.18% 4.85%/(f)/
Portfolio Turnover
Rate................ 152.5% 71.3% 60.8% 80.3%/(f)/
2004 2003 2002 2001/(G)/
---- ---- ---- ----
HIGH QUALITY INTERMEDIATE-TERM BOND FUND
- ----------------------------------------
INSTITUTIONAL SHARES
- --------------------
Net Asset Value,
Beginning of Period.. $10.64 $10.62 $10.69 $10.33
Income from Investment
Operations:
Net Investment Income
(Operating Loss)
/(a)/ .............. 0.38 0.46 0.54 0.41
Net Realized and
Unrealized Gain
(Loss) on
Investments......... 0.16 0.02 0.02 0.35
---- ---- ---- ----
Total From Investment
Operations 0.54 0.48 0.56 0.76
Less Dividends and
Distributions:
Dividends from Net
Investment Income... (0.39) (0.46) (0.54) (0.40)
Distributions from
Realized Gains...... (0.08) -- (0.09) --
----- ----- -----
Total Dividends and
Distributions (0.47) (0.46) (0.63) (0.40)
----- ----- ----- -----
Net Asset Value, End
of Period............ $10.71 $10.64 $10.62 $10.69
====== ====== ====== ======
Total Return.......... 5.23% 4.62% 5.56% 7.33%/(e)/
Ratio/Supplemental
Data:
Net Assets, End of
Period (in
thousands).......... $10 $10 $10 $10
Ratio of Expenses to
Average Net Assets.. 0.43% 0.40% 0.40% 0.40%/(f)/
Ratio of Net
Investment Income to
Average Net Assets.. 3.56% 4.32% 5.22% 5.84%/(f)/
Portfolio Turnover
Rate................ 152.5% 71.3% 60.8% 80.3%/(f)/
2004 2003 2002 2001/(D)/
---- ---- ---- ----
HIGH QUALITY INTERMEDIATE-TERM BOND FUND
- ----------------------------------------
PREFERRED SHARES
- ----------------
Net Asset Value,
Beginning of Period.. $10.57 $10.56 $10.67 $10.04
Income from Investment
Operations:
Net Investment Income
(Operating Loss)
/(a)/ .............. 0.34 0.43 0.51 0.50
Net Realized and
Unrealized Gain
(Loss) on
Investments......... 0.18 0.02 (0.02) 0.66
---- ---- ----- ----
Total From Investment
Operations 0.52 0.45 0.49 1.16
Less Dividends and
Distributions:
Dividends from Net
Investment Income... (0.37) (0.44) (0.51) (0.53)
Distributions from
Realized Gains...... (0.08) -- (0.09) --
----- ----- -----
Total Dividends and
Distributions (0.45) (0.44) (0.60) (0.53)
----- ----- ----- -----
Net Asset Value, End
of Period............ $10.64 $10.57 $10.56 $10.67
====== ====== ====== ======
Total Return.......... 4.99% 4.28% 4.93% 11.45%/(e)/
Ratio/Supplemental
Data:
Net Assets, End of
Period (in
thousands).......... $11,918 $6,339 $6,195 $2,667
Ratio of Expenses to
Average Net Assets.. 0.70% 0.66% 0.66% 0.66%/(f)/
Ratio of Net
Investment Income to
Average Net Assets.. 3.27% 4.05% 4.90% 5.65%/(f)/
Portfolio Turnover
Rate................ 152.5% 71.3% 60.8% 80.3%/(f)/
2004 2003 2002 2001/(D)/
---- ---- ---- ----
HIGH QUALITY INTERMEDIATE-TERM BOND FUND
- ----------------------------------------
SELECT SHARES
- -------------
Net Asset Value,
Beginning of Period.. $10.55 $10.54 $10.65 $10.04
Income from Investment
Operations:
Net Investment Income
(Operating Loss)
/(a)/ .............. 0.33 0.41 0.52 0.52
Net Realized and
Unrealized Gain
(Loss) on
Investments......... 0.17 0.02 (0.04) 0.61
---- ---- ----- ----
Total From Investment
Operations 0.50 0.43 0.48 1.13
Less Dividends and
Distributions:
Dividends from Net
Investment Income... (0.35) (0.42) (0.50) (0.52)
Distributions from
Realized Gains...... (0.08) -- (0.09) --
----- ----- -----
Total Dividends and
Distributions (0.43) (0.42) (0.59) (0.52)
----- ----- ----- -----
Net Asset Value, End
of Period............ $10.62 $10.55 $10.54 $10.65
====== ====== ====== ======
Total Return.......... 4.88% 4.17% 4.81% 11.15%/(e)/
Ratio/Supplemental
Data:
Net Assets, End of
Period (in
thousands).......... $12 $11 $1,483 $2,662
Ratio of Expenses to
Average Net Assets.. 0.81% 0.78% 0.77% 0.78%/(f)/
Ratio of Net
Investment Income to
Average Net Assets.. 3.18% 3.92% 4.89% 5.52%/(f)/
Portfolio Turnover
Rate................ 152.5% 71.3% 60.8% 80.3%/(f)/
FINANCIAL HIGHLIGHTS (CONTINUED)
PRINCIPAL INVESTORS FUND, INC.
-------------------------------------------------------------------------------
/(a) /Effective November 1, 2002, calculated based on average shares outstanding
during the period.
/(b) /Total return is calculated without the contingent deferred sales charge.
/(c) /Expense ratio without the Manager's voluntary expense limit. The voluntary
expense limit began on November 1, 2002. Expense limits were increased on
March 1, 2003 and decreased on March 1, 2004.
/(d) /Period from December 6, 2000, date shares first offered, through October
31, 2001. Advisors Preferred, Advisors Select, Preferred, and Select
classes of shares each recognized $.01 of net investment income per share
and incurred an unrealized gain of $.03 per share from November 30, 2000
through December 5, 2000.
/(e) /Total return amounts have not been annualized.
/(f) /Computed on an annualized basis.
/(g) /Period from March 1, 2001, date shares first offered, through October 31,
2001. Class J and Institutional shares each recognized $.01 of net
investment income per share and incurred an unrealized gain of $.02 per
share from February 27, 2001 through February 28, 2001.
FINANCIAL STATEMENTS
The financial highlights of each of the Funds for the fiscal year ended
October 31, 2004 included in this Proxy Statement/Prospectus, and the financial
statements of PIF with respect to each of the Funds for the fiscal year ended
October 31, 2004 incorporated by reference into the related SAI, have been so
included or 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 Intermediate-
Term Bond 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 the
Intermediate-Term Bond Fund by Randy Lee Bergstrom, Esq., Assistant Tax Counsel
to PIF, and for the Long-Term Bond Fund by Carolyn Kolks, Esq., Assistant Tax
Counsel to PIF.
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 PIF Fund must be received by PIF 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
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 PLAN OF ACQUISITION
High Quality Long-Term Bond Fund and
High Quality Intermediate-Term Bond Fund
The Board of Directors of Principal Investors Fund, Inc., a Maryland
corporation (the "Fund"), deems it advisable that the High Quality
Intermediate-Term Bond Fund of the Fund (the "Intermediate-Term Bond Fund")
acquire all of the assets of the High Quality Long-Term Bond Fund of the Fund
(the "Long-Term Bond Fund") in exchange for the assumption by the
Intermediate-Term Bond Fund of all of the liabilities of the Long-Term Bond Fund
and shares issued by the Intermediate-Term Bond Fund which are thereafter to be
distributed by the Long-Term Bond Fund pro rata to its shareholders in complete
liquidation and termination of the Long-Term Bond Fund and in exchange for all
of the Long-Term Bond Fund's outstanding shares.
The Long-Term Bond Fund will transfer to the Intermediate-Term Bond
Fund, and the Intermediate-Term Bond Fund will acquire from the Long-Term Bond
Fund, all of the assets of the Long-Term Bond Fund on the Closing Date and will
assume from the Long-Term Bond Fund all of the liabilities of the Long-Term Bond
Fund in exchange for the issuance of the number of shares of the
Intermediate-Term Bond Fund determined as provided in the following paragraphs,
which shares will be subsequently distributed pro rata to the shareholders of
the Long-Term Bond Fund in complete liquidation and termination of the Long-Term
Bond Fund and in exchange for all of the Long-Term Bond Fund's outstanding
shares. The Long-Term Bond Fund will not issue, sell or transfer any of its
shares after the Closing Date, and only redemption requests received by the
Long-Term Bond Fund in proper form prior to the Closing Date shall be fulfilled
by the Long-Term Bond Fund. Redemption requests received by the Long-Term Bond
Fund thereafter will be treated as requests for redemption of those shares of
the Intermediate-Term Bond Fund allocable to the shareholder in question.
The Long-Term Bond Fund will declare to its shareholders of record on
or prior to the Closing Date a dividend or dividends which, together with all
previous such dividends, shall have the effect of distributing to its
shareholders all of its income (computed without regard to any deduction for
dividends paid) and all of its net realized capital gains, if any, for the
current taxable year through the Closing Date.
On the Closing Date, the Intermediate-Term Bond Fund will issue to the
Long-Term Bond Fund a number of full and fractional shares of the
Intermediate-Term Bond Fund, taken at their then net asset value, having an
aggregate net asset value equal to the aggregate value of the net assets of the
Long-Term Bond Fund. The aggregate value of the net assets of the Long-Term Bond
Fund and the Intermediate-Term Bond Fund shall be determined in accordance with
the then current Prospectus of the Intermediate-Term Bond Fund as of close of
regularly scheduled trading on the New York Stock Exchange on the Closing Date.
The closing of the transactions contemplated in this Plan (the
"Closing") shall be held at the offices of Principal Management, 680 8th Street,
Des Moines, Iowa 50392-2080 at 2:00 p.m. Central Daylight Time on May 27, 2005,
or on such earlier or later date as fund management may determine. The date on
which the Closing is to be held as provided in this Plan shall be known as the
"Closing Date."
In the event that on the Closing Date (a) the New York Stock Exchange
is closed for other than customary weekend and holiday closings or (b) trading
on said Exchange is restricted or (c) an emergency exists as a result of which
it is not reasonably practicable for the Intermediate-Term Bond Fund or the
Long-Term Bond Fund to fairly determine the value of its assets, the Closing
Date shall be postponed until the first business day after the day on which
trading shall have been fully resumed.
As soon as practicable after the Closing, the Long-Term Bond Fund shall
(a) distribute on a pro rata basis to the shareholders of record of the
Long-Term Bond Fund at the close of business on the Closing Date the shares of
the Intermediate-Term Bond Fund received by the Long-Term Bond Fund at the
Closing in exchange for all of the Long-Term Bond Fund's outstanding shares, and
(b) be liquidated in accordance with applicable law and the Fund's Articles of
Incorporation.
For purposes of the distribution of shares of the Intermediate-Term
Bond Fund to shareholders of the Long-Term Bond Fund, the Intermediate-Term Bond
Fund shall credit on the books of the Intermediate-Term Bond Fund an appropriate
number of shares of the Intermediate-Term Bond Fund to the account of each
shareholder of the Long-Term Bond Fund. No certificates will be issued for
shares of the Intermediate-Term Bond Fund. After the Closing Date and until
surrendered, each outstanding certificate, if any, which, prior to the Closing
Date, represented shares of the Long-Term Bond Fund, shall be deemed for all
purposes of the Fund's Articles of Incorporation and Bylaws to evidence the
appropriate number of shares of the Intermediate-Term Bond Fund to be credited
on the books of the Intermediate-Term Bond Fund in respect of such shares of the
Long-Term Bond Fund as provided above.
Prior to the Closing Date, the Long-Term Bond Fund shall deliver to the
Intermediate-Term Bond Fund a list setting forth the assets to be assigned,
delivered and transferred to the Intermediate-Term Bond Fund, including the
securities then owned by the Long-Term Bond Fund and the respective federal
income tax bases (on an identified cost basis) thereof, and the liabilities to
be assumed by the Intermediate-Term Bond Fund pursuant to this Plan.
All of the Long-Term Bond Fund's portfolio securities shall be
delivered by the Long-Term Bond Fund's custodian on the Closing Date to the
Intermediate-Term Bond Fund or its custodian, either endorsed in proper form for
transfer in such condition as to constitute good delivery thereof in accordance
with the practice of brokers or, if such securities are held in a securities
depository within the meaning of Rule 17f-4 under the Investment Company Act of
1940, transferred to an account in the name of the Intermediate-Term Bond Fund
or its custodian with said depository. All cash to be delivered pursuant to this
Plan shall be transferred from the Long-Term Bond Fund's account at its
custodian to the Intermediate-Term Bond Fund's account at its custodian. If on
the Closing Date the Long-Term Bond Fund is unable to make good delivery to the
Intermediate-Term Bond Fund's custodian of any of the Long-Term Bond Fund's
portfolio securities because such securities have not yet been delivered to the
Long-Term Bond Fund's custodian by its brokers or by the transfer agent for such
securities, then the delivery requirement with respect to such securities shall
be waived, and the Long-Term Bond Fund shall deliver to the Intermediate-Term
Bond Fund's custodian on or by said Closing Date with respect to said
undelivered securities executed copies of an agreement of assignment in a form
satisfactory to the Intermediate-Term Bond Fund, and a due bill or due bills in
form and substance satisfactory to the custodian, together with such other
documents including brokers' confirmations, as may be reasonably required by the
Intermediate-Term Bond Fund.
