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 Section 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.
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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statement number, or the Form or Schedule and the date of its filing.
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PRINCIPAL VARIABLE CONTRACTS FUND, INC.
680 8th Street
Des Moines, Iowa 50392-2080
November ___, 2006
Dear Contract Owner:
The Board of Directors of Principal Variable Contracts Fund, Inc.
("PVC") has called a special meeting of the shareholders of all the separate
series or funds of PVC (the "Accounts") for December 15, 2006. The meeting is
being held for shareholders to consider the following proposals to:
(i) elect the Board of Directors, including four nominees for new
Directors (shareholders of all Accounts will vote together on
this proposal);
(ii) approve a management fee increase for the Growth Account (only
shareholders of the Growth Account will vote on this proposal);
and
(iii) approve reclassifying the Real Estate Securities Account from
"diversified" to "non-diversified" (only shareholders of the
Real Estate Securities Account will vote on this proposal).
Proposal (i), concerning the election of the Board of Directors, is
related to a proposed reorganization providing for the combination of the
separate funds of the WM Variable Trust into corresponding PVC Accounts. The
four nominees for new Directors presently are trustees of the WM Variable Trust.
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 the
Accounts. Although Principal Life is the only shareholder of PVC, and owns
shares of PVC 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 October 6, 2006, the
record date for PVC shareholders meeting.
Enclosed you will find a Notice of Special Meeting of Shareholders, a
proxy statement and a voting instruction card for the shares of each Account
attributable to your variable contract or policy as of October 6, 2006, the
record date for the meeting. Please read these materials carefully. In order for
your shares to be voted at the meeting, you are urged promptly to complete and
mail your voting instruction card(s) in the enclosed postage-paid envelope,
allowing sufficient time for receipt by December 14, 2006.
We appreciate your taking the time to respond to this important matter.
If you have questions regarding the meeting or your account, please call our
shareholder services department toll-free at 1-800-247-4123.
Sincerely,
/s/RALPH C. EUCHER
Ralph C. Eucher
President and Chief Executive Officer
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
680 8th Street
Des Moines, Iowa 50392-2080
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Asset Allocation Account LargeCap Blend Account
Balanced Account LargeCap Growth Equity Account
Bond Account LargeCap Stock Index Account
Capital Value Account LargeCap Value Account
Diversified International Account Principal LifeTime 2010 Account
Equity Growth Account Principal LifeTime 2020 Account
Equity Income Account Principal LifeTime 2030 Account
Equity Value Account Principal LifeTime 2040 Account
Government & High Quality Bond Account Principal LifeTime 2050 Account
Growth Account Principal LifeTime Strategic Income
Account
International Emerging Markets Account Real Estate Securities Account
International SmallCap Account Short-Term Bond Account
MidCap Account SmallCap Account
MidCap Growth Account SmallCap Growth Account
MidCap Value Account SmallCap Value Account
Money Market Account
To the Shareholders:
A special meeting of shareholders of all of the separate series
("Accounts") of Principal Variable Contracts Fund, Inc. will be held at 680 8th
Street, Des Moines, Iowa 50392-2080 on December 15, 2006, at 2:00 p.m. Central
Standard 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 the Board of Directors (applies to all Accounts).
2. Approval of Amendment to the Management Agreement for the Growth
Account Increasing Management Fees (applies only to the Growth
Account).
3. Approval of Reclassifying the Real Estate Securities Account from
"Diversified" to "Non-Diversified" (applies only to the Real Estate
Securities Account).
The close of business on October 6, 2006 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. Please review the materials and vote today.
By order of the Board of Directors
/s/ RALPH C. EUCHER
Ralph C. Eucher
President and Chief Executive Officer
Dated: November _, 2006
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
-------------------------------------
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 15, 2006
-------------------------------------
November ___, 2006
TABLE OF CONTENTS
Page
Introduction......................................................................................... 3
Voting Information................................................................................... 5
Proposal 1 Election of the Board of Directors .................................................... 6
Proposal 2 Approval of Amendment to the Management Agreement for the Growth Account Increasing
Management Fees ....................................................................... 13
Proposal 3 Approval of Reclassifying the Real Estate Securities Account from "Diversified" to
"Non-Diversified"...................................................................... 19
Independent Registered Public Accounting Firm............................................................... 20
Other Matters ............................................................................................. 22
Appendix A Outstanding Shares and Share Ownership.................................................. A-1
Appendix B Audit and Nominating Committee Charter ................................................. B-1
Appendix C Form of Amended Management Agreement..................................................... C-1
Appendix D Additional Information About the Management Agreement and the Manager................... D-1
Appendix E Payments to Affiliated Brokers.......................................................... E-1
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
680 8th Street
Des Moines, Iowa 50392-2080
PROXY STATEMENT
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 15, 2006
INTRODUCTION
Principal Variable Contracts Fund, Inc. ("PVC" or "we") will hold a special
shareholders meeting (the "Meeting") on December 15, 2006, at 2:00 p.m. Central
Standard Time, at 680 8th Street, Des Moines, Iowa 50392-2080. This Proxy
Statement and the accompanying form of proxy ballot are first being sent to
shareholders on or around November _, 2006.
All shares of each Account are owned of record by sub-accounts of separate
accounts ("Separate Accounts") of Principal Life Insurance Company ("Principal
Life") established to fund benefits under variable annuity contracts and
variable life insurance policies (each a "Contract") issued by Principal Life.
Persons holding Contracts are referred to herein as "Contract Owners."
PVC is a Maryland corporation and an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). PVC is a "series" mutual fund and currently offers the following 31
separate series or funds (the "Accounts"):
Asset Allocation Account LargeCap Blend Account
Balanced Account LargeCap Growth Equity Account
Bond Account LargeCap Stock Index Account
Capital Value Account LargeCap Value Account
Diversified International Account Principal LifeTime 2010 Account
Equity Growth Account Principal LifeTime 2020 Account
Equity Income Account Principal LifeTime 2030 Account
Equity Value Account Principal LifeTime 2040 Account
Government & High Quality Bond Account Principal LifeTime 2050 Account
Growth Account Principal LifeTime Strategic Income
Account
International Emerging Markets Account Real Estate Securities Account
International SmallCap Account Short-Term Bond Account
MidCap Account SmallCap Account
MidCap Growth Account SmallCap Growth Account
MidCap Value Account SmallCap Value Account
Money Market Account
The sponsor of PVC is Principal Life, the investment adviser to PVC and
each of the Accounts is Principal Management Corporation (the "Manager") and the
principal underwriter is Princor Financial Services Corporation ("Princor").
Principal Life, an insurance company organized in 1879 under the laws of the
state of Iowa, the Manager and Princor are indirect, wholly-owned subsidiaries
of Principal Financial Group, Inc. ("PFG"). Their address is Principal Financial
Group, Des Moines, Iowa 50392-2080.
PVC will furnish, without charge, a copy of its Annual Report to
Shareholders for the fiscal year ended December 31, 2005 and Semi-Annual Report
to Shareholders for the period ended June 30, 2006 to any shareholder upon
request. To obtain a report, please contact PVC by calling our shareholder
services department toll free at 1-800-247-4123 or by writing to PVC at the
address above.
Summary of Proposals. The Meeting is being held to consider the following
matters:
Proposal 1: Elect the Board of Directors
(Shareholders of all the Accounts will vote together on Proposal 1)
Proposal 2: Approve Amendment to the Management Agreement for the Growth
Account to increase management fees
(Shareholders of the Growth Account will vote on Proposal 2)
Proposal 3: Reclassify the Real Estate Securities Account from
"diversified" to "non-diversified" (Shareholders of the
Real Estate Securities Account will vote on Proposal 3)
PVC-WM Funds Reorganization. The first Proposal, concerning the election of
the Board of Directors (the "Board"), is related to a proposed reorganization
involving PVC. On July 25, 2006, PFG and the Manager entered into an agreement
with Washington Mutual, Inc. to acquire all the outstanding stock of its
subsidiary, WM Advisors, Inc. ("WMA") and two of its subsidiaries (the
"Transaction"). WMA is the investment advisor to WM Variable Trust ("WMVT"),
which, like PVC, offers its shares to separate accounts of insurance companies
as well as other eligible purchasers. The Transaction contemplates combining the
18 separate funds of WMVT (the "WM Funds") into corresponding Accounts of PVC
(the "PVC-WM Funds Reorganization"). The PVC Accounts involved in the
Reorganization are 11 newly organized funds that will commence operations at the
time of the Reorganization and the following existing PVC Accounts: Diversified
International, Growth, LargeCap Blend, Money Market, Real Estate Securities,
SmallCap Growth and SmallCap Value. One other existing PVC Account, the Equity
Income Account, is also involved in the PVC-WM Funds Reorganization in that,
pursuant to a separate, internal PVC reorganization, it is proposed that this
Account will be combined into one of the newly organized PVC Accounts into which
a corresponding WM Fund will be combined in the PVC-WM Funds Reorganization. If
shareholders of the Equity Income Account approve the internal PVC
reorganization, it is expected to take place at the same time as the PVC-WM
Funds Reorganization.
The closing of the Transaction is expected to occur in the fourth quarter
of this calendar year, subject to certain regulatory and other approvals,
including approval of the PVC-WM Funds Reorganization by the shareholders of
certain of the WM Funds. After the Transaction, WMA and its subsidiaries will be
indirect, wholly-owned subsidiaries of PFG. The PVC-WM Funds Reorganization is
expected to occur after the Transaction.
WMVT has obtained an order from the Securities and Exchange Commission
("SEC") under the 1940 Act which provides exemptive relief permitting it,
subject to certain conditions, to sell its shares to fund both variable life
insurance and variable annuity separate accounts, to fund separate accounts of
unaffiliated insurance companies, to qualified retirement plans and to certain
other persons. PVC has been selling its shares under circumstances that do not
require that kind of exemptive relief. PVC, however, will have to obtain
exemptive relief comparable to that which WMVT has in order to continue the
business of WMVT after the effective time of the PVC-WM Funds Reorganization.
