SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-12
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
PRINCIPAL FINANCIAL GROUP, INC.
Des Moines, Iowa 50392-0200
April 18, 2005
Dear Contract Owner:
The Board of Directors of Principal Variable Contracts Fund, Inc. (the
"Fund") has called a special meeting of the shareholders of all the separate
series or accounts of the Fund (the "Accounts") for May 26, 2005. The purpose of
the meeting is to elect the Board of Directors of the Fund and to consider a
number of other matters, some of which relate to all the Accounts and some of
which relate only to certain Accounts.
The matters which relate to all the Accounts include proposals to
reclassify the stated investment objective of each Account from a "fundamental"
investment policy, which may not be changed without shareholder approval, to a
"non-fundamental" investment policy which may be changed by the Board without
shareholder approval, to provide for updated fundamental investment policies
that will apply uniformly to all Accounts and to amend the Articles of
Incorporation of the Fund to permit the Board, without shareholder approval, to
designate a class of shares of an Account as a separate Account and to approve
combinations of Accounts under certain limited circumstances. These proposals
are intended to enhance the flexibility of the Board to respond quickly to
changing economic and market conditions and to new investment management
opportunities.
The matters which relate only to certain Accounts include approving
agreements appointing a new sub-advisor or sub-sub-advisors for an Account and
authorizing an Account to adopt "manager-of-managers" arrangements whereby the
Account's investment manager may select and contract with sub-advisors for the
Account after approval by the Board of Directors but without obtaining
shareholder approval.
The contributions to your variable life policy or variable annuity
contract are allocated to divisions of separate accounts of Principal Life
Insurance Company ("Principal Life"), some of which then invest in shares of
Accounts of the Fund. Although Principal Life is the only shareholder of the
Fund, and owns shares of the Fund for both its general and its separate
accounts, you have the right to instruct Principal Life how to vote the shares
of the Accounts that represent your contract value. Principal Life will vote, in
accordance with your instructions, the number of Account shares that represents
that portion of your contract value invested in each of the Accounts as of March
31, 2005, the record date for Fund shareholders meeting.
Enclosed you will find the Fund's Notice of Special Meeting of
Shareholders, a Proxy Statement explaining the matters to be voted on at the
meeting and a Voting Instructions Form for the shares of each Account in which
your contract value was invested as of the record date. Please read the Proxy
Statement carefully. In order for your shares to be voted at the meeting, you
are urged promptly to complete and mail your Voting Instructions Form(s) in the
enclosed postage-paid envelope.
If you have questions regarding the meeting, please call our
shareholder services department toll-free at 1-800-247-4123.
Sincerely,
/s/ J. BARRY GRISWELL
J. Barry Griswell
Chairman, President and Chief Executive Officer
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
680 8th Street
Des Moines, Iowa 50392-0200
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Asset Allocation Account Limited-Term Bond Account
Balanced Account MidCap Account
Bond Account MidCap Growth Account
Capital Value Account MidCap Value Account
Equity Growth Account Money Market Account
Equity Income Account Principal LifeTime 2010 Account
Equity Value Account Principal LifeTime 2020 Account
Government Securities Account Principal LifeTime 2030 Account
Growth Account Principal LifeTime 2040 Account
International Account Principal LifeTime 2050 Account
International Emerging Markets Account Principal LifeTime Strategic Income Account
International SmallCap Account Real Estate Securities Account
LargeCap Blend Account SmallCap Account
Large Growth Account SmallCap Growth Account
LargeCap Stock Index Account SmallCap Value Account
LargeCap Value Account
To the Shareholders:
A meeting of shareholders of each of the Accounts of Principal Variable
Contracts Fund, Inc. (the "Fund") will be held at 680 8th Street, Des Moines,
Iowa 50392-0200 on May 26, 2005, at 10:00 a.m. Central Daylight Time. The
meeting is being held to consider and vote on the following matters as well as
any other issues that properly come before the meeting and any adjournments:
1. Election of Board of Directors (all Accounts).
2. Approval of a Sub-Advisory or Sub-Sub-Advisory Agreement:
2A. With Columbus Circle Investors as sub-advisor for the
Growth Account (applies only to the Growth Account).
2B. With Principal Global Investors, LLC as sub-advisor for
the Money Market Account (applies only to the Money Market Account).
2C. With Principal Global Investors, LLC as sub-advisor for
the Bond Account (applies only to the Bond Account).
2D. With Spectrum Asset Management, Inc. as a sub-sub-advisor
for the Bond Account (applies only to the Bond Account).
2E. With Post Advisory Group, LLC as a sub-sub-advisor for the
Bond Account (applies only to the Bond Account).
2F. With Spectrum Asset Management, Inc. as a sub-sub-advisor
for the Equity Income Account (applies only to the Equity Income
Account).
2G. With Principal Real Estate Investors, LLC as a
sub-sub-advisor for Equity Income Account (applies only to the Equity
Income Account).
2H. With Principal Real Estate Investors, LLC as sub-advisor
for the Real Estate Securities Account (applies only to the Real Estate
Securities Account).
3. Approval of reclassifying the investment objective of each Account
as a "non-fundamental policy" which may be changed without shareholder approval
(all Accounts).
4. Approval of Amendments to the Fund's Articles of Incorporation to
authorize the Board of Directors, without shareholder approval, to:
4A. Approve combinations of Accounts (all Accounts);
4B. Liquidate the assets attributable to an Account or a class
of shares and terminate the Account or class of shares (all
Accounts); and
4C. Designate a class of shares of an Account as a separate
Account (all Accounts),
all for purposes of facilitating future combinations of Accounts that the Board
of Directors determines are in the best interests of the affected shareholders.
5. Approval of a proposal to permit Principal Management Corporation
(the "Manager") to select and contract with sub-advisors for certain Accounts
after approval by the Board of Directors but without obtaining shareholder
approval (applies only to International Emerging Markets, Principal LifeTime
2010, Principal LifeTime 2020, Principal LifeTime 2030, Principal LifeTime 2040,
Principal LifeTime 2050 and Principal LifeTime Strategic Income Accounts).
6. Approval of changes to the fundamental investment restrictions of
the Accounts with respect to:
6A. Issuing senior securities (applies only to the Capital
Value, Government Securities and Money Market Accounts);
6B. Borrowing (applies only to the Asset Allocation, Balanced,
Bond, Capital Value, Equity Growth, Equity Income, Equity
Value, Government Securities, Growth, International,
International Emerging Markets, International SmallCap,
LargeCap Blend, LargeCap Growth, LargeCap Stock Index,
LargeCap Value, Limited-Term Bond, MidCap, MidCap Growth,
MidCap Value, Money Market, Principal LifeTime 2010,
Principal LifeTime 2020, Principal LifeTime 2030, Principal
LifeTime 2040, Principal LifeTime 2050, Principal LifeTime
Strategic Income, Real Estate Securities, SmallCap, SmallCap
Growth and SmallCap Value Accounts);
6C. Underwriting securities of another issuer (applies only to
the Capital Value, Government Securities, Money Market,
Principal LifeTime 2010, Principal LifeTime 2020, Principal
LifeTime 2030, Principal LifeTime 2040, Principal LifeTime
2050, Principal LifeTime Strategic Income);
6D. Concentration of investments (applies only to the Asset
Allocation, Balanced, Bond, Capital Value, Equity Growth,
Equity Income, Government Securities, Growth, International,
International SmallCap, Limited-Term Bond, MidCap, MidCap
Growth, Money Market, Principal LifeTime 2010, Principal
LifeTime 2020, Principal LifeTime 2030, Principal LifeTime
2040, Principal LifeTime 2050, Principal LifeTime Strategic
Income, Real Estate Securities, SmallCap, SmallCap Growth
and SmallCap Value Accounts);
6E. Purchases or sales of real estate (applies only to the
Capital Value, Government Securities, Money Market,
Principal LifeTime 2010, Principal LifeTime 2020, Principal
LifeTime 2030, Principal LifeTime 2040, Principal LifeTime
2050 and Principal LifeTime Strategic Income Accounts);
6F. Purchases or sales of commodities (applies only to the Asset
Allocation, Balanced, Bond, Capital Value, Equity Growth,
Equity Income, Government Securities, Growth, International,
International SmallCap, Limited-Term Bond, MidCap, MidCap
Growth, Money Market, Principal LifeTime 2010, Principal
LifeTime 2020, Principal LifeTime 2030, Principal LifeTime
2040, Principal LifeTime 2050, Principal LifeTime Strategic
Income, Real Estate Securities, SmallCap, SmallCap Growth
and SmallCap Value Accounts);
6G. Making of loans (applies only to the Asset Allocation,
Balanced, Bond, Capital Value, Equity Growth, Equity Income,
Government Securities, Growth, International, International
Emerging Markets, International SmallCap, LargeCap Blend,
LargeCap Growth, LargeCap Stock Index, LargeCap Value,
Limited-Term Bond, MidCap, MidCap Growth, MidCap Value,
Money Market, Principal LifeTime 2010, Principal LifeTime
2020, Principal LifeTime 2030, Principal LifeTime 2040,
Principal LifeTime 2050, Principal LifeTime Strategic
Income, Real Estate Securities, SmallCap, SmallCap Growth
and SmallCap Value Accounts);
6H. Short sales (applies only to the Government Securities,
Principal LifeTime 2010, Principal LifeTime 2020, Principal
LifeTime 2030, Principal LifeTime 2040, Principal LifeTime
2050 and Principal LifeTime Strategic Income Accounts);
6I. Diversification (applies only to the Government Securities,
Money Market, Principal LifeTime 2010, Principal LifeTime
2020, Principal LifeTime 2030, Principal LifeTime 2040,
Principal LifeTime 2050 and Principal LifeTime Strategic
Income Accounts);
6J. Elimination of unnecessary restrictions (applies only to the
Asset Allocation, Balanced, Bond, Capital Value, Equity
Growth, Government Securities, Growth, International,
Limited-Term Bond, MidCap and Money Market Accounts); and
6K. Changing certain fundamental restrictions to non-fundamental
restrictions (applies only to the Capital Value, Government
Securities and Money Market Accounts).
The close of business on March 31, 2005 is the record date for the
meeting and any adjournments. Shareholders as of that date are entitled to
notice of and to vote at the meeting.
Your vote is important. No matter how many shares you own, please vote.
If you own shares in more than one Account, you need to return all of the proxy
ballots. To save your Fund from incurring the cost of additional solicitations,
please review the materials and vote today.
For the Board of Directors
A.S. Filean
Senior Vice President and Secretary
Dated: April 18, 2005
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
-------------------------------------
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 26, 2005
-------------------------------------
April 18, 2005
TABLE OF CONTENTS
Page
Introduction.........................................................................................
Voting
Information...................................................................................
Proposal 1 Election of Board of Directors..........................................................
Proposal 2 Approval of a Sub-Advisory or Sub-Sub-Advisory Agreement:
2A --With Columbus Circle Investors as sub-advisor for the Growth Account...................
2B --With Principal Global Investors, LLC as sub-advisor for the Money Market Account
2C, 2D and 2E --With Principal Global Investors, LLC as sub-advisor, and each of Spectrum Asset
Management, Inc. and Post Advisory Group, LLC as a sub-sub-advisor, for the Bond Account
2F and 2G --With each of Spectrum Asset Management, Inc. and Principal Real Estate Investors, LLC
as a sub-sub-advisor for the Equity Income Account...........................
2H --With Principal Real Estate Investors, LLC as sub-advisor for the Real Estate
Securities Account.......................................................................
Proposal 3 Approval of reclassifying the investment objective of each Account as a "non-fundamental
policy" which may be changed without shareholder approval...................
Proposal 4 Approval of Amendments to the Fund's Articles of Incorporation to authorize the Board of
Directors, without shareholder approval, to:
4A --Approve combinations of Accounts.......................................................
4B --Liquidate the assets attributable to an Account or a class of shares and terminate the
Account or class of shares...............................................................
4C --Designate a class of shares of an Account as a separate Account........................
Proposal 5 Approval of a proposal to permit the Manager to select and contract with sub-advisors
for certain Accounts after approval by the Board of Directors but without obtaining
shareholder approval.....................................................................
Proposal 6 Approval of changes to the fundamental investment restrictions of the Accounts with
respect to ..............................................................................
6A --Issuing senior securities..............................................................
6B --Borrowing..............................................................................
6C --Underwriting securities of another issuer..............................................
6D --Concentration of investments...........................................................
6E --Purchases or sales of real estate......................................................
6F --Purchases or sales of commodities......................................................
6G --Making loans...........................................................................
6H --Short sales..........................................................................--
6I --Diversification........................................................................
6J --Elimination of unnecessary restrictions................................................
6K --Changing certain fundamental restrictions to non-fundamental restrictions..............
Other Matters..........................................................................................
Appendix A Outstanding Shares and Share Ownership...................................................
Appendix B Audit and Nominating Committee Charter...................................................
Appendix C Form of Sub-Advisory Agreement...........................................................
Appendix D Form of Sub-Sub-Advisory Agreement.......................................................
Appendix E Additional Information About the Manager, Principal Global and the Proposed New
Sub-Advisors and Sub-Sub-Advisors........................................................
Appendix F Stated Investment Objectives of the Accounts.............................................
Appendix G Proposed Fundamental Investment Restrictions of the Accounts.............................
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
680 8th Street
Des Moines, Iowa 50392-0200
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 26, 2005
INTRODUCTION
Principal Variable Contracts Fund, Inc. (the "Fund" or "we") will hold
a special shareholders meeting (the "Meeting") on May 26, 2005, at 10:00 a.m.
Central Daylight Time, at 680 8th Street, Des Moines, Iowa 50392-0200. This
Proxy Statement is first being sent to shareholders on or around April 18, 2005.
The Fund is a Maryland corporation and an open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund is a "series" mutual fund and currently
offers the following 31 separate funds or accounts (the "Accounts"):
Asset Allocation Account Limited-Term Bond Account
Balanced Account MidCap Account
Bond Account MidCap Growth Account
Capital Value Account MidCap Value Account
Equity Growth Account Money Market Account
Equity Income Account Principal LifeTime 2010 Account
Equity Value Account Principal LifeTime 2020 Account
Government Securities Account Principal LifeTime 2030 Account
Growth Account Principal LifeTime 2040 Account
International Account Principal LifeTime 2050 Account
International Emerging Markets Account Principal LifeTime Strategic Income Account
International SmallCap Account Real Estate Securities Account
LargeCap Blend Account SmallCap Account
Large Growth Account SmallCap Growth Account
LargeCap Stock Index Account SmallCap Value Account
LargeCap Value Account
The sponsor of the Fund is Principal Life Insurance Company ("Principal
Life"), the investment advisor is Principal Management Corporation (the
"Manager") and the principal underwriter is Princor Financial Services
Corporation ("Princor"). Principal Global Investors LLC ("Principal Global") is
the sub-advisor for many of the Accounts. Principal Life, an insurance company
organized in 1879 under the laws of the state of Iowa, the Manager, Princor and
Principal Global are indirect, wholly-owned subsidiaries of Principal Financial
Group, Inc. Their address is Principal Financial Group, Des Moines, Iowa
50392-0200.
The Meeting is being held to elect the Board of Directors of the Fund
(Proposal 1) and to consider a number of other matters, some of which relate to
all the Accounts and some of which relate only to specified Accounts. The
matters which relate to all the Accounts are proposals to:
(i) reclassify the investment objective of each of the Accounts from a
"fundamental" investment policy, which may not be changed without
shareholder approval, to a "non-fundamental" investment policy which may be
changed by the Board without shareholder approval (Proposal 3);
(ii) amend the Articles of Incorporation of the Fund to permit the Board,
without shareholder approval: (a) to approve combinations involving the
Accounts; (b) to liquidate the assets attributable to an Account or a class
of shares thereof and terminate such Account or class of shares; and (c) to
designate a class of shares of an Account as a separate Account, all for
purposes of facilitating future combinations of Accounts that the Board
determines are in the best interests of the affected shareholders (Proposal
4); and
(iii)approve changes to the fundamental investment restrictions of the Accounts
(Proposal 6).
The matters which relate to specified Accounts are proposals to:
(i) approve: (a) a sub-advisory agreement appointing Columbus Circle Investors
("CCI") as the sub-advisor to the Growth Account (Proposal 2A);.(b) a
sub-advisory agreement appointing Principal Global as the new sub-advisor
to the Money Market Account (Proposal 2B); (c) a sub-advisory agreement
appointing Principal Global as the new sub-advisor, and each of Spectrum
Asset Management, Inc. ("Spectrum") and Post Advisory Group, LLC as a
sub-sub-advisor, to the Bond Account (Proposals 2C, 2D and 2E); (d)
sub-sub-advisory agreements appointing each of Spectrum and Principal Real
Estate Investors, LLC (Principal REI") as a sub-sub-advisor to the Equity
Income Account (Proposals 2F and 2G) and (e) a sub-advisory agreement
appointing Principal REI as the sub-advisor to the Real Estate Securities
Account (Proposal 2H); and
(ii) permit the Manager to select and contract with sub-advisors (other than
sub-advisors affiliated with the Manager), after approval by the Board but
without shareholder approval, for the following Accounts: the International
Emerging Markets, Principal LifeTime 2010, Principal LifeTime 2020,
Principal LifeTime 2030, Principal LifeTime 2040, Principal LifeTime 2050
and Principal LifeTime Strategic Income Accounts (Proposal 5).
VOTING INFORMATION
Voting procedures. We are furnishing this Proxy Statement to you in
connection with the solicitation on behalf of the Board of Directors of the Fund
(the "Board") of proxies to be used at the Meeting. The Board is asking
permission to vote for you. If you complete and return the enclosed proxy
ballot, the persons named on the ballot as proxies will vote your shares as you
indicate on the proxy ballot or for approval of each matter for which there is
no indication. If you change your mind after you send in the ballot, you may
change or revoke your vote by writing to the Principal Variable Contracts Fund,
Inc. at the Principal Financial Group, Des Moines, Iowa 50392 0200.
Please vote your shares by mailing the enclosed ballot and returning it
in the enclosed postage paid envelope.
Voting rights. Only shareholders of record at the close of business on
March 31, 2005 (the "Record Date") are entitled to vote. The shareholders of
each of the Accounts of the Fund will vote together on each proposal that we
intend to submit to the shareholders of that Account. You are entitled to one
vote on each proposal submitted to the shareholders of an Account for each share
of the Account which you hold. Certain of the proposals require for approval the
vote of a "majority of the outstanding voting securities," which is a term
defined in the Investment Company Act of 1940 (the "1940 Act") to mean, with
respect to an Account, the affirmative vote of the lesser of (1) 67% or more of
the voting securities of the Account present at the meeting of that Account, if
the holders of more than 50% of the outstanding voting securities of the Account
are present in person or by proxy, or (2) more than 50% of the outstanding
voting securities of the Account (a "Majority of the Outstanding Voting
Securities").
Principal Life owns and will vote all outstanding Fund shares. It will
vote the shares allocated to each of its separate accounts registered under the
1940 Act, and attributable to variable annuity contracts and variable life
insurance policies, in accordance with instructions received from
contractholders, policy holders, participants or annuitants. It will vote the
shares allocated to those accounts for which it does not receive instructions
and the shares allocated to its general account in proportion to the
instructions received. Principal Life may use this Proxy Statement in soliciting
voting instructions.
The number of votes eligible to be cast at the Meeting with respect to
each Account, as of the Record Date, and other shareownership information are
set forth in Appendix A to this Proxy Statement.
Quorum requirements. A quorum must be present at the Meeting for the
transaction of business. The presence in person or by proxy of one-third of the
shares of each of the Accounts outstanding at the close of business on the
Record Date constitutes a quorum for the Meeting with respect to that Account.
Abstentions and broker non-votes (proxies from brokers or nominees indicating
that they have not received instructions from the beneficial owners on an item
for which the broker or nominee does not have discretionary power) are counted
toward a quorum but do not represent votes cast for any issue. Under the 1940
Act, the affirmative vote necessary to approve certain of the proposals may be
determined with reference to a percentage of votes present at the Meeting, which
would have the effect of counting abstentions as if they were votes against a
proposal.
Solicitation procedures. We intend to solicit proxies by mail. Officers
or employees of the Fund, the Manager or their affiliates may make additional
solicitations by telephone, internet, facsimile or personal contact. They will
not be specially compensated for these services. Brokerage houses, banks and
other fiduciaries may be requested to forward soliciting materials to their
principals and to obtain authorization for the execution of proxies. For those
services, they will be reimbursed by the Fund for their out-of-pocket expenses.
Expenses of the Meeting. Except as may be otherwise noted below, the
Accounts will pay the expenses of the Meeting, including those associated with
the preparation and distribution of proxy materials and the solicitation of
proxies. To avoid the cost of further solicitation, it is important for you to
vote promptly.
PROPOSAL 1
ELECTION OF THE BOARD OF DIRECTORS
(All Accounts)
The Board has set the number of Directors at nine. Each Director will
serve until the next meeting of shareholders or until a successor is elected and
qualified. Unless you do not authorize it, your proxy will be voted in favor of
the nine nominees listed below. All of the nominees currently serve as
Directors.
Each nominee has agreed to be named in this Proxy Statement and to
serve if elected. The Board has no reason to believe that any of the nominees
will become unavailable for election as a Director. However, if that should
occur before the meeting, your proxy will be voted for the individuals
recommended by the Board to fill the vacancies.
The following table presents certain information regarding the current
Directors of the Fund, including their principal occupations which, unless
specific dates are shown, are of more than five years duration. In addition, the
table includes information concerning other directorships held by each Director
in reporting companies under the Securities Exchange Act of 1934 or registered
investment companies under the 1940 Act. Information is listed separately for
those nominees who are "interested persons" (as defined in the 1940 Act) of the
Fund (the "Interested Directors") and those nominees who are not interested
persons of the Fund (the "Independent Directors"). All Directors serve as
directors for each of the 24 investment companies (with a total of 106
portfolios as of December 31, 2004) sponsored by Principal Life: the Fund, the
separate funds commonly and collectively known as the Principal Mutual Funds and
Principal Investors Fund, Inc. (the "Fund Complex").
Independent Directors
Name, Address Position(s) Held with the Principal Occupation(s) During the Other
and Age Fund Past 5 Years Directorships Held
Elizabeth Ballantine Director (since 2004), Principal, EBA Associates The McClatchy
1113 Basil Road Member of Audit and (consulting and investments) Company
McLean, VA Nominating Committee
Age: 56
James D. Davis Director (since 1997), Retired. Formerly, Vice President, None
4940 Center Court Member of Audit and Deere & Company (machinery and
Bettendorf, IA Nominating Committee equipment)
Age: 71
Richard W. Gilbert Director (since 1997), President, Gilbert Communications, Calamos Asset
5040 Arbor Lane, #302 Member of Audit and Inc. (management advisory services) Management, Inc.
Northfield, IL Nominating Committee
Age: 64
Mark A. Grimmett Director (since 2004), Executive Vice President and CFO, None
6310 Deerfield Avenue Member of Audit and since 2000, and prior thereto, Vice
San Gabriel, CA Nominating Committee President and CFO, Merle Norman
Age: 45 Cosmetics, Inc. (manufactures and
distributes skin care and color
cosmetic products)
William C. Kimball Director (since 1999), Retired. Formerly, Chairman and Casey's General
3094 104th Member of Audit and CEO, Medicap Pharmacies Inc. (chain Stores, Inc.
Urbandale, IA Nominating Committee of retail pharmacies)
Age: 57
Barbara A. Lukavsky Director (since 1997), President and CEO, Barbican None
100 Market Street Member of Audit and Enterprises, Inc. (holding company
Des Moines, IA 50309 Nominating Committee, for franchises in the cosmetics
Age: 64 Member of Executive industry)
Committee
Interested Directors
Name, Address and Age Position(s) Held with the Positions with the Manager and Its Other
Fund Affiliates; Principal Occupation(s) Directorships Held
During the Past 5 Years
John E. Aschenbrenner Director (since 1998) Director, the Manager and Princor None
711 High Street since 1998. President, Insurance
Des Moines, Iowa 50392 and Financial Services, Principal
Age: 55 Financial Group, Inc., since 2003.
Executive Vice President,
2000-2003, and prior thereto,
Senior Vice President, Principal
Life
Ralph C. Eucher Director, President and Director, President and Chief None
711 High Street Chief Executive Officer, Executive Officer, the Manager and
Des Moines, Iowa 50392 Member of Executive Princor since 1999. Senior Vice
Age: 52 Committee (since 1999) President, since 2002, Vice
President, 1999-2002, and prior
thereto, Second Vice President,
Principal Life
Larry D. Zimpleman Director, Chairman of the Chairman and Director, the Manager None
711 High Street Board, Member of and Princor since 2001. President,
Des Moines, Iowa 50392 Executive Committee Retirement and Investor Services,
Age: 53 (since 2001) Principal Financial Group, Inc.
since 2003. Executive Vice
President, 2001-2003, and prior
thereto, Senior Vice President,
Principal Life
During the last fiscal year of the Fund, the Board of Directors held
seven meetings. Each of the Directors of the Fund attended 100% of the meetings
of the Board and of the committees of which the Director was a member, except
for two Directors who attended at least 85% of such meetings.
Correspondence intended for the Board or for an individual Director may
be sent to the attention of the Board or the individual Director at 680 8th
Street, Des Moines, Iowa 50392-0200. All communications addressed to the Board
or to an individual Director received by the Fund are forwarded to the full
Board or to the individual Director.
Officers of the Fund
The following table presents certain information regarding the current
officers of the Fund, including their principal occupations which, unless
specific dates are shown, are of more than five years duration. Officers serve
at the pleasure of the Board of Directors.