This Plan may be abandoned and terminated, whether before or after
action thereon by the shareholders of the Long-Term Bond Fund and
notwithstanding favorable action by such shareholders, if the Board of Directors
believe that the consummation of the transactions contemplated hereunder would
not be in the best interests of the shareholders of either Fund. This Plan may
be amended by the Board of Directors at any time, except that after approval by
the shareholders of the Long-Term Bond Fund no amendment may be made with
respect to the Plan which in the opinion of the Board of Directors materially
adversely affects the interests of the shareholders of the Long-Term Bond Fund.
Except as expressly provided otherwise in this Plan, Principal
Management Corporation will pay or cause to be paid all out-of-pocket fees and
expenses incurred by the Long-Term Bond Fund and the Intermediate-Term Bond Fund
in connection with the transactions contemplated under this Plan, including, but
not limited to, accountants' fees, legal fees, registration fees, printing
expenses, transfer taxes (if any) and the fees of banks and transfer agents.
Appendix B
Outstanding Shares and Share Ownership
The following table shows as of the Record Date the number of shares of
each Class of the Long-Term Bond Fund outstanding and entitled to vote, and the
number of shares of each Class of the Intermediate-Term Bond Fund outstanding.
Number of Shares
Share Class Outstanding and Entitled
to Vote
Long-Term Bond Fund --Advisors Signature
--Preferred
--Advisors Preferred
--Select
--Advisors Select
--Institutional
--Class J
Number of Shares
Outstanding
Intermediate-Term Bond Fund --Advisors Signature
--Preferred
--Advisors Preferred
--Select
--Advisors Select
--Institutional
--Class J
The following table shows as of March 3, 2005 the percentage of the
outstanding shares of each Class of each of the Funds 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 by
Share Class Principal Life
Long-Term Bond Fund --Advisors Signature 100.00%
--Preferred -
--Advisors Preferred -
--Select 2.01%
--Advisors Select -
--Institutional 100.00%
--Class J -
Intermediate-Term Bond Fund --Advisors Signature 100.00%
--Preferred -
--Advisors Preferred -
--Select 11.45%
--Advisors Select -
--Institutional 48.62%
--Class J -
As of March 3, 2005, the Directors and officers of PIF together owned
less than 1% of the outstanding shares of any Class of either of the Funds.
As of March 3, 2005, no persons owned of record, or were known by PIF
to own beneficially, 5% or more of the outstanding shares of any Class of
either Fund.
Appendix C
CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS
Securities and Investment Practices
Market Volatility. Equity securities include common stocks, preferred
stocks, convertible securities, depositary receipts, rights and warrants. Common
stocks, the most familiar type, represent an equity (ownership) interest in a
corporation. The value of a company's stock may fall as a result of factors
directly relating to that company, such as decisions made by its management or
lower demand for the company's products or services. A stock's value may also
fall because of factors affecting not just the company, but also companies in
the same industry or in a number of different industries, such as increases in
production costs. The value of a company's stock may also be affected by changes
in financial markets that are relatively unrelated to the company or its
industry, such as changes in interest rates or currency exchange rates. In
addition, a company's stock generally pays dividends only after the company
invests in its own business and makes required payments to holders of its bonds
and other debt. For this reason, the value of a company's stock will usually
react more strongly than its bonds and other debt to actual or perceived changes
in the company's financial condition or prospects. Stocks of smaller companies
may be more vulnerable to adverse developments than those of larger companies.
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.
High Yield Securities
Debt securities rated lower than BBB by S&P or Baa by Moody's or, if
not rated, determined to be of equivalent quality by the Manager or the
Sub-Advisor, sometimes referred to as high yield or "junk bonds" and are
considered speculative.
Investment in high yield bonds involves special risks in addition to
the risks associated with investment in highly rated debt securities. High yield
bonds may be regarded as predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. Moreover, such
securities may, under certain circumstances, be less liquid than higher rated
debt securities.
Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher quality debt securities. The
ability of a Fund to achieve its investment objective may, to the extent of its
investment in high yield bonds, be more dependent on such credit analysis than
would be the case if the Fund were investing in higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher-grade bonds. The prices
of high yield bonds have been found to be less sensitive to interest rate
changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. If the issuer of high
yield bonds defaults, a Fund may incur additional expenses to seek recovery.
The secondary market on which high yield bonds are traded may be less
liquid than the market for higher-grade bonds. Less liquidity in the secondary
trading market could adversely affect the price at which a Fund could sell a
high yield bond and could adversely affect and cause large fluctuations in the
daily price of the Fund's shares. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the value and
liquidity of high yield bonds, especially in a thinly traded market.
The use of credit ratings for evaluating high yield bonds also involves
certain risks. For example, credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield bonds. Also, credit
rating agencies may fail to change credit ratings in a timely manner to reflect
subsequent events. If a credit rating agency changes the rating of a portfolio
security held by a Fund, the Fund may retain the security if the Manager or
Sub-Advisor thinks it is in the best interest of shareholders.
Initial Public Offerings ("IPOs")
The Funds may invest in IPOs. An IPO is a company's first offering of
stock to the public. IPO risk is that the market value of IPO shares will
fluctuate considerably due to factors such as the absence of a prior public
market, unseasoned trading, the small number of shares available for trading and
limited information about the issuer. The purchase of IPO shares may involve
high transaction costs. IPO shares are subject to market risk and liquidity
risk. In addition, the market for IPO shares can be speculative and/or inactive
for extended periods of time. The limited number of shares available for trading
in some IPOs may make it more difficult for a Fund to buy or sell significant
amounts of shares without an unfavorable impact on prevailing prices. Investors
in IPO shares can be affected by substantial dilution in the value of their
shares by sales of additional shares and by concentration of control in existing
management and principal shareholders.
When a Fund's asset base is small, a significant portion of the Fund's
performance could be attributable to investments in IPOs because such
investments would have a magnified impact on the Fund. As the Fund's assets
grow, the effect of the Fund's investments in IPOs on the Fund's performance
probably will decline, which could reduce the Fund's performance. Because of the
price volatility of IPO shares, a Fund may choose to hold IPO shares for a very
short period of time. This may increase the turnover of the Fund's portfolio and
lead to increased expenses to the Fund, such as commissions and transaction
costs. By selling IPO shares, the Fund may realize taxable gains it will
subsequently distribute to shareholders.
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.
Portfolio Turnover
"Portfolio Turnover" is the term used in the industry for measuring the
amount of trading that occurs in a Fund's portfolio during the year. For
example, a 100% turnover rate means that on average every security in the
portfolio has been replaced once during the year.
Funds with high turnover rates (more than 100%) often have higher
transaction costs (that are paid by the Fund) that may have an adverse impact on
Fund performance and may generate short-term capital gains (on which taxes may
be imposed even if no shares of the Fund are sold during the year). Turnover
rates for each of the Funds may be found in the Fund's Financial Highlights
table.
Please consider all the factors when you compare the turnover rates of
different funds. A fund with consistently higher total returns and higher
turnover rates than another fund may actually be achieving better performance
precisely because the managers are active traders. You should also be aware that
the "total return" line in the Financial Highlights section already includes
portfolio turnover costs.
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
ADDITIONAL PERFORMANCE INFORMATION
Set forth below for each of the 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 each Fund shows performance for
its Institutional Class shares. Performance for Institutional Class shares will
be higher than performance for other share Classes of the Funds because
Institutional Class shares have lower expenses than the other share Classes.
Long-Term Bond Fund
YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
LOGO
2002 11.18
2003 4.26
2004 4.92
The Fund's Institutional Class highest/lowest quarterly returns
during this time period were:
Highest Q3 '02 6.10
Lowest Q2 '04 -3.29
Intermediate-Term Bond Fund
YEAR-BY-YEAR TOTAL RETURN (%) AS OF 12/31 EACH YEAR
LOGO
2002 9.91
2003 3.75
2004 4.33
The Fund's Institutional Class highest/lowest quarterly returns
during this time period were:
Highest Q3 '02 4.68
Lowest Q2 '04 -2.22
FORM OF PROXY CARD
Two Low-Cost Ways to Cast Your Proxy Vote
Save Time and Money
Its Fast and Convenient. The accompanying Proxy Statement/Prospectus outlines
important issues affecting your High Quality Long-Term Bond 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 1-888-221-0697.
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!
SPECIAL MEETING OF SHAREHOLDERS MAY 26, 2005
PRINCIPAL INVESTORS FUND, INC
HIGH QUALITY LONG-TERM BOND 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 May 26, 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 Special
Meeting of Shareholders and the Proxy Statement/Prospectus, both dated April 18,
2005. Shares will be voted as you instruct. If no direction is made, the proxy
will be voted FOR the proposal 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 Proposal. Sign
the proxy ballot and return it as soon as possible in the enclosed envelope.
PROPOSAL
1. Approval of Plan of Acquisition providing for the [ ] FOR
combination of the High Quality Long-Term Bond Fund into
the High Quality Intermediate-Term Bond Fund. [ ] AGAINST
[ ] ABSTAIN
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
Combination of the High Quality Long-Term Bond Fund
Into the High Quality Intermediate-Term Bond Fund
Dated: April 18, 2005
This Statement of Additional Information is available to the
shareholders of the High Quality Long-Term Bond Fund, a separate series of
Principal Investors Fund, Inc. ("PIF"), in connection with the proposed
combination of that Fund into the High Quality Intermediate-Term Bond Fund
(the"Combination").
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Proxy Statement/Prospectus dated April 18, 2005,
relating to the Special Meeting of Shareholders of the High Quality Long-Term
Bond Fund to be held on May 26, 2005. Copies of the Proxy Statement/Prospectus,
which has been filed with the Securities and Exchange Commission and describes
the proposed Combination, may be obtained without charge by writing to Principal
Management Corporation, 680 8th Street, Des Moines, Iowa 50392-0200, 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 December 28, 2004, insofar as they relate
to the High Quality Long-Term Bond Fund and the High Quality
Intermediate-Term Bond Fund.
The Annual and Semi-Annual Reports to Shareholders of PIF are available
upon request and without charge by calling toll-free at 1-800-247-4123.
TABLE OF CONTENTS
Pro Forma Financial Statements of the High Quality Long-Term Bond Fund and the
High Quality Intermediate-Term Bond Fund 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
STATEMENTS OF ASSETS AND LIABILITIES
PRINCIPAL INVESTORS FUND, INC.
OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
COMBINED
HIGH QUALITY HIGH QUALITY HIGH QUALITY
LONG-TERM INTERMEDIATE-TERM PRO FORMA INTERMEDIATE-TERM
BOND FUND BOND FUND ADJUSTMENTS BOND FUND
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $ 14,054,898 $ 81,772,082 $ -- $ 95,826,980
============ ============ ======= ============
ASSETS
Investment in
securities--at value. $ 14,808,361 $ 82,746,293 $ -- $ 97,554,654
Cash.................. 11,003 11,725 -- 22,728
Receivables:
Capital Shares sold.. 15,483 532,048 -- 547,531
Dividends and
interest............ 137,288 571,166 -- 708,454
Investment securities
sold................ -- 314,310 -- 314,310
Unrealized gain on
swap agreements..... 5,135 17,588 -- 22,723
------------ ------------ ------- ------------
Total Assets 14,977,270 84,193,130 -- 99,170,400
LIABILITIES
Accrued management and
investment advisory
fees................. 1,141 5,394 -- 6,535
Accrued administrative
service fees......... 149 1,325 -- 1,474
Accrued distribution
fees................. 1,136 3,867 -- 5,003
Accrued service fees.. 189 1,567 -- 1,756
Accrued transfer and
administrative fees.. 7,290 11,705 -- 18,995
Accrued other expenses 3,468 5,495 -- 8,963
Payables:
Capital Shares
reacquired.......... 30,373 -- -- 30,373
Investment securities
purchased........... -- 7,030,181 -- 7,030,181
Reverse repurchase
agreements.......... -- 6,024,697 -- 6,024,697
------------ ------------ ------- ------------
Total Liabilities 43,746 13,084,231 -- 13,127,977
------------ ------------ ------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $ 14,933,524 $ 71,108,899 $ -- $ 86,042,423
============ ============ ======= ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $ 13,989,983 $ 69,560,888 $ -- $ 83,550,871
Accumulated
undistributed
(overdistributed) net
investment income
(operating loss)..... 32,355 127,659 -- 160,014
Accumulated
undistributed
(overdistributed) net
realized gain (loss). 152,588 428,553 -- 581,141
Net unrealized
appreciation
(depreciation) of
investments.......... 758,598 991,799 -- 1,750,397
------------ ------------ ------- ------------
Total Net Assets $ 14,933,524 $ 71,108,899 $ -- $ 86,042,423
============ ============ ======= ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 225,000,000 225,000,000 -- 225,000,000
NET ASSET VALUE PER
SHARE:
Advisors Preferred:
Net Assets........... $ 189,515 $ 35,407,408 -- $ 35,596,923
Shares issued and
outstanding.......... 17,708 3,333,014 1,154 3,351,876
Net asset value per
share................ $ 10.70 $ 10.62 -- $ 10.62
============ ============ == ============
Advisors Select: Net
Assets............... $ 2,702,892 $ 1,920,837 -- $ 4,623,729
Shares issued and
outstanding.......... 252,391 181,037 2,362 435,790
Net asset value per
share................ $ 10.71 $ 10.61 -- $ 10.61
============ ============ == ============
Class J: Net Assets... $ 10,166,503 $ 21,840,761 -- $ 32,007,264
Shares issued and
outstanding.......... 936,421 2,045,255 15,259 2,996,935
Net asset value per
share /(a)/.......... $ 10.86 $ 10.68 -- $ 10.68
============ ============ == ============
Institutional: Net
Assets............... $ 10,553 $ 10,395 -- $ 20,948
Shares issued and
outstanding.......... 965 971 20 1,956
Net asset value per
share................ $ 10.94 $ 10.71 -- $ 10.71
============ ============ == ============
Preferred: Net Assets. $ 1,739,719 $ 11,917,593 -- $ 13,657,312
Shares issued and
outstanding.......... 162,623 1,120,166 793 1,283,582
Net asset value per
share................ $ 10.70 $ 10.64 -- $ 10.64
============ ============ == ============
Select: Net Assets.... $ 124,344 $ 11,905 -- $ 136,249
Shares issued and
outstanding.......... 11,613 1,121 95 12,829
Net asset value per
share................ $ 10.71 $ 10.62 -- $ 10.62
============ ============ == ============
/(a) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See accompanying notes.
STATEMENTS OF OPERATIONS
PRINCIPAL INVESTORS FUND, INC.
YEAR ENDED OCTOBER 31, 2004 (UNAUDITED)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
COMBINED
HIGH QUALITY HIGH QUALITY HIGH QUALITY
LONG-TERM INTERMEDIATE-TERM PROFORMA INTERMEDIATE-TERM
BOND FUND BOND FUND ADJUSTMENTS /(A)/ BOND FUND
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
NET INVESTMENT INCOME
(OPERATING LOSS)
Income:
Interest............. $748,320 $2,368,538 $ -- $3,116,858
-------- ---------- -------- ----------
Total Income 748,320 2,368,538 -- 3,116,858
Expenses:
Management and
investment advisory
fees................ 61,655 240,603 -- 302,258
Distribution fees -
Advisors Preferred.. 373 72,187 -- 72,560
Distribution fees -
Advisors Select..... 7,048 4,079 -- 11,127
Distribution fees -
Class J............. 48,793 99,006 -- 147,799
Distribution fees -
Select.............. 91 11 -- 102
Administrative
service fees -
Advisors Preferred.. 224 43,313 -- 43,537
Administrative
service fees -
Advisors Select..... 4,699 2,720 -- 7,419
Administrative
service fees -
Preferred........... 3,360 11,102 -- 14,462
Administrative
service fees -
Select.............. 119 15 -- 134
Registration fees -
Class J............. 10,294 12,390 (10,294) 12,390
Service fees -
Advisors Preferred.. 253 49,087 -- 49,340
Service fees -
Advisors Select..... 5,873 3,399 -- 9,272
Service fees -
Preferred........... 4,582 15,140 -- 19,722
Service fees - Select 137 18 -- 155
Shareholder reports -
Class J............. 3,050 5,663 -- 8,713
Transfer and
administrative fees
- Class J........... 31,833 54,076 (12,101) 73,808
Other expenses -
Class J............. 59 7 (59) 7
Reverse repurchase
agreement interest
expense............. -- 23,636 -- 23,636
-------- ---------- -------- ----------
Total Gross Expenses 182,443 636,452 (22,454) 796,441
Less: Reimbursement
from Manager - Class
J................... 5,635 -- (5,635) --
-------- ---------- -------- ----------
Total Net Expenses 176,808 636,452 (16,819) 796,441
-------- ---------- -------- ----------
Net Investment Income
(Operating Loss) 571,512 1,732,086 16,819 2,320,417
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
AND FOREIGN
CURRENCIES
Net realized gain
(loss) from:
Investment
transactions........ 158,698 541,251 -- 699,949
Swap agreements...... 5,911 25,006 -- 30,917
Change in unrealized
appreciation/depreciation
of:
Investments........... 49,008 475,317 -- 524,325
Swap agreements....... 5,135 17,588 -- 22,723
-------- ---------- -------- ----------
Net Realized and
Unrealized Gain (Loss)
on Investments and
Foreign Currencies 218,752 1,059,162 -- 1,277,914
-------- ---------- -------- ----------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $790,264 $2,791,248 $ 16,819 $3,598,331
======== ========== ======== ==========
/(a) /Reflects estimated expenses based on larger net assets, greater economies
of scale and elimination of duplicative services.
See accompanying notes.
SCHEDULES OF INVESTMENTS
OCTOBER 31, 2004
(unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
High High-Quality High High-Quality
Quality Intermediate- Quality Intermediate-
Bond Term Bond Bond Term Bond
Fund Fund Combined Fund Fund Combined
- -----------------------------------------------------------------------------------------------------------------------------------
Bonds (54.87%)
Aerospace & Defense Equipment (0.04%)
General Dynamics
15,000 - 15,000 3.00%; 05/15/08 $ 14,795 $ - $ 14,795
United Technologies
15,000 - 15,000 6.10%; 05/15/12 16,676 - 16,676
Agricultural Operations (0.44%)
Bunge Limited Finance
- 265,000 265,000 4.38%; 12/15/08 - 267,841 267,841
- 85,000 85,000 5.35%; 04/15/14 - 87,034 87,034
- 20,000 20,000 5.88%; 05/15/13 - 21,201 21,201
Asset Backed Securities (1.72%)
Adjustable Rate Mortgage Trust (1) (6)
- 225,000 225,000 2.52%; 11/25/34 - 225,000 225,000
Bear Stearns Asset Backed Securities (1)
50,000 155,000 205,000 2.53%; 03/25/34 49,998 154,993 204,991
- 250,000 250,000 2.58%; 02/25/34 - 250,921 250,921
Chase Funding Mortgage Loan
- 488 488 5.04 %; 12/25/23 - 487 487
Chase Funding Mortgage Loan Asset Backed Certificates (1)
- 125,000 125,000 2.22%; 09/25/33 - 124,994 124,994
- 120,000 120,000 2.43%; 09/25/33 - 119,994 119,994
Countrywide Asset Backed Certificates
- 325,000 325,000 3.00%; 01/25/34 (1) - 325,575 325,575
- 60,000 60,000 3.61%; 04/25/30 - 60,258 60,258
Master Adjustable Rate Mortgages Trust (1)
- 170,000 170,000 3.03%; 03/25/34 - 171,179 171,179
Auto-Cars & Light Trucks (0.52%)
DaimlerChrysler Holding
- 200,000 200,000 2.71%; 08/08/06 (1) - 202,410 202,410
- 150,000 150,000 4.05%; 06/04/08 - 151,011 151,011
- 25,000 25,000 7.25%; 01/18/06 - 26,279 26,279
20,000 - 20,000 7.30%; 01/15/12 22,909 - 22,909
General Motors
- 40,000 40,000 8.25%; 07/15/23 - 41,668 41,668
Automobile Sequential (0.28%)
Chase Manhattan Auto Owner Trust
50,000 - 50,000 2.06%; 12/15/09 49,062 - 49,062
DaimlerChrysler Auto Trust
- 57,927 57,927 5.32%; 09/06/06 - 58,408 58,408
Ford Credit Auto Owner Trust
69,718 - 69,718 4.01%; 03/15/06 69,994 - 69,994
- 15,752 15,752 4.14%; 12/15/05 - 15,797 15,797
Nissan Auto Receivables Owner Trust
50,000 - 50,000 2.70%; 12/17/07 49,918 - 49,918
Beverages-Non-alcoholic (0.05%)
Bottling Group
15,000 - 15,000 4.63%; 11/15/12 15,277 - 15,277
Coca-Cola Enterprises
30,000 - 30,000 5.25%; 05/15/07 31,555 - 31,555
Beverages-Wine & Spirits (0.35%)
Diageo Capital
- 275,000 275,000 2.17%; 04/20/07 (1) - 275,102 275,102
15,000 - 15,000 3.38%; 03/20/08 14,992 - 14,992
15,000 - 15,000 3.50%; 11/19/07 15,075 - 15,075
Brewery (0.63%)
Anheuser-Busch
30,000 - 30,000 4.38%; 01/15/13 29,927 - 29,927
Cia Brasileira de Bebidas
- 135,000 135,000 10.50%; 12/15/11 - 166,050 166,050
Coors Brewing
15,000 140,000 155,000 6.38%; 05/15/12 16,637 155,284 171,921
Miller Brewing (2)