PVC has filed an application with the SEC requesting such relief. The PVC-WM
Funds Reorganization will not close until the SEC has issued an order granting
the exemptive relief that PVC requires in order to continue the business of WMVT
after the effective time of the PVC-WM Funds Reorganization.
The Proposal concerning the election of the Board of Directors is related
to the Transaction and the PVC-WM Funds Reorganization because PVC shareholders
are being asked to elect as new Directors four nominees who are currently
members of the Board of Trustees of the WM Funds.
VOTING INFORMATION
Voting procedures. We are furnishing this Proxy Statement to you in
connection with the solicitation on behalf of 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 as proxies will vote your
shares as you indicate or for approval of each matter for which there is no
indication. You may revoke your proxy at any time prior to the proxy's exercise
by: (i) sending written notice to the Secretary of Principal Variable Contracts
Fund, Inc. at Principal Financial Group, Des Moines, Iowa 50392-2080, prior to
the Meeting; (ii) subsequent execution and return of another proxy prior to the
Meeting; or (iii) being present and voting in person at the Meeting after giving
oral notice of the revocation to the Chairman of the Meeting.
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
October 6, 2006 (the "Record Date") are entitled to vote. You are entitled to
one vote on each matter submitted to the shareholders of an Account for each
share of the Account that you hold, and fractional votes for fractional shares
held. The shareholders of all Accounts will vote together on Proposal 1
regarding the election of Directors of PVC. The affirmative vote of the holders
of a plurality of the shares voted at the Meeting is required for the election
of a Director. Only shareholders of the Growth Account will vote on Proposal 2
and only shareholders of the Real Estate Securities Account will vote on
Proposal 3. Proposals 2 and 3 require for approval the affirmative vote of a
"majority of the outstanding voting securities," which is a term defined in the
1940 Act to mean, with respect to 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 the 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").
The number of votes eligible to be cast at the Meeting with respect to each
Account as of the Record Date and other share ownership 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. For Proposal 1, the presence in person or by proxy of
one-third of the shares of PVC outstanding at the close of business on the
Record Date constitutes a quorum for a Meeting. For Proposals 2 and 3, 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 a Meeting. Shares subject to Mirror Voting (as defined below) are
counted for purposes of determining a quorum for that Account. Abstentions 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.
In the event the necessary quorum to transact business or the vote required
to approve a Proposal is not obtained at the Meeting, the persons named as
proxies or any shareholder present at the Meeting may propose one or more
adjournments of the Meeting in accordance with applicable law to permit further
solicitation of proxies. Any such adjournment as to a Proposal or any other
matter will require the affirmative vote of the holders of a majority of the
shares of the affected Account cast at the Meeting. The persons named as proxies
and any shareholder present at the Meeting will vote for or against any
adjournment in their discretion.
Contract Owner Voting Instructions. Shares of the Accounts are sold to
Separate Accounts of Principal Life and are used to fund Contracts. Each
Contract Owner whose Contract is funded by a registered Separate Account is
entitled to instruct Principal Life as to how to vote the shares attributable to
his or her Contract and can do so by marking voting instructions on the voting
instruction card enclosed with this Proxy Statement and then signing and dating
the voting instruction card and mailing it in the envelope provided. If a card
is not marked to indicate voting instructions, but is signed, dated and
returned, it will be treated as an instruction to vote the shares in favor of
the Proposals. Principal Life will vote the shares for which it receives timely
voting instructions from Contract Owners in accordance with those instructions
and will vote those shares for which it receives no timely voting instructions
for and against approval of a Proposal, and as an abstention, in the same
proportion as the shares for which it receives voting instructions. Shares
attributable to amounts invested by Principal Life will be voted in the same
proportion as votes cast by Contract Owners ("Mirror Voting"). Accordingly,
there are not expected to be any "broker non-votes."
Solicitation procedures. We intend to solicit proxies by mail. Officers or
employees of PVC, 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, PVC will reimburse them for their out-of-pocket expenses.
Expenses of the Meetings. The Accounts will not pay the expenses of the
Meeting, including those associated with the preparation and distribution of
proxy materials.
PROPOSAL 1
ELECTION OF THE BOARD OF DIRECTORS
(All Accounts)
The Board has set the number of Directors at eight and has provided that
the number will increase to twelve at the effective time of the PVC-WM Funds
Reorganization. Each Director will serve until the next annual 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 twelve nominees listed
below. Eight of the nominees currently serve as Directors. The following four
nominees, if elected, will become new Directors at the effective time of the
PVC-WM Funds Reorganization: Ms. Kristianne Blake, Mr. William G. Papesh, Mr.
Daniel Pavelich and Mr. Richard Yancey. The effective time of the PVC-WM Funds
Reorganization is expected to be as of the close of regular trading on the New
York Stock Exchange on January 5, 2007. If the PVC-WM Funds Reorganization is
not consummated for any reason, Ms. Blake and Messrs. Papesh, Pavelich and
Yancey will not become Directors of PVC.
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 PVC and the four new nominees, 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 or nominee in reporting companies under the
Securities Exchange Act of 1934 or registered investment companies under the
1940 Act. Information is listed separately for those Directors and the nominee
who are "interested persons" (as defined in the 1940 Act) of PVC (the
"Interested Directors") and those Directors and nominees who are not interested
persons of PVC (the "Independent Directors"). Of the four nominees who are not
currently directors, Mr. Papesh, who is currently an interested trustee of the
WM Funds, was nominated after having been recommended by management of the
Manager. Ms. Blake, Mr. Pavelich and Mr. Yancey currently are independent
trustees of the WM Funds. The Board's Audit and Nominating Committee, comprised
entirely of PVC's Independent Directors, selected and nominated Ms. Blake, Mr.
Pavelich and Mr. Yancey after management of PVC recommended that the Board's
Audit and Nominating Committee consider the independent trustees of the WM Funds
as potential candidates for the Board. The Board's Audit and Nominating
Committee also determined to nominate all current Independent Directors for
election as Director. All Directors serve, and all nominees elected as Directors
of such companies will serve, as directors for each of the two investment
companies (with a total of 86 portfolios or funds that offer shares for sale as
of October 6, 2006) sponsored by Principal Life: PVC and Principal Investors
Fund, Inc. ("PIF") (collectively, the "Fund Complex").
Independent Directors and Nominees
Name, Address and Year of Position(s) Held with PVC Principal Occupation(s) During the Other Directorships
Birth Past 5 Years Held
Elizabeth Ballantine Director (since 2004), Principal, EBA Associates The McClatchy Company
1113 Basil Road Member of Audit and (consulting and investments)
McLean, VA Nominating Committee
1948
Kristianne Blake Nominee for Director President, Kristianne Gates Blake, Avista Corporation;
1201 Third Avenue P.S. (CPA specializing in personal Russell Investment
8th Floor financial and tax planning) Company; Russell
Seattle, WA Investment Funds; WM
1954 Funds
Richard W. Gilbert Director (since 2000), President, Gilbert Communications, Calamos Asset
5040 Arbor Lane, #302 Member of Audit and Inc. (management advisory services) Management, Inc.
Northfield, IL Nominating Committee
1940
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
1960 Cosmetics, Inc. (manufacturer and
distributor of skin care products)
Fritz S. Hirsch Director (since 2005), President and CEO, Sassy, Inc. None
Suite 203 Member of Audit and (manufacturer of infant and
2101 Waukegan Road Nominating Committee juvenile products)
Bannockburn, IL
1951
William C. Kimball Director (since 2000), 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)
1947
Barbara A. Lukavsky Director (since 1993), President and CEO, Barbican None
100 Market Street Member of Audit and Enterprises, Inc. (holding company
Des Moines, IA Nominating Committee, for franchises in the cosmetics
1940 Member of Executive industry)
Committee
Daniel Pavelich Nominee for Director Retired. Formerly, Chairman and CEO Catalytic Inc; Vaagen
1201 Third Avenue of BDO Seidman (tax, accounting and Bros. Lumber, Inc.;
8th Floor financial consulting services) WM Funds
Seattle, WA
1944
Richard Yancey Nominee for Director Retired. Formerly, Managing AdMedia Partners,
42 Monroe Place Director of Dillon Read & Co. (an Inc.; Czech and
Brooklyn, NY investment bank, now part of UBS) Slovak American
1926 Enterprise Fund; WM
Funds
Interested Directors and Nominee
Positions with the Manager and Its
Affiliates; Principal Occupation(s) Other Directorships
Name, Address and Year of Position(s) Held with PVC During the Past 5 Years Held
Birth
Ralph C. Eucher Director, President and Director and President, the Manager None
711 High Street Chief Executive Officer, since 1999; Director, Princor since
Des Moines, Iowa 50392 Member of Executive 2006 and prior thereto, President
1952 Committee (since 1999) and Director; Senior Vice
President, since 2002,
Vice President,
1999-2002, and prior
thereto, Second Vice
President, Principal
Financial Group, Inc.
William G. Papesh* Nominee for Director President and CEO of WM Group of WM Funds
1201 Third Avenue Funds; President and Director of WM
8th Floor Advisors, Inc.
Seattle, WA
1943
Larry D. Zimpleman Director, Chairman of Chairman and Director, the Manager None
711 High Street the Board, Member of and Princor, since 2001. President
Des Moines, Iowa 50392 Executive Committee and Chief Operating Officer since
1951 (since 2001) 2006, and President, Retirement and
Investor Services, Principal
Financial Group, Inc., 2003-2006.
Executive Vice President,
2001-2003, and prior thereto,
Senior Vice President, Principal
Life
- ----------------------------
* If elected, Mr. Papesh will be an Interested Director because he will be an
officer and director of WMA, which will be an affiliated person of PVC.
During the last fiscal year of PVC, the Board of Directors held eight
meetings. Each of the current Directors of PVC attended 100% of the meetings of
the Board and of the committees of which the Director was a member.
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 50392-2080. All communications addressed to the Board or to an
individual Director received by PVC are forwarded to the full Board or to the
individual Director.