Officers
Position(s) Held Principal Occupation(s)
Name, Address with the Fund During the Past 5 Years
and Age
Craig L Bassett Treasurer (since 1997) Vice President and Treasurer, Principal Life
711 High Street
Des Moines, Iowa 50392
Age: 52
Michael J. Beer Executive Vice Executive Vice President and Chief Operating
711 High Street President, Principal Officer, the Manager and Princor
Des Moines, Iowa 50392 Accounting Officer
Age: 44 (since 1997)
David J. Brown Chief Compliance Vice President, Product & Distribution
711 High Street Officer (since 2004) Compliance, Principal Life; Senior Vice
Des Moines, Iowa 50392 President, the Manager, since 2004; Senior Vice
Age: 44 President, Princor, since 2003, and prior
thereto, Vice President, the Manager and
Princor
Jill R. Brown Vice President and Vice President and Chief Financial Officer,
711 High Street Chief Financial Officer Princor, since 2003, and prior thereto,
Des Moines, Iowa 50392 (since 2003) Assistant Financial Controller, Principal Life
Age: 37
Arthur S. Filean Senior Vice President Senior Vice President, since 2000, and prior
711 High Street and Secretary (since thereto, Vice President, the Manager and
Des Moines, Iowa 50392 1997) Princor
Age: 66
Ernest H. Gillum Vice President and Vice President and Chief Compliance Officer,
711 High Street Assistant Secretary the Manager, since 2004, and prior thereto,
Des Moines, Iowa 50392 (since 1997) Vice President, Compliance and Product
Age: 49 Development, the Manager
David W. Miles Senior Vice President Senior Vice President--Product Development, the
711 High Street (since 2005) Manager and Princor, and Second Vice President,
Des Moines, Iowa 50392 Principal Financial Group, Inc., since 2005,
Age: 47 and prior thereto, Executive Vice President,
Amcore Financial, Inc. (banking)
Layne A. Rasmussen Controller (since 1997) Vice President and Controller - Mutual Funds,
711 High Street the Manager
Des Moines, Iowa 50392
Age: 46
Michael D. Roughton Counsel (since 1997) Vice President and Senior Securities Counsel,
711 High Street Principal Financial Group, Inc.; Senior Vice
Des Moines, Iowa 50392 President and Counsel, the Manager and Princor;
Age: 53 and Counsel, Principal Global
Board Committees
Audit and Nominating Committee. The Fund has an Audit and Nominating
Committee. Its members are identified above. All are Independent Directors.
During the last fiscal year, the Committee met four times.
The audit committee functions of the Committee include: (1) appointing,
compensating, and conducting oversight of the work of the independent auditors;
(2) reviewing the scope and approach of the proposed audit plan and the audit
procedures to be performed; (3) ensuring the objectivity of the internal
auditors and the independence of the independent auditors; and (4) establishing
and maintaining procedures for the handling of complaints received regarding
accounting, internal controls, and auditing. In addition, the Committee meets
with the independent and internal auditors to discuss the results of the audits
and reports to the full Board of the Fund. The Committee also receives reports
about accounting and financial matters affecting the Fund.
The nominating committee functions of the Committee include selecting
and nominating all candidates who are not "interested persons" of the Fund (as
defined in the 1940 Act) for election to the Board. Generally, the Committee
requests director nominee suggestions from the Committee members and management.
In addition, the Committee will consider director candidates recommended by the
Fund shareholders. Recommendations should be submitted in writing to the Fund at
680 8th Street, Des Moines, Iowa 50392-0200. The Committee has not established
any specific minimum qualifications for nominees. When evaluating a person as a
potential nominee to serve as an independent director, the Committee will
generally consider, among other factors: age; education; relevant business
experience; geographical factors; whether the person is "independent" and
otherwise qualified under applicable laws and regulations to serve as a
director; and whether the person is willing to serve, and willing and able to
commit the time necessary for attendance at meetings and the performance of the
duties of an independent director. The Committee also meets personally with the
nominees and conducts a reference check. The final decision is based on a
combination of factors, including the individual strengths and the experience an
individual may bring to the Board. The Board does not use regularly the services
of any professional search firms to identify or evaluate or assist in
identifying or evaluating potential candidates or nominees.
The Board approved the Audit and Nominating Committee Charter on
September 13, 2004. The Charter is not available on the Fund website. A copy of
the Charter is attached as Exhibit B to this Proxy Statement.
Executive Committee. The Executive Committee is selected by the Board
of Directors. It may exercise all the powers of the Board, with certain
exceptions, when the Board is not in session. The Committee must report its
actions to the Board. During the last fiscal year, the Committee did not meet.
Compensation
The Fund does not pay any remuneration to its Directors who are
employed by the Manager or its affiliates or to its officers who are furnished
to the Fund by the Manager and its affiliates pursuant to the Management
Agreement. Each Director who is not an "interested person" received compensation
for service as a member of the Boards of all investment companies sponsored by
Principal Life based on a schedule that takes into account an annual retainer
amount and the number of meetings attended. These fees and expenses are divided
among the funds and portfolios based on their relative net assets.
The following table provides information regarding the compensation
received by the Independent Directors from the Fund and from the Fund Complex
during the Fund's fiscal year ended December 31, 2004. The Fund does not provide
retirement benefits to any of the Directors.
Director The Fund Fund Complex
-------- -------- ------------
Elizabeth Ballantine* $ 1,599 $ 8,750
James D. Davis $15,361 $71,500
Richard W. Gilbert $15,361 $71,500
Mark A. Grimmett** $13,370 $64,593
William C. Kimball $15,361 $71,500
Barbara A. Lukavsky $15,361 $71,500
---------------
* Ms. Ballantine did not become a Director until December 2004.
** Mr. Grimmett did not become a Director until March 2004.
Share Ownership
The following tables set forth the aggregate dollar range of the equity
securities of the mutual funds within the Fund Complex which were beneficially
owned by the Directors as of March 3, 2005. As stated above, the Fund Complex
includes the Accounts of the Fund, the Principal Mutual Funds and Principal
Investors Fund, Inc. For the purpose of these tables, beneficial ownership means
a direct or indirect pecuniary interest. Directors who beneficially owned shares
of the Accounts of the Fund did so through variable life insurance and variable
annuity contracts issued by Principal Life. Only the Directors who are
"interested persons" are eligible to participate in an employee benefit program
which invests in the Principal Investors Fund, Inc. Please note that exact
dollar amounts of securities held are not listed. Rather, ownership is listed
based on the following dollar ranges:
A - $0 D - $50,001 up to and including $100,000
B - $1 up to and including $10,000 E - $100,001 or more
C - $10,001 up to and including $50,000
Independent Directors (Not Considered to Be "Interested Persons")
Principal Variable Contracts Fund, Inc.*
Ballantine Davis Gilbert Grimmett Kimball Lukavsky
Asset Allocation Account A A A A A A
Balanced Account A A A A A A
Bond Account A A A A C A
Capital Value Account A A A A A A
Equity Growth Account A A A A C A
Equity Income Account A A A A A A
Equity Value Account A A A A A A
Government Securities Account A A A A C A
Growth Account A A A A A A
International Account A A A A A A
International Emerging Markets A A A A A A
Account
International SmallCap Account A A A A A A
LargeCap Blend Account A A A A A A
Large Growth Equity Account A A A A A A
LargeCap Stock Index Account A A A A C A
LargeCap Value Account A A A A A A
Limited-Term Bond Account A A A A A A
MidCap Account A A A A C A
MidCap Growth Account A A A A A A
MidCap Value Account A A A A C A
Money Market Account A A A A A A
Principal LifeTime 2010 Account A A A A A A
Principal LifeTime 2020 Account A A A A A A
Principal LifeTime 2030 Account A A A A A A
Principal LifeTime 2040 Account A A A A A A
Principal LifeTime 2050 Account A A A A A A
Principal LifeTime Strategic A A A A A A
Income Account
Real Estate Securities Account A A A A C A
SmallCap Account A A A A C A
SmallCap Growth Account A A A A A A
SmallCap Value Account A A A A A A
TOTAL FUND COMPLEX A A A A E A
<FN>
- -------------
* Through variable life insurance and variable annuity contracts issued by
Principal Life.
</FN>
Directors Considered to Be "Interested Persons"
Principal Variable Contracts Fund, Inc. * Aschenbrenner Eucher Zimpleman
Asset Allocation Account B A A
Balanced Account B A A
Bond Account A A A
Capital Value Account C A A
Equity Growth Account B A A
Equity Income Account A A A
Equity Value Account A A A
Government Securities Account A A A
Growth Account B A A
International Account C A A
International Emerging Markets Account A A A
International SmallCap Account B A A
LargeCap Blend Account A A A
Large Growth Equity Account C A A
LargeCap Stock Index Account A A A
LargeCap Value Account A A A
Limited-Term Bond Account A A A
MidCap Account B A A
MidCap Growth Account A A A
MidCap Value Account A A A
Money Market Account A A A
Principal LifeTime 2010 Account A A A
Principal LifeTime 2020 Account A A A
Principal LifeTime 2030 Account A A A
Principal LifeTime 2040 Account A A A
Principal LifeTime 2050 Account A A A
Principal LifeTime Strategic Income Account A A A
Real Estate Securities Account A A A
SmallCap Account C A A
SmallCap Growth Account B A A
SmallCap Value Account A A A
TOTAL FUND COMPLEX D A A
<FN>
- -------------
* Through variable life insurance and variable annuity contracts issued by
Principal Life.
</FN>
Independent Directors (Not Considered to Be "Interested Persons")
Principal Mutual Funds Ballantine* Davis Gilbert Grimmett Kimball Lukavsky
Balanced Fund, Inc. A B B A A A
Capital Value Fund, Inc. A C C A A A
Partners LargeCap Value Fund, Inc. C A A A A A
Equity Income Fund, Inc. A E B A E A
Partners Blue Chip Fund, Inc. A D B A A A
Partners LargeCap Blend Fund, Inc. A A A A A A
LargeCap Stock Index Fund, Inc. A A A A A A
Growth Fund, Inc. A C D A A A
Partners Equity Growth Fund, Inc. A A A A A A
MidCap Fund, Inc. A C D A A A
Partners MidCap Growth Fund, Inc. A A A A A A
SmallCap Fund, Inc. A A A A A A
Partners SmallCap Growth Fund, Inc. A A A A A A
Real Estate Securities Fund, Inc. C A A A C A
Bond Fund, Inc. A C D C A E
Government Securities Income Fund, Inc. A B B A A A
Tax-Exempt Bond Fund, Inc. A B A A A A
International Fund, Inc. A B C A A E
International SmallCap Fund, Inc. C C A A A A
Limited-Term Bond Fund, Inc. A A A B A E
Cash Management Fund, Inc. A D C C C D
International Emerging Markets Fund, Inc. C C A A A A
TOTAL FUND COMPLEX D E E D E E
<FN>
- ---------------
* Information for Ms. Ballantine, who became a Director in December 2004, is as
of March 4, 2005.
</FN>
Directors Considered to Be "Interested Persons"
Principal Mutual Funds Aschenbrenner Eucher Zimpleman
Balanced Fund, Inc. A A A
Capital Value Fund, Inc. A A A
Partners LargeCap Value Fund, Inc. A D A
Equity Income Fund, Inc. A C A
Partners Blue Chip Fund, Inc. A C A
Partners LargeCap Blend Fund, Inc. A D A
LargeCap Stock Index Fund, Inc. A A A
Growth Fund, Inc. A C A
Partners Equity Growth Fund, Inc. A C A
MidCap Fund, Inc. A D A
Partners MidCap Growth Fund, Inc. A A A
SmallCap Fund, Inc. A A A
Partners SmallCap Growth Fund, Inc. A A A
Real Estate Securities Fund, Inc. A A A
Bond Fund, Inc. A A A
Government Securities Income Fund, Inc. A C A
Tax-Exempt Bond Fund, Inc. A A A
International Fund, Inc. A A A
International SmallCap Fund, Inc. A A A
Limited-Term Bond Fund, Inc. A A A
Cash Management Fund, Inc. A B A
International Emerging Markets Fund, Inc. A A A
TOTAL FUND COMPLEX A E A
Directors Considered to Be "Interested Persons"
Principal Investors Fund, Inc.* Aschenbrenner Eucher Zimpleman
Bond & Mortgage Securities Fund C C C
Government Securities Fund A C A
International Fund E A C
International Emerging Markets Fund C A A
LargeCap Growth Fund C A A
LargeCap S&P 500 Index Fund C D A
Mid Cap Blend Fund C B C
Money Market Fund C A A
Partners LargeCap Blend Fund I B A A
Partners LargeCap Growth Fund I C A A
Partners LargeCap Value Fund B C C
Partners MidCap Growth Fund C A A
Principal LifeTime Strategic Income Fund C A A
Real Estate Securities Fund C A A
SmallCap S&P 600 Index Fund D A A
TOTAL FUND COMPLEX E E D
<FN>
- --------------
* Through participation in an employee benefit plan.
</FN>
Required Vote
The shareholders of all the Accounts will vote together in the election
of Directors. The affirmative vote of the holders of a plurality of the shares
voted at the meeting of the Fund is required for the election of a Director of
the Fund.
The Board of Directors unanimously recommends that the shareholders of
the Fund vote "For" all the nominees.
PROPOSAL 2
APPROVAL OF SUB-ADVISORY OR SUB-SUB-ADVISORY AGREEMENTS
Proposal 2A -- Agreement with Columbus Circle Investors ("CCI") as Sub-Advisor
for the Growth Account
(Growth Account Only)
At a meeting on December 13, 2004, the Board, including the Independent
Directors, unanimously authorized the termination of the then existing
sub-advisory agreement between the Manager and Principal Global (the "Former
Agreement") and approved an interim sub-advisory agreement between the Manager
and CCI (the "Interim Agreement"), both effective January 5, 2005, and approved
a new sub-advisory agreement between the Manager and CCI (the "Proposed
Agreement"), to be effective when approved by shareholders of the Account.
Principal Global acquired a controlling interest in CCI effective January 3,
2005.
The Former Agreement, the Interim Agreement and the Proposed Agreement
(the "Sub-advisory Agreements") have the same material terms and contain the
same compensation schedule for the sub-advisor. Under the Sub-Advisory
Agreements, the sub-advisor is compensated by the Manager and not by the
Account. Approval of the Proposed Agreement will not change the compensation
that the Account pays to the Manager under the Management Agreement or the level
of services the Manager provides the Account under that agreement.
The Interim Agreement was entered into in accordance with Rule 15a-4
under the 1940 Act, which permits an investment advisor to enter into an interim
sub-advisory arrangement with a sub-advisor, prior to shareholder approval,
provided that the conditions of the rule are met. Among these conditions are (a)
the interim contract can have a duration of no greater than 150 days following
the date on which the previous contract terminated and (b) the compensation to
be received under the interim contract is no greater than that payable under the
previous agreement. The Interim Agreement will terminate 150 days after it
became effective or on the effective date of the Proposed Agreement if earlier.
The Proposed Agreement
The following description of the Proposed Agreement is qualified in its
entirety by reference to the form of Proposed Agreement included as Appendix C
to this Proxy Statement.
The terms of the Proposed Agreement and the Interim Agreement are the
same and are the same in all material respects as those of the Former Agreement,
except for the effective and termination dates and the identity of the
sub-advisor. The Sub-Advisory Agreements provide for the Manager to pay
compensation at the same rate to the sub-advisor. Under the Sub-Advisory
Agreements, the sub-advisor manages the day-to-day investment of the Account's
assets consistent with the Account's investment objectives, policies and
restrictions and is responsible for, among other things, placing all orders for
the purchase and sale of portfolio securities, subject to supervision and
monitoring by the Manager and oversight by the Board, and provides, at its own
expense, all investment, management and administrative personnel, facilities and
equipment necessary for the conduct of the investment advisory services for the
Account.
The Proposed Agreement provides that CCI and its officers, employees,
agents, or affiliates shall not be liable to the Manager, the Fund or its
shareholders for any loss suffered by the Manager of the Fund resulting from any
error of judgment made in the good faith exercise of CCI's investment discretion
in connection with selecting investments for the Account or as a result of the
failure by the Manager of any of its affiliates to comply with the terms of the
Agreement, except for losses resulting from willful misfeasance, bad faith or
gross negligence of, or from reckless disregard of, the duties of CCI or any of
its officers, employees, agents or affiliates.
If approved by shareholders, the Proposed Agreement will become
effective on the date of such approval and will remain in effect for an initial
one-year period. Thereafter, the Proposed Agreement will continue for successive
one-year terms, provided that such continuation is specifically approved at
least annually either by the Board of Directors or by a vote of a majority of
the outstanding voting securities of the Account, and in either event by a vote
of a majority of the Independent Directors cast in person at a meeting called
for the purpose of voting on such approval. The Proposed Agreement may be
terminated at any time without the payment of any penalty by the Board, the
Manager or CCI or by vote of a majority of outstanding voting securities of the
Account on sixty days' written notice. The Proposed Agreement will automatically
terminate without penalty in the event of its assignment.
Under the Proposed Agreement, the Manager will pay CCI a fee which is
computed and paid monthly at the annual rates (as percentages of the Account's
net assets on the first day of the month) specified in the following table:
Sub-Advisory Fee Table - Growth Account
Net Assets of the Account
First Next Next Next Next Next Over
$50 million $50 million $100 million $200 million $350 million $750 million $1.5 billion
----------- ----------- ------------ ------------ ------------ ------------ ------------
0.27% 0.25% 0.22% 0.18% 0.13% 0.09% 0.06%
In calculating the fee rate for the Account, the term "Net Assets"
includes the net assets of the Account plus the net assets of any unregistered
separate account of Principal Life and any investment company sponsored by
Principal Life to which CCI provides investment services and which have the same
investment mandate as the Account.
Entering into the Proposed Agreement will not change the management fee
that the Account pays the Manager under the Management Agreement. The Manager,
and not the Fund, will bear the expenses of the services that CCI provides to
the Account under the Proposed Agreement.
Columbus Circle Investors
CCI is registered as an investment adviser under the Investment
Advisers Act of 1940 and is located at Metro Center, One Station Place,
Stamford, CT, 06902. CCI was founded in 1975. At December 31, 2004, it had
approximately $3.9 billion in assets under management.
CCI is a general partnership with two partners. One partner is CCIP,
LLC, which has a 99.9% interest in CCI. CCIP, LLC has six members, one of which
is Principal Global which has an approximately 70% membership interest. The
second partner of CCI is Principal Global Columbus Circle, LLC, which has a .1%
interest in CCI. The address of CCIP, LLC is Metro Center, One Station Place,
Stamford, Connecticut 06902. The address of Principal Global Columbus Circle,
LLC is 711 High Street, Des Moines, Iowa 50392.
The principal executive officers of CCI are: Anthony Rizza, Senior
Managing Director; Clifford G. Fox, Senior Managing Director; Warren Robert
Fehrmann, Senior Managing Director; and Frank Cuttita, Chief Administrative
Officer, Managing Director and Chief Compliance Officer. Each person's position
with CCI is his principal occupation. The address of each principal executive
officer is Metro Center, One Station Place, Stamford, Connecticut 06902.
The day-to-day management of the Account for CCI is headed by Anthony
Rizza, CFA . Mr. Rizza joined CCI in 1991. He had previously worked with
Connecticut National Bank as a Research Officer. He received a BS in Business
from the University of Connecticut. Mr. Rizza has earned the right to use the
Chartered Financial Analyst designation and is a member of the Hartford Society
of Security Analysts.
Board Considerations
In making its decision to terminate the Former Agreement, approve the
Interim Agreement and approve the Proposed Agreement and direct its submission
to shareholders for a vote, the Board, including the Independent Directors,
requested and evaluated information provided by the Manager and CCI. The
Independent Directors were assisted by independent legal counsel.
In evaluating and approving the Proposed Agreement, the Board
considered, among other factors, the following:
- the nature and extent and expected quality of the services
to be provided by CCI, which the Board concluded were likely to be favorable in
relation to those provided under the Former Agreement;
- CCI's investment management capabilities and methodologies
and its performance in managing accounts comparable to the Account, which the
Board believed to be favorable;
- the strength of CCI's personnel, technical resources and
operations, which the Board concluded was appropriate for the expected services;
and
- CCI's record with respect to adhering to an account's
investment strategies, policies and risks, which led the Board to believe that
it was likely that CCI would adhere, in all material respects, to the Accounts
investment objective, policies and restrictions as set forth in the Fund's
current Prospectus and Statement of Additional Information.
In evaluating the Proposed Agreement, the Board was aware of the extent
to which the proposed arrangements were comparable to arrangements under other
sub-advisory agreements which it had approved with respect to Accounts of the
Fund, but it did not rely on any specific comparison of the services to be
provided and the fees to be paid under the Proposed Agreement with services
provided and fees paid under other sub-advisory agreements. The Board did not
consider fee, sub-advisor profitability or economy of scale issues to be
particularly relevant in its consideration of the Proposed Agreement,
particularly because the agreement is between the Manager and the sub-advisor
and the fees for which the Proposed Agreement provides are the same as in the
Former and Interim Agreements and in any event will be paid by the Manager and
not by the Account.
Based on these considerations, the Board concluded that the Proposed
Agreement would be in the best interests of the Account and its shareholders and
decided to recommend that shareholders of the Account approve the Proposed
Agreement.
The Management Agreement
The Manager serves as the manager of the Account pursuant to a
Management Agreement between the Manager and the Fund with respect to the
Account. The Manager handles the business affairs of the Account and in that
connection provides clerical, recordkeeping, and bookkeeping services and keeps
the required financial and accounting records. In addition, the Manager performs
the portfolio management function directly or arranges for it to be performed by
a sub-advisor.
Under the Management Agreement, the Fund pays the Manager a fee which
is computed and accrued daily and payable monthly at the annual rates (as
percentages of average daily net assets) specified in the following table:
Management Fee Table - Growth Account
Net Assets of the Account
First Next Next Next Over
$250 million $250 million $250 million $250 million $1.0 billion
------------ ------------ ------------ ------------ - ------------
0.60% 0.55% 0.50% 0.45% 0.40%
During the fiscal year ended December 31, 2004, the Account paid the
Manager $812,984 (an annual rate of 0.60% of average daily net assets) for
services provided under the Management Agreement.
Additional Information
For additional information regarding the Manager and the proposed new
sub-advisor, see Appendix E to this Proxy Statement.
Required Vote
Only shareholders of the Growth Account will vote on this Proposal. The
vote required to approve the Proposal is a Majority of the Outstanding Voting
Securities of the Account.
If the Proposal is not approved by the shareholders of the Account, the
Board, in consultation with the Manager, will determine the appropriate course
to arrange for sub-advisory services for the Account and, if required by law,
will submit an alternative proposal to shareholders of the Account at a future
shareholders meeting.
The Board of Directors unanimously recommends that shareholders of the
Account vote "For" the Proposal.
Proposal 2B -- Agreement with Principal Global Investors, LLC ("Principal
Global") as Sub-Advisor for the Money
Market Account
(Money Market Account Only)
At a meeting on February 24, 2005, the Board, including the Independent
Directors, unanimously approved a new sub-advisory agreement between the Manager
and Principal Global with respect to the Money Market Accounts (the "Proposed
Agreement"). Currently, the Money Market Account does not have sub-advisory
arrangements and is managed directly by the Manager.
Under the Proposed Agreement, Principal Global will be compensated by
the Manager and not by the Account. Approval of the Proposed Agreement will not
change the compensation that the Account pays to the Manager under its
Management Agreement.
The Proposed Agreement
The following description of the Proposed Agreement is qualified in its
entirety by reference to the form of Proposed Agreement included as Appendix C
to this Proxy Statement.
Under the Proposed Agreement, Principal Global will manage the
day-to-day investment of the Account's assets consistent with the Account's
investment objectives, policies and restrictions and will be responsible for,
among other things, placing all orders for the purchase and sale of portfolio
securities, subject to supervision and monitoring by the Manager and oversight
by the Board, and will provide, at its own expense, all investment, management
and administrative personnel, facilities and equipment necessary for the conduct
of the investment advisory services for the Account.
The Proposed Agreement provides that Principal Global and its officers,
employees, agents and affiliates shall not be liable to the Manager, the Account
or its shareholders for any loss suffered by the Manager or the Account
resulting from any error of judgment made in the good faith exercise of
Principal Global's investment discretion in connection with selecting
investments for the Account or as a result of the failure by Principal Global or
any of its affiliates to comply with the terms of the Agreement, except for
losses resulting from willful misfeasance, bad faith or gross negligence, or
from reckless disregard of the duties Principal Global or any of its officers,
employees, agents or affiliates.
If approved by shareholders, the Proposed Agreement will become
effective on the date of such approval and will remain in effect for an initial
one-year period. Thereafter, the Proposed Agreement will continue for successive
one-year terms, provided that such continuation is specifically approved at
least annually either by the Board of Directors or by a vote of a Majority of
the Outstanding Voting Securities of the Account, and in either event by a vote
of a majority of the Independent Directors cast in person at a meeting called
for the purpose of voting on such approval. The Proposed Agreement may be
terminated at any time without the payment of any penalty by the Board, the
Manager or Principal Global or by vote of a Majority of the Outstanding Voting
Securities of the Account on sixty days' written notice. The Proposed Agreement
will automatically terminate without penalty in the event of its assignment.
Under the Proposed Agreement, the Manager will pay Principal Global a
fee which is computed and paid monthly at the annual rate (as a percentage of
the Account's net assets on the first day of the month) of 0.075%.
Entering into the Proposed Agreement will not change the management fee
that the Account pays the Manager under its Management Agreement. The Manager,
and not the Fund, will bear the expenses of the services that Principal Global
provides to the Account under the Proposed Agreement.
Principal Global
Principal Global is an indirect, wholly-owned subsidiary of Principal
Life and an affiliate of the Manager. Its address is 801 Grand Avenue, Des
Moines, Iowa 50392. Principal Global manages equity, fixed-income and real
estate investments primarily for institutional investors, including Principal
Life. At December 31, 2004, Principal Global, together with its affiliated asset
management companies, had approximately $128 billion in assets under management.
The principal executive officers and the directors of Principal Global
and their addresses and principal occupations are set forth in Appendix E to
this Proxy Statement.
The day-to-day management of the Account will be headed by the
following persons:
-- Alice Robertson. Ms. Robertson is a trader for Principal Global on
the corporate fixed-income trading desk. She joined the Principal Financial
Group in 1990 as a credit analyst and moved to her current position in 1993.
Previously, Ms. Robertson was an assistant vice president/commercial paper
analyst with Duff & Phelps Credit Company. Ms. Robertson earned her MA in
Finance and Marketing from DePaul University and her BA in Economics from
Northwestern University.
-- Tracy Reeg. Ms. Reeg is a portfolio manager at Principal Global
specializing in the management and research areas for the short-term money
market portfolios. She joined the Principal Financial Group in 1993. Ms. Reeg
received a BA in Finance from the University of Northern Iowa. She is a member
of the Life Office Management Association ("LOMA") and is a Fellow of the Life
Management Institute ("FLMI").