- 150,000 150,000 5.50%; 08/15/13 - 157,442 157,442
SABMiller (2)
- 15,000 15,000 6.63%; 08/15/33 - 16,880 16,880
Broadcasting Services & Programming (0.23%)
Clear Channel Communications
- 135,000 135,000 5.75%; 01/15/13 - 139,812 139,812
Grupo Televisa
- 15,000 15,000 8.50%; 03/11/32 - 17,137 17,137
Liberty Media
- 45,000 45,000 3.50%; 09/25/06 - 45,045 45,045
Building & Construction Products-Miscellaneous (0.49%)
CRH America
- 100,000 100,000 5.30%; 10/15/13 - 103,306 103,306
- 15,000 15,000 6.40%; 10/15/33 - 16,144 16,144
14,000 75,000 89,000 6.95%; 03/15/12 16,092 86,210 102,302
Masco (1) (2)
- 200,000 200,000 2.11%; 03/09/07 - 200,337 200,337
Building Products-Wood (0.01%)
Celulosa Arauco y Constitucion
- 10,000 10,000 5.13%; 07/09/13 - 9,893 9,893
Building-Residential & Commercial (0.02%)
Centex
15,000 - 15,000 5.80%; 09/15/09 16,018 - 16,018
Cable & Other Pay TV Services (0.10%)
AT&T Broadband
67,000 - 67,000 8.38%; 03/15/13 82,202 - 82,202
Cable TV (0.52%)
Comcast
- 175,000 175,000 5.30%; 01/15/14 - 178,445 178,445
5,000 - 5,000 5.50%; 03/15/11 5,271 - 5,271
- 50,000 50,000 5.85%; 01/15/10 - 53,776 53,776
- 40,000 40,000 7.05%; 03/15/33 - 45,181 45,181
Cox Communications
- 10,000 10,000 4.63%; 06/01/13 - 9,532 9,532
- 70,000 70,000 6.75%; 03/15/11 - 76,895 76,895
25,000 50,000 75,000 6.88%; 06/15/05 25,597 51,194 76,791
Casino Hotels (0.10%)
Harrah's Operating
- 80,000 80,000 5.50%; 07/01/10 - 83,477 83,477
Cellular Telecommunications (0.81%)
AT&T Wireless Services
40,000 - 40,000 7.35%; 03/01/06 42,368 - 42,368
- 45,000 45,000 7.88%; 03/01/11 - 53,609 53,609
- 25,000 25,000 8.13%; 05/01/12 - 30,499 30,499
- 75,000 75,000 8.75%; 03/01/31 - 100,689 100,689
Cingular Wireless
15,000 - 15,000 7.13%; 12/15/31 17,025 - 17,025
Telus
15,000 175,000 190,000 7.50%; 06/01/07 16,481 192,286 208,767
Verizon Wireless Capital
35,000 165,000 200,000 5.38%; 12/15/06 36,685 172,942 209,627
Vodafone Group
30,000 - 30,000 7.75%; 02/15/10 35,298 - 35,298
Chemicals-Diversified (0.46%)
Chevron Phillips Chemical
20,000 225,000 245,000 5.38%; 06/15/07 20,961 235,811 256,772
- 25,000 25,000 7.00%; 03/15/11 - 28,355 28,355
E. I. Du Pont de Nemours
15,000 - 15,000 4.75%; 11/15/12 15,372 - 15,372
ICI Wilmington I
- 95,000 95,000 5.63%; 12/01/13 - 98,304 98,304
Coatings & Paint (0.20%)
Valspar
15,000 150,000 165,000 6.00%; 05/01/07 15,944 159,435 175,379
Commercial Banks (0.47%)
Marshall & Ilsley Bank
15,000 10,000 25,000 4.13%; 09/04/07 15,335 10,223 25,558
U.S. Bank
40,000 - 40,000 6.38%; 08/01/11 44,846 - 44,846
Union Planters Bank
15,000 225,000 240,000 5.13%; 06/15/07 15,823 237,345 253,168
United Overseas Bank (2)
- 20,000 20,000 4.50%; 07/02/13 - 19,692 19,692
Wachovia Bank
- 50,000 50,000 7.80%; 08/18/10 - 59,184 59,184
Commercial Service-Finance (0.01%)
Equifax
10,000 - 10,000 4.95%; 11/01/07 10,477 - 10,477
Computers (0.05%)
Hewlett-Packard
15,000 - 15,000 6.50%; 07/01/12 16,885 - 16,885
International Business Machines
25,000 - 25,000 4.25%; 09/15/09 25,651 - 25,651
Computers-Integrated Systems (0.01%)
NCR
5,000 - 5,000 7.13%; 06/15/09 5,577 - 5,577
Copper Ores (0.06%)
Codelco (2)
- 50,000 50,000 6.38%; 11/30/12 - 55,398 55,398
Cosmetics & Toiletries (0.02%)
Procter & Gamble
15,000 - 15,000 4.75%; 06/15/07 15,649 - 15,649
Credit Card Asset Backed Securities (2.97%)
American Express Credit Account Master Trust
- 70,000 70,000 2.12%; 09/15/11 (1) - 70,141 70,141
200,000 - 200,000 4.35%; 12/15/11 205,903 - 205,903
Bank One Issuance Trust
100,000 - 100,000 2.94%; 06/16/08 100,351 - 100,351
100,000 - 100,000 3.35%; 03/15/11 99,799 - 99,799
100,000 - 100,000 3.59%; 05/17/10 101,028 - 101,028
Capital One Master Trust
150,000 - 150,000 5.30%; 06/15/09 156,281 - 156,281
Capital One Multi-Asset Execution Trust (1)
- 170,000 170,000 2.09%; 12/15/09 - 170,105 170,105
Chase Credit Card Master Trust
50,000 225,000 275,000 2.07%; 05/15/09 (1) 49,997 224,986 274,983
30,000 - 30,000 5.50%; 11/17/08 31,315 - 31,315
Credit Card Asset Backed Securities (continued)
Citibank Credit Card Issuance Trust
150,000 200,000 350,000 6.90%; 10/15/07 156,134 208,179 364,313
Citibank Credit Card Master Trust I
150,000 - 150,000 5.88%; 03/10/11 163,543 - 163,543
Discover Card Master Trust I
150,000 - 150,000 6.05%; 08/18/08 156,389 - 156,389
150,000 100,000 250,000 6.85%; 07/17/07 151,505 101,003 252,508
MBNA Credit Card Master Note Trust
45,000 - 45,000 3.65%; 03/15/11 45,262 - 45,262
MBNA Master Credit Card Trust
150,000 200,000 350,000 6.90%; 01/15/08 155,191 206,921 362,112
Data Processing & Management (0.04%)
Certegy
- 15,000 15,000 4.75%; 09/15/08 - 15,447 15,447
First Data
15,000 - 15,000 3.38%; 08/01/08 14,921 - 14,921
Diversified Financial Services (1.14%)
General Electric Capital
- 1,858,133 1,858,133 0.70%; 03/10/40 (1) (2) - 56,991 56,991
15,000 250,000 265,000 1.84%; 02/02/09 (1) 15,032 250,526 265,558
- 275,000 275,000 4.25%; 12/01/10 - 277,617 277,617
20,000 65,000 85,000 6.00%; 06/15/12 21,959 71,367 93,326
- 50,000 50,000 6.75%; 03/15/32 - 58,311 58,311
105,000 - 105,000 7.38%; 01/19/10 121,968 - 121,968
John Deere Capital
- 70,000 70,000 3.13%; 12/15/05 - 70,254 70,254
20,000 - 20,000 7.00%; 03/15/12 23,231 - 23,231
NiSource Finance
- 15,000 15,000 3.20%; 11/01/06 - 14,980 14,980
Diversified Manufacturing Operations (0.13%)
Cooper Industries
15,000 - 15,000 5.25%; 07/01/07 15,749 - 15,749
General Electric
15,000 - 15,000 5.00%; 02/01/13 15,549 - 15,549
Tyco International Group
- 75,000 75,000 6.38%; 10/15/11 - 83,487 83,487
Diversified Minerals (0.04%)
BHP Billiton Finance
15,000 - 15,000 4.80%; 04/15/13 15,262 - 15,262
Corp. Nacional del Cobre de Chile (2)
- 15,000 15,000 5.50%; 10/15/13 - 15,702 15,702
Diversified Operations (0.06%)
Hutchison Whampoa International (2)
- 45,000 45,000 6.50%; 02/13/13 - 47,897 47,897
Electric Products-Miscellaneous (0.01%)
Emerson Electric
5,000 - 5,000 6.00%; 08/15/32 5,361 - 5,361
Electric-Distribution (0.07%)
Detroit Edison
- 60,000 60,000 5.40%; 08/01/14 - 63,350 63,350
Electric-Generation (0.10%)
Korea East-West Power (2)
5,000 25,000 30,000 4.88%; 04/21/11 5,113 25,563 30,676
Tenaska Virginia Partners (2)
- 49,703 49,703 6.12%; 03/30/24 - 52,611 52,611
Electric-Integrated (3.95%)
AmerenEnergy Generating
10,000 - 10,000 7.95%; 06/01/32 12,493 - 12,493
Appalachian Power
20,000 - 20,000 4.80%; 06/15/05 20,281 - 20,281
Arizona Public Service
- 85,000 85,000 5.80%; 06/30/14 - 90,427 90,427
10,000 15,000 25,000 6.50%; 03/01/12 11,184 16,775 27,959
Carolina Power & Light
- 35,000 35,000 6.50%; 07/15/12 - 39,006 39,006
- 150,000 150,000 7.50%; 04/01/05 - 153,078 153,078
75,000 - 75,000 8.63%; 09/15/21 97,163 - 97,163
Centerpoint Energy Houston Electric
- 90,000 90,000 5.70%; 03/15/13 - 96,168 96,168
Cincinnati Gas & Electric
- 20,000 20,000 5.40%; 06/15/33 - 18,638 18,638
Commonwealth Edison
30,000 150,000 180,000 6.40%; 10/15/05 31,033 155,164 186,197
Conectiv
10,000 - 10,000 5.30%; 06/01/05 10,131 - 10,131
Consolidated Edison
15,000 - 15,000 3.63%; 08/01/08 14,976 - 14,976
15,000 - 15,000 4.88%; 02/01/13 15,373 - 15,373
Consumers Energy
- 10,000 10,000 4.25%; 04/15/08 - 10,183 10,183
Dayton Power & Light (2)
- 25,000 25,000 5.13%; 10/01/13 - 25,493 25,493
Dominion Resources (1)
30,000 175,000 205,000 2.01%; 05/15/06 30,065 175,377 205,442
DTE Energy
30,000 - 30,000 7.05%; 06/01/11 34,095 - 34,095
Duke Energy
- 235,000 235,000 2.42%; 01/15/05 (1) - 235,049 235,049
30,000 - 30,000 3.75%; 03/05/08 30,233 - 30,233
Electric-Integrated (continued)
Entergy Gulf States
- 20,000 20,000 3.60%; 06/01/08 - 19,839 19,839
Floria Power
- 5,000 5,000 4.80%; 03/01/13 - 5,048 5,048
FPL Group Capital
20,000 20,000 40,000 3.25%; 04/11/06 20,136 20,136 40,272
Georgia Power (1)
20,000 275,000 295,000 1.90%; 02/17/09 19,995 274,928 294,923
Jersey Central Power & Light (2)
- 40,000 40,000 5.63%; 05/01/16 - 41,955 41,955
MidAmerican Energy Holdings
- 225,000 225,000 4.63%; 10/01/07 - 230,556 230,556
35,000 - 35,000 6.75%; 12/30/31 40,337 - 40,337
Niagara Mohawk Power
30,000 55,000 85,000 7.75%; 05/15/06 32,150 58,942 91,092
Northeast Utilities
- 15,000 15,000 3.30%; 06/01/08 - 14,682 14,682
Oncor Electric Delivery
15,000 70,000 85,000 7.00%; 05/01/32 17,470 81,529 98,999
Pacific Gas & Electric
20,000 45,000 65,000 3.60%; 03/01/09 19,857 44,678 64,535
- 155,000 155,000 6.05%; 03/01/34 - 159,639 159,639
Pepco Holdings
- 70,000 70,000 3.75%; 02/15/06 - 70,677 70,677
- 10,000 10,000 4.00%; 05/15/10 - 9,774 9,774
15,000 - 15,000 5.50%; 08/15/07 15,760 - 15,760
Power Contract Financing (2)
- 16,625 16,625 5.20%; 02/01/06 - 16,855 16,855
PPL Electric Utilities
15,000 - 15,000 4.30%; 06/01/13 14,550 - 14,550
- 65,000 65,000 5.40%; 08/15/14 - 66,638 66,638
Progress Energy
- 175,000 175,000 6.75%; 03/01/06 - 183,508 183,508
PSEG Power
10,000 100,000 110,000 6.95%; 06/01/12 11,265 112,646 123,911
Puget Energy
- 25,000 25,000 3.36%; 06/01/08 - 24,803 24,803
SCANA (1)
15,000 200,000 215,000 2.16%; 11/15/06 15,032 200,425 215,457
Southern California Edison
- 25,000 25,000 5.00%; 01/15/14 - 25,611 25,611
Southern Company Capital Funding
- 15,000 15,000 5.30%; 02/01/07 - 15,868 15,868
Tennessee Valley Authority
65,000 - 65,000 6.00%; 03/15/13 72,552 - 72,552
Electric-Integrated (continued)
TXU Energy
- 15,000 15,000 6.13%; 03/15/08 - 16,111 16,111
Virginia Electric & Power
- 85,000 85,000 4.50%; 12/15/10 - 85,948 85,948
Wisconsin Electric Power
20,000 - 20,000 4.50%; 05/15/13 19,973 - 19,973
Export/Import Bank (0.07%)
Export-Import Bank of Korea
- 60,000 60,000 4.50%; 08/12/09 - 61,368 61,368
Federal & Federally Sponsored Credit (0.20%)
Federal Farm Credit Bank
150,000 - 150,000 3.00%; 04/15/08 149,167 - 149,167
Housing Urban Development
- 20,000 20,000 2.99%; 08/01/05 - 20,098 20,098
