U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _______________
Post-Effective Amendment No. _______________
(Check appropriate box or boxes)
Exact Name of Registrant as Specified in Charter:
Area Code and Telephone Number:
Principal Bond Fund, Inc. (800) 247-4123
Address of Principal Executive Offices: (Number, Street, City, State, Zip Code)
711 High Street, Des Moines, Iowa 50392
Name and Address of Agent for Service:
With a copy to:
Michael D. Roughton John W. Blouch
Counsel Jones & Blouch L.L.P.
Principal Bond Fund, Inc. 1025 Thomas Jefferson Street, N.W.
711 High Street Suite 405 West
Des Moines, Iowa 50392 Washington, D.C. 20007
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
______________________________________________________
Title of Securities Being Registered:
Class A and Class B Common Stock, par value $.01 per share.
______________________________________________________
No filing fee is required because of reliance on Section 24(f) under the
Investment Company Act of 1940, as amended.
It is proposed that this filing will become effective on May 13, 2002, pursuant
to Rule 488.
______________________________________________________
PRINCIPAL BOND FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 481(a) UNDER THE SECURITIES ACT OF 1933
FORM N-14 PROXY STATEMENT AND
ITEM NO. PROSPECTUS CAPTION
PART A
Item 1. Beginning of Registration Statement and Outside
Front Cover Page of Prospectus .........................................Cross Reference Sheet; Cover Page
Item 2. Beginning and Outside Back Cover Page of Prospectus.....................Table of Contents
Item 3. Fee Table, Synopsis Information and Risk Factors........................Summary; Principal Risk Factors
Item 4. Information about the Transaction.......................................The Plan
Item 5. Information about the Registrant........................................Incorporation of Documents by
Reference in the Prospectus
Item 6. Information about the Company Being Acquired............................Incorporation of Documents by
Reference in the Prospectus
Item 7. Voting Information......................................................Introduction and Voting Information
Item 8. Interest of Certain Persons and Experts.................................Not Applicable
Item 9. Additional Information Required for Reoffering
by Persons Deemed to be Underwriters ...................................Not Applicable
PART B
Item 10.Cover Page..............................................................Cover Page of Statement of Additional Information
Item 11.Table of Contents.......................................................Table of Contents of Statement of
Additional Information
Item 12.Additional Information about the Registrant.............................Statement of Additional Information
of Principal Bond Fund, Inc. dated March 1, 2002.
Item 13.Additional Information about the Company Being Acquired.................Statement of Additional Information
of Principal High Yield Fund, Inc.,
dated March 1, 2002.
Item 14.Financial Statements....................................................Financial Statements as noted in
the Statement of Additional Information
2
PART C
Item 15......................................Indemnification
Indemnification
Item 16......................................Exhibits Exhibits
Item 17......................................Undertakings Undertakings
3
May 13, 2002
Dear Shareholder:
The Board of Directors of Principal High Yield Fund has called a special meeting
of shareholders for June 26, 2002 to vote on an Agreement and Plan of
Acquisition which provides for the combination of the Principal High Yield Fund
with the Principal Bond Fund. If the Plan is approved by shareholders and
implemented, you will cease to own shares of the High Yield Fund and will become
the owner of shares of the same class of the Bond Fund equal in value to your
shares of the High Yield Fund. The Board of the High Yield Fund believes that
the proposed change is in the best interest of the Fund and its shareholders.
Both Funds are income-oriented funds which invest primarily in corporate bonds
and seek a high level of current income. The principal difference between the
two Funds is that the High Yield Fund invests primarily in "junk bonds" and its
portfolio reflects the risks associated with such bonds, while the Bond Fund
invests primarily in "investment grade" bonds.
No matter how many shares you own, it is important that you take time to read
the prospectus/proxy statement and vote as soon as possible. If you have more
than one account in the High Yield Fund, you will receive multiple proxy
ballots. Please return ALL of the proxy ballots.
We appreciate your taking the time to respond on this important matter. If you
have questions regarding the proxy or the voting process, please call our proxy
solicitor, D.F. King & Co., Inc. at 1-800-_______. If you have questions
concerning your account, please call our shareholder services department
toll-free at 1-800-247-4123.
Sincerely,
/s/Ralph C. Eucher
Ralph C. Eucher
President
Principal High Yield Fund, Inc.
4
IMPORTANT INFORMATION TO HELP YOU UNDERSTAND AND VOTE ON THE PROPOSAL
Please read the complete prospectus/proxy statement. For your convenience, we
are providing this brief overview of the Agreement and Plan of Acquisition and
the transactions contemplated thereby (Plan) on which you are being asked to
vote.
WHAT WILL HAPPEN IF SHAREHOLDERS APPROVE THE PLAN AND IT BECOMES EFFECTIVE?
At the effective time, which is scheduled for 3:00 p.m. C.D.T. on July
31, 2002, Principal Bond Fund, Inc. (Bond Fund) will acquire all the
assets and assume all the liabilities of Principal High Yield Fund,
Inc. (High Yield Fund) and will issue to the High Yield Fund shares of
its Class A and Class B common stock having a value equal to the net
assets of the High Yield Fund that are being acquired. Immediately
thereafter, the High Yield Fund will distribute Class A shares to its
Class A shareholders and Class B shares to its Class B shareholders
and thereby redeem all its outstanding shares. If you own Class A
shares of the High Yield fund, you will receive Class A shares of the
Bond Fund equal in value to the Class A shares of the High Yield Fund
which you own at the effective time. If you own Class B shares of the
High Yield fund, you will receive Class B shares of the Bond Fund
equal in value to the Class B shares of the High Yield Fund which you
own at the effective time. The acquisition will not dilute the value
of your shares.
WHY HAS THE BOARD DECIDED TO RECOMMEND THE COMBINATION OF THE HIGH YIELD FUND
WITH THE BOND FUND?
The High Yield Fund has not performed well relative to other "high
yield" funds and has been unable to attain sufficient assets to
achieve a competitive expense ratio. The Board does not believe these
circumstances are likely to change and, after considering various
alternatives, has concluded combining the High Yield Fund with the
Bond Fund is in the best interests of the shareholders of both Funds.
HOW HAVE THE FUNDS PERFORMED IN RELATION TO EACH OTHER?
The total returns of the Funds for the 1-year, 5-year and 10-year periods ended
March 31, 2002 are as follows:
TOTAL RETURN WITH MAXIMUM SALES CHARGE
--------------
FUND CLASS A CLASS B
---- ------- -------
1-YR. 5-YR. 10-YR. 1-YR. 5-YR. SINCE 12/9/94*
----- ----- ------ ----- ----- --------------
Bond -1.50% 5.16% 8.79% -1.23% 5.09% 6.53%
High Yield 10.06% -1.09% -1.09% -9.81% -1.23% 2.89%
* Inception Date
TOTAL RETURN AT NET ASSET VALUE
------------
FUND CLASS A CLASS B
---- ------- -------
1-YR. 5-YR. 10-YR. 1-YR. 5-YR. SINCE 12/9/94*
----- ----- ------ ----- ----- --------------
Bond 3.43% 6.19% 7.04% 2.70% 5.41% 6.53%
High
Yield -5.55% -0.13% 4.55% -6.39% -0.96% 2.89%
* Inception Date
WHAT ARE THE ADVANTAGES OF THE ACQUISITION?
Because the Bond Fund is substantially larger than the High Yield
Fund, the Board believes that shareholders will benefit from economies
of scale.
5
WHO WILL PAY THE FEES AND EXPENSES INCURRED BY THE FUNDS IN CONNECTION WITH THE
PLAN?
Principal Management Corporation, the manager of the Funds, will bear
all out-of-pocket fees and expenses incurred by the Funds in
connection with the transactions contemplated by the Plan.
DO THE FUNDS HAVE SIMILAR INVESTMENT OBJECTIVES, POLICIES AND PROCEDURES?
The investment objective of the Bond Fund is to provide as high a
level of income as is consistent with preservation of capital and
prudent investment risk while the investment objective of the High
Yield Fund is to seek high current income. The High Yield Fund has a
secondary objective of capital growth when consistent with the
objective of high current income. Both funds invest in fixed-income
securities and have the same fundamental and non-fundamental
investment policies and restrictions but the Bond Fund invests
primarily in investment grade securities, and as of October 31, 2001
had only 7.52% of its portfolio invested in below investment grade
securities ("junk bonds") while the High Yield Fund invests primarily
in below investment grade securities. Thus, while the risks of
investing in bond funds in general are similar for the Funds, the
Funds have different risks due to the extent to which each invests in
"junk bonds."
HOW DO THE EXPENSE STRUCTURES OF THE FUNDS COMPARE?
The Funds have different contractual rates for management fees, but
such fees for both Funds are reduced as assets reach higher levels.
The current contractual rate for the High Yield Fund is 0.60% of the
Fund's average daily net assets. The current contractual rate for the
Bond Fund is 0.50% of the first $100 million of the Fund's average
daily net assets, 0.45% of the next $100 million and 0.40% of the next
$100 million. As a percentage of average daily net assets for the year
ended October 31, 2001, each Fund had the following expenses:
HIGH YIELD FUND BOND FUND
-------------- ---------
FUND OPERATING CLASS A CLASS B CLASS A CLASS B
EXPENSES ------- ------- ------- -------
--------------
Management Fees 0.60% 0.60% 0.48% 0.48%
12b-1 Fees 0.25 0.92 0.25 0.79
Other Expenses 0.57 0.76 0.32 0.41
Total Operating
Expenses 1.42% 2.28% 1.05% 1.68%
The Bond Fund's expenses, assuming implementation of the Plan on October
31, 2001 as a percentage of average daily net assets are as follows:
BOND FUND
---------
FUND OPERATING EXPENSE CLASS A CLASS B
---------------------- ------- -------
Management Fees 0.47% 0.47%
12b-1 Fees 0.25% 0.82%
Other Expenses 0.35% 0.44%
Total Operating Expenses 1.07% 1.73%
WHAT WILL BE THE SIZE OF THE BOND FUND AFTER THE TRANSACTION?
As of March 31, 2002, the High Yield Fund had net assets of $26.1
million, and the Bond Fund had net assets of $186.9 million. The net
assets of the High Yield Fund represent less than 14% of the net
assets of the Bond Fund, and the manager of the Funds believes that
their transfer will permit them to be managed more efficiently. The
transfer of the assets will not have any adverse effect on the Bond
Fund, and may increase the assets of the Bond Fund sufficiently to
reach a reduced management fee level for the Fund.
6
WHAT ARE THE FEDERAL TAX IMPLICATIONS?
The transactions contemplated by the Plan will result in a tax-free
"reorganization" under the Internal Revenue Code. The Funds have
obtained an opinion from tax counsel to the effect that no gain or
loss will be recognized by either Fund or its shareholders in
connection with the transactions contemplated by the Plan and that
your tax cost basis will not change, and that your holding period of
the securities acquired in the transaction will include your holding
period of the High Yield Fund shares.
WHAT DO I DO IF I WISH TO MAINTAIN AN INVESTMENT IN A "JUNK BOND" FUND?
Princor Financial Services Corporation ("Princor"), the distributor of
each of the Funds, offers shares of other high yield funds. Your
registered representative, whether registered with Princor or another
broker-dealer, can review alternative high yield mutual funds with
you.
HAS THE BOARD OF DIRECTORS APPROVED THE PLAN?
Yes. The Board of Directors of each of the Funds has approved the
Plan. The Board of Directors of the High Yield Fund recommends that
you vote in favor of the Plan.
WHAT IF THERE ARE NOT ENOUGH VOTES TO REACH A QUORUM BY THE SCHEDULED DATE OF
THE SHAREHOLDER MEETING?
If a quorum is not obtained, the meeting will be postponed to allow
time to solicit additional proxies from shareholders. We urge you to
vote promptly after reviewing the enclosed material so that the
meeting is not delayed.
HOW MANY VOTES AM I ENTITLED TO CAST?
You are entitled to one vote for each share of the High Yield Fund
owned on the record date, May 1, 2002. The number of shares that you
owned on that date is stated on the enclosed proxy ballot.
HOW DO I VOTE MY SHARES?
Voting is easy. You can vote your shares by completing and signing the
enclosed proxy ballot and mailing it in the enclosed postage paid
envelope or faxing a copy to 515-235-9235 (this is not a toll free
number). You may also vote by telephone by calling toll free at
1-800-944-8454 or by using the internet by accessing
www.proxyvote.com. If you need any assistance or have any questions
concerning the Plan or how to vote your shares, please call Principal
Management Corporation at 1-800-944-8454.
HOW DO I SIGN THE PROXY BALLOT?
Individual Accounts: Shareholders should sign exactly as their names
appear in the account registration shown on the
proxy ballot.
Joint Accounts: Either owner may sign, but the name of the person
signing should conform exactly to a name that
appears in the account registration shown on the
proxy ballot.
All Other Accounts: The person signing must indicate his or her
capacity. For example, a trustee for a trust or
other entity should sign, "John A. Doe, Trustee."
7
PRINCIPAL HIGH YIELD FUND, INC.
DES MOINES, IOWA 50392-0200
____________
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 26, 2002
___________
To the Shareholders:
Notice hereby is given that a special meeting of the shareholders of Principal
High Yield Fund, Inc. (High Yield Fund) will be held at 2:00 p.m. C.D.T., on
June 26, 2002, at the offices of Principal Management Corporation, 680 8th
Street, Des Moines, Iowa 50392-0200. The meeting is being held to consider and
vote on the following matter as well as any other business that may properly
come before the meeting or any adjournment thereof:
1. Approval of an Agreement and Plan of Acquisition among the High
Yield Fund, Inc., the Principal Bond Fund, Inc. and Principal
Management Corporation, and the transactions contemplated
thereby, pursuant to which the Bond Fund will acquire all the
assets and assume all the liabilities of the High Yield Fund and
issue in exchange shares of its Class A and Class B common stock,
and the High Yield Fund will distribute those shares to its Class
A and Class B shareholders in redemption of all its outstanding
shares and then dissolve.
You are entitled to notice of and to vote at the meeting, and any adjournment,
if you owned shares of the High Yield Fund at the close of business on May 1,
2002, the record date for the meeting.
Your vote is important. No matter how many shares you own, please read the
attached prospectus/proxy statement, and vote today.
/s/ A. S. Filean
For the Board of Directors
Arthur S. Filean
Senior Vice-President and Secretary
May 13, 2002
8
PRINCIPAL BOND FUND, INC.
PRINCIPAL HIGH YIELD FUND, INC.
PROSPECTUS/PROXY STATEMENT
This prospectus/proxy statement is being furnished in connection with the
solicitation of proxies by the Board of Directors of Principal High Yield Fund,
Inc. (the "High Yield Fund") for use at a special meeting of the shareholders of
the High Yield Fund, to be held at 2:00 p.m. C.D.T., on June 26, 2002, at the
offices of Principal Management Corporation, 680 8th Street, Des Moines, Iowa
50392-0200, and at any adjournment of the meeting.
At the meeting, High Yield Fund shareholders ("you") will vote on an Agreement
and Plan of Acquisition ("Plan"). Under the Plan, if approved, Principal Bond
Fund, Inc. (the "Bond Fund") will acquire all the assets and assume all the
liabilities of the High Yield Fund and issue in exchange shares of its Class A
and Class B common stock. The High Yield Fund will immediately redeem all its
outstanding Class A and Class B shares by distributing the Bond Fund shares of
the same classes to you. As a result, you will have the same amount invested in
Class A shares and/or Class B shares of the Bond Fund that you have invested in
those share classes of the High Yield Fund at the effective time. The Funds'
manager, Principal Management Corporation, is also a party to the Plan and has
agreed to pay all expenses incurred by the Funds in connection with the Plan.
Both Funds are Maryland corporations organized by Principal Life Insurance
Company ("Principal Life") and registered as open-end, diversified management
investment companies under the Investment Company Act of 1940 (the "Investment
Company Act"). The Bond Fund's investment objective is to provide as high a
level of income as is consistent with preservation of capital and prudent
investment risk. The Bond Fund pursues this objective by investing primarily in
intermediate maturity, fixed income or debt securities rated BBB or higher by
Standard & Poor's Rating Service ("S&P") or Baa or higher by Moody's Investors
Services, Inc. ("Moody's"). The investment objective of the High Yield Fund is
to seek high current income with a secondary objective of capital growth when
consistent with the objective of high current income. The High Yield Fund
pursues its objective by investing in high yielding, lower and unrated
fixed-income securities, commonly referred to as "junk bonds". These securities
offer a higher yield than other, higher rated securities, but carry a greater
degree of risk and are considered speculative with respect to the issuers'
ability to pay interest and repay principal.
This prospectus/proxy statement sets forth concisely the information you should
know before voting on the proposed Plan. You should retain it for future
reference.
The prospectuses and Statements of Additional Information for the Bond Fund and
the High Yield Fund dated March 1, 2002 relating to this proxy statement/
prospectus have been filed with the Securities and Exchange Commission ("SEC")
and are available without charge by writing to the Funds or their manager at
their principal executive offices, 680 8th Street, Des Moines, Iowa 50392-0200
or by telephoning toll-free 1-800-247-4123. The prospectuses of the Bond Fund
and High Yield Fund and the Statement of Additional Information relating to this
prospectus/proxy statement are incorporated herein by reference. A copy of the
Bond Fund's prospectus accompanies this prospectus/proxy statement.