Board Considerations
In making its decision to approve the Proposed Agreement and direct its
submission to shareholders for a vote, the Board, including the Independent
Directors, requested and evaluated information provided by the Manager and
Principal Global. The Independent Directors were assisted by independent legal
counsel.
In evaluating and approving the Proposed Agreement, the Board
considered, among other factors, the following:
- the nature and extent and expected quality of the services
to be provided by Principal Global, which the Board concluded were likely to be
comparable in relation to those provided to the Account directly by the Manager;
- Principal Global's investment management capabilities and
methodologies and its performance in managing funds comparable to the Money
Market Account, which the Board believed to be favorable;
- the strength of Principal Global's personnel, technical
resources and operations, which the Board concluded was appropriate for the
expected services; and
- Principal Global's record with respect to adhering to a
fund's investment strategies, policies and risks, which led the Board to believe
that it was likely that Principal Global would adhere, in all material respects,
to the Account's investment objective, policies and restrictions as set forth in
the Fund's current Prospectus and Statement of Additional Information.
In evaluating the Proposed Agreement, the Board was aware of the extent
to which the proposed arrangements were comparable to arrangements under other
sub-advisory agreements which it had approved with respect to Accounts of the
Fund, but it did not rely on any specific comparison of the services to be
provided and the fees to be paid under the Proposed Agreement with services
provided and fees paid under other sub-advisory agreements. The Board did not
consider fee, sub-advisor profitability or economy of scale issues to be
particularly relevant in its consideration of each of the Proposed Agreements,
particularly because the agreement is between the Manager and the sub-advisor
and the fees for which the Proposed Agreement provides will be paid by the
Manager and not by the Account.
Based on these considerations, the Board concluded that the Proposed
Agreement would be in the best interests of the Money Market Account and its
shareholders and decided to recommend that shareholders of the Account approve
the Proposed Agreement.
The Management Agreement
The Manager serves as the investment manager of the Account pursuant to
a Management Agreement between the Manager and the Fund with respect to the
Account. The Manager handles the business affairs of the Account and in that
connection provides clerical, recordkeeping, and bookkeeping services and keeps
the required financial and accounting records. In addition, the Manager performs
the portfolio management function directly or arranges for it to be performed by
a sub-advisor.
Under the Management Agreement, the Account pays the Manager a fee
which is computed and accrued daily and payable monthly at the annual rates (as
percentages of average daily net assets) specified in the following table:
Management Fee Table - Money Market Account
Net Assets of Account
First Next Next Next Over
$100 million $100 million $100 million $100 million $400 million
------------ ------------ ------------ ------------ ------------
0.50% 0.45% 0.40% 0.35% 0.30%
During the fiscal year ended December 31, 2004, the Account paid the
Manager $698,379 (an annual rate of 0.48% of average daily net assets) for
services provided under the Management Agreement.
Additional Information
For additional information regarding the Manager and Principal Global,
see Appendix E to this Proxy Statement.
Required Vote
Only shareholders of the Money Market Account will vote on this
Proposal. The vote required to approve the Proposal is a Majority of the
Outstanding Voting Securities of the Account.
If the Proposal is not approved by the shareholders of the Account, the
Board, in consultation with the Manager, will determine the appropriate course
to arrange for sub-advisory services for the Account and, if required by law,
will submit an alternative proposal to shareholders of the Account at a future
shareholders meeting.
The Board of Directors unanimously recommends that shareholders of the
Account vote "For" the Proposal.
Proposal 2C -- Agreement with Principal Global Investors, LLC ("Principal
Global") as Sub-Advisor for the Bond
Account
Proposal 2D -- Agreement with Spectrum Asset management, Inc. ("Spectrum") as
Sub-Sub-Advisor for the Bond Account
Proposal 2E -- Agreement with Post Advisory Group, LLC ("Post") as
Sub-Sub-Advisor for the Bond Account
(Bond Account Only)
At a meeting on February 24, 2005, the Board, including the Independent
Directors, unanimously approved a sub-advisory agreement between the Manager and
Principal Global as sub-advisor, and a sub-sub-advisory agreement between
Principal and each of Spectrum and Post as a sub-sub-advisor, for the Bond
Account (the "Proposed Agreements"). Currently, the Bond Account does not have
sub-advisory arrangements and is managed directly by the Manager. Principal
Global's present intention is to allocate a portion of the assets of the Account
between Spectrum and Post while managing a portion of the Account's assets
itself, but it has as yet made no decision as to an initial percentage
allocation. Principal Global expects to vary such allocation from time to time.
Shareholders of the Bond Account are being asked to approve the
sub-advisory agreement with Principal Global under Proposal 2C, the
sub-sub-advisory agreement with Spectrum under Proposal 2D and the
sub-sub-advisory agreement with Post under Proposal 2E.
Under the Proposed Agreements, Principal Global will be compensated by
the Manager and not by the Account, and each of Spectrum and Post will be
compensated by Principal Global and not by the Account. Approval of the Proposed
Agreements will not change the compensation that the Account pays to the Manager
under its Management Agreement.
The Proposed Agreements
The following description of the Proposed Agreements is qualified in
its entirety by reference to the form of the proposed sub-advisory agreement
with Principal Global included as Appendix C to this Proxy Statement and the
form of the proposed sub-sub-advisory agreement with each of Spectrum and Post
included as Appendix D to this Proxy Statement. The terms of the two
sub-sub-advisory agreements are the same except as indicated otherwise below.
Sub-Advisory Agreement. Under the proposed sub-advisory agreement,
Principal Global will be responsible for managing the day-to-day investment of
the Account's assets consistent with the Account's investment objectives,
policies and restrictions and is responsible for, among other things, placing
all orders for the purchase and sale of portfolio securities (except those
placed by the sub-sub-advisors), subject to supervision and monitoring by the
Manager and oversight by the Board, and will provide, at its own expense, all
investment, management and administrative personnel, facilities and equipment
necessary for the conduct of the investment advisory services for the Account.
The proposed sub-advisory agreement provides that Principal Global and
its officers, employees, agents, and affiliates shall not be liable to the
Manager, the Account or its shareholders for any loss suffered by the Manager or
the Account resulting from any error of judgment made in the good faith exercise
of Principal Global's investment discretion in connection with selecting
investments for the Account or as a result of the failure by Principal Global or
any of its affiliates to comply with the terms of the agreement, except for
losses resulting from willful misfeasance, bad faith or gross negligence, or
from reckless disregard of the duties Principal Global or any of its officers,
employees, agents or affiliates.
Sub-Sub-Advisory Agreements. Under the proposed sub-sub-advisory
agreements, as permitted by the sub-advisory agreement, Principal Global will
delegate a portion of its responsibilities and duties under the sub-advisory
agreement to Spectrum and Post. Accordingly, each of Spectrum and Post will be
responsible for managing the day-to-day investment of the portion of the
Account's assets allocated to it by Principal Global and placing orders for the
purchase and sale of portfolio securities with respect to that portion of the
Account, subject to supervision and monitoring by Principal Global and oversight
by the Board, and each will provide, at its own expense, all investment,
management and administrative personnel, facilities and equipment necessary for
the conduct of the investment advisory services for the Account.
Each of the proposed sub-sub-advisory agreements provides that the
sub-sub-advisor shall not be liable to the Manager, Principal Global, the
Account or its shareholders for any act or omission in the course of, or
connected with, rendering services under the agreement or for any losses that
may be sustained in the purchase, holding or sale of any security absent willful
misfeasance, bad faith, gross negligence or reckless disregard of its duties
under the agreement on the part of the sub-sub-advisor.
If approved by shareholders, the Proposed Agreements will become
effective on the date of such approval and will remain in effect for an initial
one-year period. Thereafter, each of the Proposed Agreements will continue for
successive one-year terms, provided that such continuation is specifically
approved at least annually either by the Board of Directors or by a vote of a
Majority of the Outstanding Voting Securities of the Account, and in either
event by a vote of a majority of the Independent Directors cast in person at a
meeting called for the purpose of voting on such approval. Each of the Proposed
Agreements may be terminated at any time without the payment of any penalty by
the Board, the Manager or Principal Global, as the case may be, or the
sub-sub-advisor or by vote of a Majority of the Outstanding Voting Securities of
the Account on sixty days' written notice. Each of the Proposed Agreements will
automatically terminate without penalty in the event of its assignment.
Under of the proposed sub-advisory agreement, the Manager will pay
Principal Global a fee which is computed and paid monthly at the annual rates
(as percentages of the Account's net assets on the first day of the month)
specified in the following table:
Sub-Advisory Fee Table - Bond Account
Net Assets of the Account
First Next Next Over
$5 billion $1 billion $4 billion $10 billion
---------- ---------- ---------- -----------
0.115% 0.100% 0.995% 0.090%
In calculating the fee rates for the Account, the term "Net Assets"
includes the net assets of the Account plus the net assets of any unregistered
separate account of Principal Life and any investment company sponsored by
Principal Life to which Principal Global provides investment services and which
have the same investment mandate as the Account.
Under of the proposed sub-advisory agreements, Principal Global will
pay each of Spectrum and Post a fee which is computed and paid monthly at the
annual rates (as percentages of the Account's net assets allocated to the
respective sub-sub-advisors on the first day of the month) specified in the
following table:
Sub-Sub-Advisory Fee Table - Bond Account
Net Assets of the Account
Sub-Sub-Advisor All Asset Levels
Spectrum 0.20%
Post 0.30%
Entering into the Proposed Agreements will not change the management
fee that each Account pays the Manager under its Management Agreement. The
Manager, and not the Account, will bear the expenses of the services that
Principal Global provides to the Account under the proposed sub-advisory
agreements, and Principal Global, and not the Account, will bear the expenses of
the services that Spectrum and Post provide to the Account under the proposed
sub-sub-advisory agreements. If approved by shareholders of the Account,
however, the Proposed Agreements will have the effect of reducing the amount of
the management fee retained by the Manager.
Principal Global
Principal Global is an indirect, wholly-owned subsidiary of Principal
Life and an affiliate of the Manager. Its address is 801 Grand Avenue, Des
Moines, Iowa 50392. Principal Global manages equity, fixed-income and real
estate investments primarily for institutional investors, including Principal
Life. At December 31, 2004, Principal Global, together with its affiliated asset
management companies, had approximately $128 billion in assets under management.
The principal executive officers and the directors of Principal Global
and their addresses and principal occupations are set forth in Appendix E to
this Proxy Statement.
The day-to-day management of the portion of the Account allocated to
Principal Global will be headed by the following persons:
--William C. Armstrong. Mr. Armstrong leads the multi-sector/core
portfolio management group for Principal Global. Mr. Armstrong has been with the
Principal Financial Group since 1992. He earned his MA from the University of
Iowa and his BA from Kearney State College.
-- Timothy R. Warrick. Mr. Warrick is co-portfolio manager at Principal
Global with responsibility for the U.S. multi-sector product with focus on the
management of U.S. credit instruments. His prior responsibilities with the firm
include portfolio management for multiple asset class portfolios, product
development and fixed income credit analyst duties. He joined Principal Global
in 1990. In 1996, Mr. Warrick joined ReliaStar Investment Research, Inc. and was
responsible for multiple asset classes, including corporate bonds and leveraged
bank loans. He rejoined Principal Global in 1998 as a portfolio manager. He
received an MBA in Finance from Drake University and a BA in Accounting and
Economics from Simpson College.
Spectrum
Spectrum is an investment advisory firm that was founded in 1987 and is
registered as an investment adviser under the Investment Advisers Act. It is an
affiliate of the Manager and Principal Global and a member of the Principal
Financial Group. Spectrum's address is 4 High Ridge Park, Stamford, Connecticut
06905. As of December 31, 2004, Spectrum had approximately $12.4 billion in
assets under management.
The principal executive officers and the directors of Spectrum are: Mark A.
Lieb, Director and Co-President; Bernard M. Sussman, Director, Co-President and
Assistant Treasurer; David M. Blake, Director and Executive Vice President;
Jerald L. Bogart, Director; James P. McCaughan, Chairman; Ralph C. Eucher,
Director; Richard W. Hibbs, Director; Karen E. Shaff, Executive Vice President
and General Counsel; and Lisa Crossley, Chief Compliance Officer. Each person's
position with Spectrum is his or her principal occupation, except that Mr.
Blake, Mr. Bogart, Mr. McCaughan, Mr. Eucher, Mr. Hibbs and Ms. Shaff hold
positions with the Manager, Principal Global or Principal Financial Group, Inc.
as set forth in Appendix E to this Proxy Statement. The address of each
principal executive officer and director is 4 High Ridge Park, Stamford,
Connecticut 06905, except that the addresses of Mr. Blake, Mr. Bogart, Mr.
McCaughan, Mr. Eucher, Mr. Hibbs and Ms. Shaff are as set forth in Appendix E.
The day-to-day management of the portion of the Account allocated to
Spectrum will be headed by the following persons:
--L. Phillip Jacoby. Mr. Jacoby is Senior Vice President and Portfolio
Manager. Mr. Jacoby joined Spectrum in 1995 as Portfolio Manager. Previously, he
was a Senior Investment Officer at USL Capital Corporation (a subsidiary of Ford
Motor Corporation) and was a co-manager of a $600 million preferred stock
portfolio. Mr. Jacoby received his BS in Finance from Boston University.
--Bernard M. Sussman. Mr. Sussman is Chief Investment Officer and Chair
of Spectrum's Investment Committee. Prior to joining Spectrum in 1995, Mr.
Sussman was with Goldman Sachs & Co. for nearly 18 years. A General Partner and
head of the Preferred Stock Department, he was in charge of sales, trading and
underwriting for all preferred products and was instrumental in the development
of the hybrid market. He was a Limited Partner at Goldman Sachs from 1994-1996.
He received a BS in Industrial Relations and an MBA in Finance, both from
Cornell University.
Post
Post is an investment advisory firm that was founded in 1992 and is
registered as an investment adviser under the Advisers Act. It is an affiliate
of the Manager and Principal Global and a member of the Principal Financial
Group. Post's address is 11755 Wilshire Blvd., Suite 1400, Los Angeles,
California 90025. As of December 31, 2004, Post had had approximately $6.4
billion in assets under management.
The principal executive officers and the directors of Post are:
Lawrence Post, Director, Chief Executive Officer and Chief Investment Officer;
Carl Goldsmith, Director, Executive Vice President and Senior Investment
Officer; David M. Blake, Director; Richard W. Hibbs, Director; James P.
McCaughan, Chairman; Karen E. Shaff, Executive Vice President and General
Counsel; Tim Howald, Chief Operating Officer; Lawrence Goldman, Managing
Director and Senior Vice President - Legal and Regulatory Affairs; Allan
Schweitzer, Managing Director; Scott Klein, Managing Director; Jim LaChance,
Managing Director; and Ann Marie Swanson, Chief Compliance Officer. Each
person's position with Post is his or her principal occupation, except that Mr.
Blake, Mr. Hibbs, Mr. McCaughan and Ms. Shaff hold positions with the Manager,
Principal Global or Principal Financial Group, Inc. as set forth in Appendix E
to this Proxy Statement. The address of each principal executive officer and
director is 11755 Wilshire Blvd., Suite 1400, Los Angeles, California 90025,
except that the addresses of Mr. Blake, Mr. Hibbs, Mr. McCaughan and Ms. Shaff
are as set forth in Appendix E.
The day-to-day management of the portion of the Account allocated to
Post will be headed by the following persons:
--Scott Klein. Mr. Klein is a managing director for Post. Prior to
joining Post's predecessor in 1997, he spent five years as a bankruptcy attorney
and then serving as vice president at Dabney Resnick Imperial. Mr. Klein holds a
BA in Economics from the University of Pennsylvania's Wharton School of Business
and a J.D. from the University of California, Los Angeles School of Law.
--Lawrence A. Post. Mr. Post founded Post Advisory Group in 1992. Post was
purchased by Principal in 2004. Mr. Post has over 30 years of investment
experience. Prior to founding the Post Advisory Group in 1992, he founded the
high yield bond department at Smith Barney, and subsequently served as director
of high yield research at Salomon Brothers and co-director of research and
senior trader at Drexel Burnham Lambert. Mr. Post received an MBA from the
University of Pennsylvania's Wharton School of Business and a BA from Lehigh
University.
--Allan Schweitzer. Mr. Schweitzer is a Managing Director at Post. Prior to
joining Post in 2000, he was a senior high yield analyst at Trust Company of the
West ("TCW"). Prior to TCW, he was a high yield research analyst at Putnam
Investments. Mr. Schweitzer received a BA in Business Administration from
Washington University at St. Louis and his MBA from the University of Chicago
with a concentration in analytical finance and international economics.
Board Considerations
In making its decision to approve each of the Proposed Agreements and
direct its submission to shareholders for a vote, the Board, including the
Independent Directors, requested and evaluated information provided by the
Manager, Principal Global, Spectrum and Post. The Independent Directors were
assisted by independent legal counsel.
In evaluating and approving the Proposed Agreement for the Bond
Account, the Board considered, among other factors, the following:
- the nature and extent and expected quality of the services
to be provided by each of Principal Global, Spectrum and Post, which, with
respect to the sub-advisor and both sub-sub-advisors, the Board concluded were
likely to be comparable in relation to those currently provided to the Account
as directly managed by the Manager;
- the investment management capabilities and methodologies and
the performance of each of Principal Global, Spectrum and Post in managing funds
comparable to the Bond Account, which the Board, with respect to each, believed
to be favorable;
- the strength of the personnel, technical resources and
operations of each of Principal Global, Spectrum and Post, which the Board, with
respect to each, concluded were appropriate for the expected services; and
- the record of each of Principal Global, Spectrum and Post
with respect to adhering to a fund's investment strategies, policies and risks,
which led the Board to believe that it was likely that the sub-advisor and each
sub-sub-advisor would adhere, in all material respects, to the Account's
investment objective, policies and restrictions as set forth in the Fund's
current Prospectus and Statement of Additional Information.
In evaluating each of the Proposed Agreements, the Board was aware of
the extent to which the proposed arrangements were comparable to arrangements
under other sub-advisory and sub-sub-advisory agreements which it had approved
with respect to Accounts of the Fund, but it did not rely on any specific
comparison of the services to be provided and the fees to be paid under the
Proposed Agreements with services provided and fees paid under other
sub-advisory and sub-sub-advisory agreements. The Board did not consider fee,
sub-advisor profitability or economy of scale issues to be particularly relevant
in its consideration of each of the Proposed Agreements, particularly because
the agreements are between the Manager and Principal Global, or between
Principal Global and each sub-sub-advisor, and the fees for which the Proposed
Agreements provide will be paid by the Manager or by Principal Global and not by
the Account.
Based on these considerations, the Board concluded that each of the
Proposed Agreements would be in the best interests of the Bond Account and its
shareholders and decided to recommend that shareholders of each Account approve
each of the Proposed Agreements for that Account.
The Management Agreement
The Manager serves as the manager of the Account pursuant to a
Management Agreement between the Manager and the Fund with respect to the
Account. The Manager handles the business affairs of the Account and in that
connection provides clerical, recordkeeping, and bookkeeping services and keeps
the required financial and accounting records. In addition, the Manager performs
the portfolio management function directly or arranges for it to be performed by
a sub-advisor.
Under the Management Agreement, the Account pays the Manager a fee
which is computed and accrued daily and payable monthly at the annual rates (as
percentages of average daily net assets) specified in the following table:
Management Fee Table - Bond Account
Net Assets of the Account
First Next Next Next Over
$100 million $100 million $100 million $100 million $400 million
------------ ------------ ------------ ------------ ------------
0.50% 0.45% 0.40% 0.35% 0.30%
During the fiscal year ended December 31, 2004, the Bond Account paid
the Manager $1,239,048 (an annual rate of 0.45% of average daily net assets) for
services provided under the Management Agreement. As stated above, the Proposed
Agreements, if approved by shareholders of the Account, will have the effect of
reducing the amount of the management fee retained by the Manager.
Additional Information
For additional information regarding the Manager, Principal Global and
the proposed new sub-sub-advisors, see Appendix E to this Proxy Statement.
Required Vote
The shareholders of the Bond Account will vote separately on Proposals
2C, 2D and 2E. The vote required to approve each Proposal is a Majority of the
Outstanding Voting Securities of the Account.
If a Proposal is not approved by the shareholders of the Account, the
Board, in consultation with the Manager, will determine the appropriate course
to arrange for sub-advisory services for the Account and, if required by law,
will submit an alternative proposal to shareholders of the Account at a future
shareholders meeting.
The Board of Directors unanimously recommends that shareholders of the
Account vote "For" each of the Proposals.
Proposal 2F - Agreement with Spectrum Asset Management, Inc. ("Spectrum") as
Sub-Sub-Advisor for the Equity Income Account
Proposal 2G - Agreement with Principal Real Estate Investors, LLC ("Principal
REI") as Sub-Sub-Advisor for the
Equity Income Account
(Equity Income Account Only)
At a meeting on February 24, 2005, the Board, including the Independent
Directors, unanimously approved new sub-sub-advisory agreements between
Principal Global and each of Spectrum and Principal REI with respect to the
Equity Income Account (the "Proposed Agreements"). Currently, the Account has a
sub-advisory agreement with Principal Global which permits Principal Global to
delegate to one or more sub-sub-advisors the day-to-day investment management of
the Account. If shareholders of the Account approve both Proposed Agreements,
the Account will have two sub-sub-advisors. Principal Global believes that the
investment management of the Account will benefit from the particular skills and
expertise of Spectrum in managing preferred securities and Principal REI in
managing high yield securities (commonly known as "junk bonds"). Principal
Global's present intention is to allocate a portion of the assets of the Account
between Spectrum and Principal REI while continuing to manage a portion of the
Account's assets itself, but it has as yet made no decision as to an initial
percentage allocation. Principal Global expects to vary such allocation from
time to time.
Shareholders of the Account are being asked to approve the Proposed
Agreement with Spectrum under Proposal 2F and the Proposed Agreement with
Principal REI under Proposal 2G.
Under the Account's sub-advisory agreement with Principal Global,
Principal Global is compensated by the Manager and not by the Account. Under the
Proposed Agreements, each of Spectrum and Principal REI will be compensated by
Principal Global and not by the Account. Approval of the Proposed Agreement will
not change the compensation that the Account pays to the Manager under its
Management Agreement.
The Proposed Agreements
The following description of each of the Proposed Agreements is
qualified in its entirety by reference to the form of Sub-Sub-Advisory Agreement
included as Appendix D to this Proxy Statement. The terms of the two
sub-sub-advisory agreements are the same except as indicated otherwise below.
Under the Proposed Agreements, each of Spectrum and Principal REI will
manage the day-to-day investment of the portion of the Account's assets
allocated to it consistent with the Account's investment objectives, policies
and restrictions and will be responsible for, among other things, placing all
orders for the purchase and sale of portfolio securities with respect to that
portion of the Account, subject to supervision and monitoring by Principal
Global and oversight by the Board, and will provide, at its own expense, all
investment, management and administrative personnel, facilities and equipment
necessary for the investment advisory services which it conducts for the
Account.
Each of the Proposed Agreements provides that the sub-sub-advisor shall
not be liable to the Manager, Principal Global, the Account or its shareholders
for any act or omission in the course of, or connected with, rendering services
under the agreement or for any losses that may be sustained in the purchase,
holding or sale of any security absent willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties under the agreement on the part
of the sub-sub-advisor.
If approved by shareholders, each of the Proposed Agreements will
become effective on the date of such approval and will remain in effect for an
initial one-year period. Thereafter, each Proposed Agreement will continue for
successive one-year terms, provided that such continuation is specifically
approved at least annually either by the Board of Directors or by a vote of a
Majority of the Outstanding Voting Securities of the Account, and in either
event by a vote of a majority of the Independent Directors cast in person at a
meeting called for the purpose of voting on such approval. Each of the Proposed
Agreements may be terminated at any time without the payment of any penalty by
the Board, Principal Global or the sub-sub-advisor or by vote of a Majority of
the Outstanding Voting Securities of the Account on sixty days' written notice.
Each of the Proposed Agreements will automatically terminate without penalty in
the event of its assignment.
Under the Proposed Agreement with Spectrum, Principal Global will pay
Spectrum an annual fee of $1,750. Under the Proposed Agreement with Principal
REI, Principal REI's compensation is currently zero.
Entering into the Proposed Agreements will not change the management
fee that the Account pays the Manager under its Management Agreement or the
sub-advisory fee that the Manager pays Principal Global under its sub-advisory
agreement. Principal Global, and not the Account, will bear the expenses (if
any) of the services that each of Spectrum and Principal REI provides to the
Account under the Proposed Agreements. If approved by shareholders of the
Account, however, the Proposed Agreement with Spectrum will have the effect of
reducing the amount of the sub-advisory fee retained by Principal Global.
Spectrum
Spectrum is an investment advisory firm that was founded in 1987 and is
registered as an investment adviser under the Investment Advisers Act of 1940
(the "Advisers Act"). It is an affiliate of the Manager and Principal Global and
a member of the Principal Financial Group. Spectrum's address is 4 High Ridge
Park, Stamford, Connecticut 06905. As of December 31, 2004, Spectrum had
approximately $12.4 billion in assets under management.
The principal executive officers and the directors of Spectrum are: Mark A.
Lieb, Director and Co-President; Bernard M. Sussman, Director, Co-President and
Assistant Treasurer; David M. Blake, Director and Executive Vice President;
Jerald L. Bogart, Director; James P. McCaughan, Chairman; Ralph C. Eucher,
Director; Richard W. Hibbs, Director; Karen E. Shaff, Executive Vice President
and General Counsel; and Lisa Crossley, Chief Compliance Officer. Each person's
position with Spectrum is his or her principal occupation, except that Mr.
Blake, Mr. Bogart, Mr. McCaughan, Mr. Eucher, Mr. Hibbs and Ms. Shaff hold
positions with the Manager, Principal Global or Principal Financial Group, Inc.
as set forth in Appendix E to this Proxy Statement. The address of each
principal executive officer and director is 4 High Ridge Park, Stamford,
Connecticut 06905, except that the addresses of Mr. Blake, Mr. Bogart, Mr.
McCaughan, Mr. Eucher, Mr. Hibbs and Ms. Shaff are as set forth in Appendix E.