Fiduciary Banks (0.33%)
Bank of New York
15,000 - 15,000 4.14%; 08/02/07 15,202 - 15,202
15,000 - 15,000 5.20%; 07/01/07 15,774 - 15,774
State Street Capital Trust II (1)
- 250,000 250,000 2.21%; 02/15/08 - 251,324 251,324
Finance-Auto Loans (1.58%)
American Honda Finance (1) (2)
15,000 265,000 280,000 1.86%; 02/20/07 15,005 265,096 280,101
Ford Motor Credit
- 30,000 30,000 6.13%; 01/09/06 - 30,997 30,997
- 35,000 35,000 6.50%; 01/25/07 - 36,773 36,773
160,000 - 160,000 7.38%; 02/01/11 173,567 - 173,567
- 235,000 235,000 7.88%; 06/15/10 - 260,769 260,769
General Motors Acceptance
15,000 175,000 190,000 3.33%; 10/20/05 (1) 15,062 175,719 190,781
15,000 - 15,000 5.13%; 05/09/08 15,232 - 15,232
- 30,000 30,000 6.13%; 08/28/07 - 31,292 31,292
90,000 75,000 165,000 6.75%; 01/15/06 93,144 77,620 170,764
- 55,000 55,000 6.88%; 09/15/11 - 57,254 57,254
15,000 35,000 50,000 6.88%; 08/28/12 15,616 36,437 52,053
35,000 10,000 45,000 8.00%; 11/01/31 36,226 10,351 46,577
Toyota Motor Credit
15,000 - 15,000 2.80%; 01/18/06 15,034 - 15,034
Finance-Commercial (0.29%)
CIT Group
20,000 125,000 145,000 1.91%; 02/15/07 (1) 19,997 124,982 144,979
15,000 - 15,000 5.00%; 02/13/14 15,058 - 15,058
- 60,000 60,000 5.13%; 09/30/14 - 60,377 60,377
15,000 - 15,000 7.38%; 04/02/07 16,429 16,429
Textron Financial
15,000 - 15,000 5.88%; 06/01/07 15,980 - 15,980
Finance-Consumer Loans (1.44%)
American General Finance
40,000 - 40,000 5.75%; 03/15/07 42,247 - 42,247
Household Finance
15,000 250,000 265,000 1.86%; 02/09/07 (1) 15,018 250,298 265,316
25,000 180,000 205,000 3.38%; 02/21/06 25,198 181,425 206,623
- 20,000 20,000 4.13%; 12/15/08 - 20,303 20,303
15,000 - 15,000 4.75%; 07/15/13 14,977 - 14,977
85,000 90,000 175,000 6.50%; 01/24/06 88,847 94,073 182,920
- 180,000 180,000 7.00%; 05/15/12 - 207,953 207,953
SLM (1)
- 250,000 250,000 2.23%; 01/25/07 - 250,058 250,058
50,000 - 50,000 4.19%; 03/02/09 50,872 - 50,872
Finance-Credit Card (0.27%)
American Express
5,000 - 5,000 3.75%; 11/20/07 5,070 - 5,070
15,000 - 15,000 4.88%; 07/15/13 15,319 - 15,319
Capital One Bank
- 80,000 80,000 5.00%; 06/15/09 - 83,119 83,119
- 125,000 125,000 6.88%; 02/01/06 - 131,192 131,192
Finance-Investment Banker & Broker (3.29%)
Banque Paribas
25,000 - 25,000 6.88%; 03/01/09 27,944 - 27,944
Bear Stearns
- 175,000 175,000 2.43%; 01/30/09 (1) - 175,421 175,421
- 160,000 160,000 2.50%; 06/25/34 (1) - 160,475 160,475
- 100,000 100,000 3.00%; 03/30/06 - 100,358 100,358
- 20,000 20,000 4.00%; 01/31/08 - 20,325 20,325
25,000 - 25,000 6.50%; 05/01/06 26,359 - 26,359
Citigroup
- 10,000 10,000 5.88%; 02/22/33 - 10,131 10,131
10,000 110,000 120,000 6.63%; 06/15/32 11,158 122,738 133,896
145,000 290,000 435,000 6.75%; 12/01/05 151,332 302,664 453,996
Credit Suisse First Boston
50,000 - 50,000 6.50%; 01/15/12 56,025 - 56,025
Finance-Investment Banker & Broker (continued)
Goldman Sachs Group
- 60,000 60,000 3.88%; 01/15/09 - 60,408 60,408
- 135,000 135,000 5.15%; 01/15/14 - 136,974 136,974
- 50,000 50,000 5.25%; 04/01/13 - 51,411 51,411
15,000 - 15,000 6.60%; 01/15/12 16,852 - 16,852
45,000 100,000 145,000 7.63%; 08/17/05 46,818 104,041 150,859
Lehman Brothers Holdings
- 175,000 175,000 2.20%; 04/20/07 (1) - 175,021 175,021
- 100,000 100,000 2.35%; 11/10/09 - 99,833 99,833
- 95,000 95,000 4.80%; 03/13/14 - 94,633 94,633
50,000 - 50,000 6.25%; 05/15/06 52,528 - 52,528
Merrill Lynch
15,000 250,000 265,000 1.95%; 02/06/09 (1) 15,001 250,008 265,009
20,000 - 20,000 4.15%; 03/02/09 (1) 20,185 - 20,185
- 70,000 70,000 5.45%; 07/15/14 - 73,104 73,104
45,000 - 45,000 7.00%; 01/15/07 48,672 - 48,672
Morgan Stanley
20,000 150,000 170,000 1.84%; 02/15/07 (1) 20,008 150,058 170,066
- 85,000 85,000 4.75%; 04/01/14 - 83,269 83,269
- 20,000 20,000 5.30%; 03/01/13 - 20,766 20,766
65,000 75,000 140,000 7.75%; 06/15/05 67,117 77,443 144,560
Finance-Leasing Company (0.14%)
Boeing Capital
- 35,000 35,000 5.65%; 05/15/06 - 36,510 36,510
30,000 - 30,000 5.75%; 02/15/07 31,761 - 31,761
International Lease Finance (1)
20,000 - 20,000 2.41%; 01/15/10 19,928 - 19,928
Pitney Bowes Credit
30,000 - 30,000 5.75%; 08/15/08 32,506 - 32,506
Finance-Mortgage Loan/Banker (5.58%)
Countrywide Home Loan
20,000 40,000 60,000 1.87%; 02/17/06 (1) 19,994 39,988 59,982
- 235,000 235,000 2.28%; 06/02/06 (1) - 235,991 235,991
20,000 - 20,000 2.88%; 02/15/07 19,797 - 19,797
- 100,000 100,000 4.25%; 12/19/07 - 101,856 101,856
- 50,000 50,000 4.62%; 12/19/33 (1) - 49,550 49,550
Federal Home Loan Bank
200,000 - 200,000 2.88%; 09/15/06 200,572 - 200,572
Finance-Mortgage Loan/Banker (continued)
Federal Home Loan Mortgage
- 250,000 250,000 2.65%; 05/30/08 - 245,164 245,164
- 200,000 200,000 3.25%; 02/25/08 - 198,897 198,897
- 875,000 875,000 4.50%; 07/15/13 (4) - 884,607 884,607
- 80,000 80,000 4.63%; 05/28/13 - 79,922 79,922
- 50,000 50,000 4.75%; 10/11/12 - 49,957 49,957
- 75,000 75,000 4.75%; 05/06/13 - 74,308 74,308
440,000 - 440,000 5.75%; 03/15/09 480,352 - 480,352
525,000 375,000 900,000 6.25%; 07/15/32 601,755 429,825 1,031,580
125,000 125,000 6.88%; 01/15/05 - 126,221 126,221
Federal National Mortgage Association
- 150,000 150,000 2.30%; 03/28/06 - 149,394 149,394
- 50,000 50,000 2.88%; 05/19/08 - 49,151 49,151
- 45,000 45,000 3.70%; 11/01/07 - 45,372 45,372
- 95,000 95,000 4.75%; 02/21/13 - 94,894 94,894
320,000 - 320,000 6.13%; 03/15/12 359,550 - 359,550
- 50,000 50,000 7.13%; 02/15/05 - 50,723 50,723
- 170,000 170,000 7.13%; 01/15/30 - 213,135 213,135
Finance-Other Services (0.16%)
Mellon Funding
15,000 - 15,000 4.88%; 06/15/07 15,642 - 15,642
National Rural Utilities
30,000 - 30,000 5.75%; 08/28/09 32,389 - 32,389
Newcourt Credit Group
- 10,000 10,000 6.88%; 02/16/05 - 10,129 10,129
Verizon Global Funding
10,000 - 10,000 6.75%; 12/01/05 10,444 - 10,444
15,000 - 15,000 6.88%; 06/15/12 17,276 - 17,276
45,000 - 45,000 7.25%; 12/01/10 52,490 - 52,490
Food-Flour & Grain (0.01%)
Archer Daniels Midland
10,000 - 10,000 5.94%; 10/01/32 10,513 - 10,513
Food-Miscellaneous/Diversified (0.45%)
Campbell Soup
30,000 - 30,000 5.50%; 03/15/07 31,521 - 31,521
HJ Heinz Finance
15,000 - 15,000 6.75%; 03/15/32 17,493 - 17,493
Kellogg
- 50,000 50,000 6.00%; 04/01/06 - 52,204 52,204
Kraft Foods
- 45,000 45,000 4.63%; 11/01/06 - 46,316 46,316
50,000 125,000 175,000 5.63%; 11/01/11 53,275 133,187 186,462
Sara Lee
15,000 - 15,000 6.13%; 11/01/32 16,241 - 16,241
Food-Miscellaneous/Diversified (continued)
Unilever Capital
30,000 - 30,000 7.13%; 11/01/10 34,927 - 34,927
Food-Retail (0.38%)
Kroger
- 25,000 25,000 6.20%; 06/15/12 - 27,389 27,389
- 100,000 100,000 6.75%; 04/15/12 - 112,687 112,687
Safeway
- 185,000 185,000 2.50%; 11/01/05 - 184,411 184,411
Food-Wholesale & Distribution (0.02%)
Sysco International
15,000 - 15,000 6.10%; 06/01/12 16,617 - 16,617
Gas-Distribution (0.09%)
KeySpan
10,000 - 10,000 7.63%; 11/15/10 11,870 - 11,870
Sempra Energy
- 60,000 60,000 4.75%; 05/15/09 - 61,623 61,623
Home Decoration Products (0.02%)
Newell Rubbermaid
20,000 - 20,000 4.00%; 05/01/10 19,570 - 19,570
Home Equity-Other (2.09%)
Argent Securities (1)
20,000 125,000 145,000 2.15%; 02/25/34 19,959 124,746 144,705
Asset Backed Funding Certificates (1)
- 85,000 85,000 2.12%; 02/25/30 - 84,996 84,996
CDC Mortgage Capital Trust (1)
- 175,000 175,000 2.50%; 06/25/34 - 174,695 174,695
Long Beach Mortgage Loan Trust (1)
- 40,000 40,000 2.46%; 06/25/34 - 39,964 39,964
- 50,000 50,000 3.01%; 06/25/34 - 50,060 50,060
Master Asset Backed Securities Trust (1)
- 300,000 300,000 3.58%; 08/25/33 - 303,464 303,464
New Century Home Equity Loan Trust (1)
- 200,000 200,000 2.65%; 01/25/34 - 200,586 200,586
Option One Mortgage Loan Trust (1)
- 125,000 125,000 2.46%; 05/25/34 - 124,842 124,842
- 125,000 125,000 2.98%; 05/25/34 - 124,994 124,994
Saxon Asset Securities Trust (1)
- 225,000 225,000 3.06%; 03/25/35 - 224,918 224,918
Specialty Underwriting & Residential Finance (1)
25,000 125,000 150,000 2.44%; 02/25/35 24,999 124,994 149,993
Wells Fargo Home Equity Trust (1)
- 175,000 175,000 2.43%; 04/25/34 - 174,995 174,995
Home Equity-Sequential (0.54%)
Ameriquest Mortgage Securities (1)
50,000 140,000 190,000 2.13%; 04/25/34 49,998 139,993 189,991
Residential Asset Securities (1)
- 275,000 275,000 2.37%; 10/25/33 - 275,883 275,883
Industrial Gases (0.03%)
Praxair
25,000 - 25,000 6.38%; 04/01/12 28,263 - 28,263
Instruments-Controls (0.01%)
Parker Hannifin
10,000 - 10,000 4.88%; 02/15/13 10,238 - 10,238
Insurance Brokers (0.01%)
Marsh & McLennan
10,000 - 10,000 3.63%; 02/15/08 9,679 - 9,679
Investment Companies (0.18%)
Canadian Oil Sands (2)
- 150,000 150,000 4.80%; 08/10/09 - 153,259 153,259
Investment Management & Advisory Services (0.02%)
AMVESCAP
15,000 - 15,000 6.60%; 05/15/05 15,297 - 15,297
Life & Health Insurance (0.42%)
John Hancock Global Funding II (1) (2)
- 300,000 300,000 2.19%; 04/03/09 - 299,772 299,772
Lincoln National
20,000 - 20,000 5.25%; 06/15/07 20,954 - 20,954
Nationwide Financial Services
- 5,000 5,000 5.63%; 02/13/15 - 5,164 5,164
Torchmark
35,000 - 35,000 6.25%; 12/15/06 37,284 - 37,284
Linen Supply & Related Items (0.01%)
Cintas
- 10,000 10,000 5.13%; 06/01/07 - 10,533 10,533
Medical-Drugs (0.12%)
Eli Lilly
25,000 - 25,000 6.00%; 03/15/12 27,697 - 27,697
Schering-Plough
- 70,000 70,000 5.30%; 12/01/13 - 72,600 72,600
Medical-HMO (0.03%)
Anthem
15,000 - 15,000 6.80%; 08/01/12 16,840 - 16,840
UnitedHealth Group
10,000 - 10,000 4.88%; 04/01/13 10,099 - 10,099
Metal-Aluminum (0.08%)
Alcan
30,000 - 30,000 6.45%; 03/15/11 33,598 - 33,598
Alcoa
30,000 - 30,000 7.38%; 08/01/10 35,125 - 35,125
Metal-Diversified (0.28%)
Falconbridge
- 15,000 15,000 5.38%; 06/01/15 - 15,115 15,115
- 10,000 10,000 7.35%; 06/05/12 - 11,483 11,483
- 145,000 145,000 7.38%; 09/01/05 - 150,516 150,516
Rio Tinto Finance