_____________________
THE SEC HAS NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
_____________________
The date of this prospectus/proxy
statement is May 13, 2002
9
PROSPECTUS/PROXY STATEMENT
TABLE OF CONTENTS
INTRODUCTION AND VOTING INFORMATION................................... 11
Special Meeting; Voting of Proxies; Adjournment..................... 11
Proxy Solicitation.................................................. 11
Revocation of Proxies............................................... 12
Additional Information.............................................. 12
SUMMARY .............................................................. 12
The Plan............................................................ 12
Reasons for the Plan................................................ 12
Investment Objectives and Policies.................................. 13
Fees and Expenses of the Funds...................................... 13
Purchases........................................................... 15
Exchanges........................................................... 15
Redemption Procedures and Fees...................................... 15
Dividends and Distributions......................................... 15
Federal Income Tax Consequences of the Proposed Combination......... 15
Costs and Expenses.................................................. 15
Continuation of Shareholder Accounts................................ 16
PRINCIPAL RISK FACTORS................................................ 16
THE PLAN.............................................................. 17
Agreement and Plan of Acquisition................................... 17
Description of Securities to Be Issued.............................. 18
Reasons for the Proposed Combination................................ 18
Federal Income Tax Consequences..................................... 19
Capitalization...................................................... 19
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE........................... 19
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS........ 20
ADDITIONAL INFORMATION ABOUT THE FUNDS................................ 22
PROPOSALS OF SHAREHOLDERS............................................. 23
OTHER BUSINESS........................................................ 23
APPENDIX A: FORM OF AGREEMENT AND PLAN OF ACQUISITION
10
INTRODUCTION AND VOTING INFORMATION
SPECIAL MEETING; VOTING OF PROXIES; ADJOURNMENT
- -----------------------------------------------
We are furnishing this prospectus/proxy statement to you as shareholders of the
High Yield Fund in connection with the solicitation by the Board of Directors of
the High Yield Fund of proxies to be used at a special meeting of the
shareholders of the High Yield Fund to be held on June 26, 2002 and at any
adjournment thereof. The purpose of the meeting is to vote on an Agreement and
Plan of Acquisition to which the High Yield Fund, the Bond Fund and the manager
of those Funds, Principal Management Corporation, are parties. The Plan provides
for the combination of the High Yield Fund with the Bond Fund, as more fully
described below. The prospectus/proxy statement is first being furnished to
shareholders on or about May 13, 2002.
THE BOARD OF DIRECTORS OF THE HIGH YIELD FUND HAS APPROVED THE PLAN AND
RECOMMENDS THAT THE SHAREHOLDERS OF THE HIGH YIELD FUND VOTE FOR THE PLAN AND
THE TRANSACTIONS WHICH IT CONTEMPLATES.
Shareholders of record of the High Yield Fund at the close of business on May 1,
2002, the record date, are entitled to vote at the meeting. As of the record
date, the High Yield Fund had _____ Class A shares and _____ Class B shares
outstanding and entitled to be voted. Shareholders are entitled to one vote for
each share of each Class held. A quorum must be present at the meeting for the
transaction of business. The holders of record of one-third of the shares
outstanding at the close of business on the record date present in person or
represented by proxy will constitute a quorum for the meeting. The approval of
the Plan requires the affirmative vote of a majority of all the votes entitled
to be cast by shareholders of the High Yield 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 the Plan or any other issue. If the shareholders of
the High Yield Fund do not approve the Plan, the Funds will consider possible
alternative arrangements, and Principal Management Corporation will continue to
manage the High Yield Fund.
To vote your shares:
through the internet: Access www.proxyvote.com
by mail: return your proxy ballot in the enclosed
postage-paid envelope
by fax: fax to 515-235-9235 (this is not a toll-free number)
by telephone: call toll-free 1-800-944-8454
The proxies will vote in accordance with your direction, as indicated on your
proxy ballot, if the proxy ballot is received and is properly executed. If you
properly execute your proxy ballot and give no voting instructions with respect
to the Plan, the proxies will vote your shares in favor of the Plan. The
proxies, in their discretion, may vote upon such other matters as may properly
come before the meeting. We are not aware of any other matters expected to come
before the meeting.
If either (i) a quorum is not present at the Meeting or (ii) a quorum is present
but sufficient votes in favor of approving the Plan are not received by 12:00
Noon C.D.T., June 26, 2002, then the persons named as proxies in the enclosed
form of proxy may propose one or more adjournments of the meeting to permit
further solicitation of proxies. Any such adjournment will require the
affirmative vote of at least a majority of the High Yield Fund Shares
represented, in person or by proxy, at the session of the meeting to be
adjourned. The proxies will vote those proxies that they are required to vote
FOR the Plan in favor of such an adjournment and will vote those proxies
required to be voted AGAINST the Plan against such an adjournment.
PROXY SOLICITATION
- ------------------
We will solicit proxies primarily by mail. Additional solicitations may be made
by internet, telephone, facsimile or personal contact by officers or employees
of the High Yield Fund or Principal Management Corporation who will not be
specially compensated for these services. In addition, the High Yield Fund has
retained D.F. King & Co., Inc. to solicit proxies for estimated fees and
expenses of $_____ for the services it provides to the High Yield Fund.
Principal Management Corporation will bear the costs of the meeting, including
costs of preparing and mailing the notice, the prospectus/proxy statement, and
the proxy ballot and of soliciting proxies. Banks, brokers, and other persons
holding High Yield Fund shares as nominees will be reimbursed for their
reasonable expenses incurred in sending proxy materials to and obtaining voting
information from the beneficial owners of those shares.
11
The vote of the shareholders of the Bond Fund is not being solicited, because
their approval or consent is not necessary for the approval of the Plan.
REVOCATION OF PROXIES
- ---------------------
You may revoke your proxy: (i) at any time prior to the proxy's exercise by
sending written notice to the Secretary of the High Yield Fund, at 680 8th
Street, Des Moines, Iowa, 50392-0200 prior to the meeting; (ii) by the
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
revocation to the Chairman of the meeting.
ADDITIONAL INFORMATION
- ----------------------
On May 1, 2002, the directors and officers of the High Yield Fund together owned
less than 1% of its outstanding shares and the directors and officers of the
Bond Fund together owned less than 1% of its outstanding shares. Principal Life,
Des Moines, Iowa, 50392-0200, an Iowa life insurance company and the parent of
the manager of the Funds, owned of record and beneficially, either directly or
through subsidiaries, _____% of the outstanding shares of the Bond Fund
(including _____% of the Class A shares and _____% of the Class B shares) and
_____% of the outstanding shares of the High Yield Fund (including _____% of the
Class A shares and _____% of the Class B shares) and, based on those holdings,
would own at the effective time _____% of the outstanding shares of the Bond
Fund (_____% of the Class A shares and _____% of the Class B shares). The
ultimate parent of Principal Life is Principal Financial Group, Inc. The Funds
do not know of any other person who owned at the record date, or will own at the
effective time, of record or beneficially 5% or more of the outstanding shares
of either Fund.
SUMMARY
The following is a summary of certain information contained or incorporated by
reference in this prospectus/proxy statement. It is qualified in its entirety by
the more detailed information appearing elsewhere or incorporated by reference
in this prospectus/proxy statement.
THE PLAN
- --------
You are being asked to approve the Plan, which provides for the combination of
the High Yield Fund with the Bond Fund. Under the Plan, at the effective time on
the closing date, the Bond Fund will acquire all the assets and assume all the
liabilities of the High Yield Fund and issue to the High Yield Fund shares of
its Class A and Class B common stock having a value equal to the net assets
acquired attributable to each share class. Immediately thereafter, the High
Yield Fund will distribute all the Bond Fund shares to its Class A and Class B
shareholders and thereby redeem all its outstanding shares. Each High Yield Fund
shareholder will receive Bond Fund shares equal in value to the shares of the
same class of the High Yield Fund held by the shareholder at the effective time.
We expect the effective time will be 3:00 p.m. C.D.T. on July 31, 2002, although
the effective time is dependent upon the receipt of an exemptive order from the
SEC permitting the transaction.
REASONS FOR THE PLAN
- --------------------
We believe that the Plan will provide shareholders of the High Yield Fund with
an investment in a larger income-oriented bond fund with a more favorable
expense ratio and greater possibilities for economies of scale than are likely
with the High Yield Fund. The table below reflects the investment performance of
each of the Funds for the periods ended March 31, 2002.
TOTAL RETURN WITH MAXIMUM SALES CHARGE TOTAL RETURN AT NET ASSET VALUE
-------------- -----------
FUND CLASS A CLASS B CLASS A CLASS B
---- ------- ------- ------- -------
1-YR. 5-YR. 10-YR. 1-YR. 5-YR. 1-YR. 5-YR. 10-YR. 1.YR 5-YR.
----- ----- ------ ----- ----- ----- ----- ------ ---- -----
Bond -1.50 5.16 8.79 -1.23 5.09 8.43 6.19 7.04 2.70 5.41
High Yield -10.06 -1.09 4.04 -9.81 -1.23 -5.55 -0.13 4.55 -6.39 -0.96
The High Yield Fund, whose inception was in December 1987, has a long history of
under-performance relative to other high yield funds. As of January 31, 2002,
the Fund's percentile rankings relative to all funds in Morningstar's High Yield
category were:
12
. 10-year period = 85th percentile
. 5-year period = 73rd percentile
. 3-year period = 64th percentile
. 1-year period = 78th percentile
In part as a result of the High Yield Fund's longstanding under-performance, the
High Yield Fund has remained small. The High Yield Fund's small asset size is
insufficient to generate a competitive expense ratio. For example, the expense
ratio of the High Yield Fund's Class A shares was 1.42% versus an average of
1.04% for Morningstar's High Yield category (based on the oldest share class of
each fund, generally the Class A shares) as of January 31, 2002.
The High Yield Fund's Board has concluded that the High Yield Fund's performance
track record will remain a significant hindrance to sales and that the High
Yield Fund's expense ratio will remain uncompetitive, and that it would be
appropriate to stop offering shares of the High Yield Fund and to permit the
Bond Fund to acquire the assets of the High Yield Fund. The Board of the High
Yield Fund, including a majority of the directors who are not interested persons
of the High Yield Fund, has determined that the Plan is consistent with the best
interests of the High Yield Fund and its shareholders, that the terms of the
Plan are fair and reasonable and that the interests of the shareholders of the
High Yield Fund will not be diluted as a result of the transactions contemplated
by the Plan.
INVESTMENT OBJECTIVES AND POLICIES
- ----------------------------------
The investment objective of the Bond Fund is to provide as high a level of
income as is consistent with preservation of capital and prudent investment risk
while the investment objective of the High Yield Fund is to seek high current
income. The High Yield Fund has a secondary objective of capital growth when
consistent with the objective of high current income. Both Funds invest in
fixed-income securities, but the Bond fund invests primarily in investment grade
securities and as of October 31, 2001 had only 7.52% of its portfolio invested
in below investment grade securities ("junk bonds"), while the High Yield Fund
invests primarily in below investment grade securities. Thus, while the risks of
investing in bond funds in general are similar for the Funds, the Funds have
different risks due to the extent to which each invests in "junk bonds."
FEES AND EXPENSES OF THE FUNDS
- ------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of either Fund.
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B
----------------------- ---------------------
/
Maximum sales charge imposed
on purchases (as a % of
offering price) 4.75%/(1)/ None
Maximum Contingent Deferred
Sales Charge ("CDSC") (as a %
of dollars subject to charge) None/(2)/ 4.00/(3)/
Redemption or Exchange Fee 1.00%/(4)(5)/ 1.00/(5)/
/ /
/
(1)
Sales charges are reduced or eliminated for purchases of $50,000 or more./
/
(2)A contingent deferred sales charge of 1% applies on certain redemptions
made within 18 months following purchases of $1 million or more made
without a sales charge.//
(3)Contingent deferred sales charges are reduced after 12 months and
eliminated after 6 years.
(4)Redemption fees are charged on redemptions of $30,000 or more of shares
redeemed within 30 days after they are purchased.
(5)Exchange fees are charged on redemptions of $30,000 or more of shares
exchanged within 30 days after they are purchased.
ONE-TIME FEES
. You may pay a one-time sales charge for each purchase (Class A shares)
or redemption (Class B shares).
. Class A shares may be purchased at a price equal to the share price plus
an initial sales charge. Investments of $1 million or more of Class A
shares are sold without an initial sales charge but may be subject to a
CDSC at the time of redemption.
. Class B shares have no initial sales charge but may be subject to a
CDSC. If you sell (redeem) shares and the CDSC is imposed, it will
reduce the amount of sales proceeds.
13
. A redemption fee of 1.00% is charged on redemptions of Class A shares of
$30,000 or more if the shares were purchased within 30 days of the
redemption. The fee is calculated as a percentage of market value at the
time the shares are redeemed.
. An exchange fee of 1.00% is charged on exchanges of $30,000 or more
among the Funds if the shares were purchased within 30 days of the
exchange. The fee is calculated as a percentage of market value at the
time the shares are exchanged.
The operating expenses attributable to the Class A and Class B shares of the
Funds (as a percentage of the average daily net assets) for the fiscal year
ended October 31, 2001 were as follows:
HIGH YIELD FUND BOND FUND
-------------- ---------
FUND OPERATING CLASS A CLASS B CLASS A CLASS B
EXPENSES ------- ------- ------- -------
--------------
Management Fees 0.60% 0.60% 0.48% 0.48%
12b-1 Fees 0.25 0.92 0.25 0.79
Other Expenses 0.57 0.76 0.32 0.41
Total Operating
Expenses 1.42% 2.28% 1.05% 1.68%
The Bond Fund's expenses, assuming implementation of the Plan on October 31,
2001, as a percentage of average daily net assets are as follows:
BOND FUND
--------------------------------
FUND OPERATING EXPENSES CLASS A CLASS B
----------------------- ------- -------
Management Fees 0.60% 0.60%
12b-1 Fees 0.25 0.79
Other Expenses 0.32 0.41
Total Operating Expenses 1.05% 1.68%
The following is an example of the effect of the operating expenses of the
Funds. The examples assume (1) a 5% annual return, and (2) the Funds' 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 Funds,
based upon these assumptions:
IF YOU SELL YOUR SHARES
-----------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES
1-YEAR 3-YEARS 5-YEARS 10-YEARS
------ ------- ------- --------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- ------- ------- -------
Bond Fund $557 $584 $793 $ 860 $1,027 $1,148 $1,697 $1,741
High Yield Fund 613 642 903 1,037 1,214 1,449 2,096 2,298
Combined Funds (pro
forma) 579 589 799 875 1,037 1,173 1,719 1,785
IF YOU DO NOT SELL YOUR SHARES
-----------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES
1-YEAR 3-YEARS 5-YEARS 10-YEARS
------ ------- ------- --------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- ------- ------- -------
Bond Fund $557 $171 $793 $530 $1,027 $ 913 $1,697 $1,741
High Yield Fund 613 231 903 712 1,214 1,220 2,096 2,298
Combined Funds (pro
forma) 579 176 799 545 1,037 939 1,719 1,785
PURCHASES
- ---------
Each Fund offers its shares for sale through Princor Financial Services
Corporation, a broker-dealer that is also the principal underwriter for the
Funds, or other dealers which it selects.
14
ONGOING FEES
Each Fund pays ongoing fees to its Manager, Underwriter and others who provide
services to the Fund. They reduce the value of each share you own.
DISTRIBUTION (12B-1) FEES
Each of the Funds has adopted a Distribution Plan under Rule 12b-1 of the
Investment Company Act of 1940. Under the Distribution Plans, the Funds pay a
fee to Princor based on their average daily net asset values. These ongoing fees
pay expenses relating to distribution fees for sales of shares of the Funds and
for services provided by Princor and other selling dealers to shareholders.
Because they are ongoing fees, over time they may exceed other types of sales
charges.
. Class A shares ..................0.25%
. Class B shares ..................1.00%
EXCHANGES
- ---------
Shares of both Funds may be exchanged, without a sales charge or CDSC, for
shares of the same class of other funds sponsored by Principal Life Insurance
Company. If Class B shares of the Funds are exchanged for Class B shares of
other funds, the shares acquired will be subject to the applicable CDSC imposed
by the new fund; however, the holding period of the Class B shares exchanged is
added to the holding period of the Class B shares acquired for purposes of
determining the applicable charge.
REDEMPTION PROCEDURES AND FEES
- ------------------------------
Shares of the 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.
DIVIDENDS AND DISTRIBUTIONS
- ---------------------------
The Bond Fund and High Yield Fund pay their net investment income on a monthly
basis. Payments are made to shareholders of record on the business day prior to
the payment date. The payment date is the 19th of each month (or previous
business day).
Net realized capital gains, if any, are distributed annually. Generally the
distribution is made on the second business day of December. Payments are made
to shareholders of record on the business day prior to the payable date. Capital
gains may be taxable at different rates, depending on the length of time that
the Fund holds its assets.
Immediately prior to the reorganization, each of the Funds will pay a dividend
or dividends which, together with all previous dividends, will have the effect
of distributing to their respective shareholders all of their investment company
taxable income for taxable years ending on or prior to the reorganization
(computed without regard to any deduction for dividends paid) and all of its net
capital gains, if any, realized in taxable years ending on or prior to the
reorganization (after reduction for any available capital loss carry forward).
Such dividends will be included in the taxable income of each Fund's respective
shareholders.
FEDERAL INCOME TAX CONSEQUENCES OF THE PROPOSED COMBINATION
- -----------------------------------------------------------
The combination will be a tax-free "reorganization" under the Internal Revenue
Code of 1986, as amended (the "Code"). In the opinion of tax counsel to the
Funds, no gain or loss will be recognized by either Fund or its shareholders, in
connection with the combination, and the tax cost basis of the Bond Fund shares
received by High Yield Fund shareholders will equal the tax cost basis of their
shares in the High Yield Fund and their holding period of the Bond Fund shares
will include the time during which the shareholders held the High Yield Fund
shares.