The day-to-day management of the portion of the Account allocated to
Spectrum will be headed by the following persons:
--L. Phillip Jacoby. Mr. Jacoby is Senior Vice President and Portfolio
Manager. Mr. Jacoby joined Spectrum in 1995 as Portfolio Manager. Previously, he
was a Senior Investment Officer at USL Capital Corporation (a subsidiary of Ford
Motor Corporation) and was a co-manager of a $600 million preferred stock
portfolio. Mr. Jacoby received his BS in Finance from Boston University.
--Bernard M. Sussman. Mr. Sussman is Chief Investment Officer and Chair
of Spectrum's Investment Committee. Prior to joining Spectrum in 1995, Mr.
Sussman was with Goldman Sachs & Co. for nearly 18 years. A General Partner and
head of the Preferred Stock Department, he was in charge of sales, trading and
underwriting for all preferred products and was instrumental in the development
of the hybrid market. He was a Limited Partner at Goldman Sachs from 1994-1996.
He received a BS in Industrial Relations and an MBA in Finance, both from
Cornell University.
Principal REI
Principal REI is an indirect, wholly-owned subsidiary of Principal Life
and an affiliate of the Manager. Its address is 1800 Hub Tower, 699 Walnut, Des
Moines, Iowa 50309. Principal REI was founded in 2000. It manages investments
for institutional investors, including Principal Life. At December 31, 2004,
Principal REI had approximately $27.8 billion in assets under management.
The principal executive officers and the directors of Principal REI
are: Patrick G. Halter, Chairman and Chief Executive Officer; Steven K. Graves,
Director and Chief Operating Officer; Jerald L. Bogart, Director; James P.
McCaughan, Director; Randall C. Mundt, Director, President and Chief Investment
Officer; Stephen W. Pick, Director and Chief Finance Officer; Frank E. Schmitz,
Director; and Michael A. Migro, Chief Operating Officer and Chief Compliance
Officer. Each person's position with Principal REI is his principal occupation,
except that Mr. Bogart, Mr. Mundt and Mr. Migro have positions with Principal
Global as set forth in Appendix G to this Proxy Statement. The address of each
such person is 1800 Hub Tower, 699 Walnut , Des Moines, Iowa 50309, except that
the address for each of Mr. Bogart, Mr. Mundt and Mr. Migro is as set forth in
Appendix E.
The day-to-day management of the portion of the Account allocated to
Principal REI will be headed by the following person:
-- Kelly D. Rush, CFA. Mr. Rush directs the Real Estate Investment
Trust ("REIT") activity for Principal REI. Mr. Rush joined the Principal
Financial Group in 1987 and has been dedicated to public real estate investments
since 1995. His experience included the structuring of public real estate
transactions that include commercial mortgage loans and the issuance of
unsecured bonds. He received his MA and BA in Finance from the University of
Iowa.
Board Considerations
In making its decision to approve each of the Proposed Agreements and
direct its submission to shareholders for a vote, the Board, including the
Independent Directors, requested and evaluated information provided by the
Manager, Principal Global, Spectrum and Principal REI. The Independent Directors
were assisted by independent legal counsel.
In evaluating and approving the Proposed Agreements, the Board
considered, among other factors, the following:
- the nature and extent and expected quality of the services
to be provided by each of Spectrum and Principal REI, which, with respect to
each sub-sub-advisor, the Board concluded were likely to be comparable in
relation to those provided to the Account under the sub-advisory agreement with
Principal Global;
- the investment management capabilities and methodologies and
the performance of each of Spectrum and Principal REI in managing funds
comparable to the Equity Income Account, which the Board, with respect to each
sub-sub-advisor, believed to be favorable;
- the strength of the personnel, technical resources and
operations of each of Spectrum and Principal REI, which the Board, with respect
to each sub-sub-advisor, concluded were appropriate for the expected services;
and
- the record of each of Spectrum and Principal REI with
respect to adhering to a fund's investment strategies, policies and risks, which
led the Board to believe that it was likely that each sub-sub-advisor would
adhere, in all material respects, to the Account's investment objective,
policies and restrictions as set forth in the Fund's current Prospectus and
Statement of Additional Information.
In evaluating each of the Proposed Agreements, the Board was aware of
the extent to which the proposed arrangements were comparable to arrangements
under other sub-advisory or sub-sub-advisory agreements which it had approved
with respect to Accounts of the Fund, but it did not rely on any specific
comparison of the services to be provided and the fees to be paid under the
Proposed Agreements with services provided and fees paid under other
sub-advisory or sub-sub-advisory agreements. The Board did not consider fee,
sub-advisor profitability or economy of scale issues to be particularly relevant
in its consideration of the Proposed Agreements, particularly because the
agreements are between Principal Global and each of Spectrum and Principal REI
and the fees for which the Proposed Agreements provide will be paid by Principal
Global and not by the Account.
Based on these considerations, the Board concluded that each of the
Proposed Agreements would be in the best interests of the Account and its
shareholders and decided to recommend that shareholders of the Account approve
the Proposed Agreements.
The Management Agreement
The Manager serves as the manager of the Account pursuant to a
Management Agreement between the Manager and the Fund with respect to the
Account. The Manager handles the business affairs of the Account and in that
connection provides clerical, recordkeeping, and bookkeeping services and keeps
the required financial and accounting records. In addition, the Manager performs
the portfolio management function directly or arranges for it to be performed by
a sub-advisor.
Under the Management Agreement, the Account pays the Manager a fee
which is computed and accrued daily and payable monthly at the annual rates
(calculated as percentages of average daily net assets) specified in the
following table:
Management Fee Table - Equity Income Account
Net Assets of the Account
First Next Next Next Over
$100 million $100 million $100 million $100 million $400 million
------------ ------------ ------------ ------------ ------------
0.60% 0.55% 0.50% 0.45% 0.40%
During the fiscal year ended December 31, 2004, the Equity Income
Account paid the Manager $214,226 (an annual rate of 0.60% of average daily net
assets) for services provided under the Management Agreement.
The Sub-Advisory Agreement with Principal Global
As permitted by the Management Agreement, the Manager has entered into
a sub-advisory agreement with Principal Global pursuant to which Principal
Global has assumed the obligations of the Manager to provide investment advisory
services to the Account.
Under the sub-advisory agreement with Principal Global, the Manager
pays Principal Global a fee which is computed and paid monthly at the annual
rates (as percentages of the Account's net assets on the first day of the month)
specified in the following table:
Sub-Advisory Fee Table - Equity Income Account
Net Assets of the Account
First Next Next Next Next Next Over
$50 million $50 million $100 million $200 million $350 million $750 million 1.5 billion
----------- ----------- ------------ ------------ ------------ ------------ -----------
0.27% 0.25% 0.22% 0.18% 0.13% 0.09% 0.06%
During the fiscal year ended December 31, 2004, the Manager paid
Principal Global $71,338 (an annual rate of 0.20% of average daily net assets)
for its sub-advisory services to the Account. As stated above, if approved by
shareholders of the Account, the Proposed Agreement with Spectrum will have the
effect of reducing the amount of the sub-advisory fees retained by Principal
Global.
Additional Information
For additional information regarding the Manager, Principal Global and
the proposed new sub-sub-advisors, see Appendix E to this Proxy Statement.
Required Vote
Shareholders of the Equity Income Account will vote separately on
Proposals 2F and 2G. The vote required to approve each Proposal is a Majority of
the Outstanding Voting Securities of the Account.
If a Proposal is not approved by the shareholders of the Account, the
Board, in consultation with the Manager and Principal Global, will determine the
appropriate course to arrange for portfolio management services for the Account
and, if required by law, will submit an alternative proposal to shareholders of
the Account at a future shareholders meeting.
The Board of Directors unanimously recommends that shareholders of the
Account vote "For" each of the Proposals.
Proposal 2H -- Agreement with Principal Real Estate Investors, LLC ("Principal
REI") as S ub-Advisor for the Real Estate Securities Account
(Real Estate Securities Account Only)
At a meeting on February 24, 2005 , the Board of Directors, including
the Independent Directors, unanimously approved a new sub-advisory agreement
between the Manager and Principal REI with respect to the Real Estate Securities
Account (the "Proposed Agreement"). Currently, the Real Estate Securities
Account does not have sub-advisory arrangements and is managed directly by the
Manager.
Under the Proposed Agreement, Principal REI will be compensated by the
Manager and not by the Account. Approval of the Proposed Agreement will not
change the compensation that the Account pays to the Manager under its
Management Agreement.
The Proposed Agreement
The following description of the Proposed Agreement is qualified in its
entirety by reference to the form of Proposed Agreement included as Appendix C
to this Proxy Statement.
Under the Proposed Agreement, Principal REI will manage the day-to-day
investment of the Account's assets consistent with the Account's investment
objectives, policies and restrictions and is responsible for, among other
things, placing all orders for the purchase and sale of portfolio securities,
subject to supervision and monitoring by the Manager and oversight by the Board,
and will provide, at its own expense, all investment, management and
administrative personnel, facilities and equipment necessary for the conduct of
the investment advisory services for the Account.
The Proposed Agreement provides that Principal REI and its officers,
employees, agents, or affiliates shall not be liable to the Manager, the Account
or its shareholders for any loss suffered by the Manager of the Account
resulting from any error of judgment made in the good faith exercise of
Principal REI's investment discretion in connection with selecting investments
for the Account or as a result of the failure by the Manager of any of its
affiliates to comply with the terms of the Agreement, except for losses
resulting from willful misfeasance, bad faith or gross negligence of, or from
reckless disregard of, the duties Principal REI or any of its officers,
employees, agents or affiliates.
If approved by shareholders, the Proposed Agreement will become
effective on the date of such approval and will remain in effect for an initial
one-year period. Thereafter, the Proposed Agreement will continue for successive
one-year terms, provided that such continuation is specifically approved at
least annually either by the Board of Directors or by a vote of a majority of
the outstanding voting securities of the Account, and in either event by a vote
of a majority of the Independent Directors cast in person at a meeting called
for the purpose of voting on such approval. The Proposed Agreement may be
terminated at any time without the payment of any penalty by the Board, the
Manager or Principal REI or by vote of a majority of outstanding voting
securities of the Account on sixty days' written notice. The Proposed Agreement
will automatically terminate without penalty in the event of its assignment.
Under the Proposed Agreement, the Manager will pay Principal REI a fee
which is computed and paid monthly at the annual rate (calculated as a
percentage of the Account's net assets on the first day of the month) of 0.55%.
In calculating the fee rate for the Account, the term "Net Assets"
includes the net assets of the Account plus the net assets of any unregistered
separate account of Principal Life and any investment company sponsored by
Principal Life to which Principal REI provides investment services and which
have the same investment mandate as the Account.
Entering into the Proposed Agreement will not change the management fee
that the Account pays the Manager under its Management Agreement. The Manager,
and not the Account, will bear the expenses of the services that Principal REI
provides to the Accounts under the Proposed Agreement. If approved by
shareholders of the Account, however, the Proposed Agreement will have the
effect of reducing the amount of the management fee retained by the Manager.
Principal REI
Principal REI is an indirect, wholly-owned subsidiary of Principal Life
and an affiliate of the Manager. Its address is 1800 Hub Tower, 699 Walnut, Des
Moines, Iowa 50309. Principal REI was founded in 2000. It manages investments
for institutional investors, including Principal Life. At December 31, 2004,
Principal REI had approximately $27.8 billion in assets under management.
The principal executive officers and the directors of Principal REI
are: Patrick G. Halter, Chairman and Chief Executive Officer; Steven K. Graves,
Director and Chief Operating Officer; Jerald L. Bogart, Director; James P.
McCaughan, Director; Randall C. Mundt, Director, President and Chief Investment
Officer; Stephen W. Pick, Director and Chief Finance Officer; Frank E. Schmitz,
Director; and Michael A. Migro, Chief Operating Officer and Chief Compliance
Officer. Each person's position with Principal REI is his principal occupation,
except that Mr. Bogart, Mr. Mundt and Mr. Migro have positions with Principal
Global as set forth in Appendix G. The address of each such person is 1800 Hub
Tower, 699 Walnut , Des Moines, Iowa 50309, except that the address for each of
Mr. Bogart, Mr. Mundt and Mr. Migro is as set forth in Appendix E.
The day-to-day management of the Account for Principal REI will be
headed by the following person:
-- Kelly D. Rush, CFA. Mr. Rush directs the Real Estate Investment
Trust ("REIT") activity for Principal REI. Mr. Rush joined the Principal
Financial Group in 1987 and has been dedicated to public real estate investments
since 1995. His experience included the structuring of public real estate
transactions that include commercial mortgage loans and the issuance of
unsecured bonds. He received his MA and BA in Finance from the University of
Iowa.
Board Considerations
In making its decision to approve the Proposed Agreement and direct its
submission to shareholders for a vote, the Board, including the Independent
Directors, requested and evaluated information provided by the Manager and
Principal REI. The Independent Directors were assisted by independent legal
counsel.
In evaluating and approving the Proposed Agreement, the Board
considered, among other factors, the following:
- the nature and extent and expected quality of the services to be
provided by Principal Global, which the Board concluded were likely to be
comparable in relation to those currently provided to the Account by the
Manager;
- Principal REI's investment management capabilities and
methodologies and its performance in managing funds comparable to the Real
Estate Securities Account, which the Board believed to be favorable;
- the strength of Principal REI's personnel, technical
resources and operations, which the Board concluded was appropriate for the
expected services; and
- Principal REI's record with respect to adhering to a fund's
investment strategies, policies and risks, which led the Board to believe that
it was likely that Principal REI would adhere, in all material respects, to the
Account's investment objective, policies and restrictions as set forth in the
Fund's current Prospectus and Statement of Additional Information.
In evaluating the Proposed Agreement, the Board was aware of the extent
to which the proposed arrangements were comparable to arrangements under other
sub-advisory agreements which it had approved with respect to Accounts of the
Fund, but it did not rely on any specific comparison of the services to be
provided and the fees to be paid under the Proposed Agreement with services
provided and fees paid under other sub-advisory agreements. The Board did not
consider fee, sub-advisor profitability or economy of scale issues to be
particularly relevant in its consideration of the Proposed Agreement,
particularly because the agreement is between the Manager and the sub-advisor
and the fees for which the Proposed Agreement provides will be paid by the
Manager and not by the Account.
Based on these considerations, the Board concluded that the Proposed
Agreement would be in the best interests of the Account and its shareholders and
decided to recommend that shareholders of the Account approve the Proposed
Agreement.
The Management Agreement
The Manager serves as the manager of the Account pursuant to a
Management Agreement between the Manager and the Account with respect to the
Account. The Manager handles the business affairs of the Account and in that
connection provides clerical, recordkeeping, and bookkeeping services and keeps
the required financial and accounting records. In addition, the Manager performs
the portfolio management function directly, as it currently does for the Real
Estate Securities Account, or arranges for it to be performed by a sub-advisor.
Under the Management Agreement, the Account pays the Manager a fee
which is computed and accrued daily and payable monthly at the annual rates (as
percentages of average daily net assets) specified in the following table:
Management Fee Table - Real Estate Securities Account
Net Assets of Account
First Next Next Next Over
$100 million $100 million $100 million $100 million $400 million
------------ ------------ ------------ ------------ ------------
0.90% 0.85% 0.80% 0.75% 0.70%
During the fiscal year ended December 31, 2004, the Real Estate
Securities Account paid the Manager $972,586 (an annual rate of 0.90% of average
daily net assets) for services provided under the Management Agreement. As
stated above, the Proposed Agreement, if approved by shareholders of the
Account, will have the effect of reducing the amount of the management fee
retained by the Manager.
Additional Information
For additional information regarding the Manager and Principal REI, see
Appendix E to this Proxy Statement.
Required Vote
Only shareholders of the Real Estate Securities Account will vote on
this Proposal. The vote required to approve the Proposal is a Majority of the
Outstanding Voting Securities of the Account.
If the Proposal is not approved by the shareholders of the Account, the
Board, in consultation with the Manager, will determine the appropriate course
to arrange for sub-advisory services for the Account and, if required by law,
will submit an alternative proposal to shareholders of the Account at a future
shareholders meeting.
The Board of Directors unanimously recommends that shareholders of the
Account vote "For" the Proposal.
PROPOSAL 3
APPROVAL OF RECLASSIFYING THE INVESTMENT OBJECTIVE
OF EACH ACCOUNT AS A "NON-FUNDAMENTAL" POLICY
WHICH MAY BE CHANGED WITHOUT SHAREHOLDER APPROVAL
(All Accounts)
At its February 24, 2005 meeting, the Board of Directors, including the
Independent Directors, unanimously approved, and the Board recommends that
shareholders of each Account approve, a proposal that the investment objective
of each Account be reclassified from a "fundamental" policy to a
"non-fundamental" policy.
As with all mutual funds, the Fund has adopted certain investment
restrictions or policies that are "fundamental," meaning that as a matter of law
they cannot be changed without shareholder approval as required by the 1940 Act.
Restrictions and policies that the Fund has not designated as fundamental
policies are considered to be "non-fundamental" policies, which may be changed
by the Board without shareholder approval. Each Account of the Fund has a stated
investment objective which it pursues through separate investment strategies and
which is currently a fundamental policy which cannot be changed without
shareholder approval. The stated investment objectives of the Accounts are set
forth in Appendix F to this Proxy Statement.
Reclassifying the investment objective of each Account from fundamental
to non-fundamental will give the Board of Directors greater flexibility to
respond more quickly to new developments and changing trends in the marketplace
by adjusting the management of and investment opportunities available to the
Account.
This is particularly the case in view of the Fund's "manager of
managers" operating structure. Under this structure, the Manager, pursuant to an
SEC order, is permitted to appoint sub-advisors (other than sub-advisors
affiliated with the Manager) for the Accounts and change the terms of
sub-advisory agreements (including sub-advisory fees) with such sub-advisors
without shareholder approval. The Fund is thus able to change sub-advisors from
time to time without the expense and delays associated with obtaining
shareholder approval. The proposed reclassification as non-fundamental of the
investment objectives of the Accounts will facilitate the Fund's ability to
select and engage new sub-advisors under circumstances when, for example, a
sub-advisor change would be advantageous for an Account but the proposed new
sub-advisor has an investment approach that differs sufficiently from that of
the Account's existing sub-advisor to make appropriate a change in the Account's
stated investment objective. Most of the Accounts have previously approved
operating under the Fund's manager-of managers structure; the remaining Accounts
(the International Emerging Markets, Principal Lifetime 2010, Principal Lifetime
2020, Principal Lifetime 2030, Principal Lifetime 2040, Principal Lifetime 2050
and Principal Lifetime Strategic Income Accounts) are being asked to do under
Proposal 5 below.
The Board does not presently intend to make any significant change to
the investment objective of any Account. If the proposed reclassification is
approved by shareholders, shareholders will receive notice of any change in an
Account's investment objective prior to its implementation.
Required Vote
Approval of the proposed reclassification with respect to each Account
will require the affirmative vote of a Majority of the Outstanding Voting
Securities of the Account. If approved by shareholders of an Account, the
reclassification of its investment objective as non-fundamental will become
effective as of June 30, 2005. If the required shareholder approval is not
obtained, the current classification of an Account's investment objective as
fundamental will remain in effect pending shareholder approval of another
proposed change or other definitive action.
The Board of Directors unanimously recommends that shareholders of each
Account vote "For" the Proposal.
PROPOSAL 4
APPROVAL OF AMENDMENTS TO THE FUND'S ARTICLES OF INCORPORATION
DEALING WITH REORGANIZATIONS OF ACCOUNTS
Proposal 4A - Amendment to Clarify the Authority of the Board of Directors to
Approve Account Combinations Without Shareholder Approval
(All Accounts)
At its February 24, 2005 meeting, the Board of Directors, including the
Independent Directors, unanimously approved, and the Board recommends that
shareholders of the Fund approve, a proposed amendment to the Fund's Articles of
Incorporation that would clarify the authority of the Board, without a
shareholder vote, to approve a merger or consolidation of an Account of the Fund
with, or the sale of all or substantially all the assets of an Account to,
another Account of the Fund or another fund (an "Account Combination") under
certain circumstances.
Section 17 of the 1940 Act prohibits or limits certain transactions
between affiliated funds. On July 26, 2002, the SEC amended Rule 17a-8 under the
1940 Act to permit combinations of affiliated funds without shareholder approval
in certain circumstances to reduce the need for affiliated funds to incur the
expense of soliciting proxies when a combination does not raise significant
issues for shareholders. The Rule requires a fund board (including a majority of
the independent directors) to determine that any combination is in the best
interests of the fund and will not dilute the interests of existing
shareholders. Shareholders of an acquired affiliated fund will still be required
to approve a combination that would result in a material change in a fundamental
investment policy, a material change to the terms of an advisory agreement or
the institution of or an increase in Rule 12b-1 fees or when the board of the
surviving fund does not have a majority of independent trustees who were elected
by its shareholders.
Under Maryland law, shareholder approval is currently required for the
merger or consolidation of or the sale of substantially all the assets of the
Fund to another fund. The proposed amendment will have no affect on these
requirements of Maryland law. Maryland law, however, does not expressly require
shareholder approval of Account Combinations, that is, combinations involving
separate series of a registered investment company. The proposed amendment would
clarify the authority of the Board to effect Account Combinations without
shareholder action or approval. Shareholder approval will still be obtained for
Account Combinations when required by Rule 17a-8 or, in the case of combinations
with unaffiliated funds, when the Board deems it appropriate.
The proposed amendment to the Articles of Incorporation, consistent with
amended Rule 17a-8, authorizes the Board to approve an Account Combination
without a shareholder action or approval only if permitted by the 1940 Act,
Maryland law and other applicable laws and regulations. The amendment will
provide the Board with increased flexibility to react more quickly to new
developments and changes in competitive and regulatory conditions and, as a
consequence, may result in Accounts that operate more efficiently and
economically. If the amendment is approved, the Board will continue to exercise
its fiduciary obligations in approving any combination transaction. The Board
will evaluate any and all information reasonably necessary to make its
determination and consider and give appropriate weight to all pertinent factors
in fulfilling its fiduciary obligations to act with due care and in the best
interests of shareholders.
Currently, the Fund's Articles of Incorporation do not address
reorganizations such as mergers, consolidations or sales of substantially all
the assets of Accounts. If the proposed amendment is approved by shareholders,
new Section 12 will be added to Article V of the Articles of Incorporation to
provide as follows (the Articles refer to the Fund as the "Corporation" and to
an Account as a "series" or a "series of shares"):
Section 12. Reorganization. The Board may merge or consolidate
one or more series of shares with, and may sell, convey and transfer
the assets belonging to any one or more series of shares to, another
corporation, trust, partnership, association or other organization, or
to the Corporation to be held as assets belonging to another series of
shares, in exchange for cash, securities or other consideration
(including, in the case of a transfer to another series of shares of
the Corporation, shares of such other series of shares) with such
transfer being made subject to, or with the assumption by the
transferee of, the liabilities belonging to each transferor series of
shares if deemed appropriate by the Board. The Board shall have the
authority to effect any such merger, consolidation or transfer of
assets, without action or approval of the shareholders, to the extent
consistent with applicable laws and regulations.
The authority granted to the Board under the proposed amendment, and
the Board's flexibility in administering the Account, will be further enhanced
if shareholders also approve Proposals 4B and 4C below, which are related
proposed amendments to the Articles of Incorporation. Proposal 4B would
authorize the Board, without shareholder action or approval, to liquidate the
assets attributable to an Account or a class of shares, a step which is
necessary to complete an Account Combination in which an Account transfers
substantially all its assets to another Account in exchange for shares issued by
the Account to which the assets are transferred. Proposal 4C would authorize the
Board to designate a class of shares of an Account as a separate Account. This
proposal would authorize the Board to convert a class of shares into an Account
for purposes of combining that class of shares with another Account.
Required Vote
The shareholders of all the Accounts will vote together on the
Proposal. The vote required to approve this Proposal is a Majority of the
Outstanding Voting Securities of the Fund entitled to vote on the Proposal.
The Board of Directors unanimously recommends that shareholders of the
Fund vote "For" the Proposal.
Proposal 4B - Amendment to Authorize the Board of Directors to Liquidate the
Assets Attributable to an Account or Class of Shares and Terminate the Account
or Class of Shares Without Shareholder Approval
(All Accounts)
At its February 24, 2005 meeting, the Board of Directors, including the
Independent Directors, unanimously approved, and the Board recommends that
shareholders of the Fund approve, a proposed amendment to the Fund's Articles of
Incorporation that would authorize the Board to liquidate the assets
attributable to an Account or class of shares and terminate the Account or class
of shares without a shareholder vote. Currently, the Articles of Incorporation
require shareholder approval for such transactions.
The amendment will give the Board more flexibility and, subject to
applicable requirements of the 1940 Act and Maryland law, broader authority to
act with respect to the administration and operation of the Accounts. The 1940
Act and Maryland law do not require shareholder approval of a Board decision to
liquidate the assets attributable to a particular Account or class of shares and
to terminate the Account or class of shares. The presence of the shareholder
approval requirement can delay and add expense to the implementation of action
which the Board believes is in the best interests of shareholders. The Board has
no present intention to liquidate the assets attributable to any Account or
class of shares, but it believes that having the authority to implement such
action in the future without obtaining shareholder approval will permit more
efficient administration of the affairs of the Fund. The proposed amendment will
not alter in any way the Board's existing fiduciary obligations to act with due
care and in the best interests of shareholders. Before using the new flexibility
provided by the proposed amendment, the Board of Directors must first consider
the best interests of shareholders and then act accordingly.
As stated above, the authority granted to the Board under the proposed
amendment, together with the authority that would be granted to the Board if
Proposal 4A above and Proposal 4C below are also approved by shareholders, is
intended to facilitate Account Combinations.