Officers of PVC
The following table presents certain information regarding the current
officers of PVC, 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. Each of the officers of PVC holds the same
position with PIF.
Officers
Name, Address and Position(s) Held Principal Occupation(s)
Year of Birth with PVC During the Past 5 Years
Craig L Bassett Treasurer (since 1997) Vice President and Treasurer, Principal Life
711 High Street
Des Moines, Iowa 50392
1952
Michael J. Beer Executive Vice Executive Vice President and Chief Operating
711 High Street President (since 1997) Officer, the Manager; Director and President,
Des Moines, Iowa 50392 Princor, since 2005
1961
Randy L. Bergstrom Assistant Tax Counsel Counsel, Principal Life
711 High Street (since 2005)
Des Moines, Iowa 50392
1955
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
1960 President, Princor, since 2003, and prior
thereto, Vice President, the Manager and
Princor
Jill R. Brown Vice President and Second Vice President, Principal Financial
711 High Street Chief Financial Group, and Senior Vice President, the Manager
Des Moines, Iowa 50392 Officer, Principal and Princor since 2006, Chief Financial Officer,
1967 Accounting Officer Princor since 2003, and prior thereto, Assistant
(since 2003) Financial Controller, Principal Life
Ernest H. Gillum Vice President and Vice President and Chief Compliance Officer, the
711 High Street Assistant Secretary Manager, since 2004, and prior thereto, Vice
Des Moines, Iowa 50392 (since 1997) President, Compliance and Product Development,
1955 the Manager
Patrick A. Kirchner Assistant Counsel Counsel, Principal Life
711 High Street (sine 2002)
Des Moines, Iowa 50392
1960
Carolyn F. Kolks Assistant Tax Counsel Counsel, Principal Life, since 2003 and prior
711 High Street (since 2005) thereto, Attorney
Des Moines, Iowa 50392
1962
Sarah J. Pitts Assistant Counsel Counsel, Principal Life
711 High Street (since 2000)
Des Moines, Iowa 50392
1945
Layne A. Rasmussen Vice President and Vice President and Controller - Mutual Funds,
711 High Street Controller (since 1997) the Manager
Des Moines, Iowa 50392
1958
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;
1951 and Counsel, Principal Global
James F. Sager Assistant Secretary Vice President, the Manager and Princor
711 High Street (since 2005)
Des Moines, Iowa 50392
1950
Board Committees
Audit and Nominating Committee. PVC 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 PVC. The Committee also receives reports about
accounting and financial matters affecting PVC.
The nominating committee functions of the Committee include selecting and
nominating all candidates who are not "interested persons" of PVC (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 PVC
shareholders. Recommendations should be submitted in writing to Principal
Variable Contracts Fund, Inc. at 680 8th Street, Des Moines, Iowa 50392-2080.
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
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 its current Audit and Nominating Committee Charter on
March 13, 2006. The Charter is not available on PVC's website. A copy of the
Charter is included as Appendix 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 met once.
Compensation
PVC 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 PVC 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 portfolios of
PVC and PIF based on their relative net assets.
The following table provides information regarding the compensation
received by the Independent Directors with respect to their service as PVC
Directors from PVC and from the Fund Complex during the fiscal year ended
December 31, 2005. On that date, there were two investment companies with an
aggregate total of 86 portfolios in the Fund Complex. PVC does not provide
retirement benefits to any of the Directors.
Director PVC Fund Complex
-------- --- ------------
Elizabeth Ballantine $17,982 $81,500
Richard W. Gilbert $17,801 $81,000
Mark A. Grimmett $17,982 $84,500
Fritz S. Hirsch* $10,454 $29,000
William C. Kimball $17,982 $81,500
Barbara A. Lukavsky $17,982 $81,500
* Mr. Hirsch did not become a Director until September 2005.
Share Ownership
This section discusses beneficial ownership by the current Directors
and the new nominees for Director of shares of the Accounts of PVC and of all
funds in the Fund Complex. As stated above, the Fund Complex includes the PVC
Accounts and the separate series of PIF. For purposes of this discussion,
beneficial ownership means a direct or indirect pecuniary interest.
As of October 6, 2006, neither Mr. Eucher nor Mr. Zimpleman, the
current Interested Directors of PVC, owned shares of any PVC Account. As of that
date, the aggregate dollar range of each current Interested Director's
beneficial ownership of shares issued by all funds in the Fund Complex exceeded
$100,000. Mr. Zimpleman's beneficial ownership interest is attributable to his
participation in an employee benefit program that invests in the PIF funds. Only
Directors who are "interested persons" are eligible to participate in that
program.
As of October 6, 2006, none of the new nominees for Director
beneficially owned shares of any PVC Account or any other fund in the Fund
Complex.
The following table sets forth, as of October 6, 2006, the dollar range
of each current Independent Director's beneficial ownership of shares of each
PVC Account as well as the aggregate dollar range of each current Independent
Director's beneficial ownership of shares issued by all funds in the Fund
Complex. Directors who beneficially owned shares of the Accounts did so through
variable life insurance and variable annuity contracts issued by Principal Life.
Please note that exact dollar amounts of securities held are not listed. Rather,
ownership is listed based on the following dollar ranges:
A - $0
B - $1 up to and including $10,000
C - $10,001 up to and including $50,000
D - $50,001 up to and including $100,000
E - $100,001 or more
Independent Directors (Not Considered to Be "Interested Persons")
- --------------------------------------------------- ---------------- ---------- ------------- --------- ------------ ------------
Principal Variable Contracts Fund, Inc.
Ballantine Gilbert Grimmett Hirsch 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 B 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 A A
Growth Account A A A A A A
Diversified International Account A A A A A A
International Emerging Markets Account A A A A A A
International SmallCap Account A A A A D A
LargeCap Blend Account A A A A A A
LargeCap Growth Equity Account A A A A A A
LargeCap Stock Index Account A A A A A A
LargeCap Value Account A A A A D A
Limited Term Bond Account A A A A A A
MidCap Account A A A A E A
MidCap Growth Account A A A A C A
MidCap Value Account A A A A A 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 Income Account A A A A A A
Real Estate Securities Account A A A A E A
SmallCap Account A A A A A A
SmallCap Growth Account A A A A C A
SmallCap Value Account A A A A A A
TOTAL FUND COMPLEX E E E D E D
- --------------------------------------------------- ---------------- ---------- ------------- --------- ------------ ------------
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 is required for the election of a Director of PVC.
The Board of Directors unanimously recommends that shareholders vote
"For" all the nominees.
PROPOSAL 2
APPROVAL OF AMENDMENT TO THE MANAGEMENT AGREEMENT
FOR THE GROWTH ACCOUNT INCREASING MANAGEMENT FEES
(Growth Account Only)
At its meeting on September 11, 2006, the Board of Directors, including
all the Independent Directors, approved an amendment to the Management Agreement
for the Growth Account (for purposes of this Proposal, the "Account") providing
for an increase in the management fees payable by the Account. Shareholders of
the Account are being asked to approve the amendment to the Management Agreement
(the "Amended Agreement").
The Board approved the Amended Agreement in connection with its
approval of an amended sub-advisory agreement for the Account between the
Manager and the sub-advisor to the Account, Columbus Circle Investors ("CCI"),
an affiliate of the Manager. The proposed advisory fee increase under the
Amended Agreement reflects an increase in the sub-advisory fees that will be
payable by the Manager to CCI under the amended sub-advisory agreement with CCI
(the "Amended Sub-Advisory Agreement"). Management proposed the sub-advisory fee
increase for CCI as appropriate in view of CCI's strong performance record with
respect to the Account and in order to align the sub-advisory fees with
competitive, market rates. The Board's considerations in approving the Amended
Agreement (and the Amended Sub-Advisory Agreement) are described below under
"Evaluation by the Board of Directors."
Description of the Management Agreement
Except for the proposed increase in management fees which is described
below, the terms of the current Management Agreement (the "Current Agreement")
and the Amended Agreement are the same. A copy of the form of the Amended
Agreement is included as Appendix C to this Proxy Statement.
Under the Current and Amended Agreements, 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 arranges for portfolio management
functions to be performed by the sub-advisor to the Account and is responsible
for selecting, contracting with, compensating and monitoring the performance of
the sub-advisor.
Under the terms of Current and Amended Agreements, the Manager is
responsible for paying the expenses associated with the organization of the
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 PVC with
respect to the Account.
Each of the agreements provides for continuation in effect from year to
year only so long as such continuation is specifically approved at least
annually either by the Board of Directors or by vote of a Majority of the
Outstanding Voting Securities of the Account. In either event, continuation must
be approved by a vote of the majority of the Independent Directors.
Compensation
As compensation for its services, the Manager receives a management fee
from the Account which is determined as a percentage of the average daily net
assets of the Account. The following table sets forth the management fee
schedule for the Account under (i) the Current Agreement and (ii) the proposed
Amended Agreement:
Management Fee - Growth Account
(as a percentage of average daily net assets)
Current Agreement Amended Agreement
0.60% of the first $250 million; 0.68% of the first $500 million;
0.55% of the next $250 million; 0.63% of the next $500 million;
0.50% of the next $250 million; 0.61% of the next $1 billion;
0.45% of the next $250 million; and 0.56% of the next $1 billion; and
0.40% of the excess over $1 billion. 0.51% of the excess over
$3 billion.
For the fiscal year ended December 31, 2005, the Account paid the
Manager under the Current Agreement a management fee of $760,105. If the Amended
Agreement had been in effect for that fiscal year, the Account would have paid a
management fee of $861,707 (an increase of 13.4%).
Compensation under the Sub-Advisory Agreements. The sub-advisory fee
rates for the Account under the current sub-advisory agreement with CCI (the
"Current Sub-Advisory Agreement") and the increased sub-advisory fee rates under
the Amended Sub-Advisory Agreement are set forth in the table below. Under these
agreements, sub-advisory fees are paid by the Manager and not by the Account.