COSTS AND EXPENSES
- ------------------
Principal Management Corporation will bear all out-of-pocket fees and expenses
incurred by the Funds in connection with the transactions contemplated by the
Plan.
15
CONTINUATION OF SHAREHOLDER ACCOUNTS
- ------------------------------------
At the effective time, you will cease to be a shareholder of the High Yield Fund
and will become a shareholder of the Bond Fund owning Class A shares and/or
Class B shares of the Bond Fund having the same value as the investment you had
in the High Yield Fund at the effective time.
PRINCIPAL RISK FACTORS
The investment objective of the Bond Fund is to provide as high a level of
income as is consistent with preservation of capital and prudent investment risk
while the investment objective of the High Yield Fund is to seek high current
income. The High Yield Fund has a secondary objective of capital growth when
consistent with the objective of high current income. Both Funds invest in
fixed-income securities, but the Bond fund invests primarily in investment grade
securities and as of October 31, 2001 had only 7.52% of its portfolio invested
in below investment grade securities, while the High Yield Fund invests
primarily in below investment grade securities. Thus, while the risks of
investing in bond funds in general are similar for the Funds, the Funds have
different risks due to the extent to which each invests in "junk bonds." As with
all mutual funds, as the values of the assets of Bond Fund and High Yield Fund
rise or fall, the Funds' share prices change. If you sell your shares when their
value is less than the price you paid, you will lose money.
MAIN RISKS FOR BOND FUND
The average portfolio duration of the Bond Fund normally varies within a three-
to six-year time frame based on the Manager'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. For example, if the portfolio duration of the Fund is three years, a
change of 1% in the Fund's yield results in a change of approximately 3% in the
value of the Fund's securities. 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.
Mortgage-backed securities are subject to prepayment risk. When interest rates
decline, significant unscheduled prepayments may result. These prepayments must
then be reinvested at lower rates. Prepayments may also shorten the effective
maturities of these securities, especially during periods of declining interest
rates. On the other hand, during periods of rising interest rates, a reduction
in prepayments may increase the effective maturities of these securities,
subjecting them to the risk of decline in market value in response to rising
interest rates. This may increase the volatility of the Bond Fund.
When interest rates fall, the price of a debt security rises and when interest
rates rise, the price declines. In addition, the value of securities held by the
Bond Fund may be affected by factors such as credit rating of the entity that
issued the security and its maturity. Lower quality and longer maturity
securities will be subject to greater credit risk and price fluctuations than
higher quality and shorter maturity securities.
Fixed-income securities that are not investment grade are commonly referred to
as junk bonds or 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.
MAIN RISKS FOR HIGH YIELD FUND
Investors assume special risks when investing in the High Yield Fund. Compared
to higher rated securities, lower rated securities may:
. have a more volatile market value, generally reflecting specific events
affecting the issuer;
. be subject to greater risk of loss of income and principal (issuers are
generally not as financially secure);
. have a lower volume of trading, making it more difficult to value or
sell the security; and
. be more susceptible to a change in value or liquidity based on adverse
publicity and investor perception, whether or not based on factual
analysis.
The market for higher-yielding, lower-rated securities has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
these securities. This could cause financial stress to the issuer negatively
16
affecting the issuer's ability to pay principal and interest. This may also
negatively affect the value of the High Yield Fund's securities. In addition, if
an issuer defaults, the Fund may have additional expenses if it tries to recover
the amounts due it.
Some securities the High Yield Fund buys have call provisions. A call provision
allows the issuer of the security to redeem it before its maturity date. If a
bond is called in a declining interest rate market, the Fund would have to
replace it with a lower yielding security. This results in a decreased return
for investors. In addition, in a rising interest rate market, a higher yielding
security's value decreases. This is reflected in a lower share price for the
Fund.
The High Yield Fund tries to minimize the risks of investing in lower rated
securities by diversification, investment analysis and attention to current
developments in interest rates and economics conditions. Although the Fund's
Manager considers securities ratings when making investment decisions, it
performs its own investment analysis. This analysis includes traditional
security analysis considerations such as:
. experience and managerial strength
. changing financial condition
. borrowing requirements or debt maturity schedules
. responsiveness to changes in business conditions
. relative value based on anticipated cash flow
. earnings prospects
The Manager continuously monitors the issuers of the Fund's securities to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments. It also monitors each security to
assure the security's liquidity so the Fund can meet requests for sales of Fund
shares.
For defensive purposes, the Fund may invest in other securities. During periods
of adverse market conditions, the Fund may invest in all types of money market
instruments, higher rated fixed-income securities or any other fixed-income
securities consistent with the temporary defensive strategy. The yield to
maturity on these securities is generally lower than the yield to maturity on
lower rated fixed-income securities.
THE PLAN
AGREEMENT AND PLAN OF ACQUISITION
- ---------------------------------
The terms of the Plan are summarized below. The summary is qualified in its
entirety by reference to the Plan, a copy of which is attached as Appendix A.
Under the Plan, the Bond Fund will acquire all the assets and assume all the
liabilities of the High Yield Fund and will issue to the High Yield Fund the
number of shares of Class A and Class B Common Stock of the Bond Fund that have
a net asset value equal to the net asset value attributable to Class A and Class
B shares of the High Yield Fund. We expect that the closing date will be July
31, 2002, assuming shareholder approval of the Plan and the obtaining of an SEC
order permitting the transaction, and that the effective time will be the close
of regular trading on the NYSE at 4:00 P.M., Eastern Time, on that date. The
Funds will determine their net asset values as of the effective time using the
procedures described in the Bond Fund's prospectus. The Bond Fund will issue to
the High Yield Fund a number of Class A and Class B shares equal to the value of
the assets of the High Yield Fund Class A and Class B shares outstanding at the
effective time. The High Yield Fund will be managed such that at the effective
time it will hold only cash or other securities that are eligible investments
for the Bond Fund.
Immediately after the effective time, the High Yield Fund will distribute to you
its Bond Fund shares of the same class as the shares you own of the High Yield
Fund in exchange for all your High Yield Fund shares of that class. Each High
Yield Fund shareholder will receive shares of the Bond Fund that are equal in
value to the shares of the class of the High Yield Fund that are given up by the
shareholder in the exchange. In connection with the exchange, the Bond Fund will
credit on its books an appropriate number of its shares to the account of each
High Yield Fund shareholder, and the High Yield Fund will cancel on its books
all its shares registered to the account of that shareholder. Any outstanding
certificate for High Yield Fund shares that is not surrendered will be deemed to
represent the number of Bond Fund shares for which the High Yield shares have
been exchanged. After the effective time, the High Yield Fund will dissolve in
accordance with applicable law.
17
The consummation of the transactions contemplated by the Plan is subject to the
approval of the Plan by the shareholders of the High Yield Fund, the continued
correctness at the closing of the representations and warranties of the High
Yield Fund in the Plan, the delivery by the High Yield Fund to the Bond Fund of
a list of assets and liabilities being transferred and the High Yield Fund's
receipt of an SEC order permitting the transaction. The Plan may be amended in
any manner mutually-agreeable to the Funds, except that no amendment may be made
to the Plan which in the opinion of the Board of Directors of the High Yield
Fund would materially adversely affect the interests of the shareholders of that
Fund. Either Fund 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 its shareholders.
Principal Management Corporation, the manager of the Funds, will pay all fees
and out-of-pocket expenses incurred by the Funds in connection with the
transactions contemplated by the Plan.
DESCRIPTION OF SECURITIES TO BE ISSUED
- --------------------------------------
The Class A and Class B Shares of the Bond Fund are shares of common stock, par
value $.01 per share. They have the same rights with respect to the Bond Fund as
the Class A and Class B Shares of the High Yield Fund have with respect to the
High Yield Fund. Each share is entitled to one vote and has equal rights with
every other share as to dividends, earnings, voting, assets and redemption.
There is no cumulative voting for directors. Shares are fully paid and
non-assessable, have no preemptive or conversion rights and are freely
transferable. Each fractional share has proportionately the same rights as are
provided for a full share. As of ______________, 2002, the Bond Fund had
________ Class A shares and ________ Class B shares outstanding.
REASONS FOR THE PROPOSED COMBINATION
- ------------------------------------
The High Yield Fund, whose inception was in December 1987, has a long history of
under-performance relative to other high yield funds. As of January 31, 2002,
the Fund's percentile rankings relative to all funds in Morningstar's High Yield
category were:
. 10-year period = 85th percentile
. 5-year period = 73rd percentile
. 3-year period = 64th percentile
. 1-year period = 78th percentile
In part as a result of the Fund's longstanding under-performance, the Fund has
remained small. The Fund's small asset size is insufficient to generate a
competitive expense ratio. For example, the expense ratio of the Fund's Class A
shares was 1.42% versus an average of 1.04% for Morningstar's High Yield
category (based on the oldest share class of each fund, generally the Class A
shares) as of January 31, 2002.
The High Yield Fund's Board has concluded that the High Yield Fund's performance
track record will remain a significant hindrance to sales and that the Fund's
expense ratio will remain uncompetitive, and that it would be appropriate to
stop offering shares of the High Yield Fund and to permit the Bond Fund to
acquire the assets of the High Yield Fund. The Board of the High Yield Fund,
including a majority of the directors who are not interested persons of the
Fund, has determined that the Plan is consistent with the best interests of the
High Yield Fund and its shareholders, that the terms of the Plan are fair and
reasonable and that the interests of the shareholders of the Fund will not be
diluted as a result of the transactions contemplated by the Plan.
The Plan has been approved by the Board of Directors of each of the Funds,
including a majority of the directors of each Fund who are not "interested
persons" of that Fund as defined in Section 2(a)(19) of the Investment Company
Act. In approving the Plan, the Boards considered the investment objectives of
the two Funds and determined that interests of the existing shareholders in
their respective Funds will not be diluted as a result of the transactions
contemplated by the Plan. The High Yield Fund Board considered the following
factors, among others: (1) possible alternatives to the Plan; (2) the terms and
conditions of the Plan and whether its implementation would result in dilution
of shareholder interests or involve overreaching by any person concerned; (3)
the advantages to the High Yield Fund's shareholders of investing in a larger
asset pool with greater diversification; (4) the possible benefits of a larger
asset base to portfolio management of the Bond Fund; (5) any direct or indirect
fees or expenses incurred by the Funds as a result of the Plan; (6) expense
ratios and available information regarding the fees and expenses of the Funds,
including
18
any change in fees or expenses to be paid or borne by shareholders of the High
Yield Fund (direct or indirectly) as a result of the Plan; (7) comparative
investment performances of the Funds; (8) the direct or indirect federal income
tax consequences of the Plan to shareholders of the High Yield Fund; (9) the
continuity of or changes in services to be provided to shareholders following
implementation of the Plan; and (10) the compatibility of the investment
objectives and policies of the Funds and changes with respect to the investment
objectives and policies of the High Yield Fund that will result from the Plan.
FEDERAL INCOME TAX CONSEQUENCES
- -------------------------------
To be considered a tax-free "reorganization" under the applicable provisions of
the Code, a reorganization must exhibit a continuity of business enterprise.
Because the Bond Fund will use a portion of the High Yield Fund's assets in its
business and will continue the High Yield Fund's historic business, the
combination of the High Yield Fund with the 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 opinion of tax
counsel to the Funds, no gain or loss will be recognized by either Fund or its
shareholders in connection with the combination, the tax cost basis of the Bond
Fund shares received by High Yield Fund shareholders will equal the tax cost
basis of their shares in the High Yield Fund, and their holding periods for the
Bond Fund shares will include their holding periods for the High Yield Fund
shares.
As of October 31, 2001, High Yield Fund had accumulated capital loss
carryforwards in the amount of approximately $12,704,699. After the
reorganization, these losses will be available to the Bond Fund to offset its
capital gains, although the amount of these losses which may offset the Bond
Fund's capital gains in any given year may be limited. As a result of this
limitation, it is possible that the Bond Fund may not be able to use these
losses as rapidly as the High Yield Fund might have, and part of these losses
may not be useable at all. The ability of the Bond Fund to absorb losses in the
future depends upon a variety of factors that cannot be known in advance,
including the existence of capital gains against which these losses may be
offset. In addition, the benefits of any capital loss carryfowards currently are
available only to shareholders of High Yield Fund. After the reorganization,
however, these benefits will inure to the benefit of all shareholders of the
Bond Fund.
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 the High Yield Fund and the Bond
Fund separately, as of October 31, 2001, and combined in the aggregate
(unaudited), as of that date, giving effect to the Plan:
HIGH YIELD FUND BOND FUND COMBINED
--------------- --------- --------
CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
------- ------- ------- ------- ------- -------
Net Assets $ 20,315,271 $ 5,804,584 $ 143,817,964 $ 26,347,667 $164,133,235 $32,152,251
Net Asset Value Per Share $ 5.51 $ 5.46 $ 11.11 $ 11.11 $ 11.11 $ 11.11
Shares Outstanding 3,689,287.00 1,062,158.00 12,943,952.00 2,371,531.00 14,772,509 2,893,996
MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE
On January 3, 2001, the Federal Open Market Committee (FOMC), which sets the
rate that banks charge for overnight reserve loans, reduced the federal funds
rate by 0.50%, and began an unprecedented cycle of easing monetary policy in an
attempt to revive the deteriorating U.S. economy. While corporate earnings were
sluggish during the first quarter of 2001, the U.S. consumer continued to spend
at a brisk pace and to lend considerable support to the economy. However, just
as corporate profits were poised for a recovery in early 2002, consumer
confidence began to wane. This trend was exacerbated by the September 11
terrorist attacks that virtually assured an economic recession in the United
States and postponed the prospects for recovery further into 2002. The FOMC
reduced the federal funds rate seven times during 2001 prior to the attacks, and
then reduced rates two more times between September 11 and October 31.
19
The federal funds rate was 2.5% as of October 31, 2001. Corporate bond investors
began the year looking past poor corporate earnings and focused on historically
high-risk premiums and prospects for a late 2001 economic turnaround. Risk
premiums of U.S. Treasuries remain high not only because of poor corporate
performance and related price volatility, but because of the new risks
introduced to the market after the attacks. Though market reactions remain
severe for those companies that disappoint investors, corporate bonds
outperformed all asset classes throughout the year until the attacks. This event
drove investors to seek "safe haven" assets such as U.S. Treasuries and
agencies. As a result, U.S. Treasury rates have fallen (prices have risen)
across all maturities. For the one-year period ended October 31, 2001, the Fund
returned 9.51% compared to 14.56% for the Lehman Aggregate Index. Throughout the
year, we reduced the Fund's exposure to adverse corporate bond price movements
and emphasized investments in those industries with the most visible earnings
prospects. While the Fund is still overweight corporate bonds relative to the
Index, this position has been significantly reduced throughout the year. For the
year, the Fund's overweight to investment grade corporate bonds relative to the
Index greatly enhanced returns, although some of this performance was given up
after the attacks. The Fund benefited from being overweight to asset-backed
securities (ABS) and commercial mortgage-backed securities (CMBS), and being
slightly underweight to agency mortgage-backed securities (MBS) relative to the
Index. Being underweight in U.S. Treasuries and agencies relative to the Index
hindered performance since the attacks. Performance was further diminished by
holdings in below investment grade corporate bonds, although these positions
were reduced throughout the year. We expect the current historically high-risk
premiums to decline in 2002, which will cause outperformance in corporate bonds,
CMBS, and ABS versus Treasuries. The portfolio is well positioned for this
event.
LOGO
Growth of $10,000
Morningstar
Lehman Lehamn Lipper Intermediate
Baa Aggregate BBB Corp. Term Bond
Year Ended October 31, BON Index Bond Fund Avg. Category
9,523 10,000 10,000 10,000 10,000
1992 10,613 11,155 10,740 11,080 10,982
1993 12,228 12,928 11,787 12,754 12,353
1994 11,493 12,354 11,443 12,069 11,798
1995 13,761 14,743 13,557 13,803 13,493
1996 14,413 15,750 14,049 14,568 14,204
1997 15,874 17,350 15,405 15,962 15,390
1998 17,106 18,431 16,744 16,865 16,575
1999 16,778 18,735 16,607 16,900 16,580
2000 17,320 19,561 18,538 17,694 17,530
2001 19,911 22,515 21,237 19,902 19,819
Average Annual Total Returns
as of October 31, 2001
Class 1 Year 5 Year 10 Year Life of Fund
A 9.51% 5.64% 7.13%
B 10.23% 5.57% - 7.36%*
C 12.06% - - 5.76%**
R 14.42% 6.21% - 6.19%***
COMPARISON OF INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives of the Funds are fundamental and certain investment
restrictions which are designated as such in the Funds' prospectus or statement
of additional information are fundamental policies that may not be changed
without approval by the holders of the lesser of: (i) 67% of the fund's shares
present or represented at a shareholder's meeting at which the holders of more
than 50% of such shares are present or represented by proxy; or (ii) more than
20
50% of the outstanding shares of the Fund. All other investment policies and
restrictions are not fundamental and may be changed by a Fund's Board of
Directors without shareholder approval.
BOND FUND
- ---------
The Bond Fund seeks to provide as high a level of income as is consistent with
preservation of capital and prudent investment risk.