Section 1(c)(4) of Article V of the Articles of Incorporation addresses
"Liquidation" of the Fund or of the assets attributable to a particular Account
or class of shares. If the proposed amendment is approved by shareholders,
Section 1(c)(4) as so amended will provide as follows (new language is
underlined; language to be deleted is [bracketed]; the Articles refer to the
Fund as the "Corporation" and to an Account as a "series" or a "series of
shares"):
(4) Liquidation. In the event of the liquidation of the Corporation or
of the assets attributable to a particular series or class, the
shareholders of each series or class that has been established and
designated and is being liquidated shall be entitled to receive, as a
series or class, when and as declared by the Board of Directors, the
excess of the assets belonging to that series or class over the
liabilities belonging to that series or class. The holders of shares of
any series or class shall not be entitled thereby to any distribution
upon liquidation of any other series or class. The assets so
distributable to the shareholder of any particular series or class
shall be distributed among such shareholders according to their
respective rights taking into account the proper allocation of expenses
being borne by that series or class. The liquidation of assets
attributable to any particular series or class in which there are
shares then outstanding and the termination of the series or the class
may be authorized by vote of a majority of the Board of Directors then
in office, without action or approval of the shareholders, to the
extent consistent with applicable laws and regulation [subject to the
approval of a majority of the outstanding voting securities of that
series or class, as defined in the Investment Company Act of 1940, as
amended]. In the event that there are any general assets not belonging
to any particular series or class of stock and available for
distribution, such distribution shall be made to holders of stock of
various series or classes in such proportion as the Board of Directors
determines to be fair and equitable, and such determination by the
Board of Directors shall be conclusive and binding for all purposes.
Required Vote
The shareholders of all the Accounts will vote together on the
Proposal. The vote required to approve this Proposal is a Majority of the
Outstanding Voting Securities of the Fund entitled to vote on the Proposal.
If the Proposal is not approved by shareholders, the current provision
of the Articles of Incorporation will remain in effect, and liquidations of
assets and terminations of Accounts and classes of shares which the Board
determines are in the best interests of shareholders will be subject to the
added delay and expense associated with obtaining shareholder approval.
The Board of Directors unanimously recommends that shareholders of the
Fund vote "For" the Proposal.
Proposal 4C - Amendment to Authorize the Board of Directors To Designate a Class
of Shares of an Account as a
Separate Account
(All Accounts)
At its February 24, 2005 meeting, the Board of Directors, including the
Independent Directors, unanimously approved, and the Board recommends that
shareholders of the Fund approve, a proposed amendment to the Fund's Articles of
Incorporation that would authorize the Board to designate any class of shares of
an Account of the Fund as a separate Account.
Under the Articles of Incorporation, the Board of Directors has
authority, without action or approval of shareholders, to divide the shares of
the Fund into separate Accounts, to establish new Accounts and determine the
relative rights and preferences as between the shares of separate Accounts, and
to divide the shares of any Account into separate classes of shares. The Board
believes that this broad grant of authority may reasonably be construed to
permit the Board to designate any class of shares of an Account as a separate
Account. However, in order to resolve any uncertainty as to the scope of such
authority, the Board has approved a proposed amendment to the Articles of
Incorporation that expressly authorizes the Board, without action or approval of
shareholders, to designate any class of shares of an Account as a separate
Account.
As described above under Proposal 4A, shareholders are also being asked
to approve a proposed amendment to the Articles of Incorporation that would
clarify the authority of the Board, consistent with the SEC's Rule 17a-8 under
the 1940 Act, to approve the merger or consolidation of an Account of the Fund
with, or the sale of all or substantially all its assets to, another Account of
the Fund (an "Account Combination") without shareholder approval when such a
combination does not raise significant shareholder issues warranting incurring
the expense of soliciting proxies. That proposed amendment is intended to
provide the Board with increased flexibility to react quickly to changes in
competitive and regulatory conditions. Such flexibility will be further enhanced
if shareholders approve the proposed amendment under this Proposal 4C to
authorize the Board to designate a class of shares as a separate Account.
As with the other proposed amendments to the Articles of Incorporation,
the proposed amendment authorizing the Board to designate a class of shares as a
separate Account will not alter in any way the Board's existing fiduciary
obligations to act with due care and in the best interests of shareholders.
Before using any new flexibility that the proposed amendment may afford, the
Board must first consider the shareholders' interests and then act accordingly.
If the proposed amendment to the Articles of Incorporation is approved
by shareholders, new Section 13 will be added to Article V of the Articles of
Incorporation to provide as follows (the Articles refer to an Account as a
"series" or a "series of shares"):
Section 13. Classes of Shares. The Board shall also have the
authority, without action or approval of the shareholders, from time to
time to designate any class of shares of a series of shares as a
separate series of shares as it deems necessary or desirable. The
designation of any class of shares of a series of shares as a separate
series of shares shall be effective at the time specified by the Board.
The Board shall allocate the assets, liabilities and expenses
attributable to any class of shares designated as a separate series of
shares to such separate series of shares and shall designate the
relative rights and preferences of such series of shares, provided that
such relative rights and preferences may not be materially adversely
different from the relative rights and preferences of the class of
shares designated as a separate series of shares.
Required Vote
The shareholders of all the Accounts will vote together on the
Proposal. The vote required to approve this Proposal is a Majority of the
Outstanding Voting Securities of the Fund entitled to vote on the Proposal.
The Board of Directors unanimously recommends that shareholders of the
Fund vote "For" the Proposal.
PROPOSAL 5
APPROVAL OF PROPOSAL TO PERMIT THE MANAGER TO SELECT AND CONTRACT
WITH SUB-ADVISORS FOR CERTAIN ACCOUNTS AFTER
APPROVAL BY THE BOARD OF DIRECTORS BUT WITHOUT OBTAINING SHAREHOLDER APPROVAL
(International Emerging Markets, Principal Lifetime 2010,
Principal Lifetime 2020, Principal Lifetime 2030, Principal Lifetime 2040,
Principal Lifetime 2050 and Principal Lifetime Strategic Income Accounts)
Under Section 15 of the 1940 Act, a fund must obtain shareholder
approval of a sub-advisory agreement in order to employ new sub-advisors,
replace existing sub-advisors, change the terms of a sub-advisory agreement, or
continue the employment of an existing sub-advisor when that sub-advisor's
contract terminates because of an assignment. On January 19, 1999, the SEC
issued an order (the "Order") which permits the Manager, subject to Board
approval, to take these kinds of actions with respect to sub-advisors for the
Fund which are not affiliated with the Manager ("Unaffiliated Sub-Advisors")
without the Fund's obtaining shareholder approval. Under the Order, the
shareholders of an Account must approve this "managers-of-managers" arrangement
before it may be relied on with respect to that Account. This
"manager-of-managers" arrangement has previously been approved by the
shareholders of each of the Accounts except for the International Emerging
Markets, Principal Lifetime 2010, Principal Lifetime 2020, Principal Lifetime
2030, Principal Lifetime 2040, Principal Lifetime 2050 and Principal Lifetime
Strategic Income Accounts (the "Designated Accounts").
At its meeting on February 24, 2005, the Board of Directors unanimously
approved, and the Board recommends that the shareholders of each of the
Designated Accounts also approve, the manager-of-managers arrangement. If the
shareholders of a Designated Account approve the arrangement:
- The Manager will be able, on behalf of that Account, to
enter into and amend sub-advisory agreements with Unaffiliated Sub-Advisors
without further shareholder approval;
- The Board, including a majority of the Independent
Directors, will continue to evaluate and approve all new and amended
sub-advisory agreements with Unaffiliated Sub-Advisors; and
- The shareholder approval requirement will continue to apply
before a sub-advisory agreement with a sub-advisor affiliated with the Manager
may be entered into or materially amended.
The Board believes that it is in the best interests of the shareholders
of the Designated Accounts to allow the Manager the maximum flexibility to
select, supervise, and evaluate Unaffiliated Sub-Advisors without incurring the
potential delay, and without an Account incurring the expense, of seeking
specific shareholder approval. As noted, the Board will continue to oversee the
sub-advisor selection process to ensure that shareholders' interests are
protected whenever the Manager selects a sub-advisor or modifies a sub-advisory
agreement. As required by the Order, whenever a new sub-advisor is appointed
without shareholder approval, the Account will send to shareholders within 90
days an information statement containing all the relevant information that
otherwise would be in proxy materials used in connection with a shareholders
meeting.
If the Proposal is approved, amendments to the Management Agreement
between the Manager and the Fund will remain subject, where applicable, to the
shareholder approval requirements of Section 15 of the 1940 Act. Approval of the
Proposal generally will permit the Manager, with the approval of the Board, to
change the fees payable to an Unaffiliated Sub-Advisor without shareholder
approval, which in turn may result in a different net fee retained by the
Manager. The proposed arrangements will not permit the Board and the Manager to
increase the rate of the management fees payable by an Account to the Manager
under the Management Agreement without first obtaining shareholder approval.
If shareholders of a Designated Account approve the Proposal, the
Proposal will not be implemented with respect to that Account until the Board
determines to manage that Account in reliance on the Order. After the Board
determines to manage the Account in reliance on the Order, the Fund and the
Manager will be required to follow the conditions to which they agreed in
connection with the SEC's granting the relief provided by the Order. These
conditions, which are described below, require that any Account managed in
reliance on the Order be held out to the public as employing the
manager-of-managers strategy described above and that the prospectus for the
Account prominently disclose that the Manager has ultimate responsibility for
the investment performance of such Account due to its responsibility to oversee
the sub-advisors and recommend their hiring, termination and replacement.
Therefore, upon a determination by the Board to commence management of any
Account in reliance on the Order, the Account's prospectus will be revised to
reflect such reliance and disclose the Manager's ultimate responsibility for the
investment performance of the Account.
After shareholder approval and a Board determination to manage an
Account in reliance on the Order, the Account and the Manager will be required
to adhere to the following conditions to which they agreed in connection with
the issuance of the Order:
(1) The Manager will not enter into a sub-advisory agreement with any
affiliated sub-advisor without that agreement, including the compensation
to be paid under it, being approved by the shareholders of the applicable
Account or, in the case of insurance-related funds, by the contract owners
with assets allocated to any registered separate account for which the
Account serves as a funding medium.
(2) At all times, a majority of the Board of Directors of the Fund will
continue to be Independent Directors, and the nomination of new or
additional Independent Directors will be at the discretion of the then
existing Independent Directors.
(3) When a sub-advisor change is proposed for an Account with an affiliated
sub-advisor, the Fund's Board, including a majority of the Independent
Directors, will make a separate finding, reflected in the Fund's Board
minutes, that the change is in the best interest of the Account and its
shareholders or, in the case of an insurance-related Account, by the
contract owners with assets allocated to any registered separate account
for which the Account serves as a funding medium, and does not involve a
conflict of interest from which the Manager or the affiliated sub-advisor
derives an inappropriate advantage.
(4) Before the Fund may rely on the requested order as to any Account, the
operation of that Account in accordance with the manager-of-managers
arrangement will be approved by a majority of its outstanding voting
securities, as defined in the Act (or in the case of insurance-related
Accounts, pursuant to voting instructions provided by contract owners with
assets allocated to any registered separate account for which such Account
serves as a funding medium). Before a future Account that does not
presently have an effective registration statement may rely on the Order,
the operation of the future Account in accordance with the
manager-of-managers arrangement will be approved by its initial shareholder
before shares of such future Account are made available to the public.
(5) The Manager will provide general management services to the Fund and its
Accounts, including overall supervisory responsibility for the general
management and investment of each Account's securities portfolio, and
subject to review and approval by the Fund's Board, will (i) set the
Account's overall investment strategies; (ii) recommend and select
sub-advisors; (iii) when appropriate, allocate and reallocate the Account's
assets among multiple sub-advisors; (iv) monitor and evaluate the
performance of sub-advisors; and (v) implement procedures reasonably
designed to ensure that the sub-advisors comply with the Account's
investment objectives, policies, and restrictions.
(6) Within 90 days of the hiring of any new sub-advisor, shareholders will be
furnished with all information about the new sub-advisor that would be
included in a proxy statement. The Manager will meet this condition by
providing to shareholders an information statement meeting the requirements
of Regulation 14C, Schedule 14C and Item 22 of Schedule 14A under the
Securities Exchange Act of 1934. The Fund will insure that the information
statement is furnished to contract owners with assets allocated to any
registered separate account for which the Account serves as a funding
medium.
(7) The Fund will disclose in its prospectus the existence, substance, and
effect of the Order. In addition, the Fund will hold itself out to the
public as employing the "Manager of Managers Strategy." The prospectus
relating to the Fund will prominently disclose that the Manager has
ultimate responsibility for the investment performance of each Account
employing sub-advisors due to the Manager's responsibility to oversee the
sub-advisors and recommend their hiring, termination and replacement.
(8) No director or officer of the Fund or the Manager will own directly or
indirectly (other than through a pooled investment vehicle that is not
controlled by that director or officer) any interest in a sub-advisor
except for (i) ownership of interests in the Manager or any entity that
controls, is controlled by, or is under common control with the Manager; or
(ii) ownership of less than 1% of the outstanding securities of any class
of equity or debt of a publicly-traded company that is either a sub-advisor
or an entity that controls, is controlled by or is under common control
with a sub-advisor.
Required Vote
The vote required to approve this Proposal for any Designated Account
is a Majority of the Outstanding Voting Securities of the Account.
If the Proposal is not approved by the shareholders of a Designated
Account, the Manager and the Fund will enter into new or amended sub-advisory
agreements with Unaffiliated Sub-Advisors with respect to that Account only
after obtaining the approval of the shareholders of that Account, adding
additional time and expense to making changes in sub-advisory arrangements with
Unaffiliated Sub-Advisors deemed beneficial by the Board.
The Board of Directors unanimously recommends that shareholders of each
Designated Account vote "For" the Proposal.
PROPOSAL 6
AMENDMENT, RECLASSIFICATION OR ELIMINATION OF
CERTAIN FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted investment policies for each of its Accounts.
Policies that can only be changed by a vote of shareholders are considered
"fundamental." The 1940 Act requires that certain policies, including those
dealing with the issuance of senior securities, borrowing money, underwriting
securities of other issuers, concentrating investments, purchasing or selling
real estate or commodities and making loans, be fundamental. The Board of
Directors may elect to designate other policies as fundamental. All of the
Fund's fundamental policies are referred to as fundamental investment
restrictions.
The Manager has reviewed each of the fundamental investment
restrictions of each of the Accounts and has recommended changes to the Board.
Two primary considerations led to the recommendations. First, the Fund (and its
predecessor funds) adopted fundamental investment restrictions from time to time
over a period of several years to reflect legal and regulatory requirements that
applied, and business and industry conditions that prevailed, at the time of
their adoption. With changes in legal requirements and prevailing conditions,
some of these fundamental investment restrictions are no longer necessary
("Unnecessary Restrictions"). Second, the Manager believes that eliminating
differences between the investment restrictions that apply to the Accounts and
to the comparable funds of Principal Investors Fund, Inc. ("PIF"), another
series mutual fund sponsored by Principal Life, will assist the Manager and the
sub-advisors in more effectively managing the Accounts and monitoring their
compliance with applicable investment restrictions.
At its February 24, 2005 meeting, the Board of Directors unanimously
approved the recommendations of the Manager, and the Board is submitting the
Proposals set forth below to shareholders for their approval. The Board is
asking shareholders to act on a comprehensive set of updating changes at the
Meeting in order to help minimize the costs and delays that could be associated
with holding future shareholder meetings from time to time to make necessary
changes to outdated or inappropriate fundamental investment restrictions.
If approved by shareholders, the Proposals will effect three kinds of
changes to existing fundamental investment restrictions of the Accounts:
Category One Changes. Proposals in the first category will change the
language of a fundamental investment restriction for an Account in a way that
the Board believes will both achieve greater consistency with the comparable
investment restriction of PIF and provide the Manager and sub-advisor with
greater flexibility in managing the Accounts while continuing to meet fully the
requirements of the 1940 Act and the rules and regulations thereunder (Proposals
6A - 6I);
Category Two Changes. The proposal in the second category will eliminate
Unnecessary Restrictions Proposal 6J); and
Category Three Changes. The proposal in the third category will change
certain fundamental investment restrictions into "non-fundamental" investment
restrictions which may be changed by the Board without shareholder approval
(Proposal 6K).
The Proposals and the Accounts to which each applies are set forth
below. Each Proposal sets forth the proposed new fundamental investment
restriction or other proposed change and the current fundamental investment
restriction or restrictions to be replaced, eliminated or changed to a
non-fundamental investment restriction.
For convenience, the fundamental investment restrictions that will
apply to each of the Accounts of the Fund if all the Proposals are approved by
shareholders are set forth in Appendix G to this Proxy Statement.
Required Vote
Approval of each Proposal dealing with a change to a current
fundamental investment restriction of an Account will require the affirmative
vote of a Majority of the Outstanding Voting Securities of the Account.
If the required approval by the shareholders of an Account is not
obtained with respect to any Proposal, the current fundamental investment
restriction for the Account to which that Proposal relates will remain in effect
pending Board consideration and shareholder approval of another proposed change.
The Board of Directors unanimously recommends that the shareholders of
each Account to which each Proposal is submitted vote "For" the Proposal.
Category One Changes
Proposal 6A- Senior Securities
(applies only to the Capital Value, Government Securities,
and Money Market Accounts.)
Under Section 18(f)(1) of the 1940 Act, the Fund may not issue "senior
securities," a term that is defined, generally, to refer to obligations that
have a priority over shares of the Fund with respect to the distribution of its
assets or the payment of dividends. Sections 8(b)(1)(C) and 13(a)(2) of the 1940
Act together require that the Fund have a fundamental policy addressing senior
securities for each of its Accounts.
Proposed restriction: The Board of Directors is proposing that the
Accounts indicated above adopt the following fundamental investment restriction
dealing with senior securities:
The Account may not issue any senior securities as defined in
the 1940 Act. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in
accordance with restrictions described below do not involve
the issuance of a senior security.
Current restrictions: Currently, the Fund has two forms of fundamental
investment restriction dealing with senior securities that differ from the
proposed restriction. Each of these forms of restriction is set forth below and
is followed by the name of the Account to which it applies. The Capital Value
Account does not have a fundamental investment restriction that expressly
addresses the issuance of senior securities.
1. The Account may not issue any senior securities as defined
in the Act except insofar as the Account may be deemed to have
issued a senior security by reason of a) purchasing any
securities on a standby, when-issued or delayed delivery
basis; or b) borrowing money in accordance with restrictions
described below [see Proposal 6B for a description of
permitted borrowings].
--Government Securities
2. The Account will not issue senior securities except in
connection with such borrowings [see Proposal 6B for a
description of permitted borrowings].
--Money Market
The proposed restriction has already been adopted with respect to the
following other Accounts: Asset Allocation, Balanced, Bond, Equity Growth,
Equity Income, Equity Value, Growth, International, International Emerging
Markets, International SmallCap, LargeCap Blend, LargeCap Growth, LargeCap Stock
Index, LargeCap Value, Limited-Term Bond, MidCap, MidCap Growth, MidCap Value,
Principal LifeTime 2010, Principal LifeTime 2020, Principal LifeTime 2030,
Principal LifeTime 2040, Principal LifeTime 2050, Principal LifeTime Strategic
Income, Real Estate Securities, SmallCap, SmallCap Growth and SmallCap Value.
Proposal 6B - Borrowing
(applies only to the Asset Allocation, Balanced, Bond, Capital Value,
Equity Growth, Equity Income, Equity Value, Government Securities, Growth,
International, International Emerging Markets, International SmallCap, LargeCap
Blend, LargeCap Growth, LargeCap Stock Index, LargeCap Value, Limited-Term Bond,
MidCap, MidCap Growth, MidCap Value, Money Market, Principal LifeTime 2010,
Principal LifeTime 2020, Principal LifeTime 2030, Principal LifeTime 2040,
Principal LifeTime 2050, Principal LifeTime Strategic Income, Real Estate
Securities, SmallCap, SmallCap Growth and SmallCap Value Accounts.)
Under Section 18(f)(1) of the 1940 Act, the Fund may not borrow money,
except as expressly permitted by Section 18. Sections 8(b)(1)(B) and 13(a)(2) of
the 1940 Act together require that the Fund have a fundamental policy addressing
borrowing for each of its Accounts.
In addition, Section 12(a)(1) of the 1940 Act makes it unlawful for an
investment company, in contravention of applicable SEC rules and orders, to
purchase securities on margin except for such short-term credits as are
necessary for the clearance of transactions. There are no applicable SEC rules
or orders, and the 1940 Act does not expressly require that funds state a
fundamental investment policy regarding this matter. The use of margin in
connection with the purchase of securities, however, may be viewed as the
issuance of a senior security under circumstances not permitted by Section 18.
Proposed restriction: The Board of Directors is proposing that the
Accounts indicated above adopt the following fundamental investment restriction
dealing with borrowing and the purchase of securities on margin:
The Account may not borrow money, except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted,
modified or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
Current restrictions: Currently, the Fund has seven forms of
fundamental investment restriction dealing with borrowing and the use of margin
that differ from the proposed restriction. Each of these current forms of
restriction is set forth below and is followed by a list of the Accounts to
which that form of restrictions applies.
1. The Account may not borrow money, except for temporary or
emergency purposes, in an amount not to exceed 5% of the value
of the Account's total assets at the time of the borrowing.
The Balanced and Bond Accounts may borrow only from banks.
The Account may not 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.
--Asset Allocation, Balanced, Bond, Equity Growth,
Government Securities, Growth, International, Limited-Term
Bond, MidCap
2. The Account may not borrow money, except from banks for
temporary or emergency purposes, including the meeting of
redemption requests which might otherwise require the untimely
disposition of securities, in an amount not to exceed the
lesser of a) 5% of the value of the Account's assets, or b)
10% of the value of the Account's net assets taken at cost at
the time such borrowing is made. The Account will not issue
senior securities except in connection with such borrowings.
The Account may not pledge, mortgage, or hypothecate its
assets (at value) to an extent greater than 10% of the net
assets.
The Account may not purchase securities on margin, except it
may obtain such short-term credits as are necessary for the
clearance of transactions.
--Money Market
3. The Account does not propose to borrow money except for
temporary or emergency purposes from banks in an amount not to
exceed the lesser of a) 5% of the value of the Account's
assets, less liabilities other than such borrowings, or b) 10%
of the Account's assets taken at cost at the time such
borrowing is made. The Account may not pledge, mortgage, or
hypothecate its assets (at value) to an extent greater than
15% of the gross assets taken at cost. The deposit of
underlying securities and other assets in escrow and other
collateral arrangements in connection with transactions in put
and call options, futures contracts and options on futures
contracts are not deemed to be pledges or other encumbrances.
The Account may not 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.
--Capital Value
4. The Account may not borrow money, except that it may a)
borrow from banks (as defined in the 1940 Act) or other
financial institutions in amounts up to 33 1/3% of its total
assets (including the amount borrowed) and b) to the extent
permitted by applicable law, borrow up to an additional 5% of
its total assets for temporary purposes.
--Principal LifeTime 2010, Principal LifeTime 2020,
Principal LifeTime 2030, Principal LifeTime 2040, Principal
LifeTime 2050, Principal LifeTime Strategic Income
5. The Account may not borrow money, except it may a) borrow
from banks (as defined in the 1940 Act) or other financial
institutions or through reverse repurchase agreements in
amounts up to 33/ 1/3% of its total assets (including the
amount borrowed), b) to the extent permitted by applicable
law, borrow up to an additional 5% of its total assets for
temporary purposes, c) obtain such short-term credits as may
be necessary for the clearance of purchases and sales of
portfolio securities, and d) purchase securities on margin to
the extent permitted by applicable law (the deposit or payment
of margin in connection with transactions in options and
financial futures contracts is not considered purchase of
securities on margin).
--Equity Value
6. The Account may not borrow money, except it may a) borrow
from banks (as defined in the 1940 Act, as amended) or other
financial institutions or through reverse repurchase
agreements in amounts up to 33/ 1/3% of its total assets
(including the amount borrowed), b) to the extent permitted by
applicable law, borrow up to an additional 5% of its total
assets for temporary purposes, c) obtain such short-term
credits as may be necessary for the clearance of purchases and
sales of portfolio securities, and d) purchase securities on
margin to the extent permitted by applicable law.
The Account may not purchase any securities on margin, except
to the extent permitted by applicable law and except that the
Account 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.
--Equity Income, International SmallCap, MidCap
Growth, Real Estate Securities, SmallCap, SmallCap Growth,
SmallCap Value
7. The Account may not borrow money, except it may a) borrow
from banks (as defined in the 1940 Act, as amended) or other
financial institutions or through reverse repurchase
agreements in amounts up to 33/ 1/3% of its total assets
(including the amount borrowed), b) to the extent permitted
by applicable law, borrow up to an additional 5% of its
total assets for temporary purposes, c) obtain such
short-ter m credits as may be necessary for the clearance of
purchases and sales of portfolio securities, and d) purchase
securities on margin to the extent permitted by applicable
law.
The Account may not 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.
--International Emerging Markets, LargeCap Blend,
LargeCap Growth, LargeCap Stock Index, LargeCap Value, MidCap
Value
At the present time, the 1940 Act permits an Account to borrow from
banks in an amount up to 33 1/3% of the Account's total assets, including the
amount borrowed. An Account may also issue a note evidencing a temporary loan
(i.e., one that must be repaid within 60 days), as long as it does not exceed 5%
of the Account's total assets. The proposed restriction would permit the
Accounts to borrow to the full extent permitted by the 1940 Act. In addition, no
further Board or shareholder action would be needed to conform the borrowing
restriction to future changes in the 1940 Act, and interpretations thereunder,
that govern borrowing by mutual funds.
To the extent that any borrowing made by an Account involves leveraging
(i.e., borrowing money to purchase additional securities), it may exaggerate the
effect on the Account's net asset value and may increase the volatility of the
Account. For example, if the securities purchased with borrowed funds decline in
value, the Account may need to sell other securities to repay the loan. In
addition, any money borrowed will be subject to interest and other costs, which
may exceed the gain on securities purchased with borrowed funds.
Proposal 6C - Underwriting Securities of Another Issuer
(applies only to the Capital Value, Government Securities, Money
Market, Principal LifeTime 2010, Principal LifeTime 2020, Principal LifeTime
2030, Principal LifeTime 2040, Principal LifeTime 2050, Principal LifeTime
Strategic Income.)