Under each of the agreements, the Manager will pay CCI a fee which is computed
and paid monthly, based on net assets as of the first day of each month, at the
respective annual rates specified below. In calculating the sub-advisory fee for
CCI, 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 ("CCI Managed
Assets").
Sub-Advisory Fee - Growth Account
(As a percentage of average daily net assets managed by CCI)
Current Sub-Advisory Agreement Amended Sub-Advisory Agreement(1)
0.27% of the first $50 million; 0.26% of the first $50 million;
0.25% of the next $50 million; 0.24% of the next $50 million;
0.22% of the next $100 million; 0.22% of the next $100 million;
0.18% of the next $200 million; 0.18% of the next $200 million;
0.13% of the next $350 million; 0.13% of the next $350 million;
0.09% of the next $750 million; and 0.09% of the next $750 million;
0.06% of the excess over $1.5 billion. 0.06% of the next $500 million;
0.24% of the next $2.5 billion; and
0.17% of the excess over $4.5 billion.
------------------------
(1) Percentage fee rates are rounded.
For the fiscal year ended December 31, 2005, the Manager paid CCI under
the Current Sub-Advisory Agreement a sub-advisory fee of $170,822. If the
Amended Sub-Advisory Agreement had been in effect for that fiscal year, the
Manager would have paid CCI a sub-advisory fee of $167,222 (a decrease of
2.11%). In considering this information, it is important to bear in mind that,
as described below, the rate of the sub-advisory fee under the Amended
Sub-Advisory Agreement will increase whenever the aggregate CCI Managed Assets
exceed $2 billion. During the fiscal year ended December 31, 2005, the CCI
Managed Assets did not exceed $2 billion.
As indicated by the tables above, the proposed management fee increase
under the Amended Agreement provides for an increase in rates at all asset
levels and an increase in the amount of assets needed to reach each breakpoint
(that is, the point at which rates decline as assets increase). The proposed
sub-advisory fee under the Amended Sub-Advisory Agreement provides for a slight
reduction in fee rates at lower asset levels and adds breakpoints increasing
rates whenever CCI Managed Assets exceed $2 billion. The increase in management
fees thus does not correspond directly to the change in sub-advisory fees.
Rather, the sub-advisory fee will increase and, consequently, the spread between
the management fee and the sub-advisory fee will decrease whenever CCI Managed
Assets exceed $2 billion. This structure is intended to provide management fee
rates that will reflect economies of scale as assets grow but will nonetheless
provide a higher, market sub-advisory fee rate for CCI on all CCI Managed Assets
whenever CCI manages additional assets above the $2 billion threshold.
As of June 30, 2006, the Account had net assets of approximately
$118,859,000. Pursuant to the PVC-WM Funds Reorganization, as described above,
it is proposed that the WM Growth Fund, which as of June 30, 2006 had net assets
of approximately $289,090,000, will be combined into the Account. Consequently,
if shareholders approve the proposed fund combination and the Reorganization
takes place, the Account will experience a significant increase in assets. As
described above, the Manager calculates the sub-advisory fee to be paid to CCI
with respect to the Account by applying against the net assets of the Account a
sub-advisory fee rate which is determined by aggregating the assets of the
Account with the assets of other Principal Life-sponsored funds that are
sub-advised by CCI and have the same investment mandate as the Account. One such
fund is the PIF LargeCap Growth Fund, which is proposed to be combined with the
WM Growth Fund, a series of WM Trust II (the "Retail WM Fund"). As of July 31,
2006, the PIF LargeCap Growth Fund had net assets of approximately $832,800,000
while the Retail WM Fund had net assets of approximately $2,191,700,000.
Consequently, if the PVC-WM Funds Reorganization and the combination of the WM
Retail Fund into the PIF LargeCap Growth Fund occur, it is expected that the
aggregate CCI Managed Assets, for purposes of calculating the sub-advisory fee,
will exceed $2 billion. As a result, the effective sub-advisory fee rate at
which CCI will be compensated by the Manager will be based, in part, on the
newly-added higher fee rates that apply when CCI Managed Assets exceed $2
billion.
As noted above, the sub-advisory fees are paid by the Manager and not
by the Account. However, because CCI is an affiliate of the Manager, the
proposed increases in management fees, notwithstanding the proposed increases in
sub-advisory fees, will have the effect of increasing the amount of the
management fees for the Account that are retained by the Manager and its
affiliates.
If shareholders of the Account approve the proposed Amended Agreement,
the increase in sub-advisory fees under the Amended Sub-Advisory Agreement will
become effective at the same time as the Amended Agreement.
Fees and Expenses
The following table sets forth for the Account for the fiscal year
ended December 31, 2005 (i) annual fund operating expenses under the Current
Agreement and (ii) pro forma annual fund operating expenses assuming that the
Amended Agreement had been in effect for that fiscal year.
Annual Fund Operating Expenses(1)
(as a percentage of average daily net assets)
Current Agreement Amended Agreement (pro forma)
Management Fee 0.60% 0.68%
Other Expenses 0.02% 0.02%
---- ----
Total Fund Operating Expenses 0.62% 0.70%
- -------------------
(1) If shareholders of the WM Growth Fund approve the proposed combination of
that Fund into the Growth Account pursuant to the PVC-WM Funds
Reorganization (the "Combination"), the Combination is expected to occur as
of the close of regularly scheduled trading on the New York Stock Exchange
on January 5, 2007. Assuming the Combination had occurred at the beginning
of the fiscal year ended December 31, 2005, the Growth Account's pro forma
Management Fee and pro forma Total Fund Operating Expenses would have been
0.58% and 0.59%, respectively, under the Current Agreement, and 0.68% and
0.69%, respectively, under the Amended Agreement.
Examples: The following examples are intended to help you compare the costs of
investing in the Account under the Current and Amended Agreements. The examples
assume that Account expenses continue at the rates shown in the tables above,
that you invest $10,000 in the Account for the time periods indicated, that you
redeem all of your shares at the end of those periods and that all dividends and
distributions are reinvested. The examples also assume that your investment has
a 5% return each year. If Separate Account expenses and Contract level expenses
were included, expenses would be higher. Although your actual costs may be
higher or lower, based on these assumptions, your cost would be:
Current Agreement Amended Agreement
Number of years you own your shares
1 3 5 10 1 3 5 10
$63 $199 $346 $774 $72 $224 $390 $871
The examples shown above should not be considered a representation of future
expenses of the Account. Actual expenses may be greater or less than those
shown.
Evaluation by the Board of Directors
The Board of Directors, including all the Independent Directors,
considered and approved the Amended Agreement for the Account, as well as the
Amended Sub-Advisory Agreement with CCI, at its meeting on September 11, 2006.
At that meeting, the Board also considered the annual continuation of the
Current Agreement for the Account, as well as the Current Sub-Advisory
Agreement, both of which will continue in effect if shareholders of the Account
do not approve the Amended Agreement. The process undertaken, factors considered
and conclusions reached by the Board in approving the Current Agreement and the
Amended Agreement for the Account, as well as the Current and Amended
Sub-Advisory Agreements with CCI, are described below.
Continuance of the Current Agreement and Current Sub-Advisory Agreement
Section 15(c) of the 1940 Act requires the Board of Directors,
including a majority of the Independent Directors, annually to review and
consider the continuation of the Current Agreement with the Manager as it
relates to the Account as well as the continuation of the Current Sub-Advisory
Agreement between the Manager and CCI. The Current Agreement and the Current
Sub-Advisory Agreement are collectively referred to in this section as the
"Current Advisory Agreements."
In considering the continuation of the Current Advisory Agreements for
the Account, the Board considered the factors and reached the conclusions
described below relating to the selection of the Manager and CCI. On September
11, 2006, the Independent Directors also met in executive session with their
independent legal counsel and were assisted by an independent consultant. In
evaluating the Current Advisory Agreements, the Board, including the Independent
Directors, reviewed a broad range of information requested for this purpose by
the Independent Directors, including but not limited to the following: (i) the
investment performance of the Account as well as the investment performance of a
broad-based industry category defined by Morningstar, Inc. ("Morningstar
Category") and a market index, (ii) management fees and the expense ratio for
the Account compared to mutual funds in a broad-based, industry category defined
by Lipper Analytical Services ("Lipper Category"), (iii) fee schedules
applicable to the Manager's and CCI's other clients, (iv) the Manager's
financial results and condition, including its profitability from services it
performed for the Account, (v) a comparison of the management fee and expense
ratio for the Account at current asset levels to the management fee and expense
ratios for the funds in the Lipper Category, (vi) an analysis of the Manager's
and CCI's allocation of the benefits of economies of scale, (vii) the Manager's
and CCI's record of compliance with applicable laws and regulations, and with
the Account's investment policies and restrictions, (viii) the nature and
character of the services the Manager and CCI provide to the Account, and (ix)
other incidental benefits received by the Manager and CCI.
Nature, Extent and Quality of Services. With regard to the Manager, the
Board considered the experience and skills of senior management leading fund
operations, the experience and skills of the Manager's personnel, the resources
made available to such personnel and the Manager's ability to attract and retain
high-quality personnel. The Board also considered the Manager's rigorous program
for identifying, recommending, monitoring and replacing sub-advisors. With
regard to CCI, the Board considered its reputation, qualifications, background,
investment approach, the experience and skills of its investment personnel and
the resources made available to such personnel as well as CCI's compliance with
the Account's investment policies and compliance in general. Based on all
relevant factors, the Board concluded that the nature, quality and extent of the
services the Manager and CCI provide to the Account were sufficient to support
renewal of the Current Advisory Agreements.
Investment Performance. The Board considered the performance results
for the Account over various time periods. The Board also considered these
results in comparison to the performance of the funds in the Morningstar
Category of which the Account is a member, as well as the Account's market
index. The Board reviewed information that showed the Account's performance
ranking in the 11th, 11th and 41st percentiles of the Morningstar Category for
the one-year, three-year and five-year periods, respectively, ending June 30,
2006. The Board noted that, during the period January 5, 2005, the date CCI
became sub-advisor, through June 30, 2006, the Account outperformed its market
index as well as the average performance produced by the funds in the
Morningstar Category. The Board also considered whether the Account's
performance results were consistent with the Account's investment objectives and
policies. The Board concluded that performance results were satisfactory.