BOND STRATEGY
The Fund invests primarily in intermediate maturity fixed-income or debt
securities rated BBB or higher by Standard & Poor's Rating Service ("S&P") or
Baa or higher by Moody's Investors Service, Inc. ("Moody's"). The Fund considers
the term "bond" to mean any debt security. Under normal market and economic
circumstances, the Bond Fund invests at least 80% of its assets in:
. securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities;
. mortgage-backed securities representing an interest in a pool of
mortgage loans;
. debt securities and taxable municipal bonds rated, at the time of
purchase, in one of the top four categories by S&P or Moody's or, if not
rated, in the opinion of the Manager of comparable quality; and
. securities issued or guaranteed by the governments of Canada (Provincial
or Federal Government) or the United Kingdom payable in U.S. dollars.
The rest of the Bond Fund's assets may be invested in:
. preferred and common stock that may be convertible (may be exchanged for
a fixed number of shares of common stock of the same issuer) or may be
non-convertible; or
. securities rated less than the four highest grades of S&P or Moody's but
not lower than BB- (S&P) or Ba3 (Moody's) (i.e. less than investment
grade).
Under unusual market or economic conditions, the Bond Fund may invest up to 100%
of its assets in cash and cash equivalents.
During the fiscal year ended October 31, 2001, the average ratings of the Bond
Fund's assets, based on market value at each month-end, were as follows (all
ratings are by Moody's):
48.45% in securities rated Aaa 24.59% in securities rated Baa 2.15% in securities rated B
4.68% in securities rated Aa 5.06% in securities rated Ba 0.31% in securities rated Caa
14.76% in securities rated A
HIGH YIELD FUND
- ---------------
The High Yield Fund seeks high current income primarily by purchasing high
yielding, lower or non-rated fixed-income securities which are believed not to
involve undue risk to income or principal. Capital growth is a secondary
objective when consistent with the objective of high current income.
HIGH YIELD STRATEGY
Under normal market conditions, the High Yield Fund invests at least 80% of its
assets in high yield, lower or unrated fixed-income securities. Fixed-income
securities that are commonly known as "junk bonds" or high yield securities.
These securities offer a higher yield than other, higher rated securities, but
they carry a greater degree of risk and are considered to be speculative with
respect to the issuer's ability to pay interest and repay principal.
The High Yield Fund invests its assets in securities rated Ba1 or lower by
Moody's or BB+ or lower by S&P. The Fund may also invest in unrated securities
which the Manager believes to be of comparable quality. The High Yield Fund does
not invest in securities rated below Caa (Moody's) or below CCC (S&P) at the
time of purchase. The SAI contains descriptions of the securities rating
categories.
During the fiscal year ended October 31, 2001, the average ratings of the High
Yield Fund's assets, based on market value at each month-end, were as follows
(all ratings are by Moody's):
21
0.24% in securities rated AAA 33.56% in securities rated Ba 0.14% in securities rated Ca
0.37% in securities rated A 57.97% in securities rated B 0.12% in securities rated C
5.27% in securities rated Baa 2.27% in securities rated Caa 0.06% in securities rated D
The above percentages for Baa, Ba, B, and Caa rated securities include 0.11%,
3.28%, 3.16% and 0.13% respectively of unrated securities which have been
determined by the Manager to be of comparable quality.
While the Funds have different investment objectives and strategies, they have
the same investment policies and restrictions.
Neither Fund may:
. Invest in commodities or commodity contracts, but it may purchase and
sell financial futures contracts and options on such contracts;
. Invest in real estate, although it may invest in securities which are
secured by real estate and securities of issuers which invest or deal in
real estate;
. Borrow money, except for temporary or emergency purposes, in an amount
not to exceed 5% of the value of the Fund's total assets at the time of
the borrowing;
. 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.
. Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the U.S.
Government or its agencies or instrumentalities) or purchase more than
10% of the outstanding voting securities of any one issuer, except that
these limitations shall apply only with respect to 75% of the Fund's
total assets.
. Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of securities
held in its portfolio.
. Concentrate its investments in any particular industry or industries,
except that the Fund may invest not more than 25% of the value of its
total assets in a single industry.
. Sell securities short (except where the Fund holds or has the right to
obtain at no added cost a long position in the securities sold that
equals or exceeds the securities sold short) or purchase any securities
on margin, except it may obtain such short-term credits as are necessary
for the clearance of transactions. The deposit or payment of margin in
connection with transactions in options and financial futures contracts
is not considered the purchase of securities on margin.
. Invest in interests in oil, gas or other mineral exploration or
development programs, although the Fund may invest in securities of
issuers which invest in or sponsor such programs.
Each of the Funds has also adopted the same non-fundamental policies, which may
be changed without shareholder approval, dealing with investments in illiquid
securities, warrants, securities of any issuer having less than three years'
continuous operation, securities of other investment companies, pledging,
mortgaging or hypothecating its assets, investing in companies for the purpose
of exercising control or management, securities of foreign issuers, writing or
purchasing of put and call options, initial margin and premiums on financial
futures contracts and options on such contracts, arbitrage transactions and
investing in real estate limited partnership interests.
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 (as described in the prospectus) as suggested by the name of the
Fund. The Fund will provide 60-days notice to shareholders prior to implementing
a change in this policy for the Fund.
ADDITIONAL INFORMATION ABOUT THE FUNDS
Additional information about the Funds is available in their annual reports to
shareholders for the year ended October 31, 2001 and in the following documents
which have been filed with the SEC: prospectus and statement of additional
22
information for the High Yield Fund, both dated March 1, 2002; prospectus and
statement of additional information for the Bond Fund, both dated March 1, 2002;
and statement of additional information for the registration statement of which
this prospectus/proxy statement is a part, dated May 13, 2002. You may obtain
copies of the annual reports to shareholders, the prospectuses and the
statements of additional information by contacting Princor Financial Services
Corporation at Des Moines, Iowa 50392-0200, or by telephoning shareholder
services toll-free at 1-800-247-4123.
Each of the Funds is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and the Investment Company Act, as applicable.
Accordingly, each files reports, proxy materials and other information with
the SEC. You may inspect those reports, proxy materials and other information at
the public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D. C. 20549. Copies of such materials also may be obtained from the
Public Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D. C.
20549, at prescribed rates, or at no charge from the EDGAR database on the
Commission's website at "www.sec.gov."
PROPOSALS OF SHAREHOLDERS
A shareholder who has an issue that he or she would like to have included in the
agenda at a Principal Mutual Fund shareholder meeting should send the proposal
to the Fund at the Principal Financial Group, Des Moines, Iowa 50392-0200. To be
considered for presentation at a shareholders meeting, the proposal must be
received a reasonable time before a solicitation is made for such meeting.
Timely submission of a proposal does not necessarily mean that such proposal
will be included.
OTHER BUSINESS
We do not know of any business to be brought before the meeting other than the
matters set forth in this prospectus/ proxy statement. Should any other matter
requiring a vote of shareholders arise, however, the proxies will vote thereon
according to their best judgment.
23
APPENDIX A:
AGREEMENT AND PLAN OF ACQUISITION
24
AGREEMENT AND PLAN OF ACQUISITION
THIS AGREEMENT made as of the ______ day of March, 2002 is made by and among
Principal Bond, Inc., a Maryland corporation (hereinafter called "Bond Fund"),
Principal High Yield Fund, Inc., a Maryland corporation (hereinafter called
"High Yield Fund"), and Principal Management Corporation, an Iowa corporation
(hereinafter called "Principal Management").
WITNESSETH:
Whereas the Board of Directors of the Bond Fund and the Board of Directors of
the High Yield Fund, each an open-end management investment company, deem it
advisable that the Bond Fund acquire all of the assets of the High Yield Fund in
exchange for the assumption by the Bond Fund of all of the liabilities of the
High Yield Fund and shares issued by the Bond Fund which are thereafter to be
distributed by the High Yield Fund pro rata to its shareholders in complete
liquidation and termination of the High Yield Fund and in exchange for all of
the High Yield Fund's outstanding shares;
NOW, THEREFORE, in consideration of the mutual promises herein contained, each
of the parties hereto represents and warrants to, and agrees with each of the
other parties as follows:
1.
The Bond Fund hereby represents and warrants to the High Yield Fund that:
(a) The Bond Fund is a corporation with transferable shares duly
organized and validly existing under the laws of Maryland and has full
power to own its properties and assets and to carry on its business as
such business is now being conducted;
(b) The Bond Fund's statement of assets and liabilities as of October
31,2001 and the related statements of operations for the year then
ended, changes in net assets each of the two years in the period then
ended and its financial highlights for each of the five years in the
period then ended, all audited by Ernst & Young LLP as set forth in
their report, have been prepared in accordance with accounting
principles generally accepted in the United States. Such financial
statements fairly present the financial position of the Bond Fund as
of such date and operations, changes in net assets and financial
highlights for the periods covered thereby;
(c) There are no claims, actions, suits or proceedings pending or, to its
knowledge, threatened against or affecting the Bond Fund or its
properties or business or its right to issue and sell shares, or which
would prevent or hinder consummation of the transactions contemplated
hereby, and it is not charged with, or to the Bond Fund's knowledge,
threatened with, any charge or investigation of any violation of any
provision of any federal, state or local law or any administrative
ruling or regulation relating to any aspect of its business or the
issuance or sale of its shares;
(d) The Bond Fund is not a party to or subject to any judgment or decree
or order entered in any suit or proceeding brought by any governmental
agency or by any other person enjoining it in respect of, or the
effect of which is to prohibit, any business practice or the
acquisition of any property or the conduct of business by it or the
issuance or sale of its shares in any area;
(e) The Bond Fund has filed all tax returns required to be filed, has no
liability for any unpaid taxes and has made a proper election to be
treated as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986 (the "Code") for each of its taxable
years. The Bond Fund has not committed any action or failed to perform
any necessary action that would render invalid its election to be
treated as a regulated investment company for any of its taxable
years;
(f) The authorization, execution and delivery of this Agreement on behalf
of the Bond Fund does not, and the consummation of the transactions
contemplated hereby will not, violate or conflict with any provision
of the Bond Fund's Articles of Incorporation or Bylaws, or any
provision of, or result in the acceleration of any obligation under,
any mortgage, lien, lease, agreement, instrument, order, arbitration
award, judgment or decree to which it is party or by which it or any
of its assets is bound,
25
or violate or conflict with any other material contractual or
statutory restriction of any kind or character to which it is subject;
(g) This Agreement has been duly authorized, executed, and delivered by
the Bond Fund and constitutes a valid and binding agreement of the
Bond Fund and all governmental and other approvals required for the
Bond Fund to carry out the transactions contemplated hereunder have
been or on or prior to the Closing Date (as herein after defined) will
have been obtained;
(h) The Bond Fund is registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), as an open-end, diversified management
investment company. The Bond Fund is currently in compliance with the
1940 Act and the rules of the Securities and Exchange Commission
promulgated thereunder. Neither the Bond Fund nor its affiliates have
violated Section 9 of the 1940 Act, are currently subject to an
exemptive order of the Securities and Exchange Commission pursuant to
Section 9(c) of the 1940 Act, or are currently subject to any current
or threatened investigation or enforcement action by the Securities
and Exchange Commission or any other federal or state authority which
could result in a violation of Section 9(a) of the 1940 Act;
(i) On the Closing Date, the Bond Fund will own its assets free and clear
of all liens, claims, charges, options and encumbrances;
(j) The Bond Fund will declare to 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, as of the Closing Date;
(k) On the Closing Date the shares of the Bond Fund to be delivered to
the High Yield Fund hereunder shall have been registered under the
Securities Act of 1933, as amended (the "1933 Act") and duly
authorized, and, when issued and delivered pursuant to this Agreement,
will be validly issued, fully paid and nonassessable; and the Bond
Fund will comply with all applicable laws in connection with the
issuance of such shares and shall not be subject to a stop-order of
the Securities and Exchange Commission in connection therewith.
2.
The High Yield Fund hereby represents and warrants to the Bond Fund that:
(a) The High Yield Fund is a corporation with transferable shares duly
organized and validly existing under the laws of Maryland and has full
power to own its properties and assets and to carry on its business as
such business is now being conducted;
(b) The High Yield Fund's statement of assets and liabilities as of
October 31, 2001 and the related statements of operations for the year
then ended, changes in net assets for each of the two years in the
period then ended and its financial highlights for each of the five
years in the period then ended, all audited by Ernst & Young LLP, have
been prepared in accordance with accounting principles generally
accepted in the United States. Such financial statements fairly
present the financial position of the High Yield Fund as of that date
and the results of its operations, changes in net assets and financial
highlights for the periods covered thereby;
(c) There are no claims, actions, suits or proceedings pending or, to its
knowledge, threatened against or affecting the High Yield Fund or its
properties or business or its tight to issue and sell shares, or which
would prevent or hinder consummation of the transactions contemplated
hereby, and it is not charged with, or to the High Yield Fund's
knowledge, threatened with, any charge or investigation of any
violation of any provision of any federal, state or local law or any
administrative ruling or regulation relating to any aspect of its
business or the issuance or sale of its shares;
(d) The High Yield Fund is not party to or subject to any judgment or
decree or order entered in any suit or proceeding brought by any
governmental agency or by any other persons enjoining it in respect
of,
26
or the effect of which is to prohibit, any business practice or the
acquisition of any property or the conduct of business by it or the
issuance or sale of its shares in any area;
(e) The High Yield Fund has filed all tax returns required to be filed,
has no liability for any unpaid taxes and has made a proper election
to be treated as a regulated investment company under Subchapter M of
the Code for each of its taxable years. The High Yield Fund has not
committed any action or failed to perform any necessary action that
would render invalid its election to be treated as a regulated
investment company for any of its taxable years;
(f) The authorization, execution and delivery of this Agreement on behalf
of the High Yield Fund does not, and the consummation of the
transactions contemplated hereby will not, violate or conflict with
any provision of the High Yield Fund's Articles of Incorporation or
Bylaws, or any provision of, or result in the acceleration of any
obligation under, any mortgage, lien, lease, agreement, instrument,
order, arbitration award, judgment or decree to which it is party or
by which it or any of its assets is bound, or violate or conflict with
any other material contractual or statutory restriction of any kind or
character to which it is subject;
(g) This Agreement has been duly authorized, executed, and delivered by
the High Yield Fund and constitutes a valid and binding agreement of
the High Yield Fund, and all governmental and other approvals required
for the High Yield Fund to carry out the transactions contemplated
hereunder have been or on or prior to the Closing Date will have been
obtained;
(h) On the Closing Date the High Yield Fund will own its assets free and
clear of all liens, claims, charges, options, and encumbrances and,
except for the Management Agreement, Investment Service Agreement,
Distribution Agreement, Distribution and Shareholder Servicing
Agreement and the Custodian Agreement with Bank of New York, there
will be no material contracts or agreements (other than this
Agreement) outstanding to which the High Yield Fund is a party or to
which it is subject;
(i) On the Closing Date the High Yield Fund will have full right, power
and authority to sell, assign and deliver the assets to be sold,
assigned, transferred and delivered to the Bond Fund hereunder, and
upon delivery and payment for such assets, the Bond Fund will acquire
good, marketable title thereto free and clear of all liens, claims,
charges, options and encumbrances;
(j) The High Yield Fund will declare to 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
the shareholders all of its income (computed without regard to any
deduction for dividends paid) and all of its net realized capital
gains, if any, as of the Closing; and
(k) The High Yield Fund will, from time to time, as and when requested by
the Bond Fund, execute and deliver or cause to be executed and
delivered all such assignments and other instruments, and will take
and cause to be taken such further action, as the Bond Fund may deem
necessary or desirable in order to vest in and confirm to the Bond
Fund title to and possession of all the assets of the High Yield Fund
to be sold, assigned, transferred and delivered hereunder and
otherwise to carrot the intent and purpose of this Agreement.
3.Based on the respective representations and warranties, subject to the
terms and conditions contained herein, the High Yield Fund agrees to
transfer to the Bond Fund and the Bond Fund agrees to acquire from the
High Yield Fund, all of the assets of the High Yield Fund on the Closing
Date and to assume from the High Yield Fund all of the liabilities of the
High Yield Fund in exchange for the issuance of the number of shares of
the Bond Fund provided in Section 4 which will be subsequently
distributed pro rata to the shareholders of the High Yield Fund in
complete liquidation and termination of the High Yield Fund and in
exchange for all of the High Yield Fund's outstanding shares. The High
Yield Fund shall not issue, sell or transfer any of its shares after the
Closing Date, and only redemption requests received by the High Yield
Fund in proper form prior to the Closing Date shall be fulfilled by the
High Yield Fund. Redemption
27
requests received by the High Yield Fund thereafter shall be treated as
requests for redemption of those shares of the Bond Fund allocable to the
shareholder in question as provided in Section 6 of this Agreement.
4.On the Closing Date, the Bond Fund will issue to the High Yield Fund a
number of full and fractional shares of the 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 High Yield Fund. The aggregate
value of the net assets of the High Yield Fund and the Bond Fund shall be
determined in accordance with the then current Prospectus of the Bond
Fund as of closing of the New York Stock Exchange on the Closing Date.
5.The closing of the transactions contemplated in this Agreement (the
"Closing") shall be held at the offices of Principal Management, 680 8th
Street, Des Moines, Iowa 50392-0200 (or at such other place as the
parties hereto may agree) at 3:00 p.m. Central Daylight Time on July 31,
2002 or on such earlier or later date as the parties hereto may mutually
agree. The date on which the Closing is to be held as provided in this
Agreement 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 week-end 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 Bond Fund or the
High Yield 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.