15,000 - 15,000 2.63%; 09/30/08 14,487 - 14,487
- 50,000 50,000 5.75%; 07/03/06 - 52,347 52,347
Miscellaneous Investing (0.15%)
Archstone-Smith Operating Trust
15,000 - 15,000 3.00%; 06/15/08 14,627 - 14,627
Camden Property Trust
15,000 - 15,000 5.88%; 06/01/07 15,900 - 15,900
CenterPoint Properties Trust
15,000 - 15,000 4.75%; 08/01/10 15,294 - 15,294
Duke Realty
10,000 - 10,000 4.63%; 05/15/13 9,844 - 9,844
New Plan Excel Realty Trust
5,000 - 5,000 5.88%; 06/15/07 5,276 - 5,276
Simon Property Group
15,000 - 15,000 3.75%; 01/30/09 14,812 - 14,812
- 10,000 10,000 5.38%; 08/28/08 - 10,531 10,531
United Dominion Realty Trust
15,000 25,000 40,000 6.50%; 06/15/09 16,405 27,342 43,747
Money Center Banks (0.93%)
Bank of America
- 5,000 5,000 3.88%; 01/15/08 - 5,083 5,083
85,000 365,000 450,000 4.75%; 10/15/06 87,986 377,823 465,809
- 95,000 95,000 7.40%; 01/15/11 - 111,301 111,301
JP Morgan Chase
- 135,000 135,000 5.13%; 09/15/14 - 137,170 137,170
15,000 - 15,000 5.25%; 05/30/07 15,732 - 15,732
60,000 - 60,000 6.75%; 02/01/11 67,694 - 67,694
Mortgage Backed Securities (4.10%)
Banc of America Commercial Mortgage
250,000 - 250,000 5.12%; 07/11/43 261,487 - 261,487
150,000 - 150,000 7.33%; 11/15/31 171,856 - 171,856
Bear Stearns Adjustable Rate Mortgage Trust (1) (2)
- 75,000 75,000 3.52%; 06/25/34 - 74,047 74,047
Bear Stearns Commercial Mortgage Securities
3,211,361 755,614 3,966,975 0.65%; 05/11/39 (1) (2) 90,959 21,402 112,361
98,584 - 98,584 3.97%; 11/11/35 99,339 - 99,339
Credit Suisse First Boston Mortgage Securities (1)
- 95,000 95,000 2.53%; 05/25/34 - 94,452 94,452
CS First Boston Mortgage Securities (1)
- 1,240,992 1,240,992 0.57%; 05/15/36 (2) - 27,641 27,641
- 1,311,749 1,311,749 0.68%; 07/15/36 (2) - 43,018 43,018
- 55,000 55,000 2.53%; 06/25/34 (2) - 54,841 54,841
9,800 - 9,800 4.39%; 07/15/06 9,809 - 9,809
- 40,000 40,000 7.68%; 09/15/41 - 46,352 46,352
First Union National Bank Commercial Mortgage
84,616 - 84,616 5.59%; 02/12/34 89,684 - 89,684
150,000 - 150,000 6.14%; 02/12/34 165,921 - 165,921
215,000 - 215,000 7.84%; 05/17/32 252,411 - 252,411
- 65,000 65,000 8.09%; 05/17/32 - 76,807 76,807
GE Capital Commercial Mortgage
75,000 - 75,000 4.97%; 08/11/36 78,223 - 78,223
GMAC Commercial Mortgage Securities
- 1,361,199 1,361,199 0.97%; 03/10/38 (1) (2) - 57,120 57,120
150,000 - 150,000 6.96%; 09/15/35 171,730 - 171,730
Greenwich Capital Commercial Funding (1) (2)
- 2,571,000 2,571,000 0.39%; 06/10/36 - 47,540 47,540
JP Morgan Chase Commercial Mortgage Securities
- 1,200,000 1,200,000 1.22%; 01/12/39 (1) (2) - 62,844 62,844
- 115,746 115,746 4.55%; 05/12/34 - 118,001 118,001
LB Commercial Conduit Mortgage Trust
150,000 - 150,000 7.33%; 10/15/32 170,946 - 170,946
LB-UBS Commercial Mortgage Trust (3)
- 714,993 714,993 0.14%; 03/15/36 (1) - 20,110 20,110
- 1,005,022 1,005,022 0.75%; 08/15/36 - 34,881 34,881
1,860,780 676,647 2,537,427 1.23%; 03/15/36 (1) (2) 97,021 35,280 132,301
- 125,000 125,000 4.90%; 06/15/26 - 130,002 130,002
110,000 - 110,000 5.59%; 06/15/31 118,576 - 118,576
66,147 - 66,147 6.06%; 06/15/20 70,606 - 70,606
Merrill Lynch Mortgage Investors (1)
- 165,000 165,000 2.49%; 01/25/35 - 164,992 164,992
Merrill Lynch Mortgage Trust (1)
- 2,758,154 2,758,154 0.60%; 02/12/42 - 67,751 67,751
Mortgage Backed Securities (continued)
Morgan Stanley Capital I (2)
- 850,000 850,000 1.12%; 01/13/41 (1) - 44,673 44,673
150,000 - 150,000 6.54%; 02/15/31 163,815 - 163,815
100,000 95,000 195,000 7.11%; 04/15/33 113,034 107,383 220,417
PNC Mortgage Acceptance
- 53,671 53,671 7.11%; 12/10/32 - 57,865 57,865
Wachovia Bank Commercial Mortgage Trust (1) (2)
1,001,313 - 1,001,313 0.33%; 01/15/41 13,200 - 13,200
Multi-line Insurance (0.64%)
AEGON
10,000 - 10,000 4.75%; 06/01/13 9,986 - 9,986
Allstate
15,000 - 15,000 7.88%; 05/01/05 15,394 - 15,394
American International Group
15,000 - 15,000 4.25%; 05/15/13 14,590 - 14,590
Hartford Financial Services Group
15,000 - 15,000 4.70%; 09/01/07 15,375 - 15,375
MetLife
- 225,000 225,000 5.25%; 12/01/06 - 234,408 234,408
5,000 - 5,000 6.50%; 12/15/32 5,434 - 5,434
Metropolitan Life Global Funding I (1) (2)
- 250,000 250,000 2.04%; 03/17/09 - 249,637 249,637
Safeco
3,000 - 3,000 7.25%; 09/01/12 3,459 - 3,459
Multimedia (1.48%)
AOL Time Warner
- 540,000 540,000 5.63%; 05/01/05 - 548,154 548,154
70,000 155,000 225,000 6.13%; 04/15/06 73,177 162,036 235,213
15,000 75,000 90,000 7.63%; 04/15/31 17,772 88,861 106,633
Gannett
15,000 - 15,000 5.50%; 04/01/07 15,853 - 15,853
News America
- 10,000 10,000 4.75%; 03/15/10 - 10,290 10,290
- 55,000 55,000 6.55%; 03/15/33 - 59,173 59,173
- 150,000 150,000 6.63%; 01/09/08 - 164,158 164,158
Thomson
15,000 - 15,000 4.75%; 05/28/10 15,462 - 15,462
15,000 - 15,000 5.75%; 02/01/08 16,016 - 16,016
Viacom
50,000 - 50,000 6.40%; 01/30/06 52,270 - 52,270
- 35,000 35,000 6.63%; 05/15/11 - 39,461 39,461
Walt Disney
10,000 - 10,000 7.00%; 03/01/32 11,468 - 11,468
Mutual Insurance (0.12%)
Liberty Mutual Group (2)
- 60,000 60,000 5.75%; 03/15/14 - 58,806 58,806
- 40,000 40,000 7.00%; 03/15/34 - 40,295 40,295
Non-hazardous Waste Disposal (0.14%)
Waste Management
- 40,000 40,000 5.00%; 03/15/14 - 40,445 40,445
15,000 60,000 75,000 7.00%; 07/15/28 16,739 66,957 83,696
Oil & Gas Drilling (0.22%)
Consolidated Natural Gas
- 15,000 15,000 5.00%; 03/01/14 - 15,156 15,156
Nabors Holdings
15,000 10,000 25,000 4.88%; 08/15/09 15,552 10,368 25,920
Nabors Industries
- 60,000 60,000 5.38%; 08/15/12 - 63,113 63,113
Precision Drilling
- 65,000 65,000 5.63%; 06/01/14 - 68,622 68,622
Transocean
15,000 - 15,000 7.38%; 04/15/18 17,921 - 17,921
Oil Company-Exploration & Production (1.08%)
Canadian Natural Resources
- 15,000 15,000 6.45%; 06/30/33 - 16,187 16,187
Devon Financing
15,000 50,000 65,000 7.88%; 09/30/31 18,922 63,072 81,994
Husky Energy
- 55,000 55,000 6.15%; 06/15/19 - 59,251 59,251
15,000 25,000 40,000 6.25%; 06/15/12 16,504 27,508 44,012
Kerr-McGee
- 50,000 50,000 5.38%; 04/15/05 - 50,598 50,598
- 100,000 100,000 6.95%; 07/01/24 - 110,134 110,134
Nexen
- 110,000 110,000 5.05%; 11/20/13 - 110,401 110,401
5,000 15,000 20,000 7.88%; 03/15/32 6,232 18,697 24,929
Pemex Project Funding Master Trust
- 255,000 255,000 6.13%; 08/15/08 - 270,300 270,300
- 50,000 50,000 7.88%; 02/01/09 - 56,250 56,250
45,000 45,000 90,000 8.00%; 11/15/11 51,750 51,750 103,500
Oil Company-Integrated (0.40%)
BP Canada Finance
15,000 - 15,000 3.63%; 01/15/09 14,991 - 14,991
ChevronTexaco Capital
5,000 - 5,000 3.38%; 02/15/08 5,024 - 5,024
Conoco Funding
40,000 - 40,000 6.35%; 10/15/11 44,924 - 44,924
Marathon Oil
15,000 - 15,000 6.80%; 03/15/32 16,954 - 16,954
Occidental Petroleum
20,000 - 20,000 4.00%; 11/30/07 20,379 - 20,379
Petrobas International Finance
- 150,000 150,000 9.75%; 07/06/11 - 174,000 174,000
Petronas Capital (2)
- 10,000 10,000 7.88%; 05/22/22 - 12,322 12,322
Petro-Canada
15,000 - 15,000 4.00%; 07/15/13 14,155 - 14,155
Phillips Petroleum
25,000 - 25,000 8.75%; 05/25/10 30,983 - 30,983
Union Oil Company of California
10,000 - 10,000 5.05%; 10/01/12 10,268 - 10,268
Oil Field Machinery & Equipment (0.10%)
Cooper Cameron
- 90,000 90,000 2.65%; 04/15/07 - 88,442 88,442
Oil Refining & Marketing (0.33%)
Valero Energy
- 225,000 225,000 6.13%; 04/15/07 - 240,307 240,307
15,000 25,000 40,000 6.88%; 04/15/12 17,073 28,454 45,527
Oil-Field Services (0.54%)
Halliburton
- 250,000 250,000 2.86%; 01/26/07 (1) (2) - 250,084 250,084
15,000 - 15,000 3.57%; (1)0/17/05 (1) 15,122 - 15,122
15,000 175,000 190,000 5.50%; 10/15/10 15,861 185,047 200,908
Paper & Related Products (0.58%)
International Paper
- 40,000 40,000 3.80%; 04/01/08 - 40,073 40,073
20,000 25,000 45,000 5.85%; 10/30/12 21,353 26,691 48,044
- 75,000 75,000 6.75%; 09/01/11 - 84,299 84,299
MeadWestvaco
10,000 - 10,000 6.85%; 04/01/12 11,249 - 11,249
Nexfor
15,000 20,000 35,000 7.25%; 07/01/12 16,842 22,456 39,298
Norske Skog (2)
- 15,000 15,000 7.13%; 10/15/33 - 16,020 16,020
Sappi Papier Holding (2)
- 90,000 90,000 6.75%; 06/15/12 - 99,694 99,694
Paper & Related Products (continued)
Weyerhaeuser
- 15,000 15,000 6.13%; 03/15/07 - 15,995 15,995
10,000 100,000 110,000 6.75%; 03/15/12 11,318 113,176 124,494
15,000 - 15,000 7.38%; 03/15/32 17,497 - 17,497
Photo Equipment & Supplies (0.02%)
Eastman Kodak
15,000 - 15,000 3.63%; 05/15/08 14,723 - 14,723
Pipelines (1.00%)
Buckeye Partners
15,000 35,000 50,000 4.63%; 07/15/13 14,678 34,250 48,928
Duke Capital
- 45,000 45,000 4.37%; 03/01/09 - 45,629 45,629
Duke Energy Field Services
- 175,000 175,000 7.50%; 08/16/05 - 181,480 181,480
- 120,000 120,000 7.88%; 08/16/10 - 141,926 141,926
Enbridge Energy Partners
- 35,000 35,000 4.00%; 01/15/09 - 34,811 34,811
Equitable Resources
15,000 15,000 30,000 5.15%; 11/15/12 15,673 15,673 31,346
Kinder Morgan
35,000 - 35,000 6.65%; 03/01/05 35,456 - 35,456
- 110,000 110,000 6.80%; 03/01/08 - 120,404 120,404
Kinder Morgan Energy Partners
30,000 - 30,000 6.75%; 03/15/11 33,739 - 33,739
National Fuel Gas
20,000 20,000 40,000 5.25%; 03/01/13 20,601 20,601 41,202
TEPPCO Partners
5,000 5,000 10,000 6.13%; 02/01/13 5,383 5,383 10,766
- 115,000 115,000 7.63%; 02/15/12 - 134,376 134,376
Property & Casualty Insurance (1.65%)
ACE
15,000 125,000 140,000 6.00%; 04/01/07 15,745 131,211 146,956
ACE INA Holdings
- 30,000 30,000 5.88%; 06/15/14 - 31,181 31,181
Arch Capital Group
- 110,000 110,000 7.35%; 05/01/34 - 115,987 115,987
Infinity Property & Casualty
- 100,000 100,000 5.50%; 02/18/14 - 99,775 99,775
Markel
- 100,000 100,000 6.80%; 02/15/13 - 108,000 108,000
Progressive
5,000 - 5,000 6.25%; 12/01/32 5,324 - 5,324
St. Paul
10,000 145,000 155,000 5.75%; 03/15/07 10,480 151,958 162,438
- 185,000 185,000 7.88%; 04/15/05 - 189,268 189,268
Property & Casualty Insurance (continued)