Investment Management and Sub-Advisory Fees and Expenses. The Board
reviewed the Account's management fees and total expense ratio. The Board
received information, based on data supplied by Lipper Analytical Services,
comparing the Account's current management fee (at current asset levels and at
theoretical asset levels) and expense ratio (at current asset levels) to
advisory fees and expense ratios of the Lipper Category. Under the Current
Agreement, the management fee for the Account ranks in the 18th percentile and
the Account's expense ratio ranks in the 7th percentile when compared to the
Lipper Category, which the Board considered reasonable. The Board also
considered the Account's current management fee rate as compared to management
fees charged by the Manager for comparable mutual funds. On the basis of the
information provided, the Board concluded that the current management fee
schedule and current total expense ratio for the Account were reasonable and
appropriate in light of the quality of services provided by the Manager and
other relevant factors.
The Board also considered CCI's current sub-advisory fees. The Board
evaluated the competitiveness of the sub-advisory fees based upon data the
Manager supplied, which compared the sub-advisory fees to available information
about funds with sub-advisors in the Lipper Category. The Board noted that CCI's
current effective sub-advisory fee of 0.115% was the lowest of any sub-advisor
in the Lipper Category. The Board noted that CCI is an affiliate of the Manager
and that, therefore, the parties may allocate the fee among themselves based
upon other than competitive factors, but that in the end, the shareholders pay
only the management fee. Based upon all of the above, the Board determined that
the current sub-advisory fee for the Account was reasonable in light of the
quality of the services provided by CCI and other relevant factors.
Profitability. The Board reviewed the Manager's detailed analysis of
its profitability, including the estimated direct and indirect costs the Manager
incurs in providing service with regard to the Account and other PVC Accounts,
under the Current Agreement as well as its profitability from other
relationships between the Manager, its affiliates and each PVC Account. The
Board reviewed data on the profitability to CCI. The Board concluded that the
profitability to the Manager from the management of each Account and the
profitability to CCI in connection with the investment advisory services it
provides were not unreasonable.
Economies of Scale. The Board considered whether there are economies of
scale with respect to the management of the Account and whether the Account
benefits from any such economies of scale through breakpoints in fees. The Board
also reviewed the level at which breakpoints occur and the amount of the
reduction. The Board also considered whether the effective management fee rate
for the Account under the Current Agreement is reasonable in relation to the
asset size of the Account. The Board concluded that the fee schedule for the
Account reflects an appropriate level of sharing of any economies of scale. The
Board also considered whether there are economies of scale with respect to the
sub-advisory services provided to the Account and, if so, whether the
sub-advisory fees reflect such economies of scale through breakpoints in fees.
The Board also considered whether the effective sub-advisory fee rate for the
Account under the Current Sub-Advisory Agreement is reasonable in relation to
the asset size of the Account. The Board concluded that the fee schedule for the
Account reflects an appropriate recognition of any economies of scale.
Other benefits to the Manager. The Board received and considered
information regarding the character and amount of other incidental benefits the
Manager, its affiliates and CCI receive as a result of their relationship with
PVC, including CCI's soft dollar practices. The Board concluded that, taking
into account any incidental benefits the Manager and CCI receive, the management
and sub-advisory fees for the Account were reasonable.
Overall Conclusions. Based upon all of the information it considered and the
conclusions it reached, the Board determined unanimously that the terms of each
Current Advisory Agreement continue to be fair and reasonable and that the
continuation of each Current Advisory Agreement is in the best interests of the
Account.
Approval of the Amended Agreement and Amended Sub-Advisory Agreement
Section 15(c) of the 1940 Act requires the Board, including a majority
of the Independent Directors, to review and consider any amendment to an
investment advisory agreement that proposes to increase fees charged by an
investment advisor. The Amended Agreement and the Amended Sub-Advisory Agreement
are collectively referred to in this section as the "Amended Advisory
Agreements."
In determining whether to approve the proposed Amended Advisory
Agreements, which differ from their corresponding Current Advisory Agreements
only with respect to the proposed increase in fees, the Board considered in
particular the proposed fees and total expected expense ratio (taking into
account the proposed increased management fee) for the Account under the Current
and Amended Advisory Agreements, the relationship between the proposed
management fees and sub-advisory fees and the management fee structure in
relation to the proposed PVC-WM Reorganization. The Board received information,
based on data supplied by Lipper Analytical Services, comparing the Account's
management fees (at current asset levels and at theoretical asset levels) and
expense ratio (at current asset levels) to advisory fees and expense ratios of
the Lipper Category. Under the Amended Agreement, the proposed management fee
for the Account would rank in the 43rd percentile and the Account's expected
expense ratio would rank in the 17th percentile when compared to the Lipper
Category, which the Board considered reasonable given the reasons for the
proposed increase, as described above. The Board also considered the Account's
management fee rate under the Amended Agreement as compared to management fees
charged by the Manager for comparable mutual funds.
Under the Amended Sub-Advisory Agreement, the Board noted that the
proposed sub-advisory fee would continue to be among the lowest for funds with
sub-advisors in the Lipper Category. The Board also considered in particular,
and found favorable, the strong performance record of the Account over the past
three years, CCI's investment management capabilities with respect to
growth-oriented funds, its past services as sub-advisor to the Account and the
strength of its personnel, technical resources and operations. The Board also
reviewed the sub-advisory fee rates under the Current and Amended Sub-Advisory
Agreements in comparison to the sub-advisory fees paid with respect to
comparable funds and concluded that management's view that the proposed
sub-advisory fee increase for CCI was appropriate in order to align the
sub-advisory fees with competitive, market rates was reasonable.
On the basis of the information provided, the Board concluded that the
management fee and sub-advisory fee schedules and expense ratio for the Account
under the Amended Advisory Agreements are reasonable and appropriate in light of
the quality of services provided by the Manager and CCI and other relevant
factors and that approval of the Amended Advisory Agreements was in the best
interests of the Account.
Additional Information
For additional information regarding the Management Agreement between
the Account and the Manager, including the date of the Current Agreement and the
dates of its most recent approval by the Board and by shareholders, the
principal officers and Directors of the Manager, payments made to the Manager by
the Account during the fiscal year ended December 31, 2005 and comparable funds
managed by the Manager, see Appendix D ("Additional Information About the
Management Agreement and the Manager") to this Proxy Statement. For information
regarding any brokerage commissions paid by the Account to affiliated brokers
during the fiscal year ended December 31, 2005, see Appendix E ("Payments to
Affiliated Brokers").
Required Vote
Approval of the Proposal will require the affirmative vote of 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
of action to take which may include submitting an alternative proposal to
shareholders of the Account at a future shareholders meeting.
The Board, including all the Independent Directors, recommends that
shareholders of the Growth Account vote "For" the Proposal.
PROPOSAL 3
APPROVAL OF RECLASSIFYING THE REAL ESTATE SECURITIES ACCOUNT
FROM "DIVERSIFIED" TO "NON-DIVERSIFIED"
(Real Estate Securities Account Only)
The Board of Directors, including all the Independent Directors, has
approved, and the Board recommends that shareholders of the Real Estate
Securities Account approve, a proposed change in the classification of the
Account under the 1940 Act from "diversified" to "non-diversified."
The Real Estate Securities Account is currently classified as a
diversified investment company under Section 5(b)(1) of the 1940 Act. This means
that the Account, with respect to 75% of its total assets, is limited in its
investment in the securities of any one issuer (other than government securities
or securities of other investment companies) to an amount not greater in value
than 5% of the value of the Account's total assets and to not more than 10% of
the outstanding voting securities of that issuer. These percentage limits apply
as of the time the Account purchases a security of a particular issuer and are
not deemed to be exceeded if securities already owned by the Account increase in
value relative to the rest of the Account's holdings. A non-diversified
investment company is not subject to these limits, may invest a higher
percentage of its assets in the securities of a small number of companies, and
has increased risk because it may be affected more than a diversified fund by
changes in the financial condition, or the financial markets' assessments, of
any of such companies.
The Account's classification as diversified is a fundamental policy
that may be changed only with shareholder approval. The proposed
reclassification of the Account as non-diversified is intended to provide the
Account with greater flexibility in responding to investment opportunities.
If the Account is reclassified as non-diversified, it will nonetheless
remain subject to the diversification requirements necessary to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). In order to maintain such favorable tax treatment, the Account may
not purchase a security if, as a result, with respect to 50% of the Account's
total assets, more than 5% of the Account's total assets would be invested in
the securities of a single issuer, or the Account would hold more than 10% of
the outstanding voting securities of such issuer. These limits apply as of the
end of each quarter of the Account's fiscal year.
If approved by shareholders of the Account, the proposed change in
classification will become effective as of January 8, 2007.
Evaluation by the Board of Directors
The Board reviewed the proposal to change the classification of the
Account from diversified to non-diversified at its meeting on August 25, 2006.
The Board considered a number of factors, including, as indicated above, the
desirability of affording the Account greater flexibility in the management of
portfolio assets. The Board also considered the increased risk associated with
portfolios that are non-diversified, and the mitigation of risk from the
continuing applicability to the Account of the diversification requirements
under the Code. The Board, including all the Independent Directors, determined
that it is in the best interests of the Account that the Account change its
classification under the 1940 Act from diversified to non-diversified.
Required Vote
Approval of the change in classification of the Real Estate Securities
Account will require the affirmative vote of a Majority of the Outstanding
Voting Securities of the Account. If the required shareholder approval is not
obtained, the current classification of the Account as diversified will remain
in effect pending shareholder approval of another proposed change or other
definitive action.