Sections 8(b)(1)(D) and 13(a)(2) of the 1940 Act together require that
the Fund have a fundamental policy addressing the underwriting of securities for
each of its Accounts. Section 12(c) of the 1940 Act prohibits those Accounts
that are diversified investment companies from making any underwriting
commitments in excess of limits set forth in the Section. None of the Accounts
intends to enter into formal underwriting commitments. The Accounts may acquire
restricted securities (i.e., securities which may be sold only if registered
under the 1933 Act or pursuant to an exemption from registration such as that
provided by Rule 144). These acquisitions, however, are not deemed to be
underwriting commitments within the meaning of Section 12(c). Each Account will
have a non-fundamental investment restriction that provides the Account may not
invest more than 15% of its net assets in illiquid securities (including
illiquid restricted securities) except to the extent permitted by applicable
law.
Proposed restriction: The Board of Directors is proposing that the
Accounts indicated above adopt the following fundamental investment restriction
dealing with underwriting:
The Account may not act as an underwriter of securities,
except to the extent that the Account may be deemed to be an
underwriter in connection with the sale of securities held in
its portfolio.
Current restrictions: Currently, the Fund has four forms of fundamental
investment restriction dealing with the underwriting of securities that differ
from the proposed restriction. Each of these current forms of restriction is set
forth below and is followed by a list of the Accounts to which that form of
restriction applies.
1. The Account may not act as an underwriter of securities,
except to the extent the Account may be deemed to be an
underwriter in connection with the sale of GNMA certificates
held in its portfolio.
--Government Securities
2. The Account may not act as an underwriter except to the
extent that, in connection with the disposition of portfolio
securities, it may be deemed to be an underwriter under the
federal securities laws.
--Money Market
3. The Account may not act as an underwriter of securities,
except to the extent that the Account or an underlying Account
may be deemed to be an underwriter in connection with the sale
of securities held in its portfolio.
--Principal LifeTime 2010, Principal LifeTime 2020,
Principal LifeTime 2030, Principal LifeTime 2040, Principal
LifeTime 2050, Principal LifeTime Strategic Income
4. The Account may not underwrite securities of other issuers,
except that the Account may acquire portfolio securities under
circumstances where if sold the Account might be deemed an
underwriter for purposes of the Securities Act of 1933.
--Capital Value
The proposed restriction has already been adopted with respect to the
following other Accounts: Asset Allocation, Balanced, Bond, Equity Growth,
Equity Income, Equity Value, Growth, International, International Emerging
Markets, International SmallCap, LargeCap Blend, LargeCap Growth, LargeCap Stock
Index, LargeCap Value, Limited-Term Bond, MidCap, MidCap Growth, MidCap Value,
Real Estate Securities, SmallCap, SmallCap Growth and SmallCap Value
Proposal 6D - Concentration of Investments
(applies only to the Asset Allocation, Balanced, Bond, Capital Value,
Equity Growth, Equity Income, Government Securities, Growth, International,
International SmallCap, Limited-Term Bond, MidCap, MidCap Growth, Money Market,
Principal LifeTime 2010, Principal LifeTime 2020, Principal LifeTime 2030,
Principal LifeTime 2040, Principal LifeTime 2050, Principal LifeTime Strategic
Income, Real Estate Securities, SmallCap, SmallCap Growth and SmallCap Value
Accounts.)
Sections 8(b)(1)(E) and 13(a)(3) of the 1940 Act together require that
the Fund have a fundamental policy addressing the concentration of investments
for each of its Accounts. An investment of more than 25% of an Account's assets
in any one industry represents concentration.
Proposed restriction: The Board of Directors is proposing that the
Accounts indicated above adopt the following fundamental investment restriction
dealing with concentration of investments:
The Account may not concentrate its investments in any
particular industry, except that the Account may invest up to
25% of the value of its total assets in a single industry,
provided that, when the Account has adopted a temporary
defensive posture, there shall be no limitation on the
purchase of obligations issued or guaranteed by the U.S.
government or its agencies or instrumentalities. This
restriction does not apply to the Real Estate Securities
Account.
Current restrictions: Currently, the Fund has nine forms of fundamental
investment restriction dealing with the concentration of investments that differ
from the proposed restriction. Each of these current forms of restriction is set
forth below and is followed by a list of the Accounts to which that form of
restrictions applies.
1. The Account may not invest less than 25% of its total
assets in securities of companies in the public utilities
industry, except that it may, for temporary defensive
purposes, place all of its assets in cash, cash equivalents,
bank certificates of deposit, bankers acceptances, repurchase
agreements, commercial paper, commercial paper master notes,
U.S. government securities, and preferred stocks and debt
securities, whether or not convertible into or carrying rights
for common stock.
--Equity Income
2. The Account may not invest less than 25% of its total
assets in securities of companies in the real estate industry
except that it may, for temporary defensive purposes, place
all of its assets in cash, cash equivalents, bank certificates
of deposit, bankers acceptances, repurchase agreements,
commercial paper, commercial paper master notes, U.S.
government securities, and preferred stocks and debt
securities, whether or not convertible into or carrying rights
for common stock.
--Real Estate Securities
3. The Account may not purchase any securities other than
obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, except that the Account may
maintain reasonable amounts in cash or commercial paper or
purchase short-term debt securities not issued or guaranteed
by the U.S. Government or its agencies or instrumentalities
for daily cash management purposes or pending selection of
particular long-term investments.
--Government Securities
4. The Account may not concentrate its investments in any
particular industry or industries, except that the Account may
invest not more than 25% of the value of its total assets in a
single industry.
--Asset Allocation, Balanced, Equity Growth, Growth,
International, MidCap
5. The Account may not concentrate its investments in any
particular industry, except that the Account may invest not
more than 25% of the value of its total assets in a single
industry.
--International SmallCap, MidCap Growth, SmallCap,
SmallCap Growth, SmallCap Value
6. The Account may not concentrate its investments in any one
industry. No more than 25% of the value of its total assets
will be invested in any one industry.
--Capital Value
7. The Account may not concentrate its investments in any
particular industry or industries.
--Limited-Term Bond
8. The Account may not invest 25% or more of its total assets
in securities of issuers in any one industry except that the
Account will concentrate its investments in the mutual Account
industry. This restriction does not apply to the Account's
investments in the mutual Account industry by virtue of its
investments in the underlying Accounts. This restriction also
does not apply to obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
--Principal LifeTime 2010, Principal LifeTime 2020,
Principal LifeTime 2030, Principal LifeTime 2040, Principal
LifeTime 2050, Principal LifeTime Strategic Income
9. The Account may not concentrate its investments in any one
industry. No more than 25% of the value of its total assets
will be invested in securities of issuers having their
principal activities in any one industry, other than
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, or obligations of domestic
branches of U.S. banks and savings institutions.
--Money Market
The proposed restriction has already been adopted with respect to the
following other Accounts: Equity Value, International Emerging Markets, LargeCap
Blend, LargeCap Growth, LargeCap Value, LargeCap Stock Index, MidCap Value.
(This restriction applies to the LargeCap Stock Index Account except to the
extent that the Standard & Poor's 500 Index also is so concentrated.)
Proposal 6E - Purchases or Sales of Real Estate
(applies only to the Capital Value, Government Securities, Money
Market, Principal LifeTime 2010, Principal LifeTime 2020, Principal LifeTime
2030, Principal LifeTime 2040, Principal LifeTime 2050 and Principal LifeTime
Strategic Income Accounts.)
Sections 8(b)(1)(F) and 13(a)(2) of the 1940 Act together require the
Fund to set forth a fundamental policy governing the purchasing or sale of real
estate for each of its Accounts.
Proposed restriction: The Board of Directors is proposing that the
Accounts indicated above adopt the following fundamental investment restriction
dealing with the purchase or sale of real estate:
The Account may not invest in real estate, although it may
invest in securities that are secured by real estate and
securities of issuers that invest or deal in real estate.
Current restrictions: Currently, the Fund has four forms of fundamental
investment restriction dealing with the purchase or sale of real estate that
differ from the proposed restriction. Each of these current forms of restriction
is set forth below and is followed by a list of the Accounts to which that form
of restriction applies.
1. The Account may not engage in the purchase and sale of
interests in real estate, including interests in real estate
investment trusts (although it will invest in securities
secured by real estate or interests therein, such as
mortgage-backed securities).
--Government Securities Account
2. The Account may not engage in the purchase and sale of
illiquid interests in real estate, including interests in real
estate investment trusts (although it may invest in securities
secured by real estate or interests therein).
--Money Market Account
3. The Account may not purchase or sell real estate or
interests therein, although the Account may purchase
underlying funds which purchase securities of issuers that
engage in real estate operations and securities secured by
real estate or interests therein.
--Principal LifeTime 2010, Principal LifeTime 2020,
Principal LifeTime 2030, Principal LifeTime 2040, Principal
LifeTime 2050, Principal LifeTime Strategic Income
4. The Account may not engage in the purchase and sale of
illiquid interests in real estate. For this purpose, readily
marketable interests in real estate investment trusts are not
interests in real estate.
--Capital Value
The proposed restriction has already been adopted with respect to the
following other Accounts: Asset Allocation, Balanced, Bond, Equity Growth,
Equity Income, Equity Value, Growth, International, International Emerging
Markets, International SmallCap, LargeCap Blend, LargeCap Growth, LargeCap Stock
Index, LargeCap Value, Limited-Term Bond, MidCap, MidCap Growth, MidCap Value,
Real Estate Securities, SmallCap, SmallCap Growth and SmallCap Value.
Proposal 6F - Purchases or Sales of Commodities
(applies only to the Asset Allocation, Balanced, Bond, Capital Value,
Equity Growth, Equity Income, Government Securities, Growth, International,
International SmallCap, Limited-Term Bond, MidCap, MidCap Growth, Money Market,
Principal LifeTime 2010, Principal LifeTime 2020, Principal LifeTime 2030,
Principal LifeTime 2040, Principal LifeTime 2050, Principal LifeTime Strategic
Income, Real Estate Securities, SmallCap, SmallCap Growth and SmallCap Value
Accounts.)
Sections 8(b)(1)(F) and 13(a)(2) of the 1940 Act together require the
Fund to set forth a fundamental policy dealing with the purchase or sale of
commodities for each of its Accounts.
Proposed restriction: The Board of Directors is proposing that the
Accounts indicated above adopt the following fundamental investment restriction
dealing with the purchase or sale of commodities:
The Account may not invest in physical commodities or
commodity contracts (other than foreign currencies), but it
may purchase and sell financial futures contracts, options on
such contracts, swaps and securities backed by physical
commodities.
Current restrictions: Currently, the Fund has four forms of fundamental
investment restriction dealing with the purchase or sale of commodities that
differ from the proposed restriction. Each of these current forms of restriction
is set forth below and is followed by a list of the Accounts to which that form
of restriction applies.
1. The Account may not invest in commodities or commodity
contracts, but it may purchase and sell financial futures
contracts and options on such contracts.
--Asset Allocation, Balanced, Bond, Capital Value,
Equity Growth, Growth, International, Limited-Term
Bond, MidCap,
2. The Account may not invest in physical commodities or
commodity contracts (other than foreign currencies), but it
may purchase and sell financial futures contracts and options
on such contracts.
--Equity Income, International SmallCap, MidCap
Growth, Real Estate Securities, SmallCap, SmallCap
Growth, SmallCap Value
3. The Account may not purchase or sell commodities or
commodities contracts except that the Account may invest in
underlying funds that may purchase or write interest rate,
currency and stock and bond index futures contracts and
related options thereon.
--Principal LifeTime 2010, Principal LifeTime 2020,
Principal LifeTime 2030, Principal LifeTime 2040, Principal
LifeTime 2050, Principal LifeTime Strategic Income
4. The Account may not invest in commodities or commodity
contracts
--Government Securities, Money Market
The proposed restriction has already been adopted with respect to the
following other Accounts: Equity Index, International Emerging Markets, LargeCap
Blend, LargeCap Growth, LargeCap Stock Index, LargeCap Value and MidCap Value.
Proposal 6G - Making of Loans
(applies only to the Asset Allocation, Balanced, Bond, Capital Value,
Equity Growth, Equity Income, Government Securities, Growth, International,
International Emerging Markets, International SmallCap, LargeCap Blend, LargeCap
Growth, LargeCap Stock Index, LargeCap Value, Limited-Term Bond, MidCap, MidCap
Growth, MidCap Value, Money Market, Principal LifeTime 2010, Principal LifeTime
2020, Principal LifeTime 2030, Principal LifeTime 2040, Principal LifeTime 2050,
Principal LifeTime Strategic Income, Real Estate Securities, SmallCap, SmallCap
Growth and SmallCap Value Accounts.)
Sections 8(b)(1)(G) and 13(a)(2) of the 1940 Act together require that
the Fund set forth a fundamental policy governing the making of loans to other
persons for each of its Accounts.
Proposed restriction: The Board of Directors is proposing that the
Accounts indicated above adopt the following fundamental investment restriction
dealing with making loans to other persons:
The Account may not make loans, except that the Account may a)
purchase and hold debt obligations in accordance with its
investment objectives and policies; b) enter into repurchase
agreements; and c) lend its portfolio securities without
limitation against collateral (consisting of cash or liquid
assets) equal at all times to not less than 100% of the value
of the securities loaned. This limit does not apply to
purchases of debt securities or commercial paper.
Current restrictions: Currently, the Fund has three forms of
fundamental investment restriction dealing with the making of loans that differ
from the proposed restriction. Each of these current forms of restriction is set
forth below and is followed by a list of the Accounts to which that form of
restriction applies.
1. The Account may not make loans, except that the Account 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.
--Asset Allocation, Balanced, Bond, Capital Value,
Equity Growth, Equity Income, Government Securities, Growth,
International, International SmallCap, Limited-Term Bond,
MidCap, MidCap Growth, Money Market, Real Estate Securities,
SmallCap, SmallCap Growth, SmallCap Value
2. The Account may not make loans, except that the Account may
a) purchase underlying Accounts which purchase and hold debt
obligations; and b) enter into repurchase agreements. This
limit does not apply to purchases of debt securities or
commercial paper by the Account or an underlying Account. For
the purpose of this restriction, lending of Account securities
by the underlying Accounts are not deemed to be loans.
--Principal LifeTime 2010, Principal LifeTime 2020,
Principal LifeTime 2030, Principal LifeTime 2040, Principal
LifeTime 2050, Principal LifeTime Strategic Income
3. The Account may not make loans, except that the Account may
a) purchase and hold debt obligations in accordance with its
investment objective and policies, b) enter into repurchase
agreements, and c) lend its portfolio securities without
limitation against collateral (consisting of cash or
securities issued or guaranteed by the U.S. Government or its
agencies or instrumentalities) equal at all times to not less
than 100% of the value of the securities loaned. This limit
does not apply to purchases of debt securities or commercial
paper.
--International Emerging Markets, LargeCap Blend,
Large Cap Growth, LargeCap Stock Index, LargeCap Value, MidCap
Value
The proposed restriction has already been adopted with respect
to the Equity Value Account.
Proposal 6H - Short Sales
(applies only to the Government Securities, Principal LifeTime 2010,
Principal LifeTime 2020, Principal LifeTime 2030, Principal LifeTime 2040,
Principal LifeTime 2050 and Principal LifeTime Strategic Income.)
Section 12(a)(3) of the 1940 Act makes it unlawful for an investment
company, in contravention of applicable SEC rules and orders, to effect a short
sale of any security, except in connection with an underwriting in which the
fund is a participant. There are no applicable SEC rules or orders, and the 1940
Act does not require that funds state a fundamental investment policy regarding
this matter. The sale of securities short, however, may be viewed in some cases
as the issuance of a senior security under circumstances not permitted by
Section 18.
Proposed restriction: The Board of Directors is proposing that the
Accounts indicated above adopt the following fundamental investment restriction
dealing with effecting short sales:
The Account may not sell securities short (except where the
Account 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).
Current restrictions: Currently, the Fund has two forms of fundamental
investment restriction dealing with effecting short sales that differ from the
proposed restriction. Each of these current forms of restriction is set forth
below and is followed by a list of the Accounts to which that form of
restriction applies.
1. The Account may not sell securities short.
--Government Securities
2. The Account may not sell securities short. Each Account may
invest in underlying Accounts which may sell securities short
when the underlying Account 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.
--Principal LifeTime 2010, Principal LifeTime 2020,
Principal LifeTime 2030, Principal LifeTime 2040, Principal
LifeTime 2050, Principal LifeTime Strategic Income, Equity
Value
The proposed restriction has already been adopted with respect to the
following other Accounts: Asset Allocation, Balanced, Bond, Capital Value,
Equity Growth, Equity Income, Equity Value, Growth, International, International
Emerging Markets, International SmallCap, LargeCap Blend, LargeCap Growth,
LargeCap Stock Index, LargeCap Value, Limited-Term Bond, MidCap, MidCap Growth,
MidCap Value, Real Estate Securities, SmallCap, SmallCap Growth and SmallCap
Value.
Proposal 6I - Diversification
(applies only to the Government Securities, Money Market, Principal
LifeTime 2010, Principal LifeTime 2020, Principal LifeTime 2030, Principal
LifeTime 2040, Principal LifeTime 2050 and Principal LifeTime Strategic Income
Accounts.)
Section 5(b)(1) of the 1940 Act sets forth the requirements that must
be met for an open-end investment company to be diversified. These statutory
standards are reflected in the proposed restriction set forth below. Section
13(a)(1) of the 1940 Act provides that an investment company may not change its
classification from diversified to nondiversified unless authorized by the vote
of a majority of its outstanding voting securities.
Proposed restriction: The Board of Directors is proposing that the
Accounts indicated above adopt the following fundamental investment restriction
dealing with diversification:
The Account may not invest more than 5% of its total assets in the
securities of any one issuer (other than obligations issued or
guaranteed by the U.S. Government or its agencies or instrumentalities)
or purchase more than 10% of the outstanding voting securities of any
one issuer, except that this limitation shall apply only with respect
to 75% of the total assets of the Account.
Current restrictions: Currently, the Fund has one fundamental
investment restriction that differs from the proposed revision and that applies
to the Money Market Account. This form of investment restriction is set forth
below. The Government Securities and the LifeTime Accounts currently have no
fundamental investment restriction dealing with diversification:
1. The Account may not purchase the securities of any issuer
if the purchase will cause more than 5% of the value of its
total assets to be invested in the securities of any one
issuer (except securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities).
.....The Account may not purchase the securities of any issuer
if the purchase will cause more than 10% of the outstanding
voting securities of the issuer to be held by the Account
(other than securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities).
--Money Market
The proposed restriction has already been adopted with respect to the
following other Accounts: Asset Allocation, Balanced, Bond, Capital Value,
Equity Growth, Equity Income, Equity Value, Growth, International, International
Emerging Markets, International SmallCap, LargeCap Blend, LargeCap Growth,
LargeCap Stock Index, LargeCap Value, Limited-Term Bond, MidCap, MidCap Growth,
MidCap Value, Money Market, Real Estate Securities, SmallCap, SmallCap Growth
and SmallCap Value.
Category Two Changes
Proposal 6J - Fundamental Investment Restrictions to Be Eliminated
(applies only to the Asset Allocation, Balanced, Bond, Capital Value,
Equity Growth, Government Securities, Growth, International, Limited-Term Bond,
MidCap and Money Market Accounts.)
The Board has decided that certain fundamental investment restrictions
should be deleted. These unnecessary Restrictions reflect legal and regulatory
requirements that applied and business and industry conditions that prevailed at
the time they were adopted. With changes in legal requirements and prevailing
conditions, the following fundamental investment restrictions are no longer
necessary. Each Unnecessary Restriction proposed to be eliminated is set forth
below and is followed by a list of the Accounts to which the restriction
applies.
1. The Account may not purchase or retain in its portfolio
securities of any issuer if those officers or directors of the
Account or the Manager owning beneficially more than one-half
of 1% (0.5%) of the securities of the issuer together own
beneficially more than 5% of such securities.
--Asset Allocation, Balanced, Bond, Capital Value,
Equity Growth, Government Securities, Growth, International,
Limited-Term Bond, MidCap, Money Market
2. The Account may not purchase securities of any company with
a record of less than three years' continuous operations
(including that of predecessors) if the purchase would cause
the value of the Account's aggregate investments in all such
companies to exceed 5% of the Account's total assets.
--Capital Value, Money Market
3. The Account may not invest in oil and gas interests or
mineral exploration or development programs.
--Government Securities, Money Market
4. The Account may not invest in interests in oil, gas, or
other mineral exploration or development programs, although
the Account may invest in securities of issuers that invest in
or sponsor such programs.
--Asset Allocation, Balanced, Bond, Equity Growth,
Growth, International, Limited-Term Bond, MidCap
5. It is contrary to the Account's present policy to purchase
warrants in excess of 5% of its total assets of which 2% may
be invested in warrants that are not listed on the New York or
American Stock Exchange.
--Capital Value
6. The Account may not invest more than 5% of its assets at
the time of purchase in rights and warrants (other than those
that have been acquired in units or attached to other
securities).
--Capital Value
7. The Account may not invest more than 5% of its assets in
initial margins and premiums on financial futures contracts
and options on such contracts.
--Government Securities
8. The Account may not invest more than 5% of its total assets
in the purchase of covered spread options and the purchase of
put and call options on securities, securities indices and
financial futures contracts.
--Government Securities
9. The Account will not issue or acquire put and call options,
straddles or spreads or any combination thereof.
--Money Market
Category Three Changes
Proposal 6K - Fundamental Investment Restrictions to Be Changed to
Non-Fundamental Investment Restrictions
(applies only to the Capital Value, Government Securities
and Money Market Accounts.)
In addition to the fundamental investment restrictions discussed above,
the Fund has adopted other investment restrictions for certain Accounts and
classified them as fundamental. These investment restrictions are not required
to be fundamental, and the Board of Directors seeks shareholder approval to
change them from fundamental to non-fundamental. The proposed changes would
place the affected Accounts with respect to such restrictions in substantially
the same position as the other Accounts of the Fund and the corresponding PIF
Funds. The Board has no present intention to change any investment restriction
which is changed from fundamental to non-fundamental except for those changes
discussed below.
The fundamental investment restrictions proposed to be changed to
non-fundamental investment restrictions, and the Accounts to which each
currently applies, are set forth below.
1. The Account may not invest in companies for the purpose of
exercising control or management.
--Capital Value, Government Securities, Money Market
2. The Account may not invest more than 20% of its total
assets in securities of foreign issuers.
--Capital Value
If this investment restriction becomes non-fundamental, the Board
intends to make a minor change in the language used to describe the restriction
and to increase the percentage figure from 20% to 25% to conform the restriction
to the non-fundamental restriction currently in effect for most of the PIF Fund.
As so changed, the investment restriction would state as follows: "The Account
may not invest more than 25% of its assets in foreign securities."
3. The Account may not enter into repurchase agreements
maturing in more than seven days if, as a result thereof, more
than 10% of the value of the Account's total assets would be
invested in such repurchase agreements and other assets
without readily available market quotations.
--Government Securities
If this investment restriction becomes non-fundamental, the Board
intends to change it to conform to the non-fundamental investment restriction
currently in effect for most of the PIF Funds. As so changed, the investment
restriction would state as follows: "The Account may not invest more than 15% of
its net assets in illiquid securities and in repurchase agreements maturing in
more than seven days except to the extent permitted by applicable law."
4. The Account may not invest a greater percentage of its
total assets in securities not readily marketable than is
allowed by federal securities rules or interpretations.
The Account may not enter into repurchase agreements maturing
in more than seven days if, as a result thereof, more than 10%
of the value of the Account's total assets would be invested
in such repurchase agreements and other assets (excluding time
deposits) without readily available market quotations.
The Account may not invest in uncertificated time deposits
maturing in more than seven days; uncertificated time deposits
maturing from two business days through seven calendar days
may not exceed 10% of the value of the Account's total assets.
--Money Market
If these investment restrictions become non-fundamental, the Board
intends to replace them with the following non-fundamental investment
restriction which currently applies to the PIF Money Market Fund: "The Account
may not invest more than 15% of its net assets in illiquid securities and in
repurchase agreements maturing in more than seven days except to the extent
permitted by applicable law."
OTHER MATTERS
We do not know of any matters to be presented at the Meeting other than
those mentioned in this Proxy Statement. If any other matters properly come
before the Meeting, the shares presented by proxies will be voted in accordance
with the best judgment of the person or persons voting the proxies.
Shareholder proposals to be presented at any future meeting of
shareholders of the Fund or any Account must be received by us a reasonable time
before we commence soliciting proxies for that meeting in order for such
proposals to be considered for inclusion in the proxy materials related to that
meeting.
BY ORDER OF THE BOARD OF DIRECTORS
April 18, 2005
Des Moines, Iowa
It is important that proxies be returned promptly. Therefore,
shareholders who do not expect to attend the meeting in person are urged to
complete, sign, and date and return the proxy ballot(s) in the enclosed
envelope.
Appendix A
SHARES OUTSTANDING AND OWNERSHIP OF SHARES
The following table shows the number of shares outstanding of each of
the Accounts as of the Record Date. As stated under "Voting Information" above,
all the shares of the Accounts are owned of record by Principal Life. The
ultimate parent of Principal Life is Principal Financial Group, Inc.
Account Shares Outstanding
Asset Allocation Account
Balanced Account
Bond Account
Capital Value Account
Equity Growth Account
Equity Income Account
Equity Value Account
Government Securities Account
Growth Account
International Account
International Emerging Markets Account
International SmallCap Account
LargeCap Blend Account
Large Growth Account
LargeCap Stock Index Account
LargeCap Value Account
Limited-Term Bond Account
MidCap Account
MidCap Growth Account
MidCap Value Account
Money Market Account
Principal LifeTime 2010 Account
Principal LifeTime 2020 Account
Principal LifeTime 2030 Account
Principal LifeTime 2040 Account
Principal LifeTime 2050 Account
Principal LifeTime Strategic Income Account
Real Estate Securities Account
SmallCap Account
SmallCap Growth Account
SmallCap Value Account
As of March 3, 2005, the Directors and officers of the Fund together
owned less than 1% of the outstanding shares of any of the Accounts.
As of March 3, 2005, no one was known by the Fund to own beneficially
5% or more of the outstanding shares of any of the Accounts.
Appendix B
PRINCIPAL VariablE CONTRACTS FUND, INC.
AUDIT AND NOMINATING COMMITTEE CHARTER
Organization
The Audit and Nominating Committee of the Board of Directors ("Board") shall be
composed of directors who are not interested persons as defined in the
Investment Company Act of 1940.