Travelers Property Casualty
10,000 - 10,000 3.75%; 03/15/08 9,953 - 9,953
W.R. Berkley
- 145,000 145,000 5.13%; 09/30/10 - 147,646 147,646
5,000 30,000 35,000 5.88%; 02/15/13 5,148 30,885 36,033
XL Capital
- 195,000 195,000 5.25%; 09/15/14 - 194,678 194,678
10,000 145,000 155,000 6.50%; 01/15/12 10,917 158,293 169,210
Real Estate Operator & Developer (0.05%)
EOP Operating
35,000 - 35,000 7.00%; 07/15/11 39,670 - 39,670
Regional Authority (0.18%)
New Brunswick
10,000 - 10,000 3.50%; 10/23/07 10,115 - 10,115
Province of Nova Scotia
25,000 - 25,000 5.75%; 02/27/12 27,436 - 27,436
Province of Ontario
25,000 - 25,000 5.13%; 07/17/12 26,458 - 26,458
Province of Quebec
75,000 - 75,000 7.13%; 02/09/24 92,482 - 92,482
Regional Banks (1.02%)
Bank One
50,000 - 50,000 6.00%; 08/01/08 54,197 - 54,197
- 50,000 50,000 7.63%; 08/01/05 - 51,924 51,924
Fifth Third Bancorp
10,000 - 10,000 3.38%; 08/15/08 9,944 - 9,944
FleetBoston Financial
40,000 - 40,000 7.25%; 09/15/05 41,572 - 41,572
KeyCorp
20,000 25,000 45,000 4.63%; 05/16/05 20,213 25,267 45,480
Korea Development Bank
- 110,000 110,000 2.48%; (1)0/20/09 (1) - 109,830 109,830
15,000 - 15,000 3.88%; 03/02/09 15,002 - 15,002
- 10,000 10,000 4.25%; 11/13/07 - 10,224 10,224
15,000 - 15,000 7.25%; 05/15/06 16,006 - 16,006
PNC Funding
20,000 75,000 95,000 5.75%; 08/01/06 20,946 78,546 99,492
SunTrust Banks
15,000 - 15,000 5.05%; 07/01/07 15,699 - 15,699
Wachovia
55,000 - 55,000 4.95%; 11/01/06 57,167 - 57,167
- 35,000 35,000 5.25%; 08/01/14 - 36,156 36,156
- 180,000 180,000 6.38%; 02/01/09 - 196,890 196,890
Regional Banks (continued)
Wells Fargo
- 30,000 30,000 3.12%; 08/15/08 - 29,442 29,442
10,000 - 10,000 3.50%; 04/04/08 10,042 - 10,042
75,000 - 75,000 5.90%; 05/21/06 78,750 - 78,750
Reinsurance (0.16%)
Endurance Specialty Holdings
- 135,000 135,000 7.00%; 07/15/34 - 137,343 137,343
Research & Development (0.03%)
Science Applications International
20,000 - 20,000 7.13%; 07/01/32 23,370 - 23,370
Retail-Discount (0.06%)
Costco Wholesale
20,000 - 20,000 5.50%; 03/15/07 21,075 - 21,075
Target
30,000 - 30,000 5.40%; 10/01/08 31,996 - 31,996
Retail-Drug Store (0.02%)
CVS
15,000 - 15,000 3.88%; 11/01/07 15,252 - 15,252
Retail-Regional Department Store (0.01%)
Kohl's
10,000 - 10,000 6.00%; 01/15/33 10,346 - 10,346
Retail-Restaurants (0.04%)
McDonald's
15,000 - 15,000 5.38%; 04/30/07 15,790 - 15,790
Wendy's International
15,000 - 15,000 6.20%; 06/15/14 16,565 - 16,565
Savings & Loans-Thrifts (0.35%)
Golden West Financial
15,000 15,000 30,000 4.13%; 08/15/07 15,371 15,371 30,742
Washington Mutual
- 125,000 125,000 3.81%; 06/25/34 - 123,799 123,799
- 52,800 52,800 3.97%; 03/25/33 - 52,624 52,624
- 5,000 5,000 5.50%; 01/15/13 - 5,228 5,228
25,000 50,000 75,000 6.88%; 06/15/11 28,421 56,842 85,263
Sovereign (0.90%)
Chile Government
- 175,000 175,000 2.52%; 01/28/08 (1) - 175,665 175,665
5,000 - 5,000 5.50%; 01/15/13 5,232 - 5,232
Italy Government
90,000 - 90,000 5.63%; 06/15/12 98,410 - 98,410
Mexico Government
85,000 25,000 110,000 7.50%; 01/14/12 96,560 28,400 124,960
- 110,000 110,000 8.00%; 09/24/22 - 126,225 126,225
- 45,000 45,000 8.30%; 08/15/31 - 52,020 52,020
25,000 60,000 85,000 8.38%; 01/14/11 29,500 70,800 100,300
Poland Government
15,000 - 15,000 6.25%; 07/03/12 16,688 - 16,688
South Africa Government
- 65,000 65,000 6.50%; 06/02/14 - 70,606 70,606
Special Purpose Entity (0.43%)
Fondo Latinoamericano de Reservas (2)
- 365,000 365,000 3.00%; 08/01/06 - 366,070 366,070
Supranational Bank (0.58%)
Asian Development Bank
35,000 - 35,000 2.38%; 03/15/06 34,980 - 34,980
Corp Andina de Fomento
- 250,000 250,000 2.46%; 01/26/07 (1) - 250,438 250,438
25,000 35,000 60,000 6.88%; 03/15/12 28,039 39,254 67,293
European Investment Bank
65,000 - 65,000 4.63%; 03/01/07 67,503 - 67,503
Inter-American Development Bank
75,000 - 75,000 6.38%; 10/22/07 81,922 - 81,922
Telephone-Integrated (2.88%)
ALLTEL
20,000 - 20,000 7.88%; 07/01/32 24,981 - 24,981
BellSouth
50,000 50,000 100,000 5.00%; 10/15/06 51,936 51,936 103,872
British Telecommunications (1)
50,000 410,000 460,000 7.88%; 12/15/05 52,817 433,101 485,918
Deutsche Telekom International Finance (1)
- 75,000 75,000 5.25%; 07/22/13 - 77,543 77,543
10,000 - 10,000 8.25%; 06/15/05 10,343 - 10,343
20,000 50,000 70,000 8.50%; 06/15/10 24,095 60,238 84,333
France Telecom (1)
25,000 300,000 325,000 8.50%; 03/01/11 30,026 360,307 390,333
SBC Communications
- 65,000 65,000 4.13%; 09/15/09 - 65,325 65,325
50,000 - 50,000 5.75%; 05/02/06 52,183 - 52,183
- 30,000 30,000 6.15%; 09/15/34 - 30,306 30,306
Telephone-Integrated (continued)
Sprint Capital
- 30,000 30,000 6.13%; 11/15/08 - 32,503 32,503
- 190,000 190,000 6.885; 11/15/28 - 204,046 204,046
40,000 20,000 60,000 6.90%; 05/01/19 44,780 22,390 67,170
- 50,000 50,000 7.13%; 01/30/06 - 52,590 52,590
Telecom Italia Capital
15,000 - 15,000 4.00%; 11/15/08 15,100 - 15,100
- 325,000 325,000 4.00%; 01/15/10 (2) - 321,976 321,976
- 70,000 70,000 5.25%; 11/15/13 - 71,672 71,672
- 65,000 65,000 6.38%; 11/15/33 - 67,462 67,462
Telefonica Europe
20,000 50,000 70,000 7.75%; 09/15/10 23,708 59,270 82,978
Telefonos de Mexico
- 100,000 100,000 4.50%; 11/19/08 - 100,881 100,881
- 125,000 125,000 8.25%; 01/26/06 - 132,906 132,906
Textile-Home Furnishings (0.04%)
Mohawk Industries
5,000 25,000 30,000 6.50%; 04/15/07 5,346 26,733 32,079
Tools-Hand Held (0.02%)
Stanley Works
15,000 - 15,000 4.90%; 11/01/12 15,288 - 15,288
Transport-Rail (0.26%)
Burlington Northern Santa Fe
30,000 - 30,000 7.95%; 08/15/30 38,045 - 38,045
Canadian National Railway
- 65,000 65,000 4.25%; 08/01/09 - 66,143 66,143
15,000 - 15,000 4.40%; 03/15/13 14,763 - 14,763
CSX
15,000 - 15,000 8.63%; 05/15/22 19,177 - 19,177
Norfolk Southern
15,000 - 15,000 8.38%; 05/15/05 15,451 - 15,451
Union Pacific
- 10,000 10,000 4.70%; 01/02/24 - 9,734 9,734
35,000 - 35,000 6.63%; 02/01/29 38,332 - 38,332
- 25,000 25,000 7.60%; 05/01/05 - 25,607 25,607
Transport-Services (0.12%)
FedEx
- 60,000 60,000 1.88%; 04/01/05 - 60,033 60,033
- 40,000 40,000 3.50%; 04/01/09 - 39,484 39,484
Total Bonds 12,173,325 35,020,810 47,194,135
Federal Home Loan Mortgage Corporation
(FHLMC) Certificates (12.36%)
- 625,252 625,252 4.50%; 11/01/10 - 634,670 634,670
30,000 - 30,000 4.50%; 10/01/11 30,459 - 30,459
- 411,945 411,945 4.50%; 11/01/18 - 414,126 414,126
- 700,000 700,000 4.50%; 12/01/19 (5) - 699,672 699,672
- 179,100 179,100 5.00%; 12/01/17 - 182,864 182,864
- 1,487,311 1,487,311 5.00%; 05/01/18 - 1,518,696 1,518,696
- 233,942 233,942 5.00%; 12/01/08 - 238,879 238,879
363,882 - 363,882 5.00%; 05/01/34 363,225 - 363,225
- 1,500,000 1,500,000 5.00%; 11/01/34 (5) - 1,495,313 1,495,313
- 17,664 17,664 5.50%; 03/01/09 - 18,168 18,168
- 191,571 191,571 5.50%; 05/01/33 - 195,466 195,466
- 509,858 509,858 5.50%; 08/01/33 - 520,225 520,225
- 172,911 172,911 5.50%; 10/01/33 - 176,426 176,426
132,958 - 132,958 5.50%; 12/01/33 135,662 - 135,662
- 2,824,014 2,824,014 5.50%; 01/01/34 - 2,879,805 2,879,805
- 22,952 22,952 6.00%; 09/01/16 - 24,098 24,098
- 64,419 64,419 6.00%; 03/01/17 - 67,641 67,641
- 96,253 96,253 6.00%; 04/01/17 - 101,066 101,066
- 32,751 32,751 6.00%; 01/01/22 - 34,125 34,125
- 79,533 79,533 6.00%; 06/01/28 - 82,552 82,552
- 22,709 22,709 6.50%; 12/01/15 - 24,070 24,070
- 22,805 22,805 6.50%; 09/01/16 - 24,165 24,165
- 12,777 12,777 6.50%; 03/01/17 - 13,539 13,539
- 55,452 55,452 6.50%; 04/01/17 - 58,759 58,759
- 100,306 100,306 6.50%; 03/01/29 - 105,646 105,646
112,605 - 112,605 6.50%; 05/01/31 118,544 - 118,544
12,586 25,171 37,757 6.50%; 10/01/31 13,250 26,499 39,749
- 22,516 22,516 6.50%; 02/01/32 - 23,704 23,704
11,719 97,344 109,063 6.50%; 05/01/32 12,333 102,626 114,959
12,900 - 12,900 6.50%; 06/01/32 13,576 - 13,576
- 97,614 97,614 6.50%; 09/01/32 - 102,728 102,728
- 47,129 47,129 7.00%; 01/01/32 - 50,069 50,069
25,691 - 25,691 7.00%; 12/01/30 27,302 - 27,302
- 34,088 34,088 7.50%; 12/01/15 - 36,204 36,204
- 31,718 31,718 7.50%; 10/01/30 - 34,084 34,084
- 5,867 5,867 7.50%; 12/01/30 - 6,301 6,301
- 18,918 18,918 7.50%; 04/01/32 - 20,294 20,294
- 9,790 9,790 8.00%; 11/01/30 - 10,633 10,633
Total FHLMC Certificates 714,351 9,923,113 10,637,464
Value
- ------------------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Association
(FNMA) Certificates (11.38%)
- 375,000 375,000 4.50%; 11/01/34 (5) - 363,984 363,984
- 608,981 608,981 5.00%; 09/01/17 - 622,301 622,301
- 667,715 667,715 5.00%; 03/01/18 - 682,370 682,370
- 1,500,000 1,500,000 5.00%; 11/01/34 (5) - 1,494,375 1,494,375
36,217 - 36,217 5.50%; 02/01/09 37,201 - 37,201
- 64,078 64,078 5.50%; 06/01/09 - 65,818 65,818
- 146,527 146,527 5.50%; 01/01/18 - 152,003 152,003
- 395,670 395,670 5.50%; 03/01/23 - 406,492 406,492
- 571,252 571,252 5.50%; 07/01/23 - 586,876 586,876
- 348,860 348,860 5.50%; 09/01/33 - 355,901 355,901
49,775 - 49,775 5.50%; 06/01/34 50,750 - 50,750
- 1,800,000 1,800,000 5.50%; 11/01/34 (5) - 1,832,625 1,832,625
- 22,622 22,622 6.00%; 10/01/16 - 23,752 23,752
- 93,038 93,038 6.00%; 09/01/31 - 96,617 96,617
- 141,840 141,840 6.00%; 04/01/33 - 147,269 147,269
- 170,140 170,140 6.00%; 10/01/33 - 176,651 176,651
- 632,457 632,457 6.00%; 11/01/33 - 656,662 656,662
- 571,965 571,965 6.00%; 12/01/33 - 593,854 593,854
- 1,278,494 1,278,494 6.00%; 02/01/34 - 1,327,423 1,327,423
- 81,362 81,362 6.50%; 12/01/31 - 85,718 85,718
- 35,234 35,234 7.00%; 09/01/31 - 37,444 37,444
Total FNMA Certificates 87,951 9,708,135 9,796,086
Government National Mortgage Association
(GNMA) Certificates (2.74%)
42,255 - 42,255 6.00%; 07/15/32 44,041 - 44,041
- 91,359 91,359 6.00%; 12/15/32 - 95,220 95,220
- 1,203,503 1,203,503 6.00%; 12/15/33 - 1,253,200 1,253,200
- 49,841 49,841 6.50%; 10/20/28 - 52,705 52,705
- 31,217 31,217 6.50%; 02/20/32 - 32,969 32,969
