Filing by WM Variable Trust pursuant to Rule 425 of the
Securities Act of 1933, and deemed filed under
Rule 14a-12(b)under the Securities Exchange Act of 1934.
Subject Company: Principal Variable Contracts Fund, Inc.
File Number: 811-01944
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WM GROUP OF FUNDS
1201 Third Avenue, 22nd Floor
Seattle, Washington 98101
www.wmgroupoffunds.com
August 18, 2006
Dear Shareholder:
I am pleased to report that the Board of Trustees of the WM Group of Funds has
approved a series of fund reorganizations proposed in conjunction with the
acquisition of WM Advisors by the Principal Financial Group. It is anticipated
that the proposed actions would take place shortly after the close of the
acquisition, which is expected to occur late this year. Enclosed is a copy of a
supplement to the March 1, 2006 prospectus (May 1, 2006 for the Variable Trust
Funds) dated August 17, 2006, relating to the proposed fund reorganizations.
To summarize, of the 22 existing retail WM Funds, 13 will continue with their
current portfolio management teams, two are expected to retain their current
portfolio managers while also having a Principal Fund merged into them, and
seven will be merged into existing Principal Funds.*
I would like to emphasize three important points about the reorganizations:
-First, each surviving fund will have an expense ratio equal to or lower
than that of the current WM Fund. In certain instances, this will be
achieved through an expense cap agreed to by The Principal.
-Second, with respect to current WM Funds merging into existing Principal
Funds, in each instance the surviving fund has had better historical
performance than the merged fund for the 1-, 3-, and 5-year periods ended
June 30, 2006, as applicable.
-Finally, the next important step in this process will be to seek
shareholder approval. Proxy statements will be distributed in October to
all fund shareholders. Because all funds will require an affirmative
shareholder vote, your support in this process is appreciated.
Perhaps most importantly, I want to affirm how excited we are at the prospect of
becoming part of The Principal. In addition to continuing to manage and
distribute the Strategic Asset Management (SAM) Portfolios and many of our
individual funds, we expect to soon be able to bring you an expanded choice of
funds, including one of the industry's leading selections of target-date asset
allocation funds, and state-of-the-art retirement solutions.
We hope you're beginning to see why we believe WM Advisors will be an ideal
strategic fit for The Principal, combining two strong, high-growth mutual fund
businesses-resulting in continuity for you and even greater investment
opportunities for the future. As always, thank you for your support of the WM
Group of Funds over the years.
Sincerely yours,
/s/ Wiliam G. Papesh
William G. Papesh
President
This material is not authorized for distribution unless preceded or accompanied
by a current prospectus that includes more information regarding the risk
factors, expenses, policies, and objectives of the investment. Contact your
Investment Representative or call 800-222-5852 to obtain another copy of the
prospectus. A mutual fund's share price and investment return will vary with
market conditions, and the principal value of an investment when you sell your
shares may be more or less than the original cost.
The foregoing is not an offer to sell, nor a solicitation of an offer to buy,
shares of any Acquiring Fund, nor is it a solicitation of any proxy. For more
information regarding the Acquiring Funds, or to receive a free copy of a
prospectus/proxy statement relating to the proposed reorganizations (and
containing important information about fees, expenses and risk considerations)
once a registration statement relating to the proposed reorganizations has been
filed with the Securities and Exchange Commission and becomes effective, please
call 1-800-247-4123 or visit the Acquiring Funds' website at
www.principal.com/funds/mfprosp.htm. The prospectus/proxy statement will also be
available for free on the Securities and Exchange Commission's website
(http://www.sec.gov). Please read the prospectus/ information statement
carefully before making any investment decisions.
The WM Group of mutual funds is advised by WM Advisors, Inc., distributed by WM
Funds Distributor, Inc., and sold through WM Financial Services, Inc. (all
affiliates of Washington Mutual, Inc.) and independent broker/dealers.
__________________________
*Of the 18 existing WM Variable Trust Funds, 10 will continue with their current
portfolio management teams, two are expected to retain their current portfolio
managers while also having a Principal Fund merged into them, and six will be
merged into existing Principal Funds.
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Supplement Dated August 17, 2006 to the Prospectus dated May 1, 2006
WM VARIABLE TRUST
On July 25, 2006, the Principal Financial Group, Inc. ("PFG") and its
subsidiary, Principal Management Corporation entered into an agreement with
Washington Mutual, Inc. to acquire all of the outstanding stock of its
subsidiaries, WM Advisors, Inc., the investment advisor to the WM Group of
Funds, WM Funds Distributor, Inc. and WM Shareholder Services, Inc.