6.As soon as practicable after the Closing, the High Yield Fund shall (a)
distribute on a pro rata basis to the shareholders of record of the High
Yield Fund at the close of business on the Closing Date the shares of the
Bond Fund received by the High Yield Fund at the Closing in exchange for
all of the High Yield Fund's outstanding shares, and (b) be liquidated
and dissolved in accordance with applicable law and its Articles of
Incorporation.
For purposes of the distribution of shares of the Bond Fund to
shareholders of the High Yield Fund, the Bond Fund shall credit on the
books of the Bond Fund an appropriate number of shares of the Bond Fund
to the account of each shareholder of the High Yield Fund. The Bond Fund
will issue a certificate or certificates only upon request and, in the
case of a shareholder of the High Yield Fund whose shares are represented
by certificates, only upon surrender of such certificates. No
certificates will be issued for fractional shares of the Bond Fund. After
the Closing Date and until surrendered, each outstanding certificate
which, prior to the Closing Date, represented shares of the High Yield
Fund, shall be deemed for all purposes of the Bond Fund's Articles of
Incorporation and Bylaws to evidence the appropriate number of shares of
the Bond Fund to be credited on the books of the Bond Fund in respect of
such shares of the High Yield Fund as provided above.
7.Subsequent to the execution of this Agreement and prior to the Closing
Date, the High Yield Fund shall deliver to the Bond Fund a list setting
forth the assets to be assigned, delivered and transferred to the Bond
Fund, including the securities then owned by the High Yield Fund and the
respective federal income tax bases (on an identified cost basis)
thereof, and the liabilities to be assumed by the Bond Fund pursuant to
this Agreement.
8.All of the High Yield Fund's portfolio securities shall be delivered by
the High Yield Fund's custodian on the Closing Date to the 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 1940 Act,
transferred to an account in the name of the Bond Fund or its custodian
with said depository. All cash to be delivered pursuant to this Agreement
shall be transferred from the High Yield Fund's account at its custodian
to the Bond Fund's account at its custodian. If on the Closing Date the
High Yield Fund is unable to make good delivery pursuant to this Section
8 to the Bond Fund's custodian of any of the High Yield Fund's portfolio
securities because such securities have not yet been delivered to the
High Yield Fund's custodian by its brokers or by the transfer agent for
such securities, then the delivery requirement of this
28
Section 8 with respect to such securities shall be waived, and the High
Yield Fund shall deliver to the 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 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 Bond Fund.
9.
The obligations of the Bond Fund under this Agreement shall be subject to
receipt by the Bond Fund on or prior to the Closing Date of:
(a) Copies of the resolutions adopted by the Board of Directors of the
High Yield Fund and its shareholders authorizing the execution of this
Agreement by the High Yield Fund and the transactions contemplated
hereunder, certified by the Secretary or Assistant Secretary of the
High Yield Fund;
(b) A certificate of the Secretary or Assistant Secretary of the High
Yield Fund as to the signatures and incumbency of its officers who
executed this Agreement on behalf of the High Yield Fund and any other
documents delivered in connection with the transactions contemplated
thereby on behalf of the High Yield Fund;
(c) A certificate of an appropriate officer of the High Yield Fund as to
the fulfillment of all agreements and conditions on its part to be
fulfilled hereunder at or prior to the Closing Date and to the effect
that the representations and warranties of the High Yield Fund are
true and correct in all material respects at and as of the Closing
Date as if made at and as of such date; and
(d) Such other documents, including an opinion of counsel, as the Bond
Fund may reasonably request to show fulfillment of the purposes and
conditions of this Agreement.
10. The obligations of the High Yield Fund under this Agreement shall be
subject to receipt by the High Yield Fund on or prior to the Closing Date
of:
(a) Copies of the resolutions adopted by the Board of Directors of the
Bond Fund authorizing the execution of this Agreement and the
transactions contemplated hereunder, certified by the Secretary or
Assistant Secretary of the Bond Fund;
(b) A certificate of the Secretary or Assistant Secretary of the Bond
Fund as to the signatures and incumbency of its officers who executed
this Agreement on behalf of the Bond Fund and any other documents
delivered in connection with the transactions contemplated thereby on
behalf of the Bond Fund;
(c) A certificate of an appropriate officer of the Bond Fund as to the
fulfillment of all agreements and conditions on its part to be
fulfilled hereunder at or prior to the Closing Date and to the effect
that the representations and warranties of the Bond Fund are true and
correct in all material respects at and as of the Closing Date as if
made at and as of such date; and
(d) Such other documents, including an opinion of counsel, as the High
Yield Fund may reasonably request to show fulfillment of the purposes
and conditions of this Agreement.
11.
The obligations of the parties under this Agreement shall be subject to:
(a) Any required approval, at a meeting duly called for the purpose, of
the holders of the outstanding shares of the High Yield Fund of this
Agreement and the transactions contemplated hereunder; and
(b) The right to abandon and terminate this Agreement, if either party to
this Agreement believes that the consummation of the transactions
contemplated hereunder would not be in the best interests of its
shareholders.
29
12. Except as expressly provided otherwise in this Agreement, Principal
Management will pay or cause to be paid all out-of-pocket fees and
expenses incurred by the High Yield Fund or the Bond Fund in connection
with the transactions contemplated under this Agreement, 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. This obligation shall survive the termination or
expiration of this Agreement regardless of the consummation of the
transactions contemplated hereunder.
13.
This Agreement may be amended by an instrument executed by both the duly
authorized officers of the Bond Fund and the High Yield Fund at any time,
except that after approval by the shareholders of the High Yield Fund no
amendment may be made with respect to the Agreement which in the opinion
of the Board of Directors of the High Yield Fund materially adversely
affects the interests of the shareholders of the High Yield Fund. At any
time either party hereto may by written instrument signed by it (i) waive
any inaccuracies in the representations and warranties made to it
contained herein and (ii) waive compliance with any of the covenants or
conditions made for its benefit contained herein.
14. In addition to the right to terminate this Agreement described in
paragraph 11, this Agreement may be terminated and the plan described in
the Agreement abandoned at any time prior to the Closing Date, whether
before or after action thereon by the shareholders of the High Yield Fund
and notwithstanding favorable action by such shareholders, by mutual
consent of the Board of Directors of the Bond Fund and the Board of
Directors of the High Yield Fund. This Agreement may also be terminated
by action of the Board of Directors of the Bond Fund or the Board of
Directors of the High Yield Fund (the "Terminating Fund"), if:
(a) The plan described in the Agreement shall not have become effective
by October 31, 2002 (hereinafter called the "Final Date") unless such
Final Date shall have been changed by mutual agreement; or
(b) The Bond Fund shall, at the Final Date, have failed to comply with
any of its agreements; or
(c) Prior to the Final Date any one or more of the conditions to the
obligations of the Bond Fund contained in this Agreement shall not be
fulfilled to the reasonable satisfaction of the High Yield Fund and
its counsel or it shall become evident to the High Yield Fund that any
of such conditions are incapable of being fulfilled.
15.
This Agreement shall bind and inure to the benefit of the parties hereto
and is not intended to confer upon any other person any rights or
remedies hereunder.
16.
The parties hereto represent and warrant that they have not employed any
broker, finder or intermediary in connection with this transaction who
might be entitled to a finder's fee or other similar fee or commission.
17.
All prior or contemporaneous agreements and representations are hereby
merged into this Agreement, which constitutes the entire contract between
the parties hereto.
18.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Iowa.
19.
This Agreement maybe executed in one or more counterparts, all of which
shall be considered one and the same agreement, and shall become
effective when one or more of the counterparts has been signed by all
parties hereto.
20.
Principal Management shall indemnify, defend and hold harmless the Bond
Fund, its officers, directors, employees and agents against all losses,
claims, demands, liabilities and expenses, including reasonable legal and
other expenses incurred in defending claims or liabilities, whether or
not resulting in any liability to the Bond Fund, its officers, directors,
employees or agents, arising out of (1) breach by the High Yield Fund of
any warranty made by the High Yield Fund herein or (2) any untrue
statement or alleged untrue
30
statement of a material fact contained in any prospectus or registration
statement for the High Yield Fund, as filed with the SEC or any state, or
any amendment or supplement thereto, or in any information provided by
the High Yield Fund included in any registration statement filed by the
Bond Fund with the SEC or any state or any amendment or supplement
thereto; or which shall arise out of or be based upon any omission or
alleged omission to state therein a material fact required to be stated
in any such prospectus, registration statement or application necessary
to make the statements therein not misleading. This indemnity provision
shall survive the termination of this Agreement.
21.
The Bond Fund shall indemnify, defend and hold harmless the High Yield
Fund, its officers, trustees, employees and agents against all losses,
claims, demands, liabilities and expenses, including reasonable legal and
other expenses incurred in defending claims or liabilities, whether or
not resulting in any liability to the High Yield Fund, its officers,
trustees, employees or agents, arising out of any untrue statement or
alleged untrue statement of a material fact contained in any prospectus
or registration statement for the Bond Fund, as filed with the SEC or any
state, or any amendment or supplement thereto, or any application
prepared by or on behalf of the Bond Fund and filed with any state
regulatory agency in order to register or qualify shares of the Bond Fund
under the securities laws thereof; or which shall arise out of or be
based upon any omission or alleged omission to state therein a material
fact required to be stated in any such prospectus, registration statement
or application necessary to make the statements therein not misleading;
provided, however, the Bond Fund shall not be required to indemnify the
High Yield Fund, its officers, trustees, employees and agents against any
loss, claim, demand, liability or expense arising out of any information
provided by the Bond Fund with the SEC or any state, or any amendment or
supplement thereto. This indemnity provision shall survive the
termination of this Agreement.
22. The execution of this Agreement has been authorized by the Board of
Directors of the Bond Fund and by the Board of Directors of the High
Yield Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and attested by their officers thereunto duly authorized, as of the date first
written above.
PRINCIPAL BOND FUND, INC.
BY:___________________________________
A. S. Filean
TITLE: Senior Vice President and Secretary
Attest:
By:_______________________________________
Ernest H. Gillum
Title: Vice President and Assistant Secretary
PRINCIPAL HIGH YIELD FUND, INC.
BY:___________________________________
A. S. Filean
TITLE: Senior Vice President and Secretary
Attest:
By:_______________________________________
Ernest H. Gillum
Title: Vice President and Assistant Secretary
31
PRINCIPAL MANAGEMENT CORPORATION
BY:__________________________________
A. S. Filean
TITLE: Senior Vice President and Secretary
Attest:
By:_______________________________________
Ernest H. Gillum
Title: Vice President and Assistant Secretary
32
PRINCIPAL BOND FUND, INC.
DES MOINES, IOWA 50392-0200
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus/ proxy statement dated May 13, 2002 for the
special meeting of the holders of the common stock, $.01 par value per share, of
Principal High Yield Fund, Inc., a diversified, open-end management investment
company. The meeting is to be held on Wednesday, June 26, 2002.
The prospectus/proxy statement describes certain transactions contemplated by
the proposed combination of the High Yield Fund with Principal Bond Fund, Inc.
pursuant to the terms of an Agreement and Plan of Acquisition among the two
Funds and their manager, Principal Management Corporation. Under the Plan,
Principal Bond Fund would acquire all the assets and assume all the liabilities
of the High Yield Fund and issue in exchange shares of its Class A and Class B
common stock. The High Yield Fund would immediately redeem all its outstanding
shares by distributing the Bond Fund shares to its shareholders. As a result,
each shareholder would own shares in the Bond Fund equal in value to shares of
the same class as he or she had owned in the High Yield Fund at the effective
time. Principal Management Corporation has agreed to pay all expenses incurred
by the Funds in connection with the Plan.
The date of the Statement of Additional Information is May 13, 2002.
33
FINANCIAL STATEMENTS
The following audited historical financial statements and footnotes thereto of
the High Yield Fund and the Bond Fund, together with the Report of Independent
Auditors thereon, are incorporated herein by reference from the Funds' Annual
Report to Shareholders for the year ended October 31, 2001:
(1) Statement of Assets and Liabilities, including the schedule of
investments, for each of the Funds as of October 31, 2001;
(2) Statement of Operations for each of the Funds for the year ended
October 31, 2001;
(3) Statement of Changes in Net Assets for each of the Funds for the years
ended October 31, 2001 and 2000;
(4) Financial Highlights for each of the Funds for each of the five years
in the period ended October 31, 2001; and
(5) Notes to Financial Statements.
The financial statements of the Funds incorporated by reference into this
Statement of Additional Information have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report by reference such financial
statement are incorporated by reference in reliance upon such report given the
authority of such firm as experts in accounting and auditing.
34
STATEMENTS OF ASSETS AND LIABILITIES
OCTOBER 31, 2001 (UNAUDITED)
-------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL COMBINED
BOND HIGH YIELD PRO FORMA PRINCIPAL BOND
FUND, INC. FUND, INC. ADJUSTMENTS FUND, INC.
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
INVESTMENT IN
SECURITIES--AT COST.. $179,516,424 $ 30,826,860 $ -- $210,343,284
============ ============ =========== ============
ASSETS
Investment in
securities--at value. $187,571,974 $ 27,654,580 $ -- $215,226,554
Cash.................. 12,518 17,173 -- 29,691
Receivables:
Capital Shares sold.. 107,192 10,287 -- 117,479
Dividends and
interest............ 2,262,628 586,841 -- 2,849,469
Investment securities
sold................ 3,280,007 -- -- 3,280,007
Other assets.......... 5,554 3,080 -- 8,634
------------ ------------ ----------- ------------
Total Assets 193,239,873 28,271,961 -- 221,511,834
LIABILITIES
Accrued expenses...... 115,800 27,160 -- 142,960
Payables:
Capital Shares
reacquired.......... 98,762 44,524 -- 143,286
Investment securities
purchased........... 4,128,753 699,097 -- 4,827,850
------------ ------------ ----------- ------------
Total Liabilities 4,343,315 770,781 -- 5,114,096
------------ ------------ ----------- ------------
NET ASSETS APPLICABLE
TO OUTSTANDING SHARES $188,896,558 $ 27,501,180 $ -- $216,397,738
============ ============ =========== ============
NET ASSETS CONSIST OF:
Capital Shares and
additional
paid-in-capital...... $188,412,095 $ 43,392,618 $ -- $231,804,713
Accumulated
undistributed
(overdistributed) net
investment income
(operating loss)..... 9,442 (8,969) -- 473
Accumulated
undistributed
(overdistributed) net
realized gain (loss). (7,580,529) (12,710,189) -- (20,290,718)
Net unrealized
appreciation
(depreciation) of
investments.......... 8,055,550 (3,172,280) -- 4,883,270
------------ ------------ ----------- ------------
Total Net Assets $188,896,558 $ 27,501,180 $ -- $216,397,738
============ ============ =========== ============
CAPITAL STOCK (PAR
VALUE: $.01 A SHARE):
Shares authorized..... 100,000,000 100,000,000 -- 100,000,000
NET ASSET VALUE PER
SHARE:
Class A: Net Assets... $143,817,964 $ 20,315,271 $ -- $164,133,235
Shares issued and
outstanding.......... 12,943,952 3,689,287 (1,860,730)/(c)/ 14,772,509
Net asset value per
share................ $ 11.11 $ 5.51 -- $ 11.11
Maximum offering
price per share /(a)/ $ 11.66 $ 5.78 -- $ 11.66
============ ============ == ============
Class B: Net Assets... $ 26,347,667 $ 5,804,584 $ -- $ 32,152,251
Shares issued and
outstanding.......... 2,371,531 1,062,158 (539,693)/(c)/ 2,893,996
Net asset value per
share /(b)/.......... $ 11.11 $ 5.46 -- $ 11.11
============ ============ == ============
Class C: Net Assets... $ 1,237,334 $ 186,851 $ -- $ 1,424,185
Shares issued and
outstanding.......... 112,314 34,998 (18,042)/(c)/ 129,270
Net asset value per
share /(b)/.......... $ 11.02 $ 5.34 -- $ 11.02
============ ============ == ============
Class R: Net Assets... $ 17,493,593 $ 1,194,474 $ -- $ 18,688,067
Shares issued and
outstanding.......... 1,568,820 221,575 (114,447)/(c)/ 1,675,948
Net asset value per
share................ $ 11.15 $ 5.39 -- $ 11.15
============ ============ == ============
/(a) /Maximum offering price equals net asset value plus a front-end sales
charge of 4.75% of the offering price or 4.99% of the net asset value.
/(b) /Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
/(c) /Reflects new shares issued, net of retired shares of Principal High Yield
Fund, Inc.
See accompanying notes.