The Board, including all the Independent Directors, recommends that
shareholders of the Real Estate Securities Account vote "For" the Proposal.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The firm of Ernst & Young LLP ("Ernst & Young") has been selected as
the independent registered public accounting firm for PVC for the fiscal year
ending December 31, 2006 and served as such for the last two fiscal years. The
independent registered public accounting firm examines annual financial
statements for PVC and reviews regulatory filings that include those financial
statements. Representatives of Ernst & Young are not expected to be present at
the Meeting but have been given the opportunity to make a statement if they so
desire and will be available should any matter arise requiring their presence.
The Audit and Nominating Committee of the Board of Directors of PVC
(the "Audit Committee") has adopted the following policy regarding approval and
pre-approval of audit and non-audit services provided by the independent
registered public accounting firm (the "independent auditor").
* * *
Policy on Auditor Independence
The purpose of this policy is to ensure the independence of the Funds'
primary independent auditor. This policy is established by the Audit Committee
of the Principal Investors Fund, Inc. and Principal Variable Contracts Fund,
Inc. (the "Funds") Board of Directors effective for all engagements of the
primary independent auditor entered into on and after March 8th, 2004.
1. Prohibited Services shall not be provided by the primary independent
auditor, its subsidiaries and affiliates to the Funds. For the purposes of this
policy, Prohibited Services are:
--Services that are subject to audit procedure during a financial statement
audit;
--Services where the auditor would act on behalf of management;
--Services where the auditor is an advocate to the client's position in an
adversarial proceeding;
--Bookkeeping or other services related to the accounting records or
financial statements of the Funds, its subsidiaries and affiliates;
--Financial information systems design and implementation;
--Appraisal or valuation services, fairness opinions, or
contribution-in-kind reports;
--Actuarial services;
--Internal audit functions or human resources;
--Broker or dealer, investment advisor, or investment banking services;
--Legal services and expert services unrelated to the audit;
--Any other service that the Public Company Accounting Oversight Board
determines, by regulation, is impermissible.
2. (A) All services provided by the primary independent auditor, its
subsidiaries and affiliates to the Funds, and (B) audit services, including
audits of annual financial statements, audits of acquired or divested businesses
or review of regulatory filings, by any independent auditor, shall be approved
by the Audit Committee in advance in accordance with the following procedure:
Each quarter, Management will present to the Audit Committee for pre-approval, a
detailed description as to each particular service for which pre-approval is
sought and a range of fees for such service. The Audit Committee may delegate
pre-approval authority to one or more of its members provided a report of any
services approved by such delegated member(s) shall be presented to the full
Audit Committee at its next regularly scheduled meeting. The Audit Committee
Chairperson shall have pre-approval authority for changes to any range of fees
applicable to services previously approved by the Audit Committee and for
services and the range of fees for such services that arise between regularly
scheduled Audit Committee meetings.
In considering whether to pre-approve the provision of non-audit services by the
primary independent auditor, the Audit Committee will consider whether the
services are compatible with the maintenance of such auditor's independence. The
Audit Committee will also consider whether the primary independent auditor is
best positioned to provide the most effective and efficient service, for reasons
such as its familiarity with the Funds' business, people, culture, accounting
systems, risk profile and other factors, and whether the service might enhance
the Funds' ability to manage or control risk or improve audit quality.
3. The provisions of this policy shall apply to all audit and non-audit
services provided directly to the Funds. Additionally, the provisions of this
policy shall apply to non-audit services provided to Principal Management
Corporation or an affiliate of Principal Management Corporation that provides
ongoing services to the Funds if the engagement relates directly to the
operations and financial reporting of the Funds.
4. Not less than annually, the primary independent auditor shall report
to the Audit Committee its independence policies, as well as all relationships
that may bear on independence between the auditor and the Funds with respect to
any services provided by the auditor, its subsidiaries or affiliates.
5. The Audit Committee shall ensure that the lead and concurring
partners of the Funds' primary independent auditor are rotated at least every
five years and subject upon rotation to a five year "time out" period. All other
partners of the primary independent auditor, excluding partners who simply
consult with others on the audit engagement regarding technical issues, shall
rotate after seven years and be subject upon rotation to a two year "time out"
period.
The Funds or Principal Management Corporation may not hire any former
partner, principal, shareholder or professional employee ("Former Employee") of
the primary independent auditor into an accounting or financial reporting
oversight role unless the Former Employee has severed his/her economic interest
in the independent audit firm. In addition, employment of a Former Employee into
an accounting or financial reporting oversight role will not be allowed unless
the Former Employee was not a member of the audit engagement team of the Company
during the one year period preceding the date that the audit procedures began
for the fiscal period in which the Company proposes to hire the Former Employee.
An accounting or financial reporting oversight role is presumed to mean CEO,
CFO, or Controller.
* * *
The Audit Committee has considered whether the provision of non-audit
services that were rendered to PVC's investment advisor (not including any
sub-advisor whose role is primarily portfolio management and is subcontracted
with or overseen by another investment advisor), and any entity controlling,
controlled by or under common control with the investment advisor that provides
ongoing services to PVC that were not pre-approved pursuant to paragraph
(c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the
principal accountant's independence.
Audit Fees. During the last two fiscal years, Ernst & Young has billed
the following amounts for their professional services.
December 31, 2004 - $140,780
December 31, 2005 - $244,020
Audit-Related Fees. Ernst & Young has not provided any audit-related
services to PVC during the last two fiscal years that are not included under
"Audit Fees" above.
Ernst & Young billed no fees that the Audit Committee was required to
pre-approve pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
Tax Fees. Ernst & Young reviews the federal income tax returns and
federal excise tax returns of PVC. In connection with this review, Ernst & Young
reviews the calculation of PVC's dividend distributions that are included as
deductions on the tax returns. During 2004, affiliates of Ernst & Young located
in India and Taiwan performed tax services for PVC. The services provided by the
affiliate in India included a review of the security transactions of PVC that
took place in India. After this review, an Indian income tax return was prepared
and filed by Ernst & Young. Additionally, another affiliate of Ernst & Young
located in Taiwan reviewed the securities held by PVC in Taiwan. After the
review, a statement of portfolio was prepared. A tax return filing in Taiwan was
also required.
During the last two fiscal years, Ernst & Young has billed the
following amounts for their professional tax services.
December 31, 2004 - $46,686
December 31, 2005 - $53,766
Ernst & Young billed no fees that the Audit Committee was required to
pre-approve pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
All Other Fees. Ernst & Young has not billed PVC for other products or
services during the last two fiscal years.
Ernst & Young billed no fees that the Audit Committee was required to
pre-approve pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X.
All work in connection with the audit of PVC's financial statements was
performed by full-time employees of Ernst & Young.
The aggregate non-audit fees Ernst & Young billed to PVC, its
investment advisor (not including any sub-advisor whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
advisor), and any entity controlling, controlled by or under common control with
the advisor that provides ongoing services to PVC for each of its last two
fiscal years were as follows.
December 31, 2004 - $46,686
December 31, 2005 - $53,766
OTHER MATTERS
We do not know of any matters to be presented at the Meeting other than
those mentioned in this Proxy Statement, in the separate proxy
statement/prospectus which deals with the combinations of the Equity Income
Account into the Equity Income Account I and in the separate proxy
statement/prospectus which deals with the combination of the LargeCap Growth
Equity Account into the Equity Growth Account. The proxy statements/prospectuses
relating to these fund combinations are being furnished only to shareholders of
the Accounts being acquired in such combinations. If any other matters properly
come before the Meeting, the shares represented by proxies will be voted in
accordance with the best judgment of the person or persons voting the proxies.
PVC is not required to hold annual meetings of shareholders and,
therefore, cannot determine when the next meeting of shareholders will be held.
Shareholder proposals to be presented at any future meeting of shareholders of
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
November ___, 2006
Des Moines, Iowa
It is important that proxies be returned promptly. Please complete,
sign, and date the proxy ballot and return it in the enclosed envelope.
Appendix A
OUTSTANDING SHARES AND SHARE OWNERSHIP
The following table shows the number of shares outstanding and entitled
to vote 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.
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
Shares Shares
Account Outstanding Account Outstanding
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
Asset Allocation Account 7,401,294.204 LargeCap Blend Account 15,358,555.097
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
Balanced Account 7,106,565.259 LargeCap Growth Equity Account 8,564,973.447
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
Bond Account 33,027,703.905 LargeCap Stock Index Account 20,459,119.843
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
Capital Value Account 7,876,952.815 LargeCap Value Account 12,844,994.871
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
Diversified International Account 19,028,753.665 Principal LifeTime 2010 Account 1,895,043.007
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
Equity Growth Account 14,782,594.404 Principal LifeTime 2020 Account 5,987,514.617
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
Equity Income Account 13,240,981.267 Principal LifeTime 2030 Account 955,752.250
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
Equity Value Account 453,153.631 Principal LifeTime 2040 Account 401,384.118
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
Government & High Quality Bond Account 27,064,781.564 Principal LifeTime 2050 Account 259,628.076
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
Growth Account 8,655,571.430 Principal LifeTime Strategic Income Account 921,021.084
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
International Emerging Markets Account 5,470,483.026 Real Estate Securities Account 9,767,981.877
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
International SmallCap Account 7,503,298.673 Short-Term Bond Account 10,985,319.622
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
MidCap Account 10,921,702.602 SmallCap Account 9,650,535.682
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
MidCap Growth Account 6,389,727.089 SmallCap Growth Account 6,846,656.090
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
MidCap Value Account 8,337,874.785 SmallCap Value Account 8,997,582.078
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
Money Market Account 174,538,713.110
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
- -------------------------------------------- ------------------ --------------------------------------------- -------------------
As of the Record Date, the Directors and officers of PVC together owned
less than 1% of the outstanding shares of any of the Accounts.
As of the Record Date, no persons were known by PVC to own beneficially
5% or more of the outstanding shares of any of the Accounts.
Appendix B
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, 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 Fund's financial statements, the
Fund'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. At least annually review and
assess the adequacy of the Fund's Policy on Auditor Independence and
recommend any proposed changes to the Board for approval.