(the "Transaction"). On August 11, 2006, the Board of Trustees of WM Variable
Trust ("WMVT") approved proposed reorganizations (the "Reorganizations")
pursuant to which each of the following Funds (each, an "Acquired Fund") will
combine with and into the following corresponding separate series (each, an
"Acquiring Fund") of Principal Variable Contracts Fund, Inc. ("PVC"), subject to
various conditions including the approval of shareholders of each Acquired Fund
and approval by the directors of PVC:
WMVT Acquired Funds Corresponding PVC Acquiring Funds
Balanced Portfolio Balanced Account 1
Conservative Balanced Portfolio Conservative Balanced Account 1
Conservative Growth Portfolio Conservative Growth Account 1
Equity Income Fund Equity Income Account I 1
Flexible Income Portfolio Flexible Income Account 1
Growth Fund Growth Account 2
Growth & Income Fund LargeCap Blend Account 2
Income Fund Income Account 1
International Growth Fund Diversified International Account 2
Mid Cap Stock Fund Mid Cap Stock Account 1
Money Market Fund Money Market Account 2
REIT Fund Real Estate Securities Account 2
Short Term Income Fund Short-Term Income Account 1
Small Cap Growth Fund SmallCap Growth Account 2
Small Cap Value Fund SmallCap Value Account 2
Strategic Growth Portfolio Strategic Growth Account 1
U.S. Government Securities Fund Mortgage Securities Account 1
West Coast Equity Fund West Coast Equity Account 1
It is currently expected that the Transaction will close in the fourth
quarter of this calendar year and that the Reorganizations will occur shortly
thereafter.
Under the Reorganizations (i) all the assets and the stated liabilities
of each Acquired Fund will be transferred to its corresponding Acquiring Fund
in exchange for Class 1 and Class 2 shares of the Acquiring Fund; (ii) holders
of Class 1 and Class 2 shares of the Acquired Fund will receive, respectively,
that number of Class 1 and Class 2 shares of the corresponding Acquiring Fund
equal in value at the time of the exchange to the value of the holder's
Acquired Fund shares at such time; and (iii) the Acquired Fund will be
liquidated and dissolved.
Federal Income Tax Consequences
As a condition to the consummation of the Reorganizations, WMVT and PVC
will have received, in form and substance satisfactory to each, an opinion
from Dykema Gossett PLLC substantially to the effect that, based upon the facts
and assumptions stated therein and with respect to each Acquired Fund and its
corresponding Acquiring Fund, for federal income tax purposes: (1) the
Reorganization will constitute a reorganization within the meaning of Section
368(a) of the Code; (2) no gain or loss will be recognized by the Acquired Fund
or the Acquiring Fund upon the transfer of the assets and liabilities, if any,
of the Acquired Fund to the Acquiring Fund solely in exchange for shares of
the Acquiring Fund; (3) no gain or loss will be recognized by shareholders of
the Acquired Fund upon the exchange of such Acquired Fund's shares solely for
shares of the Acquiring Fund; (4) the holding period and tax basis of the
shares of the Acquiring Fund received by each holder of shares of the Acquired
Fund pursuant to the Reorganization will be the same as the holding period and
tax basis of the shares of the Acquired Fund held by the shareholder (provided
the shares of the Acquired Fund were held as a capital asset on the date of the
Reorganization) immediately prior to the Reorganization; and (5) the holding
period and tax basis of the assets of the Acquired Fund acquired by the
Acquiring Fund will be the same as the holding period and tax basis of those
assets to the Acquired Fund immediately prior to the Reorganization.
The foregoing is only a summary of the principal federal income tax
consequences of the Reorganizations and should not be considered to be tax
advice. There can be no assurance that the Internal Revenue Service will
concur on all or any of the issues discussed above. Further, this description
of the federal income tax consequences of the Reorganizations is made without
regard to the particular facts and circumstances of any shareholder.
Shareholders are urged to consult their own tax advisors as to the specific
consequences to them of the Reorganizations, including the applicability and
effect of state, local, non-U.S. and other tax laws.
Other Information
The closing of each Reorganization is not conditioned upon the closing
of the others. However, one of the conditions to the closing of the
Transaction is that shareholders of each of the following Acquired Funds (as
well as certain other funds advised by WMA) approve the Reorganization:
Conservative Balanced Portfolio, Flexible Income Portfolio, Balanced Portfolio,
Conservative Growth Portfolio, Strategic Growth Portfolio, U.S. Government
Securities Fund, Growth & Income Fund, Income Fund, Mid Cap Stock Fund, West
Coast Equity Fund, International Growth Fund, Growth Fund, Short Term Income
Fund and Equity Income Fund. If shareholders of any of these funds do not
approve the Reorganization, PFG, in its discretion, may elect not to
consummate the Transaction, in which case the Reorganization will not take
place as to any Acquired Funds.
The foregoing is not an offer to sell, nor a solicitation of an offer to buy,
shares of any Acquiring Fund, nor is it a solicitation of any proxy. For more
information regarding the Acquiring Funds, or to receive a free copy of a
prospectus/proxy statement relating to the proposed reorganizations (and
containing important information about fees, expenses and risk considerations)
once a registration statement relating to the proposed reorganizations has
been filed with the Securities and Exchange Commission and becomes effective,
please call 1-800-247-4123 or visit the Acquiring Funds' website at
www.principal.com/funds/mfprosp.htm. The prospectus/proxy statement will also
be available for free on the Securities and Exchange Commission's website
(http://www.sec.gov). Please read the prospectus/information statement
carefully before making any investment decisions.
_____________________________
1 These Acquiring Funds are newly-organized funds that will commence
operations in connection with the Reorganization. It is expected that the
WMA portfolio management team managing each corresponding Acquired Fund will
continue to manage the Acquiring Fund as sub-advisor, and that the Acquired
Fund will be the survivor for accounting and performance reporting purposes.
2 These Acquiring Funds are existing PVC Funds into which the relevant WM
Fund will be merged; the portfolio management teams for these funds will be
different from those of the corresponding Acquired Funds.