35
STATEMENTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2001 (UNAUDITED)
-------------------------------------------------------------------------------
PRINCIPAL PRINCIPAL COMBINED
BOND HIGH YIELD PRO FORMA PRINCIPAL BOND
FUND, INC. FUND, INC. ADJUSTMENTS FUND, INC. /(A)/
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income:
Dividends............ $ -- $ 40,435 $ -- $ 40,435
Interest............. 11,844,941 3,231,907 -- 15,076,848
----------- ----------- -------- -----------
Total Income 11,844,941 3,272,342 -- 15,117,283
Expenses:
Management and
investment advisory
fees................ 842,753 180,320 (47,686) 975,387
Distribution fees -
Class A............. 334,712 55,769 -- 390,481
Distribution fees -
Class B............. 191,433 52,758 -- 244,191
Distribution fees -
Class C............. 9,526 2,304 -- 11,830
Distribution fees -
Class R............. 103,796 11,268 -- 115,064
Registration fees -
Class A............. 10,272 7,094 (7,094) 10,272
Registration fees -
Class B............. 4,214 7,812 (7,812) 4,214
Registration fees -
Class C............. 7,704 7,662 (7,662) 7,704
Registration fees -
Class R............. 24 5,873 (5,873) 24
Shareholder reports -
Class A............ 8,452 2,445 -- 10,897
Shareholder reports -
Class B............ 2,878 963 -- 3,841
Shareholder reports -
Class C............ 1,270 171 -- 1,441
Shareholder reports -
Class R............ 923 214 -- 1,137
Transfer and
administrative fees
- Class A........... 101,450 27,658 -- 129,108
Transfer and
administrative fees
- Class B........... 36,095 11,633 -- 47,728
Transfer and
administrative fees
- Class C........... 1,366 459 -- 1,825
Transfer and
administrative fees
- Class R........... 29,028 4,474 -- 33,502
Auditing and legal
fees................ 8,923 7,423 (7,423) 8,923
Custodian fees....... 6,692 5,262 -- 11,954
Directors' fees...... 9,351 2,736 -- 12,087
Registration fees.... 15,910 11,145 -- 27,055
Transfer and
administrative fees. 324,153 91,114 -- 415,267
Other expenses....... 46,055 3,271 (1,807) 47,519
----------- ----------- -------- -----------
Total Expenses 2,096,980 499,828 (85,357) 2,511,451
----------- ----------- -------- -----------
Net Investment Income
(Operating Loss) 9,747,961 2,772,514 85,357 12,605,832
NET REALIZED AND
UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain
(loss) from:
Investment
transactions........ 349,242 (3,792,034) -- (3,442,792)
Change in unrealized
appreciation/depreciation
of:
Investments........... 14,064,403 (390,890) -- 13,673,513
----------- ----------- -------- -----------
Net Realized and
Unrealized Gain (Loss)
on Investments 14,413,645 (4,182,924) -- 10,230,721
----------- ----------- -------- -----------
Net Increase (Decrease)
in Net Assets
Resulting from
Operations $24,161,606 $(1,410,410) $ 85,357 $22,836,553
=========== =========== ======== ===========
/(a) /Reflects estimated reduction in expenses due to lower management and
investment advisory fees, larger net assets and greater economies of scale,
and assumes the Principal Bond Fund, Inc. fee structure was in effect for the
year ended October 31, 2001.
See accompanying notes.
37
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(UNAUDITED)
-------------------------------------------------------------------------------
1. BASIS OF COMBINATION
On March 11, 2002, the Board of Directors of Principal High Yield Fund, Inc.
approved an Agreement and Plan of Reorganization whereby, subject to approval by
the shareholders of Principal High Yield Fund, Inc., Principal Bond Fund, Inc.
will acquire all the assets of the Principal High Yield Fund, Inc. subject to
the liabilities of such fund, in exchange for a number of shares equal to the
pro rata net assets of shares of the Principal Bond fund, Inc. (the "Merger").
The Merger will be accounted for as a tax-free merger 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, 2001. The unaudited pro forma schedule of investments and statement of
assets and liabilities reflect the financial position of the Principal Bond
Fund, Inc. and the Principal High Yield Fund, Inc. at October 31, 2001. The
unaudited pro forma statement of operations reflects the results of operations
of the Principal Bond Fund, Inc. and the Principal High Yield Fund, Inc. for the
year ended October 31, 2001. 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 Principal Bond Fund, Inc. and Principal High Yield
Fund, Inc. under accounting principles generally accepted in the United States.
The historical cost of investment securities will be carried forward to the
surviving entity and results of operations of Principal Bond Fund, Inc. 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.
2. SECURITY VALUATION
Principal Bond Fund, Inc. and Principal High Yield Fund, Inc. value securities
for which market quotations are readily available at market value, which is
determined using the last reported sale price or, if no sales are reported, as
is regularly the case for some securities traded over-the-counter, the last
reported bid price. When reliable market quotations are not considered to be
readily available, which may be the case, for example, with respect to certain
debt securities and preferred stocks, the investments are valued by using prices
provided by market makers or estimates of market values obtained from yield data
and other factors relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by each
fund's Board of Directors. Securities with remaining maturities of 60 days or
less are valued at amortized cost, which approximates market.
3. CAPITAL SHARES
The pro forma net asset value per share assumes additional shares of common
stock issued in connection with the proposed acquisition of Principal High Yield
Fund, Inc. by Principal Bond Fund, Inc. as of October 31, 2001. The number of
additional shares issued was calculated by dividing the net asset value of each
class of Principal High Yield Fund, Inc. by the respective class net asset value
per share of Principal Bond Fund, Inc.
4. PRO FORMA ADJUSTMENTS
The accompanying pro forma financial statements reflect changes in fund shares
as if the merger had taken place on October 31, 2001. The expenses of the
Principal High Yield Fund, Inc. were adjusted assuming the fee structure of
Principal Bond Fund, Inc. was in effect for the year ended October 31, 2001.
5. DISTRIBUTIONS
No provision for federal income taxes is considered necessary because each fund
is qualified as a "regulated investment company" under the Internal Revenue Code
and intends to distribute each year substantially all of its net investment
income and realized capital gains to shareholders. The cost of investments for
federal income tax reporting purposes approximates that used for financial
reporting purposes.
Principal Bond Fund, Inc. and Principal High Yield Fund, Inc. will distribute
substantially all of their net investment income and any realized gains prior to
the merger date.
6. SUBSEQUENT EVENT
Effective December 28, 2001 and January 31, 2002, Principal Bond Fund, Inc. and
Principal High Yield Fund, Inc. exchanged all Class R shares and Class C shares,
respectively, into Class A shares. The pro forma financial statements do not
reflect the discontinuation of Class C shares and Class R shares.
37
Principal Amount or Number of Shares
_____________________________________________________
Bond High Yield
Fund Fund Combined
BONDS (54.66%)
Aerospace & Defense (0.17%)
Raytheon
370,000 370,000 7.20%; 08/15/27
Agricultural Chemicals (0.33%)
IMC Global 1
700,000 700,000 10.88%; 06/01/08
Apparel Manufacturers (0.05%)
William Carter 1
100,000 100,000 10.88%; 08/15/11
Auto-Cars & Light Trucks (0.51%)
Ford Motor
1,000,000 1,000,000 8.90%; 01/15/32
Auto-Medium & Heavy Duty Trucks (0.33%)
Navistar Financial
700,000 700,000 9.00%; 06/01/02
Auto/Truck Parts & Equipment-Original (0.38%)
Advance Stores 1
200,000 200,000 10.25%; 04/15/08
Visteon
600,000 600,000 8.25%; 08/01/10
Automobile Sequential (0.71%)
Capital Auto Receivables Asset Trust
1,500,000 1,500,000 6.46%; 01/15/04
Broadcasting Services & Programming (0.35%)
Clear Channel Communications
750,000 750,000 6.00%; 11/01/06
Building & Construction Products-
Miscellaneous (0.48%)
Masco
1,000,000 1,000,000 6.00%; 05/03/04
Building Products-Air & Heating (0.10%)
York International
200,000 200,000 6.63%; 08/15/06
Building Products-Wood (0.28%)
Celulosa Arauco y Constitucion
600,000 600,000 7.75%; 09/13/11
Building-Residential & Commercial (0.35%)
D.R. Horton
750,000 750,000 9.75%; 09/15/10
Cable TV (1.57%)
Charter Communications Holdings
700,000 700,000 0.00%; 05/15/11 2
700,000 700,000 10.75%; 10/01/09
Comcast Cable Communications
1,100,000 1,100,000 6.88%; 06/15/09
Frontiervision Holdings
700,000 700,000 11.88%; 09/15/07
Mediacom Broadband 1
350,000 350,000 11.00%; 07/15/13
Casino Hotels (0.15%)
Park Place Entertainment
350,000 350,000 8.13%; 05/15/11
Casino Services (0.35%)
Anchor Gaming
700,000 700,000 9.88%; 10/15/08
Cellular Telecommunications (1.11%)
American Cellular
350,000 350,000 9.50%; 10/15/09
Crown Castle International
350,000 350,000 9.38%; 08/01/11
Nextel Partners
350,000 350,000 11.00%; 03/15/10
Telus
625,000 7.50%; 06/01/07
600,000 8.00%; 06/01/11
UbiquiTel Operating 2
350,000 350,000 0.00%; 04/15/10
Chemicals-Diversified (0.30%)
Equistar Chemicals 1
700,000 700,000 10.13%; 09/01/08
Coal (0.17%)
Luscar Coal 1
350,000 350,000 9.75%; 10/15/11
Commercial Banks (0.46%)
Fleet National Bank
1,000,000 1,000,000 5.75%; 01/15/09
Commercial Services (0.08%)
Iron Mountain
175,000 175,000 8.63%; 04/01/13
Computer Services (0.23%)
Globix
750,000 750,000 12.50%; 02/01/10
Unisys
350,000 350,000 8.13%; 06/01/06
Credit Card Asset Backed Securities (2.50%)
American Express Credit Account Master Trust
1,265,000 1,265,000 5.60%; 11/15/06
American Express Master Trust
600,000 600,000 7.85%; 08/15/05
Discover Card Master Trust I
3,250,000 3,250,000 5.60%; 05/16/06
Diversified Financial Services (1.66%)
Associates Corp. of North America
1,500,000 1,500,000 7.75%; 02/15/05
Citigroup
1,750,000 1,750,000 5.75%; 05/10/06
Finova Group
350,000 350,000 7.50%; 11/15/09
Diversified Manufacturing Operations (0.83%)
Tyco International Group
1,750,000 1,750,000 4.95%; 08/01/03
Diversified Minerals (0.31%)
Cyprus Amax Minerals
650,000 650,000 10.13%; 04/01/02
Diversified Operations (0.42%)
Rio Tinto Finance
875,000 875,000 5.75%; 07/03/06
Electric-Distribution (0.17%)
BRL Universal Equipment 1
350,000 350,000 8.88%; 02/15/08
Electric-Generation (1.14%)
CE Casecnan Water & Energy
350,000 350,000 11.45%; 11/15/05
CE Generation
1,916,500 1,916,500 7.42%; 12/15/18
Reliant Energy Finance 1
165,000 165,000 7.40%; 11/15/02
Electric-Integrated (2.83%)
Dominion Resources
900,000 900,000 6.00%; 01/31/03
1,000,000 1,000,000 7.82%; 09/15/14
DTE Energy
1,750,000 1,750,000 6.00%; 06/01/04
Mirant Americas Generation 1
450,000 450,000 7.20%; 10/01/08
PG&E National Energy Group
700,000 700,000 10.38%; 05/16/11
Toledo Edison
1,000,000 1,000,000 8.70%; 09/01/02
Electronic Components-Miscellaneous (0.17%)
Flextronics International
350,000 350,000 9.88%; 07/01/10
Finance-Auto Loans (2.05%)
Ford Motor Credit
775,000 775,000 6.50%; 01/25/07
1,500,000 1,500,000 6.88%; 02/01/06
General Motors Acceptance
700,000 700,000 6.13%; 09/15/06
600,000 600,000 6.38%; 01/30/04
400,000 400,000 6.75%; 01/15/06
400,000 400,000 8.00%; 11/01/31
Finance-Consumer Loans (0.29%)
Household Finance
600,000 600,000 6.40%; 06/17/08
Finance-Investment Banker & Broker (1.33%)
Goldman Sachs Group
1,175,000 1,175,000 6.88%; 01/15/11
Lehman Brothers
1,500,000 1,500,000 7.38%; 01/15/07
Finance-Mortgage Loan/Banker (5.58%)
Countrywide Home Loans
1,750,000 1,750,000 5.25%; 06/15/04
1,750,000 1,750,000 5.50%; 08/01/06
Federal Home Loan Mortgage
2,250,000 2,250,000 3.50%; 09/15/03
2,000,000 2,000,000 5.13%; 10/15/08
750,000 750,000 6.75%; 03/15/31
Federal National Mortgage Association
1,000,000 1,000,000 6.00%; 05/15/08
2,000,000 2,000,000 6.25%; 05/15/29
Finance-Other Services (1.05%)
Alamosa Delaware
350,000 350,000 12.50%; 02/01/11
Orion Power Holdings
700,000 700,000 12.00%; 05/01/10
Verizon Global Funding
1,000,000 1,000,000 6.75%; 12/01/05
Food-Meat Products (0.14%)
Smithfield Foods 1
300,000 300,000 8.00%; 10/15/09
Food-Miscellaneous/Diversified (0.38%)
Kraft Foods
450,000 450,000 6.50%; 11/01/31
Michael Foods
350,000 350,000 11.75%; 04/01/11
Food-Retail (0.93%)
Safeway
1,800,000 1,800,000 3.63%; 11/05/03
200,000 200,000 7.00%; 09/15/02
Food-Wholesale/Distribution (0.21%)
Fleming
100,000 100,000 10.13%; 04/01/08
350,000 350,000 10.63%; 07/31/07
Funeral Service & Related Items (0.30%)
Service Corp. International
700,000 700,000 6.00%; 12/15/05
Gas-Distribution (0.24%)
PG Energy
500,000 500,000 8.38%; 12/01/02
Hotels & Motels (0.78%)
John Q Hammons Hotels
700,000 700,000 8.88%; 02/15/04
Marriott International
1,000,000 1,000,000 6.63%; 11/15/03
Independent Power Producer (1.99%)
Calpine
1,750,000 750,000 2,500,000 8.50%; 02/15/11
NRG Energy
1,750,000 1,750,000 6.75%; 07/15/06
Internet Connectivity Service (0.06%)
Covad Communications Group 1 2
750,000 750,000 6.00%; 09/15/05
Life & Health Insurance (0.23%)
Conseco
700,000 700,000 8.50%; 10/15/02
Medical-Hospitals
(0.91%) HCA - The
Healthcare Co.