Statement of Policy
The function of the Audit and Nominating Committee is oversight; it is
management's responsibility to maintain appropriate systems for accounting and
internal control over financial reporting, and the auditor's responsibility to
plan and carry out a proper audit. Specifically, Fund management is responsible
for: (1) the preparation, presentation and integrity of the Fund's financial
statements; (2) the maintenance of appropriate accounting and financial
reporting principles and policies; and (3) the maintenance of internal control
over financial reporting and other procedures designed to assure compliance with
accounting standards and related laws and regulations. The independent auditors
are responsible for planning and carrying out an audit consistent with
applicable legal and professional standards and the terms of their engagement
letter. Nothing in this Charter shall be construed to reduce the
responsibilities or liabilities of the Fund's service providers, including the
auditors.
Although the Committee is expected to take a detached and questioning approach
to the matters that come before it, the review of a Fund's financial statements
by the Committee is not an audit, nor does the Committee's review substitute for
the responsibilities of the Funds management for preparing; or the independent
auditors for auditing, the financial statements. Members of the Committee are
not full-time employees of the Fund and, in serving on this Committee, are not,
and do not hold themselves out to be, acting as accountants or auditors. As
such, it is not the duty or responsibility of the Committee or its members to
conduct "field work" or other types of auditing or accounting reviews or
procedures.
In discharging their duties the members of the Committee are entitled to rely on
information, opinions, reports, or statements, including financial statements
and other financial data, if prepared or presented by: (1) one or more officers
of the Fund whom the director reasonably believes to be reliable and competent
in the matters presented; (2) legal counsel, public accountants, or other
persons as to matters the director reasonably believes are within the persons
professional or expert competence; or (3) a Board committee of which the
director is not a member.
The Committee shall assist the directors in fulfilling their responsibilities to
the shareholders, potential shareholders, and investment community relating to
monitoring the integrity of the financial reporting processes and systems of
internal accounting and financial controls, the compliance with legal and
regulatory requirements, the independence and performance of internal and
external auditors, and the effectiveness and efficiency of operations. The
auditors for the Fund shall report directly to the Committee. Further, the
Committee shall be responsible for maintaining free and open communication among
the directors, the independent auditors, the internal auditors, and the
management of the Fund.
Responsibilities
In carrying out its responsibilities, the Committee should be flexible so that
it can best react to changing conditions to provide the directors and
shareholders with reasonable assurance that the Fund accounting and reporting
practices are in accordance with all requirements and are of the highest
quality.
The Committee shall have the authority to retain outside counsel or other
consultants to advise the Committee as it deems appropriate to its duties. The
Committee may request any officer or employee of the Fund or management company
or the company's outside counsel or independent auditors to attend a meeting of
the Committee or to meet with any members of, or consultants to the Committee.
No member of the Committee shall receive any compensation from the Fund except
for service as a member of the Fund's Board or a committee of the Board.
The Committee shall meet not less than twice per year to review the
Fund's financial statements and shall make regular reports to the
Board addressing such matters as the quality and integrity of the
Company's financial statements, the Company's compliance with legal
and regulatory requirements and the performance of the independent and
internal auditors. The chair of the Committee may call additional
meetings as necessary.
The Committee shall:
1. Appoint, compensate, and conduct oversight of the work of the independent
auditors.
2. Meet with the independent auditors to review the scope and approach of the
proposed audit plan and the audit procedures to be performed.
3. Confirm and ensure the objectivity of the internal auditors and the
independence of the independent auditors. Pre-approve all engagements and
compensation to be paid to the auditor consistent with the Fund's Policy on
Auditor Independence and discuss independence issues with the independent
auditor on an annual basis. If so determined by the Committee, recommend
that the Board take appropriate action to satisfy itself of the
independence of the auditor.
No engagement of the independent auditor should:
(a) create a mutual or conflicting interest between the audit firm and the
Fund
(b) place the audit firm in the position of auditing its own work
(c) result in the audit firm acting in a management role for the Fund, or
(d) place the audit firm in a position of being an advocate for the Fund.
Annually, the independent auditor shall report all relationships that
may bear on independence between the auditor and the Fund with respect
to any services provided by the auditor, its subsidiaries or
affiliates.
4. Review the adequacy and effectiveness of the Fund's internal controls, with
the independent auditors, the organization's internal auditors, and its
financial and accounting personnel, and consider their recommendations for
improving the internal controls or particular areas where new or more
detailed controls or procedures are desirable. Particular emphasis should
be given to the adequacy of internal controls in exposing any payments,
transactions, or procedures that might be deemed illegal or otherwise
improper. Consider major changes to the Fund's auditing and accounting
principles and practices as suggested by the independent auditors, internal
auditor or management.
5. Request that management inform the Committee of all new or changed
accounting principles and disclosure practices on a timely basis. Inquire
of the auditors regarding their judgments and reasoning regarding the
appropriateness of the changes or proposed changes, as well as the
appropriateness of the accounting principles and disclosure practices
management employs for new transactions or events.
6. Review legal and regulatory matters that may have a material effect on the
financial statements, the Fund's compliance policies and ethical business
practices programs, and any material related to regulatory examinations or
reports received from regulators or government agencies.
7. Inquire of management, the internal auditors, and the independent auditors
regarding significant risks or exposures, and assess the steps management
has taken to minimize such risks and exposures to the organization.
8. Review the results of the Fund's monitoring of compliance with its Code of
Ethics.
9. Review the Fund's policies and procedures with respect to officers' and
directors' expense accounts and perquisites, including their use of the
organization's assets, and consider the results of the internal or
independent auditors' reviews of those areas. (Expenses of individuals
serving in the role of a Fund officer are not charged to the Fund and there
are no related perquisites. Fees and reimbursable expenses of the
independent directors are the only expenses of Fund directors charged to
the Fund).
10. Review the Fund's internal audit function, including its audit plans,
staffing, explanations for any deviations from plans, and the coordination
of such plans with those of the independent auditors.
11. Review the significant issues reported to management prepared by the
internal auditor and management's responses. Receive a summary of findings
from completed internal audits. Review with the internal auditors any
difficulties encountered in the course of the audit work, including any
restrictions on the scope of activities or access to required information.
12. Meet with the independent auditors, at the conclusion of the audit, to
review the results of the audit, including any comments or recommendations
of the independent auditors. In addition, review with the independent
auditors any major issues regarding accounting and auditing principles,
practices and judgments as well as the adequacy of internal controls that
could significantly affect the financial statements. Further, report the
results of the annual audit to the Board of Directors.
13. Review the financial statements contained in the annual report to
shareholders with management and the independent auditors. Inquire of the
independent auditors regarding their qualitative judgments about the
appropriateness, not just the acceptability, of the accounting principles
and the clarity of the financial disclosures. Also, inquire of the
independent auditors regarding their reasoning in accepting or questioning
management's significant estimates.
14. Inquire of the independent auditors regarding their judgments about whether
management's accounting principles and estimates are conservative,
moderate, or extreme from the perspective of income, asset, and liability
recognition, and whether those principles are common practices or minority
practices. Also, discuss with the independent auditors how the Fund's
choices of accounting principles and disclosure practices may affect
shareholders' and the public's views and attitudes about the organization.
15. Discuss with the independent auditors other matters, if any, required to be
discussed by Statements on Auditing Standards relating to the conduct of
the audit such as audit adjustments, fraud and illegal acts, auditor
retention issues, consultation with other auditors, disagreements with
management and resolve any such disagreements, access to information, other
difficulties encountered during the audit, etc.
16. Meet separately with the independent auditors and internal auditors without
management. Among the items to be discussed in these meetings are the
independent auditors' evaluation of the Fund's financial, accounting, and
auditing personnel, and the cooperation that the independent auditors
received during the audit.
17. Establish and maintain procedures for the handling of complaints received
regarding accounting, internal controls, and auditing.
18. Submit the minutes of all the Committee's meetings to, or discuss the
matters considered at each Committee meeting with, the Board of Directors.
Review and reassess the adequacy of this Charter annually and recommend any
proposed changes to the Board for approval.
19. Select, review and nominate for consideration by the Board candidates for
directors who are not interested persons as defined in the Investment
Company Act of 1940.
(adopted by the Board of Directors on September 13, 2004)
Appendix C
FORM OF SUB-ADVISORY AGREEMENT
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
SUB-ADVISORY AGREEMENT
[NAME OF SUB-ADVISOR] SUB-ADVISED SERIES
AGREEMENT executed as of January ____, 2005, by and between PRINCIPAL
MANAGEMENT CORPORATION (hereinafter called "the Manager"), and [NAME OF
SUB-ADVISOR] (hereinafter called "the Sub-Advisor").
W I T N E S S E T H:
WHEREAS, the Manager is the manager and investment adviser to each Series
of Principal Variable Contracts Fund, Inc., (the "Fund"), an open-end management
investment company registered under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Manager desires to retain the Sub-Advisor to furnish it with
portfolio selection and related research and statistical services in connection
with the investment advisory services for each Series of the Fund identified in
Appendix A hereto (hereinafter called "Series"), which the Manager has agreed to
provide to the Fund, and the Sub-Advisor desires to furnish such services; and
WHEREAS, The Manager has furnished the Sub-Advisor with copies properly
certified or authenticated of each of the following and will promptly provide
the Sub-Advisor with copies properly certified or authenticated of any amendment
or supplement thereto:
(a) Management Agreement (the "Management Agreement") with the Fund;
(b) The Fund's registration statement and financial statements as filed
with the Securities and Exchange Commission; and
(c) Policies, procedures or instructions adopted or approved by the Board
of Directors of the Fund relating to obligations and services to be
provided by the Sub-Advisor.
NOW, THEREFORE, in consideration of the premises and the terms and conditions
hereinafter set forth, the parties agree as follows:
1. Appointment of Sub-Advisor
In accordance with and subject to the Management Agreement, the
Manager hereby appoints the Sub-Advisor to perform the services
described in Section 2 below for investment and reinvestment of the
securities and other assets of each Series, subject to the control and
direction of the Manager and the Fund's Board of Directors, for the
period and on the terms hereinafter set forth. The Sub-Advisor accepts
such appointment and agrees to furnish the services hereinafter set
forth for the compensation herein provided. The Sub-Advisor shall for
all purposes herein be deemed to be an independent contractor and
shall, except as expressly provided or authorized, have no authority
to act for or represent the Fund or the Manager in any way or
otherwise be deemed an agent of the Fund or the Manager.
2. Obligations of and Services to be Provided by the Sub-Advisor
-------------------------------------------------------------
The Sub-Advisor will:
(a) Provide investment advisory services, including but not limited
to research, advice and supervision for each Series.
(b) Furnish to the Board of Directors of the Fund for approval (or
any appropriate committee of such Board), and revise from time to
time as conditions require, a recommended investment program for
each Series consistent with each Series investment objective and
policies.
(c) Implement the approved investment program by placing orders for
the purchase and sale of securities without prior consultation
with the Manager and without regard to the length of time the
securities have been held, the resulting rate of portfolio
turnover or any tax considerations, subject always to the
provisions of the Fund's registration statement, Articles of
Incorporation and Bylaws and the requirements of the 1940 Act, as
each of the same shall be from time to time in effect.
(d) Advise and assist the officers of the Fund, as requested by the
officers, in taking such steps as are necessary or appropriate to
carry out the decisions of its Board of Directors, and any
appropriate committees of such Board, regarding the general
conduct of the investment business of each Series.
(e) Maintain, in connection with the Sub-Advisor's investment
advisory services obligations, compliance with the 1940 Act and
the regulations adopted by the Securities and Exchange Commission
thereunder and the Series' investment strategies and restrictions
as stated in the Fund's prospectus and statement of additional
information.
(f) Report to the Board of Directors of the Fund at such times and in
such detail as the Board of Directors may reasonably deem
appropriate in order to enable it to determine that the
investment policies, procedures and approved investment program
of each Series are being observed.
(g) Upon request, provide assistance and recommendations for the
determination of the fair value of certain securities when
reliable market quotations are not readily available for purposes
of calculating net asset value in accordance with procedures and
methods established by the Fund's Board of Directors.
(h) Furnish, at its own expense, (i) all necessary investment and
management facilities, including salaries of clerical and other
personnel required for it to execute its duties faithfully, and
(ii) administrative facilities, including bookkeeping, clerical
personnel and equipment necessary for the efficient conduct of
the investment advisory affairs of each Series.
(i) Open accounts with broker-dealers and futures commission
merchants ("broker-dealers"), select broker-dealers to effect all
transactions for each Series, place all necessary orders with
broker-dealers or issuers (including affiliated broker-dealers),
and negotiate commissions, if applicable. To the extent
consistent with applicable law, purchase or sell orders for each
Series may be aggregated with contemporaneous purchase or sell
orders of other clients of the Sub-Advisor. In such event
allocation of securities so sold or purchased, as well as the
expenses incurred in the transaction, will be made by the
Sub-Advisor in the manner the Sub-Advisor considers to be the
most equitable and consistent with its fiduciary obligations to
the Fund and to other clients. The Sub-Advisor will report on
such allocations at the request of the Manager, the Fund or the
Fund's Board of Directors providing such information as the
number of aggregated trades to which each Series was a party, the
broker-dealers to whom such trades were directed and the basis
for the allocation for the aggregated trades. The Sub-Advisor
shall use its best efforts to obtain execution of transactions
for each Series at prices which are advantageous to the Series
and at commission rates that are reasonable in relation to the
benefits received. However, the Sub-Advisor may select brokers or
dealers on the basis that they provide brokerage, research or
other services or products to the Sub-Advisor. To the extent
consistent with applicable law, the Sub-Advisor may pay a broker
or dealer an amount of commission for effecting a securities
transaction in excess of the amount of commission or dealer
spread another broker or dealer would have charged for effecting
that transaction if the Sub-Advisor determines in good faith that
such amount of commission is reasonable in relation to the value
of the brokerage and research products and/or services provided
by such broker or dealer. This determination, with respect to
brokerage and research products and/or services, may be viewed in
terms of either that particular transaction or the overall
responsibilities which the Sub-Advisor and its affiliates have
with respect to each Series as well as to accounts over which
they exercise investment discretion. Not all such services or
products need be used by the Sub-Advisor in managing the Series.
In addition, joint repurchase or other accounts may not be
utilized by the Series except to the extent permitted under any
exemptive order obtained by the Sub-Advisor provided that all
conditions of such order are complied with.
(j) Maintain all accounts, books and records with respect to each
Series as are required of an investment advisor of a registered
investment company pursuant to the 1940 Act and Investment
Advisers Act of 1940 (the "Investment Advisers Act"), and the
rules thereunder, and furnish the Fund and the Manager with such
periodic and special reports as the Fund or Manager may
reasonably request. In compliance with the requirements of Rule
31a-3 under the 1940 Act, the Sub-Advisor hereby agrees that all
records that it maintains for each Series are the property of the
Fund, agrees to preserve for the periods described by Rule 31a-2
under the 1940 Act any records that it maintains for the Series
and that are required to be maintained by Rule 31a-1 under the
1940 Act, and further agrees to surrender promptly to the Fund
any records that it maintains for a Series upon request by the
Fund or the Manager. The Sub-Advisor has no responsibility for
the maintenance of Fund records except insofar as is directly
related to the services the Sub-Advisor provides to a Series.
(k) Observe and comply with Rule 17j-1 under the 1940 Act and the
Sub-Advisor's Code of Ethics adopted pursuant to that Rule as the
same may be amended from time to time. The Manager acknowledges
receipt of a copy of Sub-Advisor's current Code of Ethics.
Sub-Advisor shall promptly forward to the Manager a copy of any
material amendment to the Sub-Advisor's Code of Ethics along with
certification that the Sub-Advisor has implemented procedures for
administering the Sub-Advisor's Code of Ethics.
(l) From time to time as the Manager or the Fund may request, furnish
the requesting party reports on portfolio transactions and
reports on investments held by a Series, all in such detail as
the Manager or the Fund may reasonably request. The Sub-Advisor
will make available its officers and employees to meet with the
Fund's Board of Directors at the Fund's principal place of
business on due notice to review the investments of a Series.
(m) Provide such information as is customarily provided by a
sub-advisor and may be required for the Fund or the Manager to
comply with their respective obligations under applicable laws,
including, without limitation, the Internal Revenue Code of 1986,
as amended (the "Code"), the 1940 Act, the Investment Advisers
Act, the Securities Act of 1933, as amended (the "Securities
Act"), and any state securities laws, and any rule or regulation
thereunder.
(n) Perform quarterly and annual tax compliance tests to monitor each
Series' compliance with Subchapter M of the Code. The Sub-Advisor
shall notify the Manager immediately upon having a reasonable
basis for believing that a Series has ceased to be in compliance
or that it might not be in compliance in the future. If it is
determined that a Series is not in compliance with the
requirements noted above, the Sub-Advisor, in consultation with
the Manager, will take prompt action to bring the Series back
into compliance (to the extent possible) within the time
permitted under the Code.
(o) Provide a copy of the Sub-Advisor's Form ADV and any amendments
thereto contemporaneously with the filing of such documents with
the Securities and Exchange Commission or other regulatory
agency.
(p) Vote proxies received on behalf of the Series in a manner
consistent with Sub-Advisor's proxy voting policies and
procedures and provide a record of votes cast containing all of
the voting information required by Form N-PX in an electronic
format to enable the Series to file Form N-PX as required by SEC
rule.
(q) Respond to tender offers, rights offerings and other voluntary
corporate action requests affecting securities held by the Fund
and complete and file notices of claims in connection with class
action lawsuits concerning securities owned by the Fund.
3. Prohibited Conduct
In providing the services described in this agreement, the Sub-Advisor
will not consult with any other investment advisory firm that provides
investment advisory services to any investment company sponsored by
Principal Life Insurance Company regarding transactions for the Fund
in securities or other assets.
4. Compensation
As full compensation for all services rendered and obligations assumed
by the Sub-Advisor hereunder with respect to each Series, the Manager
shall pay the compensation specified in Appendix A to this Agreement.
5. Liability of Sub-Advisor
Neither the Sub-Advisor nor any of its directors, officers, employees,
agents or affiliates shall be liable to the Manager, the Fund or its
shareholders for any loss suffered by the Manager or the Fund
resulting from any error of judgment made in the good faith exercise
of the Sub-Advisor's investment discretion in connection with
selecting investments for a Series or as a result of the failure by
the Manager or any of its affiliates to comply with the terms of this
Agreement, except for losses resulting from willful misfeasance, bad
faith or gross negligence of, or from reckless disregard of, the
duties of the Sub-Advisor or any of its directors, officers,
employees, agents, or affiliates.
6. Supplemental Arrangements
The Sub-Advisor may enter into arrangements with other persons
affiliated with the Sub-Advisor or with unaffiliated third parties to
better enable the Sub-Advisor to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Sub-Advisor, subject to written notification to and approval of the
Manager and, where required by applicable law, the Board of Directors
of the Fund.
7. Regulation
The Sub-Advisor shall submit to all regulatory and administrative
bodies having jurisdiction over the services provided pursuant to this
Agreement any information, reports or other material which any such
body may request or require pursuant to applicable laws and
regulations.
8. Duration and Termination of This Agreement
This Agreement shall become effective on the latest of (i) the date of
its execution, (ii) the date of its approval by a majority of the
Board of Directors of the Fund, including approval by the vote of a
majority of the Board of Directors of the Fund who are not interested
persons of the Manager, the Sub-Advisor, Principal Life Insurance
Company or the Fund cast in person at a meeting called for the purpose
of voting on such approval or (iii) if required by the 1940 Act, the
date of its approval by a majority of the outstanding voting
securities of the Series. It shall continue in effect thereafter from
year to year provided that the continuance is specifically approved at
least annually either by the Board of Directors of the Fund or by a
vote of a majority of the outstanding voting securities of the Series
and in either event by a vote of a majority of the Board of Directors
of the Fund who are not interested persons of the Manager, Principal
Life Insurance Company, the Sub-Advisor or the Fund cast in person at
a meeting called for the purpose of voting on such approval.
If the shareholders of a Series fail to approve the Agreement or any
continuance of the Agreement in accordance with the requirements of
the 1940 Act, the Sub-Advisor will continue to act as Sub-Advisor with
respect to the Series pending the required approval of the Agreement
or its continuance or of any contract with the Sub-Advisor or a
different manager or sub-advisor or other definitive action; provided,
that the compensation received by the Sub-Advisor in respect to the
Series during such period is in compliance with Rule 15a-4 under the
1940 Act.
This Agreement may be terminated at any time without the payment of
any penalty by the Board of Directors of the Fund or by the
Sub-Advisor, the Manager or by vote of a majority of the outstanding
voting securities of the Series on sixty days written notice. This
Agreement shall automatically terminate in the event of its
assignment. In interpreting the provisions of this Section 8, the
definitions contained in Section 2(a) of the 1940 Act (particularly
the definitions of "interested person," "assignment" and "voting
security") shall be applied.
9. Amendment of this Agreement
No material amendment of this Agreement shall be effective until
approved, if required by the 1940 Act or the rules, regulations,
interpretations or orders issued thereunder, by vote of the holders of
a majority of the outstanding voting securities of the Series and by
vote of a majority of the Board of Directors of the Fund who are not
interested persons of the Manager, the Sub-Advisor, Principal Life
Insurance Company or the Fund cast in person at a meeting called for
the purpose of voting on such approval.
10. General Provisions
(a) Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Iowa.
The captions in this Agreement are included for convenience only
and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(b) Any notice under this Agreement shall be in writing, addressed
and delivered or mailed postage pre-paid to the other party at
such address as such other party may designate for the receipt of
such notices. Until further notice to the other party, it is
agreed that the address of the Manager for this purpose shall be
Principal Financial Group, Des Moines, Iowa 50392-0200, and the
address of the Sub-Advisor shall be [ADDRESS OF SUB-ADVISOR].
(c) The Sub-Advisor will promptly notify the Manager in writing of
the occurrence of any of the following events:
(1) the Sub-Advisor fails to be registered as an investment
adviser under the Investment Advisers Act or under the laws
of any jurisdiction in which the Sub-Advisor is required to
be registered as an investment advisor in order to perform
its obligations under this Agreement.
(2) the Sub-Advisor is served or otherwise receives notice of
any action, suit, proceeding, inquiry or investigation, at
law or in equity, before or by any court, public board or
body, involving the affairs of a Series.
(d) The Manager shall provide (or cause the Series custodian to
provide) timely information to the Sub-Advisor regarding such
matters as the composition of the assets of a Series, cash
requirements and cash available for investment in a Series, and
all other reasonable information as may be necessary for the
Sub-Advisor to perform its duties and responsibilities hereunder.
(e) This Agreement contains the entire understanding and agreement of
the parties.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date first above written.
PRINCIPAL MANAGEMENT CORPORATION
By __________________________________________
A. S. Filean, Senior Vice President
[NAME OF SUB-ADVISOR]
By ___________________________________________
Name:
Title
[Appendix A]
Appendix D
FORM OF SUB-SUB-ADVISORY AGREEMENT
AGREEMENT made this ____ day of _________________, 2005, by and between
_______________________ (hereinafter called the "Sub-Adviser") and Principal
Global Investors, LLC (hereinafter called the "Adviser").
WHEREAS, the Adviser has entered into a Subadvisory Agreement
("Sub-Advisory Agreement") with Principal Management Corporation, ("Client")
relating to __________________________ (the "Fund"), pursuant to which the
Adviser acts as investment adviser to the portfolio listed on Exhibit A
(individually a "Portfolio" and collectively the "Portfolios").
NOW, THEREFORE, in consideration of the premises and the mutual promises
set forth, the Adviser and the Sub-Adviser agree as follows:
1. (a) The Sub-Adviser shall, subject to the supervision of the Adviser,
direct the investments of all or such portion of the Portfolio's assets as the
Adviser shall designate in accordance with the investment objectives, policies
and limitations as provided in the Portfolio's prospectus or other governing
instruments, as amended from time to time, the Investment Company Act of 1940
and rules thereunder, as amended from time to time (the "1940 Act"), and such
other limitations as the Portfolio may impose by notice in writing to the
Adviser or Sub-Adviser. The Sub-Adviser shall also furnish for the use of the
Portfolios office space and all necessary office facilities, equipment and
personnel for servicing the investments of the Portfolio; and shall pay the
salaries and fees of all personnel of the Sub-Adviser performing services for
the Portfolio relating to research, statistical and investment activities. The
Sub-Adviser is authorized, in its discretion and without prior consultation with
the Portfolio or the Adviser, to buy, sell, lend and otherwise trade in any
stocks, bonds and other securities and investment instruments on behalf of the
Portfolio. The investment policies and all other actions of the Portfolio are
and shall at all times be subject to the control and direction of the Fund's
Board of Directors.
(b) The Sub-Adviser shall also furnish such reports, evaluations,
information or analyses to the Fund and the Adviser as the Fund's Board of
Directors or the Adviser may request from time to time or as the Sub-Adviser may
deem to be desirable. The Sub-Adviser shall make recommendations to the Fund's
Board of Directors with respect to Portfolio policies, and shall carry out such
policies as are adopted by the Directors. The Sub-Adviser shall, subject to
review by the Board of Directors, furnish such other services as the Sub-Adviser
shall from time to time determine to be necessary or useful to perform its
obligations under this Agreement and which are not otherwise furnished by the
Adviser.
(c) The Sub-Adviser shall place all orders for the purchase and sale of
portfolio securities for the Portfolio's accounts with brokers or dealers
selected by the Sub-Adviser, which may include brokers or dealers affiliated
with the Adviser or Sub-Adviser. The Sub-Adviser shall use its best efforts to
seek to execute portfolio transactions at prices which are advantageous to the
Portfolio and at commission rates which are reasonable in relation to the
benefits received. In selecting brokers or dealers qualified to execute a
particular transaction, brokers or dealers may be selected who also provide
brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934) to the Portfolio and/or the other accounts
over which the Sub-Adviser, Adviser or their affiliates exercise investment
discretion. The Sub-Adviser is authorized to pay a broker or dealer who provides
such brokerage and research services a commission for executing a portfolio
transaction for the Portfolio which is in excess of the amount of commission
another broker or dealer would have charged for effecting that transaction if
the Sub-Adviser determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker or dealer. This determination may be viewed in terms of
either that particular transaction or the overall responsibilities which the
Sub-Adviser and its affiliates have with respect to accounts over which they
exercise investment discretion.