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 "Policy on Board of Directors and Officers
Compensation and Expenses" and consider the results of any internal or
independent auditor's reviews of those areas. Internal auditors will
review Directors' expense records once every three calendar years.
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.
20. At least annually, meet separately with the Fund's Chief Compliance
Officer.
(Adopted by the Board of Directors of each of the
Principal funds on March 13, 2006)
Appendix C
FORM OF AMENDED MANAGEMENT AGREEMENT
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
AMENDED AND RESTATED
MANAGEMENT AGREEMENT
AGREEMENT to be effective the __________________, by and between
PRINCIPAL VARIABLE CONTRACTS FUND, INC., a Maryland corporation (hereinafter
called the "Fund") and PRINCIPAL MANAGEMENT CORPORATION, an Iowa corporation
(hereinafter called "the Manager").
W I T N E S S E T H:
WHEREAS, The Fund has furnished the Manager with copies properly
certified or authenticated of each of the following:
(a) Certificate of Incorporation of the Fund;
(b) Bylaws of the Fund as adopted by the Board of Directors;
(c) Resolutions of the Board of Directors of the Fund selecting the
Manager as investment adviser and approving the form of this
Agreement.
NOW THEREFORE, in consideration of the premises and mutual agreements
herein contained, the Fund hereby appoints the Manager to act as investment
adviser and manager of the Fund, and the Manager agrees to act, perform or
assume the responsibility therefore in the manner and subject to the conditions
hereinafter set forth. The Fund will furnish the Manager from time to time with
copies, properly certified or authenticated, of all amendments of or supplements
to the foregoing, if any.
1. INVESTMENT ADVISORY SERVICES
The Manager will regularly perform the following services for the Fund:
(a) Provide investment research, advice and supervision;
(b) Provide investment advisory, research and statistical facilities
and all clerical services relating to research, statistical and
investment work;
(c) Furnish to the Board of Directors of the Fund (or any appropriate
committee of such Board), and revise from time to time as
economic conditions require, a recommended investment program for
the portfolio of each Account of the Fund consistent with the
Account's investment objective and policies;
(d) Implement such of its recommended investment program as the Fund
shall approve, by placing orders for the purchase and sale of
securities, subject always to the provisions of the Fund's
Certificate of Incorporation and Bylaws and the requirements of
the Investment Company Act of 1940 (the "1940 Act"), and the
Fund's Registration Statement, current Prospectus and Statement
of Additional Information, as each of the same shall be from time
to time in effect;
(e) Advise and assist the officers of the Fund 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 the
Fund; and
(f) Report to the Board of Directors of the Fund at such times and in
such detail as the Board may deem appropriate in order to enable
it to determine that the investment policies of the Fund are
being observed.
2. CORPORATE AND OTHER ADMINISTRATIVE SERVICES AND EXPENSES
The Manager will regularly perform or assume responsibility for general
corporate and all other administrative services and expenses, except as set out
in Section 4 hereof, as follows:
(a) Furnish office space, all necessary office facilities and assume
costs of keeping books of the Fund;
(b) Furnish the services of executive and clerical personnel
necessary to perform the general corporate functions of the Fund;
(c) Compensate and pay the expenses of all officers, and employees of
the Fund, and of all directors of the Fund who are persons
affiliated with the Manager;
(d) Determine the net asset value of the shares of the Fund's Capital
Stock as frequently as the Fund shall request or as shall be
required by applicable law or regulations;
(e) Provide for the organizational expense of the Fund and expenses
incurred with the registration of the Fund and Fund shares with
the federal and state regulatory agencies, including the costs of
printing prospectuses in such number as the Fund shall need for
purposes of registration and for the sale of its shares;
(f) Be responsible for legal and auditing fees and expenses incurred
with respect to registration and continued operation of the Fund;
(g) Act as, and provide all services customarily performed by, the
transfer and paying agent of the Fund including, without
limitation, the following:
(i) issuance, registry of shares, and maintenance of open
account system;
(ii) preparation and distribution of dividend and capital gain
payments to shareholders;
(iii)preparation and distribution to shareholders of reports,
tax information, notices, proxy statements and proxies;
(iv) delivery, redemption and repurchase of shares, and
remittances to shareholders; and
(v) correspondence with shareholders concerning items (i), (ii),
(iii) and (iv) above.
(h) Prepare stock certificates, and distribute the same requested by
shareholders of the Fund; and
(i) Provide such other services as required by law or considered
reasonable or necessary in the conduct of the affairs of the Fund
in order for it to meet its business purposes.
3. RESERVED RIGHT TO DELEGATE DUTIES AND SERVICES TO OTHERS
The Manager in assuming responsibility for the various services as set
forth in 1 and 2 above, reserves the right to enter into agreements with others
for the performance of certain duties and services or to delegate the
performance of some or all of such duties and services to Principal Life
Insurance Company, or an affiliate thereof; provided, however that entry into
any such agreements shall not relieve the Manager of its duty to review and
monitor the performance of such persons to the extent provided in the agreements
with such persons or as determined from time to time by the Board of Directors.
4. EXPENSES BORNE BY FUND
The Fund will pay, without reimbursement by the Manager, the following
expenses:
(a) Taxes, including in the case of redeemed shares any initial
transfer taxes, and other local, state and federal taxes,
governmental fees and other charges attributable to investment
transactions;
(b) Portfolio brokerage fees and incidental brokerage expenses;
(c) Interest;
(d) The fees and expenses of the Custodian of its assets;
(e) The fees and expenses of all directors of the Fund who are not
persons affiliated with the Manager; and
(f) The cost of meetings of shareholders.
5. COMPENSATION OF THE MANAGER BY FUND
For all services to be rendered and payments made as provided in
Sections 1 and 2 hereof, the Fund will accrue daily and pay the Manager within
five days after the end of each calendar month a fee based on the average of the
values placed on the net assets of the Accounts of the Fund as of the time of
determination of the net asset value on each trading day throughout the month in
accordance with the schedules attached hereto.
Net asset value shall be determined pursuant to applicable provisions of
the Certificate of Incorporation of the Fund. If pursuant to such provisions the
determination of net asset value is suspended, then for the purposes of this
Section 5 the value of the net assets of the Fund as last determined shall be
deemed to be the value of the net assets for each day the suspension continues.
The Manager may, at its option, waive all or part of its compensation
for such period of time as it deems necessary or appropriate.
6. ASSUMPTION OF EXPENSES BY PRINCIPAL LIFE INSURANCE COMPANY
Although in no way relieving the Manager of its responsibility for the
performance of the duties and services set out in Section 2 hereof, and
regardless of any delegation thereof as permitted under Section 3 hereof, some
or all of the expenses therefore may be voluntarily assumed by Principal Life
Insurance Company and the Manager may be reimbursed therefore, or such expenses
may be paid directly by Principal Life Insurance Company.
7. AVOIDANCE OF INCONSISTENT POSITION
In connection with purchases or sales of portfolio securities for the
account of the Fund, neither the Manager nor any of the Manager's directors,
officers or employees will act as a principal or agent or receive any
commission.
8. LIMITATION OF LIABILITY OF THE MANAGER
The Manager shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with the matters to which
this Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the Manager's part in the performance of its duties
or from reckless disregard by it of its obligations and duties under this
Agreement.
9. COPIES OF CORPORATE DOCUMENTS
The Fund will furnish the Manager promptly with properly certified or
authenticated copies of amendments or supplements to its articles or bylaws.
Also, the Fund will furnish the Manager financial and other corporate
information as needed, and otherwise cooperate fully with the Manager in its
efforts to carry out its duties and responsibilities under this Agreement.
10. DURATION AND TERMINATION OF THIS AGREEMENT
This Agreement shall remain in force until the conclusion of the first
meeting of the shareholders of the Fund and if it is approved by a vote of a
majority of the outstanding voting securities of the Fund 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, if required by the 1940 Act, by a vote of a majority of the outstanding
voting securities of the Fund and in either event by vote of a majority of the
directors of the Fund who are not interested persons of the Manager, Principal
Life Insurance Company, or the Fund cast in person at a meeting called for the
purpose of voting on such approval. This Agreement may, on sixty days written
notice, be terminated at any time without the payment of any penalty, by the
Board of Directors of the Fund, by vote of a majority of the outstanding voting
securities of the Fund, or by the Manager. This Agreement shall automatically
terminate in the event of its assignment. In interpreting the provisions of this
Section 10, the definitions contained in Section 2(a) of the Investment Company
Act of 1940 (particularly the definitions of "interested person," "assignment"
and "voting security") shall be applied.
11. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived, discharged or
terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, and 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 Fund's
outstanding voting securities and by vote of a majority of the directors who are
not interested persons of the Manager, Principal Life Insurance Company or the
Fund cast in person at a meeting called for the purpose of voting on such
approval.
12. ADDRESS FOR PURPOSE OF NOTICE
Any notice under this Agreement shall be in writing, addressed and
delivered or mailed, postage prepaid, 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 Fund and that of the
Manager for this purpose shall be The Principal Financial Group, Des Moines,
Iowa 50392.
13. MISCELLANEOUS
The captions in this Agreement are included for convenience of reference
only, and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized.
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
By
-----------------------------------------
Michael J. Beer, Executive Vice President
PRINCIPAL MANAGEMENT CORPORATION
By
-----------------------------------------
Ralph C. Eucher, President
SCHEDULE
MANAGEMENT FEES
Growth Account
Average Daily Net Fee as a Percentage of
Assets of the Account Average Daily Net Assets
--------------------- ------------------------
First $500 Million 0.68%
Next $500 Million 0.63%
Next $1 Billion 0.61%
Next $1 Billion 0.56%
Over $3 Billion 0.51%
Appendix D
ADDITIONAL INFORMATION ABOUT
THE MANAGEMENT AGREEMENT AND THE MANAGER
This Appendix contains additional information about the Management
Agreement and the Manager and its affiliates and should be read in conjunction
with Proposal 2.