875,000 500,000 1,375,000 7.13%; 06/01/06
IASIS Healthcare
175,000 175,000 13.00%; 10/15/09
Magellan Health Services
350,000 350,000 9.00%; 02/15/08
Medical-Wholesale Drug Distribution (0.04%)
Amerisource Bergen 1
75,000 75,000 8.13%; 09/01/08
Money Center Banks (1.27%)
Bank of America
900,000 900,000 4.75%; 10/15/06
JP Morgan Chase
1,750,000 1,750,000 6.75%; 02/01/11
Mortgage Backed Securities (3.45%)
GMAC Commercial Mortgage Securities
2,000,000 2,000,000 7.72%; 03/15/33
JP Morgan Commercial Mortgage Finance
1,750,000 1,750,000 7.77%; 10/15/32
Merrill Lynch Mortgage Investors
3,000,000 3,000,000 7.34%; 12/26/25
Multimedia (1.31%)
AOL Time Warner
1,000,000 1,000,000 7.63%; 04/15/31
Viacom
1,150,000 1,150,000 6.40%; 01/30/06
500,000 500,000 7.88%; 07/30/30
Oil Company-Exploration & Production (3.09%)
Alberta Energy
375,000 375,000 7.38%; 11/01/31
Anadarko Finance
1,000,000 1,000,000 6.75%; 05/01/11
Chesapeake Energy 1
700,000 700,000 8.38%; 11/01/08
Cross Timbers Oil
350,000 350,000 9.25%; 04/01/07
Kerr-McGee
1,200,000 1,200,000 5.88%; 09/15/06
Louis Dreyfus Natural Gas
2,000,000 2,000,000 6.88%; 12/01/07
Petroleos Mexicanos 1
600,000 250,000 850,000 6.50%; 02/01/05
Oil Company-Integrated (0.19%)
Conoco Funding
400,000 400,000 7.25%; 10/15/31
Oil-Field Services (0.17%)
Hanover Equipment Trust 1
350,000 350,000 8.50%; 09/01/08
Oil Refining & Marketing (0.25%)
Ashland
500,000 500,000 7.71%; 05/11/07
Paper & Related Products (0.64%)
Doman Industries
1,100,000 1,100,000 12.00%; 07/01/04
Mead
50,000 50,000 6.60%; 03/01/02
Norske Skog Canada 1
350,000 350,000 8.63%; 06/15/11
Physical Therapy & Rehabilitation
Centers (0.33%)
Healthsouth 1
700,000 700,000 7.38%; 10/01/06
Pipelines (1.72%)
Duke Energy Field Services
1,500,000 1,500,000 7.88%; 08/16/10
Mapco
1,000,000 1,000,000 8.48%; 08/05/13
Williams
875,000 875,000 7.75%; 06/15/31
Poultry (0.60%)
Tyson Foods 1
900,000 900,000 6.63%; 10/01/04
350,000 350,000 7.25%; 10/01/06
Real Estate Operator & Developer (0.28%)
EOP Operating
575,000 575,000 7.00%; 07/15/11
Regional Authority (0.15%)
Province of Quebec
275,000 275,000 7.50%; 09/15/29
Regional Banks (0.65%)
PNC Funding
1,350,000 1,350,000 5.75%; 08/01/06
Retail-Automobile (0.09%)
Autonation 1
200,000 200,000 9.00%; 08/01/08
Retail-Discount (0.14%)
K Mart 1
350,000 350,000 9.88%; 06/15/08
Retail-Major Department Store (0.05%)
Sears Roebuck Acceptance
105,000 105,000 6.95%; 05/15/02
Retail-Regional Department Store (0.27%)
Dillards
350,000 350,000 6.13%; 11/01/03
Federated Department Stores
275,000 275,000 7.00%; 02/15/28
Retail-Toy Store (0.21%)
Toys R US 1
450,000 450,000 6.88%; 08/01/06
Rubber & Vinyl (0.09%)
Applied Extrusion Technologies 1
175,000 175,000 10.75%; 07/01/11
Satellite Telecom (0.17%)
EchoStar Broadband
350,000 350,000 10.38%; 10/01/07
Sovereign (0.12%)
Mexico Government
250,000 250,000 8.38%; 01/14/11
Special Purpose Entity (0.42%)
York Power Funding 1
900,000 900,000 12.00%; 10/30/07
Steel-Producers (0.15%)
United States Steel 1
350,000 350,000 10.75%; 08/01/08
Telecom Equipment Fiber Optics (0.10%)
Williams Communications Group
525,000 525,000 11.70%; 08/01/08
Telecommunication Services (0.61%)
Asia Global Crossing
350,000 350,000 13.38%; 10/15/10
Citizens Communications 1
875,000 875,000 6.38%; 08/15/04
Dolphin Telecom 2
1,500,000 1,500,000 0.00%; 05/15/09
KPNQwest
350,000 350,000 8.13%; 06/01/09
McLeodUSA
350,000 350,000 11.38%; 01/01/09
Telephone-Integrated (2.28%)
BellSouth
250,000 250,000 6.88%; 10/15/31
France Telecom 1
1,500,000 1,500,000 7.75%; 03/01/11
Intermedia Communications
350,000 350,000 8.60%; 06/01/08
Qwest Capital Funding
1,000,000 1,000,000 6.88%; 07/15/28
500,000 500,000 7.75%; 02/15/31
WorldCom
1,100,000 1,100,000 6.50%; 05/15/04
XO Communications
750,000 750,000 12.50%; 04/15/06
Transport-Air Freight (0.24%)
FedEx
500,000 500,000 8.40%; 03/23/10
Transport-Rail (0.33%)
Canadian Pacific Railway
225,000 225,000 7.13%; 10/15/31
CSX
30,000 30,000 7.05%; 05/01/02
Union Pacific
450,000 450,000 5.75%; 10/15/07
Web Hosting & Design (0.01%)
Psinet 2
350,000 350,000 10.50%; 12/01/06
Wireless Equipment (0.28%)
SBA Communications
750,000 750,000 10.25%; 02/01/09
Total Bonds
FEDERAL HOME LOAN MORTGAGE
CORPORATION (FHLMC) CERTIFICATES (16.69%)
FHLMC
1,480,526 1,480,526 6.00%; 03/01/31 - 04/01/31
FHLMC
9,550,198 9,550,198 6.50%; 03/01/19 - 07/01/31
FHLMC
12,175,138 12,175,138 7.00%; 12/01/29 - 05/01/31
FHLMC
7,681,398 7,681,398 7.50%; 11/01/29 - 03/01/31
FHLMC
3,743,619 3,743,619 8.00%; 09/01/30
Total FHLMC Certificates
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(FNMA) CERTIFICATES (9.09%)
FNMA
1,695,409 1,695,409 5.50%; 06/01/1931
FNMA
5,238,073 5,238,073 6.00%; 05/01/09 - 03/01/11
FNMA
12,042,852 12,042,852 6.50%; 01/01/11 - 10/01/31
Total FNMA Certificates
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (GNMA) CERTIFICATES (4.12%)
GNMA II
7,391,308 7,391,308 6.00%; 07/20/28 - 07/20/29
GNMA II
1,389,506 1,389,506 6.50%; 03/20/28 - 05/20/29
Total GNMA Certificates
TREASURY BONDS (12.36%)
U.S. Treasury
1,400,000 1,400,000 4.63%; 02/28/03
4,010,000 4,010,000 4.63%; 05/15/06
1,400,000 1,400,000 4.75%; 01/31/03
4,290,000 4,290,000 5.00%; 02/15/11
3,275,000 750,000 4,025,000 5.00%; 08/15/11
2,250,000 2,250,000 5.38%; 02/15/31
500,000 500,000 5.75%; 08/15/10
25,000 25,000 6.13%; 08/15/29
6,610,000 6,610,000 6.25%; 05/15/30
Total Treasury Bonds
COMMON STOCKS (0.00%)
Computer Services (0.00%)
3,500 3,500 Decisionone 2
2,054 2,054 Decisionone 2
3,540 3,540 Decisionone 2
2,100 2,100 Decisionone 2
Wireless Equipment (0.00%)
FWT
14,933 14,933 Total Common Stocks
3,733 3,733 PREFERRED STOCKS (0.05%)
Retail-Propane Distribution (0.00%)
308 308 Star Gas Partners
Telecommunication Services (0.01%)
7,500 7,500 Global Crossing Holding
Wireless Equipment (0.04%)
170,986 170,986 FWT 2
Total Preferred Stocks
COMMERCIAL PAPER (2.49%)
Finance-Consumer Loans (2.49%)
Investment in Joint Trading Account;
Household Finance
4,566,744 821,220 5,387,964 2.63%; 11/01/01
Total Commercial Paper
Total Portfolio Investments (99.46%)
Cash, receivables and other assets, net of
liabilities (0.61%)
Liabilities, net of cash, receivables and other
assets (-0.07%)
Total Net Assets (100.00%)
Market Value
__________________________________________________________
Bond High Yield
Fund Fund Combined
BONDS (54.66%)
Aerospace & Defense (0.17%)
Raytheon
7.20%; 08/15/27 $ 372,711 $ 372,711
Agricultural Chemicals (0.33%)
IMC Global 1
10.88%; 06/01/08 $ 717,500
717,500
Apparel Manufacturers (0.05%)
William Carter 1
10.88%; 08/15/11 104,500
104,500
Auto-Cars & Light Trucks (0.51%)
Ford Motor
8.90%; 01/15/32 1,094,542
1,094,542
Auto-Medium & Heavy Duty Trucks (0.33%)
Navistar Financial
9.00%; 06/01/02 711,596
711,596
Auto/Truck Parts & Equipment-Original (0.38%)
Advance Stores 1
10.25%; 04/15/08 193,000
193,000
Visteon
8.25%; 08/01/10 629,088
629,088
Automobile Sequential (0.71%)
Capital Auto Receivables Asset Trust
6.46%; 01/15/04 1,539,681
1,539,681
Broadcasting Services & Programming (0.35%)
Clear Channel Communications
6.00%; 11/01/06 753,016
753,016
Building & Construction Products-
Miscellaneous (0.48%)
Masco
6.00%; 05/03/04 1,040,464
1,040,464
Building Products-Air & Heating (0.10%)
York International
6.63%; 08/15/06 209,212
209,212
Building Products-Wood (0.28%)
Celulosa Arauco y Constitucion
7.75%; 09/13/11 601,546
601,546
Building-Residential & Commercial (0.35%)
D.R. Horton
9.75%; 09/15/10 751,875
751,875
Cable TV (1.57%)
Charter Communications Holdings
0.00%; 05/15/11 2 421,750
421,750
10.75%; 10/01/09 733,250
733,250
Comcast Cable Communications
6.88%; 06/15/09 1,150,821
1,150,821
Frontiervision Holdings
11.88%; 09/15/07 728,000
728,000
Mediacom Broadband 1
11.00%; 07/15/13 371,000
371,000
Casino Hotels (0.15%)
Park Place Entertainment
8.13%; 05/15/11 325,500
325,500
Casino Services (0.35%)
Anchor Gaming
9.88%; 10/15/08 758,625
758,625
Cellular Telecommunications (1.11%)
American Cellular
9.50%; 10/15/09 351,750
351,750
Crown Castle International
9.38%; 08/01/11 304,500
304,500
Nextel Partners
11.00%; 03/15/10 260,750
260,750
Telus
7.50%; 06/01/07 671,718
671,718
8.00%; 06/01/11 654,045
654,045
UbiquiTel Operating 2
0.00%; 04/15/10 168,000
168,000
Chemicals-Diversified (0.30%)
Equistar Chemicals 1
10.13%; 09/01/08 647,500
647,500
Coal (0.17%)
Luscar Coal 1
9.75%; 10/15/11 363,125
363,125
Commercial Banks (0.46%)
Fleet National Bank
5.75%; 01/15/09 1,004,645
1,004,645
Commercial Services (0.08%)
Iron Mountain
8.63%; 04/01/13 182,875
182,875
Computer Services (0.23%)
Globix
12.50%; 02/01/10 150,000
150,000
Unisys
8.13%; 06/01/06 350,000
350,000
Credit Card Asset Backed Securities (2.50%)
American Express Credit Account Master Trust
5.60%; 11/15/06 1,331,932
1,331,932
American Express Master Trust
7.85%; 08/15/05 667,686
667,686
Discover Card Master Trust I
5.60%; 05/16/06 3,405,001
3,405,001
Diversified Financial Services (1.66%)
Associates Corp. of North America
7.75%; 02/15/05 1,637,181
1,637,181
Citigroup
5.75%; 05/10/06 1,834,957
1,834,957
Finova Group
7.50%; 11/15/09 129,500
129,500
Diversified Manufacturing Operations (0.83%)
Tyco International Group
4.95%; 08/01/03 1,789,387
1,789,387
Diversified Minerals (0.31%)
Cyprus Amax Minerals
10.13%; 04/01/02 661,151
661,151
Diversified Operations (0.42%)
Rio Tinto Finance
5.75%; 07/03/06 915,864
915,864
Electric-Distribution (0.17%)
BRL Universal Equipment 1
8.88%; 02/15/08 360,500
360,500
Electric-Generation (1.14%)
CE Casecnan Water & Energy
11.45%; 11/15/05 301,000
301,000
CE Generation
7.42%; 12/15/18 1,998,756
1,998,756
Reliant Energy Finance 1
7.40%; 11/15/02 170,999
170,999
Electric-Integrated (2.83%)
Dominion Resources
6.00%; 01/31/03 927,377
927,377
7.82%; 09/15/14 1,087,751
1,087,751
DTE Energy
6.00%; 06/01/04 1,832,000
1,832,000
Mirant Americas Generation 1
7.20%; 10/01/08 450,888
450,888
PG&E National Energy Group
10.38%; 05/16/11 789,730
789,730
Toledo Edison
8.70%; 09/01/02 1,031,140
1,031,140
Electronic Components-Miscellaneous (0.17%)
Flextronics International
9.88%; 07/01/10 364,000
364,000
Finance-Auto Loans (2.05%)
Ford Motor Credit
6.50%; 01/25/07 772,613
772,613
6.88%; 02/01/06 1,535,430
1,535,430
General Motors Acceptance
6.13%; 09/15/06 696,626
696,626
6.38%; 01/30/04 620,088
620,088
6.75%; 01/15/06 409,856
409,856
8.00%; 11/01/31 403,411
403,411
Finance-Consumer Loans (0.29%)
Household Finance
6.40%; 06/17/08 628,878
628,878
Finance-Investment Banker & Broker (1.33%)
Goldman Sachs Group
6.88%; 01/15/11 1,239,576
1,239,576
Lehman Brothers
7.38%; 01/15/07 1,634,997
1,634,997
Finance-Mortgage Loan/Banker (5.58%)
Countrywide Home Loans
5.25%; 06/15/04 1,805,907
1,805,907
5.50%; 08/01/06 1,789,905
1,789,905
Federal Home Loan Mortgage
3.50%; 09/15/03 2,280,980
2,280,980
5.13%; 10/15/08 2,061,728
2,061,728
6.75%; 03/15/31 867,122
867,122
Federal National Mortgage Association
6.00%; 05/15/08 1,088,582
1,088,582
6.25%; 05/15/29 2,172,840
2,172,840
Finance-Other Services (1.05%)
Alamosa Delaware
12.50%; 02/01/11 346,500
346,500
Orion Power Holdings
12.00%; 05/01/10 847,000
847,000
Verizon Global Funding
6.75%; 12/01/05 1,076,600
1,076,600
Food-Meat Products (0.14%)
Smithfield Foods 1
8.00%; 10/15/09 311,250
311,250
Food-Miscellaneous/Diversified (0.38%)
Kraft Foods
6.50%; 11/01/31 460,278
460,278
Michael Foods
-
11.75%; 04/01/11 371,000
371,000
Food-Retail (0.93%)
Safeway
3.63%; 11/05/03 1,801,314
1,801,314
7.00%; 09/15/02 205,444
205,444
Food-Wholesale/Distribution (0.21%)
Fleming
10.13%; 04/01/08 104,500
104,500
10.63%; 07/31/07 352,625
352,625
Funeral Service & Related Items (0.30%)
Service Corp. International
6.00%; 12/15/05 638,750
638,750
Gas-Distribution (0.24%)
PG Energy
8.38%; 12/01/02 527,763
527,763
Hotels & Motels (0.78%)
John Q Hammons Hotels
8.88%; 02/15/04 637,000
637,000
Marriott International
6.63%; 11/15/03 1,047,402
1,047,402
Independent Power Producer (1.99%)
Calpine
8.50%; 02/15/11 1,760,994 754,712
2,515,706
NRG Energy
6.75%; 07/15/06 1,800,909
1,800,909
Internet Connectivity Service (0.06%)
Covad Communications Group 1 2
6.00%; 09/15/05 135,000
135,000
Life & Health Insurance (0.23%)
Conseco
8.50%; 10/15/02 507,500
507,500
Medical-Hospitals
(0.91%) HCA - The
Healthcare Co.