- 9,746 9,746 6.50%; 05/20/32 - 10,294 10,294
- 210,850 210,850 6.50%; 11/15/32 - 223,346 223,346
- 503,862 503,862 6.50%; 09/15/33 - 533,259 533,259
- 48,343 48,343 7.00%; 07/15/31 - 51,617 51,617
- 9,717 9,717 7.00%; 02/15/32 - 10,374 10,374
- 18,974 18,974 7.50%; 12/15/30 - 20,435 20,435
- 17,553 17,553 7.50%; 04/15/31 - 18,905 18,905
- 9,173 9,173 8.00%; 08/20/29 - 9,960 9,960
- 3,657 3,657 8.00%; 02/15/32 - 3,987 3,987
Total GNMA Certificates 44,041 2,316,271 2,360,312
Treasury Bonds (16.34%)
U.S. Treasury
- 1,000,000 1,000,000 1.88%; 12/31/05 - 995,352 995,352
- 675,000 675,000 3.63%; 07/15/09 (4) - 685,785 685,785
- 850,000 850,000 3.88%; 02/15/13 - 850,265 850,265
- 675,000 675,000 4.00%; 06/15/09 - 697,017 697,017
- 550,000 550,000 4.00%; 02/15/14 (4) - 550,022 550,022
- 600,000 600,000 4.75%; 05/15/14 (4) - 634,406 634,406
- 650,000 650,000 4.88%; 02/15/12 - 696,592 696,592
- 500,000 500,000 5.00%; 02/15/11 - 539,922 539,922
- 1,100,000 1,100,000 5.38%; 02/15/31 (4) - 1,194,746 1,194,746
- 875,000 875,000 6.25%; 08/15/23 - 1,033,594 1,033,594
- 500,000 500,000 7.25%; 05/15/16 (4) - 634,297 634,297
U.S.Treasury Inflation-Indexed Obligations
- 333,314 333,314 2.00%; 01/15/14 (4) - 345,513 345,513
- 897,053 897,053 3.38%; 01/15/07 (4) - 961,318 961,318
- 809,356 809,356 3.63%; 01/15/08 - 892,758 892,758
- 779,956 779,956 3.88%; 01/15/09 (4) - 884,914 884,914
- 337,899 337,899 4.25%; 01/15/10 - 396,055 396,055
U.S. Treasury Strip
550,000 225,000 775,000 0.00%; 11/15/15 338,347 115,132 453,479
600,000 - 600,000 0.00%; 11/15/18 (3) 307,019 - 307,019
700,000 265,000 965,000 0.00%; 05/15/20 327,429 123,955 451,384
2,050,000 420,000 2,470,000 0.00%; 08/15/25 712,313 145,937 858,250
Total Treasury Bonds 1,685,108 12,377,580 14,062,688
Commercial Paper (15.69%)
Finance-Mortgage Loan/Banker (15.69%)
Investment in Joint Trading Account;
Federal Home Loan Bank
103,585 13,400,384 13,503,9691.69%; 11/01/04 103,585 13,400,384 13,503,969
Total Commercial Paper 103,585 13,400,384 13,503,969
-
Total Portfolio Investments (113.38%) 14,808,361 82,746,293 97,554,654
Cash and receivables, net of liabilities (-13.38%) 125,163 (11,637,394) (11,512,231)
Total Net Assets (100.00%) $14,933,524 $ 71,108,899 $ 86,042,423
==================================
<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 $4,017,393 or 4.69% of net
assets.
(3) Non-income producing security.
(4) Security or a portion of the security was pledged as collateral for reverse
repurchase agreements. At the end of the period, these securities totaled
$5,755,519 or 6.71% 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) Market value is determined in accordance with procedures established in
good faith by the Board of Directors..
</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 $ 788,306 $ 1,084,617 $ 1,872,923
Unrealized Depreciation (34,843) (110,406) (145,249)
---------------------------------------
Net Unrealized Appreciation (Depreciation) 753,463 974,211 $ 1,727,674
Cost for federal income tax purposes $14,054,898 $ 81,772,082 $ 95,826,980
High Quality Long-Term Bond High Quality Intermediate-Term
Fund Fund
-------------------------------------------------------------
Notional Unrealized Notional Unrealized
Gain (Loss) Gain (Loss)
Description
Swap Agreements
Total Return Swaps
Receive monthly a return equal to the Lehman ERISA Eligible
CMBS Index and pay monthly a floating rate based on 1-month
LIBOR less 45 basis points with Morgan Stanley. Expires
November 2004. $ 800,000 $ 5,135 $2,750,000 $17,588
Investments by Sector (unaudited)
- -----------------------------------------------------------------------------------------------------------------------------
Percentage of Total Value Sector Value
29.02% 38.27% 36.87%Government $ 4,298,97 $ 31,679,447 $ 35,978,423
20.15 26.07 25.18 Mortgage Securities 2,984,960 21,580,748 24,565,708
17.66 12.79 13.53 Financial 2,615,704 10,589,691 13,205,395
12.74 5.35 6.47 Asset Backed Securities 1,886,625 4,426,885 6,313,510
5.89 5.3 5.39 Communications 873,125 4,383,627 5,256,752
3.72 3.64 3.65 Utilities 550,535 3,014,280 3,564,815
2.99 3.26 3.21 Energy 442,593 2,694,228 3,136,821
2.75 2.15 2.24 Consumer, Non-cyclical 408,182 1,775,628 2,183,810
1.92 0.99 1.13 Industrial 283,819 820,344 1,104,163
1.52 1.42 1.44 Basic Materials 225,942 1,175,961 1,401,903
0 0.66 0.74 Consumer, Cyclical 174,867 542,110 716,977
0.42 0.02 0.08 Technology 63,033 15,447 78,480
1.18 0.06 0.05 Diversified - 47,897 47,897
0.04 0.02 0.02 Swap Agreements 5,135 17,588 22,723
Total $ 14,813,4 $ 682,763,881 $ 97,577,377
===============================================
<FN>
Percentages are adjusted to reflect the impact of currency
contracts, futures contracts, and swap agreements, if
applicable.
</FN>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
PRINCIPAL INVESTORS FUND, INC.
(UNAUDITED)
-------------------------------------------------------------------------------
1. DESCRIPTION OF THE FUND
High Quality Intermediate-Term Bond Fund, is a 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 Investors Fund, Inc.,
High Quality Long-Term Bond Fund approved an Agreement and Plan of
Reorganization (the "Reorganization") whereby, subject to approval by the
shareholders of High Quality Long-Term Bond Fund, High Quality Intermediate-Term
Bond Fund will acquire all the assets of High Quality Long-Term Bond Fund
subject to the liabilities of such fund, in exchange for a number of shares
equal to the pro rata net assets of shares of High Quality Intermediate-Term
Bond 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 schedule of
investments and statement of assets and liabilities reflect the financial
position of High Quality Long-Term Bond Fund and High Quality Intermediate-Term
Bond Fund at October 31, 2004. The unaudited pro forma statement of operations
reflect the results of operations of High Quality Long-Term Bond Fund and High
Quality Intermediate-Term Bond Fund 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 High Quality Long-Term Bond Fund and High Quality Intermediate-Term
Bond Fund 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 High Quality Intermediate-Term Bond Fund for
pre-combination periods will not be restated.
The pro forma schedule 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
High Quality Long-Term Bond Fund and High Quality Intermediate-Term Bond 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 Principal Management
Corporation under procedures established and periodically reviewed by each
Fund's Board of Directors.
Short-term securities are valued at amortized cost, which approximates market.
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 High
Quality Intermediate-Term Bond Fund 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 High Quality Long-Term Bond Fund, as of
October 31, 2004, divided by the net asset value per share of the High Quality
Intermediate-Term Bond Fund as of October 31, 2004. The pro forma number of
shares outstanding, by class, for the combined fund can be found on the
statement 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 High Quality Long-Term Bond Fund were adjusted assuming the fee structure of
the High Quality Intermediate-Term Bond Fund 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.
7. SUBSEQUENT EVENTS
Effective November 1, 2004, initial purchases of Advisors Signature shares of
High Quality Long-Term Bond Fund and High Quality Intermediate-Term Bond Fund
were made by Principal Life Insurance Company. The pro forma financial
statements do not reflect the addition of Advisors Signature shares.
3
PRINCIPAL INVESTORS FUND, INC.
(UNAUDITED)
-------------------------------------------------------------------------------
7. SUBSEQUENT EVENTS
Effective January 1, 2005, High Quality Long-Term Bond Fund and High Quality
Intermediate-Term Bond Fund 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
------ ------ ------ ---------------
High Quality Intermediate-Term Bond .40% .38% .36% .35%
Fund
High Quality Long-Term Bond Fund .40 .38 .36 .35
The fee schedule described above is reflected in the pro forma statements of
operations.
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. Spectrum Sub-Advisory Agreement (filed 04/29/02)
b. Amended &Restated Sub-Advisory Agreement with Spectrum (filed
9/11/03)
(3) 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)
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)
(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) Consent of Randy Lee Bergstrom- *
(b)(ii) 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) Prospectuses of Principal Investors Fund, Inc., with respect to the
High Quality Long-Term Bond Fund, dated March 1, 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)
* 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 15th 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 15,2005
R. C. Eucher Chief Executive Officer
(Principal Executive Officer)
(L. D. Zimpleman)* Director and Chairman March 15,2005
L. D. Zimpleman of the Board
/s/ J. R. Brown Vice President and March 15,2005
J. R. Brown Chief Financial Officer
(Principal Accounting Officer)
(J. E. Aschenbrenner)* Director March 15,2005
J. E. Aschenbrenner
(E. Ballantine)* Director March 15,2005
E. Ballantine
(J. D. Davis)* Director March 15,2005
J. D. Davis
(R. W. Gilbert)* Director March 15,2005
R. W. Gilbert
(M. A. Grimmett)* Director March 15,2005
M. A. Grimmett
(W. C. Kimball)* Director March 15,2005
W. C. Kimball
(B. A. Lukavsky)* Director March 15,2005
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) Consent of Randy Lee Bergstrom
(b)(ii) Consent of Carolyn Kolks
14 Consent of Independent Registered Public Accountants.