Information About the Manager
The Manager serves as the manager of the Growth Account, as well as of
each of the other Accounts of PVC, pursuant to a Management Agreement between
the Manager and PVC.
The Manager was organized on January 10, 1969 and since that time has
managed various mutual funds sponsored by Principal Life. At December 31, 2005,
the mutual funds it managed had assets of approximately $25.1 billion.
The following table lists the principal executive officers and
directors of the Manager, their positions with PVC, if any, and their principal
occupations. The address of each such person is the Principal Financial Group,
Des Moines, Iowa 50392-2080.
Name and Position
with the Manager Position with PVC Principal Occupation
John E. Aschenbrenner None 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/Chief Operating
Executive Vice President/Chief Officer - Mutual Funds, the Manager;
Operating Officer - Mutual Funds Director and President, Princor
David J. Brown Chief Compliance Officer Vice President, Product & Distribution
Senior Vice President Compliance, Principal Life Insurance
Company; Senior Vice President, the
Manager and Princor
Jill R. Brown Vice President and Chief Senior Vice President and Chief
Senior Vice President and Chief Financial Officer; Financial Officer, the Manager and
Financial Officer Principal Accounting Princor
Officer
Ralph C. Eucher Director, President and Director and President, the Manager;
Director and President Chief Executive Officer Director, Princor; Senior Vice
President, Principal Financial Group,
Inc.
Ernest H. Gillum Vice President and Vice President and Chief Compliance
Vice President and Chief Compliance Assistant Secretary Officer, the Manager
Officer
Layne H. Rasmussen Vice President and Vice President and Controller - Mutual
Vice President and Controller - 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 Vice
President/Senior Securities Counsel,
Principal Global Investors LLC
James F. Sager Assistant Secretary Vice President, the Manager and Princor
Vice President
Larry D. Zimpleman Director and Chairman of Chairman and Director, the Manager and
Director and Chairman of the Board the Board Princor; President, and Chief Operating
Officer, Principal Financial Group, Inc.
Dates and Prior Approvals of Management Agreement for the Growth Account
The date of the Management Agreement between the Manager and the Growth
Account is December 12, 2005.
Approval by the Board. The Management Agreement with respect to the
Growth Account was most recently approved by the Board of Directors on September
11, 2006 in connection with the annual continuance thereof.
Approval by Shareholders. The Management Agreement was last submitted
to a vote of the Growth Account shareholders on November 2, 1999 for the
following purposes: approval of a modified fee schedule and approval of
clarifying changes to the delegation provision of the Agreement.
Payments to the Manager
Management Agreement. As compensation for its services as manager of
the Growth Account, the Manager receives fees from the Growth Account. For the
fiscal year ended December 31, 2005, the Growth Account paid the Manager a
management fee of $706,105.
Payments by the Manager to CCI
Sub-Advisory Agreement. CCI is an affiliate of the Manager. During the
fiscal year ended December 31, 2005, the Manager paid CCI, pursuant to a
sub-advisory agreement, a sub-advisory fee in the amount of $170,822.
Comparable Funds Managed by the Manager
The following table identifies other registered investment companies
("comparable funds") managed by the Manager that have investment objectives
similar to the Growth Account. The table shows the size of each comparable fund
as well as the Manager's rate of compensation.
Advisory Fee Fiscal
Net (as a percentage of Year
Comparable Fund Assets average daily net assets) Ended
PVC Equity Growth $250,018,960 0.80% of the first $100 million; December 31, 2005
(as of June 30, 0.75% of the next $100 million;
2006 (unaudited)) 0.70% of the next $100 million;
0.65% of the next $100 million; and
0.60% of the excess over $400 million.
PVC LargeCap Growth Equity $41,012,624 1.00% December 31, 2005
(as of June 30,
2006 (unaudited))
PIF LargeCap Growth Fund* $832,798,598 0.55% of the first $500 million; October 31, 2005
(as of July 31, 0.53% of the next $500 million;
2006 (unaudited)) 0.51% of the next $500 million; and
0.50% of the excess over $1.5 billion.
PIF Partners LargeCap Growth Fund $149,438,991 1.00% of the first $500 million; October 31, 2005
(as of July 31, 0.98% of the next $500 million;
2006 (unaudited)) 0.96% of the next $500 million; and
0.95% of the excess over $1.5 billion.
PIF Partners LargeCap Growth Fund I $916,228,410 0.75% of the first $500 million; October 31, 2005
(as of July 31, 0.73% of the next $500 million;
2006 (unaudited)) 0.71% of the next $500 million; and
0.70% of the excess over $1.5 billion.
PIF Partners LargeCap Growth Fund II $859,561,800 1.00% of the first $500 million; October 31, 2005
(as of July 31, 0.98% of the next $500 million;
2006 (unaudited)) 0.96% of the next $500 million; and
0.95% of the excess over $1.5 billion.
- ---------------------------
* The Board of Directors of PIF has approved a proposal to increase the
management fee payable to the Manager. If shareholders approve the
proposal, the new management fee schedule for the PIF LargeCap Growth Fund
will be: 0.68% of the first $500 million; 0.65% of the next $500 million;
0.62% of the next $1 billion; 0.58% of the next $1 billion; and 0.55% of
the excess over $3 billion.
Appendix E
PAYMENTS TO AFFILIATED BROKERS
The following broker-dealers are considered to be affiliated persons of the PVC
Growth Account or affiliated persons of such persons ("Affiliated Brokers"):
o BNY Broker, Inc. is an affiliate of BNY Investments, which serves as
sub-advisor for two portfolios of the Principal Investors Fund, Inc.
o Goldman Sachs & Co. is an affiliate of Goldman Sachs Asset Management,
which serves as sub-advisor for two portfolios of the Principal Investors
Fund, Inc.
o J.P Morgan Securities, Inc. is an affiliate of J.P. Morgan Investment
Management Inc., which serves as sub-advisor for the SmallCap Value Account
of Principal Variable Contracts Fund, Inc. and a portfolio of Principal
Investors Fund, Inc.
o Lehman Brothers, Inc. is an affiliate of Neuberger Berman Management Inc.,
which serves as sub-advisor for the MidCap Value Account of Principal
Variable Contracts Fund, Inc. and a portfolio of the Principal Investors
Fund, Inc.
o Morgan Stanley DW Inc. is an affiliate of Morgan Stanley Asset Management,
which serves as sub-advisor to the Asset Allocation Account of the
Principal Variable Contracts Fund, Inc.
o Sanford C. Bernstein & Co., LLC is an affiliate of AllianceBernstein L.P.,
which serves as sub-advisor to the LargeCap Value Account of Principal
Variable Contracts Fund, Inc. and two portfolios of Principal Investors
Fund, Inc.
o UBS Securities LLC is an affiliate of UBS Global AM, which serves as a
sub-advisor to the SmallCap Growth Account of Principal Variable Contracts
Fund, Inc. and two portfolios of Principal Investors Fund, Inc.
The following table shows the amount of brokerage commissions paid by the PVC
Growth Account to Affiliated Brokers during the fiscal year ended December 31,
2005:
Total Dollar As a Percentage of Aggregate
Amount Brokerage Commissions
BNY Broker, Inc. $1,160 0.49%
Goldman Sachs & Co. $7,236 3.03%
JP Morgan Securities, Inc. $240 0.10%
Lehman Brothers Inc. $42,047 17.62%
Morgan Stanley DW, Inc. $6,473 2.71%
Sanford C. Bernstein & Co., LLC $1,819 0.76%
UBS Securities LLC $13,560 5.68%
VOTING INSTRUCTION FORM
Principal Variable Contracts Fund, Inc.
Des Moines, IA 50392-2080
GIVE YOUR VOTING INSTRUCTIONS TODAY!
SPECIAL MEETING OF SHAREHOLDERS DECEMBER 15, 2006
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
{ACCOUNT NAME PRINTS HERE} With respect to the proposals listed on the reverse
side of this form, the Board of Directors of Principal Variable Contracts Fund,
Inc. ("PVC") is soliciting your instructions for voting shares of the
above-referenced account, a series of PVC, that are attributable to your
variable contract and held by Principal Life Insurance Company ("Principal
Life"). Principal Life will vote the shares in accordance with your instructions
at a Special Meeting of Shareholders of the above-referenced account to be held
on December 15, 2006 at 2:00 p.m. Central Time, and at any adjournments thereof.
In the discretion of Principal Life, votes also will 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 the Notice
of Special Meeting of Shareholders and the Proxy Statement, both dated November
_____, 2006. If you complete, sign and return the form, Principal Life will vote
as you have instructed. If you simply sign and return the form, it will be voted
FOR the proposals. If your instructions are not received, votes will be case in
proportion to the instructions received from all other contractowners with a
voting interest in the above-referenced account.
Date: ______________________, 2006
Signature(s), (Title(s), if applicable) (Sign in the Box)
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. Attorneys, executors, administrators,
trustees or guardians should so indicate when signing.
Please fill in box(es) as shown using black or blue ink or
number 2 pencil. [X]
PLEASE DO NOT USE FINE POINT PENS.
1. Election the Board of Directors, including four nominees for new
Directors (shareholders of all Accounts will vote together on this
proposal).
(01) Elizabeth Ballantine (05) Fritz S. Hirsch (09) Richard Yancey
(02) Kristianne Blake (06) William C. Kimball (10) Ralph C. Eucher
(03) Richard W. Gilbert (07) Barbara A. Lukavsky (11) William G. Papesh
(04) Mark A. Grimmett (08) Daniel Pavelich (12) Larry D. Zimpleman
FOR ALL____ WITHHOLD ALL____ FOR ALL EXCEPT____
2. Approve a management fee increase for the Growth Account (only
shareholders of the Growth Account will vote on this proposal).
FOR____ AGAINST____ ABSTAIN____
3. Approve reclassifying the Real Estate Securities Account from
"diversified" to "non-diversified" (only shareholders of the Real
Estate Securities Account will vote on this proposal).
FOR____ AGAINST____ ABSTAIN____