2. As compensation for the services to be furnished by the Sub-Adviser
hereunder, the Adviser agrees to pay the Sub-Adviser a fee equal to ____________
in respect of that portion of the Portfolio's assets managed by the Sub-Adviser.
Such fee shall not be reduced to reflect expense reimbursements or fee waivers
by the Adviser, if any, in effect from time to time.
3. It is understood that the Portfolio will pay all its expenses other than
those expressly stated to be payable by the Sub-Adviser hereunder or by the
Adviser under the Sub-Advisory Agreement.
4. The Services of the Sub-Adviser to the Adviser are not to be deemed to
be exclusive, the Sub-Adviser being free to render services to others and engage
in other activities, provided, however, that such other services and activities
do not, during the term of this Agreement, interfere, in a material manner, with
the Sub-Adviser's ability to meet all of its obligations with respect to
rendering investment advice hereunder. The Sub-Adviser shall for all purposes be
an independent contractor and not an agent or employee of the Adviser or the
Fund.
5. In the absence of willful misfeasance, bad faith, gross negligence or
reckless disregard of obligations or duties hereunder on the part of the
Sub-Adviser, the Sub-Adviser shall not be subject to liability to the Adviser,
the Client, the Fund or to any shareholder of the Portfolio for any act or
omission in the course of, or connected with, rendering services hereunder or
for any losses that may be sustained in the purchase, holding or sale of any
security.
6. (a) Subject to prior termination as provided in sub-paragraph (d) of
this paragraph 6 for Portfolio, this Agreement shall continue in force for one
year, and indefinitely thereafter, but only so long as the continuance after
such period shall be specifically approved at least annually by vote of the
Fund's Board of Directors or by vote of a majority of the outstanding voting
securities of the Portfolio.
(b) This Agreement may be modified by mutual consent subject to the
provisions of Section 15 of the 1940 Act, as modified by or interpreted by any
applicable order or orders of the Securities and Exchange Commission (the
"Commission") or any rules or regulations adopted by, or interpretive release
of, the Commission.
(c) In addition to the requirements of sub-paragraphs (a) and (b) of this
paragraph 6, the terms of any continuance or modification of the Agreement must
have been approved by the vote of a majority of those Directors of the Fund who
are not parties to such Agreement or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such approval.
(d) Either the Adviser, the Sub-Adviser or the Portfolio may, at any time
on sixty (60) days' prior written notice to the other parties, terminate this
Agreement, without payment of any penalty, by action of its Board of Directors,
or by vote of a majority of its outstanding voting securities. This Agreement
shall terminate automatically upon the termination of the Sub-Advisory
Agreement. This Agreement shall terminate automatically in the event of its
assignment.
7. The Sub-Adviser agrees that any obligations of the Fund or the Portfolio
arising in connection with this Agreement shall be limited in all cases to the
Portfolio and its assets, and the Sub-Adviser shall not seek satisfaction of any
such obligation from the shareholders or any shareholder of the Portfolio. Nor
shall the Sub-Adviser seek satisfaction of any such obligation from the
Directors or any individual Director.
The terms "registered investment company," "vote of a majority of the
outstanding voting securities," "assignment," and "interested persons," when
used herein, shall have the respective meanings specified in the 1940 Act as now
in effect or as hereafter amended.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
signed in their behalf by their respective officers, duly authorized, all as of
the date written above.
PRINCIPAL GLOBAL INVESTORS, LLC
By:_______________________________
[NAME OF SUB-SUB-ADVISOR]
By: _______________________________
Appendix E
ADDITIONAL INFORMATION ABOUT THE MANAGER, PRINCIPAL GLOBAL
AND THE PROPOSED SUB-ADVISORS AND SUB-SUB-ADVISORS
This Appendix contains additional information about the Manager, Principal
Global and the proposed new sub-advisors or sub-sub-advisors for the Accounts,
and should be read in conjunction with the Proposals, listed below.
Account New Sub-Advisor/Sub-Sub-Advisor Proposal
Growth Account CCI 2A
Money Market Account Principal Global 2B
Bond Account Principal Global, Spectrum and Post 2C, 2D and 2E
Equity Income Account Spectrum and Principal REI 2F and 2G
Real Estate Securities Account Principal REI 2H
Information About the Manager
The Manager serves as the manager of each of the Accounts pursuant to a
Management Agreement between the Manager and the Fund.
The Manager was organized on January 10, 1969 and since that time has
managed various mutual funds sponsored by Principal Life. At December 31, 2004,
the mutual funds it manages had assets of approximately $16.6 billion. The
address of the Manager and each of its parents is the Principal Financial Group,
Des Moines, Iowa, 50392-0200.
Under the Management Agreement, the Manager handles the business affairs of
each of the Accounts and in that connection provides clerical, recordkeeping,
and bookkeeping services and keeps the required financial and accounting
records. In addition, the Manager performs the portfolio management function
directly or arranges for it to be performed by a sub-advisor.
Under the terms of the Management Agreement, the Manager is responsible for
paying the expenses associated with the organization of each Account, including
the expenses incurred in the initial registration of the Account with the SEC,
compensation of personnel, officers and directors who are also affiliated with
the Manager; and expenses and compensation associated with furnishing office
space and all necessary office facilities and equipment and personnel necessary
to perform the general corporate functions of the Fund with respect to each of
the Accounts.
The Manager is also responsible for providing portfolio accounting services
and transfer agent services, including qualifying shares of the Accounts for
sale in states and other jurisdictions, for each of the Accounts pursuant to
additional agreements with the Accounts.
The following table lists the principal executive officers and directors of
the Manager, their positions with the Fund, if any, and their principal
occupations. The address of each such person is the Principal Financial Group,
Des Moines, Iowa 50392-0200.
Name and Position
with the Manager Position with the Fund Principal Occupation
John E. Aschenbrenner Director Director, the Manager and Princor;
Director President, Insurance and Financial
Services, Principal Financial Group,
Inc.
Craig L. Bassett Treasurer Vice President and Treasurer, Principal
Treasurer Financial Group, Inc.
Michael J. Beer Executive Vice President Executive Vice President and Chief
Executive Vice President and Principal Accounting Operating Officer, the Manager and
Officer Princor
David J. Brown Chief Compliance Officer Vice President, Product & Distribution
Senior Vice President Compliance, Principal Financial Group,
Inc; Senior Vice President, the Manager
and Princor
Jill R. Brown Vice President and Chief Vice President and Chief Financial
Vice President and Chief Financial Officer Officer, the Manager and Princor
Financial Officer
Ralph C. Eucher Director, Chief Executive Director, President and Chief Executive
Director, President and Chief Officer and President Officer, the Manager and Princor;
Executive Officer Senior Vice President, Principal
Financial Group, Inc.
Arthur S. Filean Senior Vice President and Senior Vice President, the Manager and
Senior Vice President Secretary Princor
Ernest H. Gillum Vice President and Vice President and Chief Compliance
Vice President and Chief Compliance Assistant Secretary Officer, the Manager
Officer
David Miles Senior Vice President Senior Vice President, the Manager and
Senior Vice President - Product Princor; and Second Vice President,
Development Principal Financial Group, Inc.
Layne H. Rasmussen Controller Vice President and Controller - Mutual
Vice President and Controller - Funds, the Manager
Mutual Funds
Michael D. Roughton Counsel Vice President and Senior Securities
Senior Vice President and Counsel Counsel, Principal Financial Group,
Inc.; Senior Vice President and Counsel,
the Manager and Princor; and Counsel,
Principal Global
James F. Sager None Vice President, the Manager and Princor
Vice President
Jean B. Schustek Assistant Vice President Assistant Vice President, the Manager
Assistant Vice President - and Assistant Secretary and Princor
Registered Products
Karen Shaff None Executive Vice President and General
Director Counsel, Principal Financial Group, Inc.
Larry D. Zimpleman Director and Chairman of Chairman and Director, the Manager and
Director and Chairman of the Board the Board Princor; President, Retirement and
Investor Services, Principal Financial
Group, Inc.
Information About Principal Global
As permitted by the Management Agreement, the Manager has delegated the
day-to-day management of each of the Accounts except the Asset Allocation,
Equity Growth, Equity Value, Growth, LargeCap Blend, LargeCap Growth, LargeCap
Growth Equity, LargeCap Value, MidCap Growth, MidCap Value, SmallCap Growth and
SmallCap Value Accounts to Principal Global pursuant to sub-advisory agreements
between the Manager and Principal Global with respect to each Account. Principal
Global is a wholly-owned subsidiary of Principal Life and an affiliate of the
Manager. Principal Global manages equity, fixed-income and real estate
investments primarily for institutional investors, including Principal Life. At
December 31, 2004, Principal Global had assets under management of approximately
$128 billion. The address of Principal Global and each of its parents is the
Principal Financial Group, Des Moines, Iowa, 50392-0200.
The following table lists the principal executive officers and directors of
Principal Global, their positions with the Fund, if any, and their principal
occupations. The address of each such person is the Principal Financial Group,
Des Moines, Iowa 50392-0200.
Name and Position with
Principal Global Position with the Fund Principal Occupation
J. Barry Griswell None Chairman, President and Chief Executive
Chairman Officer, Principal Financial Group, Inc.
David M. Blake None Director and Executive Director,
Director and Executive Director Principal Global
Jerald L. Bogart None Director and Executive Director,
Director and Executive Director Principal Global
Timothy M. Dunbar None Director and Executive Director,
Director and Executive Director Principal Global
Patrick G. Halter None Director and Executive Director,
Director and Executive Director Principal Global
Richard W. Hibbs None Executive Director, Principal Global
Executive Director
James P. McCaughan None Director and Chief Executive Officer,
Director and Chief Executive Officer Principal Global
Michael A. Migro None Director, Chief Operating Officer and
Director, Chief Operating Officer Chief Compliance Officer, Principal
and Chief Compliance Officer Global
Randall C. Mundt None Director and Executive Director,
Director and Executive Director Principal Global
Karen E. Schaff None Executive Vice President and General
Director, Executive Vice President Counsel, Principal Financial Group, Inc.
and General Counsel
Larry D. Zimpleman Director, Chairman of the Chairman and Director, the Manager and
Director Board, Member of Executive Princor; President, Retirement and
Committee Investor Services, Principal Financial
Group, Inc.
Prior Approval of Management Agreement and Principal Global Sub-Advisory
Agreement
The Board of Directors, including a majority of the Independent Directors,
most recently approved the Management Agreement for each of the Accounts, and
the Sub-Advisory Agreement with Principal Global for the each of the Bond and
Equity Income Accounts, on September 13, 2004 in connection with the annual
renewals thereof. The Management Agreement was last approved by shareholders of
the Accounts on November 2, 1999.
Payments to the Manager and its Affiliates
The Manager
Management Agreement. During the fiscal year ended December 31, 2004, the
Manager served as the investment manager to each of the 31 Accounts of the Fund
then in existence. As compensation for its services, the Manager received fees
from the Fund Accounts computed separately for each Account. For the fiscal year
ended December 31, 2004, the Fund Accounts paid the Manager aggregate management
fees of $20,810,381. The amount of the management fee paid to the Manager by
each of the Accounts for such year, and the percentage of the annual net assets
of the Account represented by such amount, are set forth under the Proposal
relating to the sub-advisory or sub-sub-advisory agreements for the Account.
Principal Global. During the fiscal year ended December 31, 2004, Principal
Global served as the sub-advisor to numerous Fund Accounts in addition to
certain of the Accounts. As compensation for its services, Principal Global
received sub-advisory fees from the Manager computed separately for each such
Fund Account. For the fiscal year ended December 31, 2004, the Manager paid
Principal Global aggregate sub-advisory fees of $3,478,055 for all the Fund
Accounts for which it served as sub-advisor. The amount of the sub-advisory fees
paid to Principal Global for each Account for such year, and the percentage of
the annual net assets of the Account represented by such amount, are set forth
under the Proposal relating to the sub-advisory or sub-sub-advisory agreement
for the Account.
Other Investment Companies Advised by the Proposed Sub-Advisors or
Sub-Sub-Advisors
Neither Principal Global nor Principal REI acts as advisor, sub-advisor or
sub-sub-advisor to any registered investment company other than funds included
in the Fund Complex.
The following table sets forth, to the extent applicable to a proposed
sub-advisor or sub-sub-advisor (other than Principal Global and Principal REI)
and with respect to the Account sub-advised, the names of the other registered
investment companies, if any (and excluding other funds or Accounts which are
managed by the Manager), for which it served as investment sub-advisor or
sub-sub-advisor during all or part of each such investment company's last fiscal
year and which have an investment objective similar to that of the Account, the
net assets of the investment company as of its last fiscal year end and the
annual rate of the sub-advisor's or sub-sub-advisor's compensation for its
advisory services.
CCI -- Growth Account
Net Assets Annual Rate
Name of Investment Company (last fiscal year end) of Compensation
-------------------------- ---------------------- ---------------
Strategic Partners -- Large Capitalization Growth Fund $52.8 million 0.40%
Target Portfolio Trust -- Large Capitalization $180.2 million 0.30%
Growth Portfolio
Diversified Investors Portfolios - Mid Cap $210.2 million 0.40%
Growth Portfolio
Affiliated Brokers
During the fiscal year ended December 31, 2004, each of the brokers listed
below may be deemed to have been an affiliated broker of the Accounts because
it, or an affiliate, served as a sub-advisor to one or more of the Accounts or
other funds in the Fund Complex.
- --Goldman Sachs & Co. is an affiliate of Goldman Sachs Asset Management which
acts as a sub-advisor for the Principal Partners Blue Chip Fund, Inc. and
certain PIF Funds.
- --J.P.Morgan Securities is an affiliate of J.P.Morgan Investment Management Inc.
which acts as a sub-advisor for the SmallCap Value Account .
- --Lehman Brothers, Inc. is an affiliate of Neuberger Berman LLC which acts as
acts as a sub-advisor for the MidCap Value Account and the PIF Partners MidCap
Value Fund.
- --Morgan Stanley & Company is affiliated with Morgan Stanley Asset Management,
which acts as sub-advisor for the Asset Allocation Account.
- --Sanford C. Bernstein & Co., LLC is an affiliate of AllianceBernstein
Investment Research and Management which sub-advises the LargeCap Value Account
and the Principal Partners LargeCap Value Fund, Inc.
- -- Spectrum Asset Management, Inc. is an affiliate of the Principal Global
Investors which serves as sub-advisor for several Principal Mutual Funds,
certain accounts of the Principal Variable Contracts Fund, Inc. and certain
portfolios of the Principal Investors Fund. Spectrum Asset Management, Inc.
serves as sub-advisor for one portfolio of the Principal Investors Fund.
- --UBS Securities LLC is an affiliate of UBS Global AM which acts as sub-advisor
to the SmallCap Growth Account, certain PIF Funds and Principal Partners
SmallCap Growth Fund, Inc.
Brokerage commissions paid by the Accounts to these affiliated brokers
during the fiscal year ended December 31, 2004 were as follows:
Commissions Paid to Goldman Sachs & Co.
Total Dollar Amount As Percentage of
Account of Commissions Total Commissions
- ------- -------------- -----------------
Growth Account $19,288.75 6.54%
Equity Income Account $4,083.45 2.60%
Real Estate Securities Account $8,510.65 4.40%
Commissions Paid to J.P. Morgan Securities
Total Dollar Amount As Percentage of
Account of Commissions Total Commissions
- ------- -------------- -----------------
Growth Account $1,763.80 0.60%
Equity Income Account $4,142.14 2.63%
Real Estate Securities Account $1,520.00 0.79%
Commissions Paid to Lehman Brothers
Total Dollar Amount As Percentage of
Account of Commissions Total Commissions
- ------- -------------- -----------------
Growth Account $13,099.25 4.44%
Equity Income Account $13,508.93 8.59%
Real Estate Securities Account $21,221.31 10.97%
Commissions Paid to Morgan Stanley & Company
Total Dollar Amount As Percentage of
Account of Commissions Total Commissions
- ------- -------------- -----------------
Growth Account $5,448.25 1.85%
Equity Income Account $2,879.08 1.83%
Real Estate Securities Account $4,413.85 2.28%
Commissions Paid to Sanford C. Bernstein & Co., LLC
Total Dollar Amount As Percentage of
Account of Commissions Total Commissions
- ------- -------------- -----------------
Growth Account $6,032.50 2.04%
Equity Income Account $152.00 0.10%
Commissions Paid to Spectrum Asset Management
Total Dollar Amount As Percentage of
Account of Commissions Total Commissions
- ------- -------------- -----------------
Equity Income Account $4,145.11 2.63%
Commissions Paid to UBS Securities LLC
Total Dollar Amount As Percentage of
Account of Commissions Total Commissions
- ------- -------------- -----------------
Growth Account $9,409.48 3.19%
Equity Income Account $19,368.62 12.31%
Real Estate Securities Account $13,425.65 6.94%
Appendix F
STATED INVESTMENT OBJECTIVES OF THE ACCOUNTS
The stated investment objective of each of the Accounts is set forth in the
following table:
Asset Allocation Account To seek to generate a total investment
return consistent with preservation
of capital
Balanced Account To seek to generate a total return
consisting of current income and
capital appreciation
Bond Account To seek as high a level of income as
is consistent with preservation of
capital and prudent investment risk
Capital Value Account To seek to provide long-term capital
appreciation and secondarily growth of
investment income
Equity Growth Account To seek to provide long-term capital
appreciation by investing primarily in
equity securities
Equity Income Account To seek to achieve high current income
and long-term growth of income and
capital
Equity Value Account To seek long-term growth of capital
Government
Securities Account To seek a high level of current
income, liquidity and safety of
principal
Growth Account To seek long-term growth of
capital through the purchase primarily
of common stocks, but the Account may
invest in other securities
International Account To seek long-term growth of
capital by investing in a portfolio of
equity securities of companies
established outside of the U.S.
International Emerging
Markets Account To seek long-term growth of capital by
investing primarily in equity
securities of issuers in emerging
market countries
International SmallCap Account To seek long-term growth of capital by
investing in a portfolio of equity
securities of companies established
outside of the U.S.
LargeCap Blend Account To seek long-term growth of capital
LargeCap Growth Equity Account To seek to achieve long-term growth
of capital
LargeCap Stock Index Account To seek long-term growth of capital
LargeCap Value Account To seek long-term growth of capital
Limited-Term Bond Account To seek to provide current income
MidCap Account To seek to achieve capital
appreciation by investing primarily
in securities of emerging and other
growth-oriented companies
MidCap Growth Account To seek long-term growth of capital
MidCap Value Account To seek long-term growth of capital
by investing primarily in equity
securities of companies with value
characteristics and market
capitalizations in the $1 billion to
$10 billion range
Money Market Account To seek to obtain as high a level of
current income available from
investments in short-term securities
as is consistent with preservation of
principal and maintenance of
liquidity
Principal LifeTime 2010 Account To seek a total return consisting of
long-term growth of capital and
current income
Principal LifeTime 2020 Account To seek a total return consisting of
long-term growth of capital and
current income
Principal LifeTime 2030 Account To seek a total return consisting of
long-term growth of capital and
current income
Principal LifeTime 2040 Account To seek a total return consisting of
long-term growth of capital and
current income
Principal LifeTime 2050 Account To seek a total return consisting of
long-term growth of capital and
current income
Principal LifeTime Strategic
Income Account To seek high current income
Real Estate Securities Account To seek to generate a total return by
investing primarily in equity
securities of companies principally
engaged in the real estate industry
SmallCap Account To seek long-term growth of capital by
investing primarily in equity
securities of companies with
comparatively small market
capitalizations
SmallCap Growth Account To seek long-term growth of capital
SmallCap Value Account To seek long-term growth of capital
Appendix G
PROPOSED FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE ACCOUNTS
If shareholders of the Accounts voting on the proposals included under
Proposal 6 above approve all the proposed changes to the fundamental investment
restrictions applicable to those Accounts, then all the Accounts of the Fund
will have the same fundamental investment restrictions. These uniform
fundamental investment restrictions for each Account would be the following:
Subject of Restriction Fundamental Investment Restriction
Senior Securities: The Account may not issue any senior
securities as defined in the 1940 Act. Purchasing
and selling securities and futures contracts and
options thereon and borrowing money in accordance
with restrictions described below do not involve
the issuance of a senior security.
Borrowing: The Account may not borrow money, except as
permitted under the Investment Company Act of
1940, as amended, and as interpreted, modified or
otherwise permitted by regulatory authority having
jurisdiction, from time to time.
Underwriting Securities of The Account may not act as an underwriter of
another Issuer: securities, except to the extent that the Account
may be deemed to be an underwriter in connection
with the sale of securities held in its portfolio.
Concentration of The Account may not concentrate its investments
Investments: in any particular industry, except that the
Account may invest up to 25% of the value of its
total assets in a single industry, provided that,
when the Account has adopted a temporary
defensive posture, there shall be no limitation
on the purchase of obligations issued or
guaranteed by the U.S. government or its
agencies or instrumentalities. This restriction
does not apply to the Real Estate Securities
Account.
Purchases or Sales of Real The Account may not invest in real estate,
Estate: although it may invest in securities that are
secured by real estate and securities of issuers
that invest or deal in real estate.
Purchases or Sales of The Account may not invest in physical commodities
Commodities: or commodity contracts (other than foreign
currencies), but it may purchase and sell
financial futures contracts, options on such
contracts, swaps and securities backed by physical
commodities.
Making of Loans: The Account may not make loans, except that the
Account may a) purchase and hold debt obligations
in accordance with its investment objectives and
policies; b) enter into repurchase agreements; and
c) lend its portfolio securities without
limitation against collateral (consisting of cash
or liquid assets) equal at all times to not less
than 100% of the value of the securities loaned.
This limit does not apply to purchases of debt
securities or commercial paper.
Short Sales: The Account may not sell securities short
(except where the Account 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).
Diversification: The Account may not invest more than 5% of its
total assets in the securities of any one issuer
(other than obligations issued or guaranteed by
the U.S. Government or its agencies or
instrumentalities) or purchase more than 10% of
the outstanding voting securities of any one
issuer, except that this limitation shall apply
only with respect to 75% of the total assets of
the Account.
[VOTING INSTRUCTIONS FORM]
Principal Variable Contracts Fund, Inc.
Des Moines, Iowa 50392-0200
GIVE YOUR VOTING INSTRUCTIONS TODAY!
SPECIAL MEETING OF SHAREHOLDERS MAY 26, 2005
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
[NAME OF ACCOUNT]
The Board of Directors is soliciting instructions for voting shares of the [NAME
OF ACCOUNT] held by Principal Life Insurance Company at the Special Meeting of
Principal Variable Contracts Fund, Inc. to be held on May 26, 2005 at 10:00 a.m.
Central Daylight Time, and at any adjournments thereof, on the issues listed on
the reverse side of this form. In the discretion of Principal Life Insurance
Company, votes will also be authorized for such other matters as may properly
come before the meeting.
Check the appropriate boxes on the reverse of this form, date this form and sign
exactly as your name appears. Your signature acknowledges receipt of Notice of
Special Meeting of Shareholders and Proxy Statement, both dated April 18, 2005.
If you complete, sign and return the form, Principal Life Insurance Company will
vote as you have instructed. If you simply sign and return the form, it will be
voted FOR electing all nominees as Directors and FOR the other proposals. If
your instructions are not received, votes will be cast in proportion to the
instructions received from all contracts with a voting interest in this Account.
NOTE: Please sign exactly as your name appears on this form. Please mark, sign,
date and mail your form 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.
- ----------------------------------- ------------------------------
Signature Signature (if held jointly)
___________________________________ , 2005
Date
The Board of Directors unanimously recommends that you vote FOR the election of
all nominees for Director and FOR all Proposals.
Please mark your choices by filling in the appropriate boxes below. Sign and
return the ballot as soon as possible in the enclosed envelope.
PROPOSALS
1. Election of the following nine nominees as For All Withhold Authority For All Nominees
Directors of Principal Variable Contracts Fund, Inc.: Nominees for all Nominees except individuals
Elizabeth Ballantine, James D. Davis, Richard W. named below:
Gilbert, Mark A Grimmett, William C. Kimball, Barbara A. [ ] [ ] [ ]
Lukavsky, John E. Aschenbrenner, Ralph C. Eucher, and
Larry D. Zimpleman. _____________
2. Approval of a Sub-Advisory/Sub-Sub-Advisory
Agreement: For Against Abstain
2A. With CCI for the Growth Account. [ ] [ ] [ ]
2B. With Principal Global for the Money Market [ ] [ ] [ ]
Account.
2C. With Principal Global for the Bond Account. [ ] [ ] [ ]
2D. With Spectrum for the Bond Account. [ ] [ ] [ ]
2E. With Post the Bond Account. [ ] [ ] [ ]
2F. With Spectrum for the Equity Income Account. [ ] [ ] [ ]
2G. With Principal REI for the Equity Income [ ] [ ] [ ]
Account.
2H. With Principal REI for the Real Estate [ ] [ ] [ ]
Securities Account.
For Against Abstain
3. Approval of reclassifying investment objective of [ ] [ ] [ ]
Account as "non-fundamental."
4. Approval of Amendments to Articles of Incorporation
to authorize the Board of Directors to: For Against Abstain
4A. Approve combinations of Accounts. [ ] [ ] [ ]
4B. Liquidate assets attributable to an Account or [ ] [ ] [ ]
class of shares and terminate the Account or class
of shares.
4C. Designate a class of shares of an Account as a [ ] [ ] [ ]
separate Account.
For Against Abstain
5. Approval of "manager-of-managers" arrangements. [ ] [ ] [ ]
6. Approval of changes to fundamental investment restrictions
of the Accounts with respect to:
For Against Abstain
6A. Issuing senior securities. [ ] [ ] [ ]
6B. Borrowing. [ ] [ ] [ ]
6C. Underwriting securities. [ ] [ ] [ ]
6D. Concentration of investments. [ ] [ ] [ ]
6E. Purchases or sales of real estate. [ ] [ ] [ ]
6F. Purchases or sales of commodities. [ ] [ ] [ ]
6G. Making of loans. [ ] [ ] [ ]
6H. Short sales. [ ] [ ] [ ]
6I. Elimination of unnecessary restrictions. [ ] [ ] [ ]
6K. Changing fundamental restrictions to non- [ ] [ ] [ ]
fundamental restrictions.