7.13%; 06/01/06 916,562 523,750
1,440,312
IASIS Healthcare
-
13.00%; 10/15/09 187,250
187,250
Magellan Health Services
-
9.00%; 02/15/08 339,500
339,500
Medical-Wholesale Drug Distribution (0.04%)
Amerisource Bergen 1
8.13%; 09/01/08 78,750
78,750
Money Center Banks (1.27%)
Bank of America
4.75%; 10/15/06 899,810
899,810
JP Morgan Chase
6.75%; 02/01/11 1,853,422
1,853,422
Mortgage Backed Securities (3.45%)
GMAC Commercial Mortgage Securities
7.72%; 03/15/33 2,254,522
2,254,522
JP Morgan Commercial Mortgage Finance
7.77%; 10/15/32 1,973,141
1,973,141
Merrill Lynch Mortgage Investors
7.34%; 12/26/25 3,243,611
3,243,611
Multimedia (1.31%)
AOL Time Warner
7.63%; 04/15/31 1,049,204
1,049,204
Viacom
6.40%; 01/30/06 1,214,754
1,214,754
7.88%; 07/30/30 561,717
561,717
Oil Company-Exploration & Production (3.09%)
Alberta Energy
7.38%; 11/01/31 385,266
385,266
Anadarko Finance
6.75%; 05/01/11 1,047,956
1,047,956
Chesapeake Energy 1
8.38%; 11/01/08 694,750
694,750
Cross Timbers Oil
9.25%; 04/01/07 368,375
368,375
Kerr-McGee
5.88%; 09/15/06 1,221,168
1,221,168
Louis Dreyfus Natural Gas
6.88%; 12/01/07 2,113,840
2,113,840
Petroleos Mexicanos 1
6.50%; 02/01/05 608,250 253,437
861,687
Oil Company-Integrated (0.19%)
Conoco Funding
7.25%; 10/15/31 410,474
410,474
Oil-Field Services (0.17%)
Hanover Equipment Trust 1
8.50%; 09/01/08 365,750
365,750
Oil Refining & Marketing (0.25%)
Ashland
7.71%; 05/11/07 546,488
546,488
Paper & Related Products (0.64%)
Doman Industries
12.00%; 07/01/04 968,000
968,000
Mead
6.60%; 03/01/02 50,527
50,527
Norske Skog Canada 1
8.63%; 06/15/11 362,687
362,687
Physical Therapy & Rehabilitation
Centers (0.33%)
Healthsouth 1
7.38%; 10/01/06 724,500
724,500
Pipelines (1.72%)
Duke Energy Field Services
7.88%; 08/16/10 1,664,025
1,664,025
Mapco
8.48%; 08/05/13 1,156,045
1,156,045
Williams
7.75%; 06/15/31 896,593
896,593
Poultry (0.60%)
Tyson Foods 1
6.63%; 10/01/04 930,397
930,397
7.25%; 10/01/06 362,836
362,836
Real Estate Operator & Developer (0.28%)
EOP Operating
7.00%; 07/15/11 599,938
599,938
Regional Authority (0.15%)
Province of Quebec
7.50%; 09/15/29 322,026
322,026
Regional Banks (0.65%)
PNC Funding
5.75%; 08/01/06 1,406,661
1,406,661
Retail-Automobile (0.09%)
Autonation 1
9.00%; 08/01/08 197,000
197,000
Retail-Discount (0.14%)
K Mart 1
9.88%; 06/15/08 305,416
305,416
Retail-Major Department Store (0.05%)
Sears Roebuck Acceptance
6.95%; 05/15/02 107,023
107,023
Retail-Regional Department Store (0.27%)
Dillards
6.13%; 11/01/03 326,668
326,668
Federated Department Stores
7.00%; 02/15/28 253,813
253,813
Retail-Toy Store (0.21%)
Toys R US 1
6.88%; 08/01/06 459,042
459,042
Rubber & Vinyl (0.09%)
Applied Extrusion Technologies 1
10.75%; 07/01/11 183,750
183,750
Satellite Telecom (0.17%)
EchoStar Broadband
10.38%; 10/01/07 365,750
365,750
Sovereign (0.12%)
Mexico Government
8.38%; 01/14/11 256,375
256,375
Special Purpose Entity (0.42%)
York Power Funding 1
12.00%; 10/30/07 915,750
915,750
Steel-Producers (0.15%)
United States Steel 1
10.75%; 08/01/08 315,000
315,000
Telecom Equipment Fiber Optics (0.10%)
Williams Communications Group
11.70%; 08/01/08 220,500
220,500
Telecommunication Services (0.61%)
Asia Global Crossing
13.38%; 10/15/10 84,000
84,000
Citizens Communications 1
6.38%; 08/15/04 902,452
902,452
Dolphin Telecom 2
0.00%; 05/15/09 15,000
15,000
KPNQwest
8.13%; 06/01/09 220,500
220,500
McLeodUSA
11.38%; 01/01/09 94,500
94,500
Telephone-Integrated (2.28%)
BellSouth
6.88%; 10/15/31 257,703
257,703
France Telecom 1
7.75%; 03/01/11 1,635,141
1,635,141
Intermedia Communications
8.60%; 06/01/08 355,250
355,250
Qwest Capital Funding
6.88%; 07/15/28 894,559
894,559
7.75%; 02/15/31 494,630
494,630
WorldCom
6.50%; 05/15/04 1,141,533
1,141,533
XO Communications
12.50%; 04/15/06 150,000
150,000
Transport-Air Freight (0.24%)
FedEx
8.40%; 03/23/10 527,905
527,905
Transport-Rail (0.33%)
Canadian Pacific Railway
7.13%; 10/15/31 231,884
231,884
CSX
7.05%; 05/01/02 30,609
30,609
Union Pacific
5.75%; 10/15/07 459,177
459,177
Web Hosting & Design (0.01%)
Psinet 2
10.50%; 12/01/06 24,500
24,500
Wireless Equipment (0.28%)
SBA Communications
10.25%; 02/01/09 600,000
600,000
Total Bonds 92,358,432 25,921,445 26,643,115
FEDERAL HOME LOAN MORTGAGE
CORPORATION (FHLMC) CERTIFICATES (16.69%)
FHLMC
6.00%; 03/01/31 - 04/01/31 1,501,346
1,501,346
FHLMC
6.50%; 03/01/19 - 07/01/31 9,895,155
9,895,155
FHLMC
7.00%; 12/01/29 - 05/01/31 12,698,896 12,698,896
FHLMC
7.50%; 11/01/29 - 03/01/31 8,053,736
8,053,736
FHLMC
8.00%; 09/01/30 3,959,771
3,959,771
Total FHLMC Certificates 36,108,904 0 36,108,904
FEDERAL NATIONAL MORTGAGE ASSOCIATION
(FNMA) CERTIFICATES (9.09%)
FNMA
5.50%; 06/01/1931 1,684,212
1,684,212
FNMA
6.00%; 05/01/09 - 03/01/11 5,472,725
5,472,725
FNMA
6.50%; 01/01/11 - 10/01/31 12,508,856 12,508,856
Total FNMA Certificates 19,665,793 0 19,666,793
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION (GNMA) CERTIFICATES (4.12%)
GNMA II
6.00%; 07/20/28 - 07/20/29 7,478,563
7,478,563
GNMA II
6.50%; 03/20/28 - 05/20/29 1,430,510
1,430,510
Total GNMA Certificates 8,909,073 0
8,909,073
TREASURY BONDS (12.36%)
U.S. Treasury
4.63%; 02/28/03 1,445,282
1,445,282
4.63%; 05/15/06 4,195,462
4,195,462
4.75%; 01/31/03 1,445,391
1,445,391
5.00%; 02/15/11 4,527,962
4,527,962
5.00%; 08/15/11 3,465,232 793,564
4,258,796
5.38%; 02/15/31 2,420,507
2,420,507
5.75%; 08/15/10 555,313
555,313
6.13%; 08/15/29 29,070
29,070
6.25%; 05/15/30 7,878,809
7,878,809
Total Treasury Bonds 25,963,028 793,564 26,756,592
COMMON STOCKS (0.00%)
Computer Services (0.00%)
Decisionone 2 0
Decisionone 2 0
Decisionone 2 0
Decisionone 2 0
Wireless Equipment (0.00%)
FWT 3,733
3,733
Total Common Stocks 0 3,733
3,733
PREFERRED STOCKS (0.05%)
Retail-Propane Distribution (0.00%)
Star Gas Partners 6,625
6,625
Telecommunication Services (0.01%)
Global Crossing Holding 22,500
22,500
Wireless Equipment (0.04%)
FWT 2 85,493
85,493
Total Preferred Stocks 0 114,618
114,618
COMMERCIAL PAPER (2.49%)
Finance-Consumer Loans (2.49%)
Investment in Joint Trading Account;
Household Finance
2.63%; 11/01/01 4,566,744 821,220
5,387,964
Total Commercial Paper 4,566,744 821,220 46,489,064
Total Portfolio Investments (99.46%) 187,571,974 27,654,580 215,226,554
Cash, receivables and other assets, net of 1,324,584
1,324,584
liabilities (0.61%)
Liabilities, net of cash, receivables and other (153,400)
153,400
assets (-0.07%)
Total Net Assets (100.00%) $ 188,896,558 $ 27,501,180 $ 216,397,738
OTHER INFORMATION
The information otherwise required to be set forth in this Statement of
Additional Information is included in the prospectuses and Statements of
Additional Information of the two Funds, all dated March 1, 2002, and in the
Funds' Annual Reports to Shareholders for the year ended October 31, 2001, all
of which are incorporated herein by reference.
PART C: OTHER INFORMATION
Item 15. Indemnification.
The information required in response to this item is incorporated herein by
reference to Item 25 of Post-Effective Amendment No. 30 to Registrant's
Registration Statement on Form N-1A (File No. 33-14536) as filed with the
Commission on February 5, 2002.
Item 16. Exhibits.
Exhibit Number Description
(1)(a)
Articles of Amendment and Restatement of the Charter of the Registrant -
incorporated herein by reference to Exhibit 1(b) to Post-Effective
Amendment No. 21 to Registrant's Registration Statement on Form N-1A (File
No. 33-14536) as filed with the Commission on December 30, 1998.
(1)(b)
Articles Supplementary are incorporated herein by reference to Exhibit
(a)(3) to Post-Effective Amendment No. 26 to Registrant's Registration
Statement on Form N1-A (File No. 33-14536) as filed with the Commission on
December 30, 1999.
(2) By-Laws of the Registrant - incorporated herein by reference to Exhibit (b)
to Post-Effective Amendment No. 24 to Registrant's Registration Statement
on Form N-1A (File No. 33-14536) as filed with the Commission on December
30, 1999.
(3) None
(4) Copy of Agreement and Plan of Acquisition (included as Appendix A to the
Proxy Statement/Prospectus, which is part of the Registration Statement on
Form N-14).
(5) None
(6)(a)
Management Agreement with Principal Management Corporation - incorporated
herein by reference to Exhibit 5(a) to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A (File No. 33-14526) as
filed with the Commission on December 30, 1998.
(6)(b)
Investment Service Agreement - incorporated herein by reference to Exhibit
5(b) to Post-Effective Amendment No. 14 to Registrant's Registration
Statement on Form N-1A (File No. 33-14536) as filed with the Commission on
February 26, 1996.
(7)(a)
Distribution Agreement - incorporated herein by reference to Exhibit 6(a)
to Post-Effective Amendment No. 14 to Registrant's Registration Statement
on Form N-1A (File No. 33-14536) as filed with the Commission on February
26, 1996.
(7)(b)
Dealer Selling Agreement - incorporated herein by reference to Exhibit
(e)(2) to Post-Effective Amendment No. 24 to Registrant's Registration
Statement on Form N-1A (File No. 33-14536) as filed with the Commission on
December 30, 1999.
(8) None
(9) Custody Agreement - incorporated herein by reference to Exhibit 8(a) to
Post-Effective Amendment No. 14 to Registrant's Registration Statement on
Form N-1A (File No. 33-14536) as filed with the Commission on February 26,
1996.
39
(10)(a)
12b-1 Plan - Class A Shares 12b-1 Plan is incorporated herein by reference
to Exhibit 15(a) to Post-Effective Amendment No. 13 to Registrant's
Registration Statement on Form N-1A (File No. 33-14536) as filed with the
Commission on December 14, 1995.
(10)(b)
12b-1 Plan - Class B Shares 12b-1 Plan - incorporated herein by reference
to Exhibit 15(b) to Post-Effective Amendment No. 13 to Registrant's
Registration Statement on Form N-1A (File No. 33-14536) as filed with the
Commission on December 14, 1995.
(10)(c)
Rule 18f-3 - Multiple Class Distribution Plan - incorporated herein by
reference to Exhibit (o) to Post-Effective Amendment No. 24 to Registrant's
Registration Statement on Form N-1A (File No. 33-14536) as filed with the
Commission on December 30, 1999.
(11) Opinion and consent of Counsel regarding legality of securities being
registered.
(12) Opinion and consent of Counsel regarding certain tax matters and
consequences to shareholders.
(13) None
(14) Consent of Independent Auditors
(15) None
(16) Powers of attorney executed by L.D. Zimpleman, J. E. Aschenbrenner, R. C.
Eucher, J. D. Davis, P. A. Ferguson, R. W. Gilbert, B. A. Lukavsky and
W. C. Kimball.
(17)(a) Form of Proxy Ballot
(17)(b)
Registrant's Rule 24f-2 Notice pursuant to Rule 24f-2 under the Investment
Company Act of 1940 for its fiscal year ended October 31, 2001 -
incorporated herein by reference to Form 24f-2 filed with the Commission on
January 4, 2002.
Item 17. Undertakings.
The undersigned registrant agrees that prior to any public offering 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 [17 CFR 230.145c], the
reoffering prospectus will contain the information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
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 1933 Act, each post-effective amendment
shall be deemed to be a new registration statement for the securities offered
therein, and the offering of securities at that time shall be deemed to be the
initial bona fide offering of them.
40
SIGNATURES
As required by the Securities Act of 1933, this registration statement has been
signed on behalf of the registrant, in the City of Des Moines and the State of
Iowa, on the 12th day of April, 2002.
Principal Bond Fund, Inc.
/s/ Ralph C. Eucher
By:_____________________________________
R. C. Eucher
President
As required by the Securities Act of 1933, this registration statement has been
signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ R. C. Eucher
_____________________________ Director and President April 12, 2002
R. C. Eucher (Principal Executive _________________
Officer)
(L. D. Zimpleman)*
_____________________________ Director and April 12, 2002
L. D. Zimpleman Chairman of the Board _________________
(J. Aschenbrenner)*
_____________________________ Director April 12, 2002
J. E. Aschenbrenner _________________
(J. D. Davis)*
_____________________________ Director April 12, 2002
J. D. Davis _________________
(P. A. Ferguson)*
_____________________________ Director April 12, 2002
P. A. Ferguson _________________
(R. W. Gilbert)*
_____________________________ Director April 12, 2002
R. W. Gilbert _________________
(W. C. Kimball)*
_____________________________ Director April 12, 2002
W. C. Kimball _________________
(B. A. Lukavsky)*
_____________________________ Director April 12, 2002
B. A. Lukavsky _________________
/s/K. L. Tibbetts
_____________________________ Chief Financial Officer April 12, 2002
K. L. Tibbetts (Principal Financial _________________
and Accounting Officer)
/s/ R. C. Eucher
By _____________________________
R. C. Eucher
Attorney-in-Fact Pursuant to
Powers of attorney previously
filed
41
April 8, 2002
Board of Directors
Principal Bond Fund, Inc.
Des Moines, IA 50392-0200
RE Registration Statement on Form N-14
Pursuant to Securities Act of 1933
I am familiar with the proposed issuance by Principal Bond Fund, Inc. of shares
of its Class A common stock, par value $.01 per share and Class B common stock,
par value $.01 per share, in connection with the transfer to it of the assets
and liabilities of Principal High Yield Fund, Inc. pursuant to the terms of an
Agreement and Plan of Acquisition to which they are parties (the "Shares"). I am
also familiar with the above-referenced Registration Statement (the
"Registration Statement") filed with the Securities and Exchange Commission
relating to the offer and sale of Shares. Based upon such investigation as I
have deemed necessary, I am of the opinion that the Shares, when issued in
accordance with the terms described in the Registration Statement, will be
legally issued, fully paid and non-assessable.
I hereby consent to the filing of this opinion as a exhibit to the Registration
Statement.
Very truly yours,
Michael D. Roughton
Counsel
42
March 29, 2002
Board of Directors
Principal High Yield Fund, Inc.
711 High Street
Des Moines, IA 50309
RE Acquisition of Principal High Yield Fund, Inc.
By Principal Bond Fund, Inc.
To the Board of Directors and Shareholders
Principal Bond Fund, Inc. ("Bond Fund") intends to acquire all of the assets and
assume all of the liabilities of Principal High Yield Fund, Inc. ("High Yield")
in a transaction described in a Form N-14 Registration Statement filed with the
United States Securities and Exchange Commission (the "Registration Statement")
on or about April 5, 2002. You have asked for an opinion concerning the Federal
income tax consequences of the proposed transaction.
Bond Fund is a Maryland Corporation. Continuously since its formation it has
qualified as a regulated investment company for purposes of Subchapter M of the
United States Internal Revenue Code of 1986 (the "Code") and has elected to be
taxed as such.
High Yield is also a Maryland Corporation. High Yield, like Bond Fund, has
qualified since its inception as a regulated investment company for purposes of
the Code, and has elected to be taxed as such.
Bond Fund and High Yield are each an open-end diversified management company
registered with the Securities and Exchange Commission and various states.
Bond Fund will acquire all of the assets of High Yield, and assume all of its
liabilities, in exchange for Bond Fund shares. High Yield will immediately
liquidate and dissolve, distributing the shares of Bond Fund to High Yield
shareholders in retirement of their High Yield shares. Each holder of shares of
High Yield will as a result of the transaction own shares of Bond Fund of equal
value.
In reliance on the information provided in the Registration Statement, I am of
the opinion that:
1.) The acquisition of all of the assets and liabilities of High Yield by
Bond Fund in exchange for shares of Bond Fund, followed by distribution
of those shares of Bond Fund to shareholders of High Yield in
liquidation of High Yield, will constitute a reorganization within the
meaning of section 368(a)(1)(C) of the Code.
2.) Shareholders of High Yield will recognize no gain or loss as a
consequence of the surrender of their shares of High Yield in exchange
for shares of Bond Fund pursuant to the liquidation of High Yield. (Code
Section 354).
3.) The tax basis and holding period of shares of Bond Fund acquired in
exchange for shares of High Yield will be the same as the tax basis and
the holding period of the shares of High Yield exchanged therefore.
(Code Sections 354 and 1223).
4.) High Yield will recognize no gain or loss on the transfer of all of its
assets to Bond Fund. (Code Section 361(a)).
5.) The tax basis of the assets of High Yield in the hands of Bond Fund
will be the same as the tax basis of those assets in the hands of High
Yield immediately prior to the acquisition. (Code Section 362(b)).
43
The foregoing opinions are based on the Code, current Treasury Regulations
issued thereunder, published administrative, interpretations thereof and
judicial decisions with respect thereto (collectively the "Tax Law") as of the
date hereof. No assurance can be given that the Tax Laws will not change.
I hereby consent to the use of this letter as an Exhibit to, and reference to it
in, the Registration Statement.
Sincerely yours
Randy Bergstrom
Counsel to Principal Bond Fund, Inc.
44
Consent of Independent Auditors
We consent to the reference to our firm under Sections 1(b) and 2(b) in the
Agreement and Plan of Acquisition included as Appendix A to the Prospectus/Proxy
Statement and the caption "Financial Statements" in the Statement of Additional
Information and to the incorporation by reference of our report dated November
26, 2001, with respect to the financial statements and financial highlights of
Principal Bond Fund, Inc. and Principal High Yield Fund, Inc. included in this
Registration Statement Under the Securities Act of 1993 (Form N-14), filed with
the Securities and Exchange Commission.
LOGO
Ernst & Young LLP
45
PRINCIPAL HIGH YIELD FUND, INC.
Des Moines, Iowa 50392-0200
(800) 247-4123
------------
PROXY FOR A SPECIAL MEETING OF SHAREHOLDERS
June 26, 2002
This proxy is solicited on behalf of the Board of Directors of the Fund. 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 the reverse side of
this ballot, at the meeting of shareholders of the Fund to be held June 26, 2002
at 2:00 p.m., C.D.T., and at 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
your name appears. Your signature acknowledges receipt of Notice of the special
Meeting of Shareholders and Prospectus/Proxy Statement dated May 9, 2002. Shares
will be voted as you instruct. If no direction is made, the proxy will be voted
FOR the proposal listed on the reverse side. In their discretion the Proxies
will also be authorized to vote upon such other matters that may properly come
before the meeting.
NOTE: PLEASE SIGN EXACTLY AS YOUR 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.
As an alternative to mailing, you may fax a copy of your proxy ballot to
515-235-9235 (this is not a toll-free number) or you may call toll-free
1-800-944-8454.
______________________________
Signature
______________________________
Signature (if held jointly)
Date ______________________________, 2002
The Board of Directors recommends that shareholders vote FOR the following
proposal. Please make your choice below in blue or black ink. Example: {X} Sign
the proxy ballot and return it as soon as possible in the enclosed envelope.
1. Approval of the Agreement and Plan of Acquisition among Principal High
Yield Fund, Inc., Principal Bond Fund, Inc. and Principal Management
Corporation, and the transaction contemplated thereby, pursuant to which
the Bond Fund would acquire all the assets and assume all the liabilities
of the High Yield Fund and issue in exchange shares of its Class A and
Class B common stock, and the High Yield Fund would distribute those
shares to its shareholders and then dissolve.
FOR [ ] AGAINST[ ] ABSTAIN [ ]
47