SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. ___)
___XX__ Filed by the Registrant
_______ Filed by a party other than the Registrant
Check the appropriate box:
___XX___ 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 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)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
Fee paid previously with preliminary materials.
<PAGE>
Principal
Financial
Group
September 20, 1999
Dear Contract Owner,
The contributions to your variable life policy or variable annuity contract are
allocated to divisions of Principal Life Insurance Company Separate Accounts.
Certain of these divisions then invest in shares of Accounts of the Principal
Variable Contracts Fund, Inc. The Fund will hold a shareholder meeting on
November 2, 1999 at the Home Office of Principal Life.
Principal Life is the only shareholder of the Fund and owns shares of the Fund
for both its general and its separate accounts. However, you have the right to
instruct the Company as to how the shares that represent your contract value are
to be voted. Principal Life will vote, in accordance with your instructions, the
number of Account shares which represents that portion of your contract value
invested in each of the Accounts as of August 27, 1999.
We are asking you to provide us with voting instructions on important issues
affecting the Accounts in which you have a voting interest. The proposed changes
will give the Accounts additional flexibility needed in today's competitive
market. The Board of Directors of the Fund unanimously believes that these
changes are in the best interest of the Accounts. On the following pages you
will find a brief overview of these changes, the Notice of Meeting and complete
Proxy Statement. The Proxy Statement explains the issues which are to be voted
on at the shareholder meeting.
It is important that you take the time to read the Proxy Statement and complete
and mail the Voting Instruction Form(s) as soon as you can. If you have
investments in more than one Account, you will receive multiple Voting
Instruction Forms.
Thank you for responding to these important matters.
Sincerely,
/s/David J. Drury
David J. Drury
Chairman and CEO
OVERVIEW
For your convenience, we are providing a brief overview of the proposals to be
voted upon at the November 2, 1999 shareholder meeting. Please note that not all
issues apply to each Account. This overview should be read in conjunction with
the complete proxy statement.
1. I'm a small investor. Will my voting instructions make a difference?
Whether you are a large or small investor, your instructions are needed to
ensure that Principal Life represents your wishes when it casts votes at the
shareholder meeting. We encourage you to participate in this very important
voting process.
2. How do I provide my instructions?
Complete the enclosed voting instruction form and return it in the enclosed
postage paid envelope.
3. What are the issues being proposed at the shareholder meeting?
From time to time your board seeks shareholder approval of certain issues by
means of a proxy solicitation. This year, because of the death of one of the
members of your board of directors, the board is asking shareholders to
elect a replacement as well as re-elect the remaining board members. In
addition, the Board is asking shareholders to approve modifications of the
management agreement. Several other issues of administrative nature are on
the ballot for certain of the Accounts. All issues are discussed in detail
in the following pages.
4. What are the administrative issues that are on the ballot?
The board is asking shareholders to ratify the selection of Ernst & Young
LLP as independent auditors. Your board is asking shareholders of the
Balanced, Bond, Capital Value, High Yield, MidCap and Money Market Accounts
to approve certain changes to investment restrictions that bring these
Accounts in line with similar practices of the other Accounts, and the
industry generally. An issue for all Accounts is to more clearly establish
Principal Management Corporation's responsibility for investment management
in situations where a sub-advisory relationship has been established.
5. Why is a modification of the investment management fee being proposed for
the Capital Value, Growth and International Accounts?
The predecessor to the Capital Value Account was organized in 1969, and to
the Growth and International Accounts in 1994. Since their organization,
these Accounts (and their predecessors) have paid the same investment
management fee even though costs attributable to the investment management
function have increased significantly. The fee modification, as proposed,
is designed to partially offset the impact of increased costs.
6. How will the investment management fee be modified?
The actual amount paid by an Account for investment management is determined
by applying an annual percentage rate against specific levels of assets in
the Accounts. The annual percentage rate decreases as assets in the Account
increase. As explained in detail in the following pages, the proposal
includes an increase in the annual percentage rate and a broadening of the
asset base against which it is applied. As an example, on a $10,000 account,
at current asset levels of the Accounts for which a modification is
proposed, the annual fee increase would be between $12 and $16, depending on
which Account you own.
7. How will shareholders benefit from a modification in the investment
management fee?
Through the proposed modification, Principal Management Corporation will be
in a stronger position to compete for experienced, top-notch investment
analysts, portfolio managers and other professional staff so as to deliver
competitive investment returns to shareholders. Further, a strengthened
financial position will make the advisor more able to develop new products
and services that can benefit current and future shareholders.
8. How do the Accounts compare with similar funds as to investment management
fees and total operating expenses? Will a fee modification alter this
positioning?
Investment management fees for the Accounts for which a modification is
proposed are lower than the average fees of specific comparison universes
developed by an independent consultant in connection with the board of
directors' consideration of the fee modification proposal.
9. What steps did the board of directors follow in considering the fee
proposal?
The Fund board appointed a committee of independent directors to consider
the proposal and prepare a recommendation. For professional assistance, the
independent directors engaged the services of a private consultant. Among
the issues considered by the independent directors were investment
performance relative to comparable portfolios, fees charged by advisors of
similar funds for comparable services and the expense ratios of those funds,
the profitability of Principal Management Corporation's relationship with
the Accounts, the reasonableness of expecting Principal Management to
continue its investment advisory relationship indefinitely under the current
arrangement, and other factors relating to the nature, quality and extent of
the services provided by Principal Management. At the conclusion of these
deliberations, the independent directors were unanimous in endorsing the fee
modification proposal and recommending its adoption by shareholders.
10. Does the board of directors have recommendations with regard to the
modification of the management agreement and other ballot issues?
After careful consideration of each issue, the board members of the Fund
unanimously recommend a "Yes" vote on all proposals.
Principal Variable Contracts Fund, Inc.
Aggressive Growth Account MicroCap Account
Asset Allocation Account MidCap Account
Balanced Account MidCap Growth Account
Blue Chip Account MidCap Value Account
Bond Account Money Market Account
Capital Value Account Real Estate Account
Government Securities Account SmallCap Account
Growth Account SmallCap Growth Account
High Yield Account SmallCap Value Account
International Account Stock Index 500 Account
International SmallCap Account Utilities Account
LargeCap Growth
Notice of Special Meeting of Shareholders
To the Shareholders:
A meeting of Shareholders of each of the Accounts will be held at 680 8th
Street, Des Moines, Iowa 50392-0200 on November 2, 1999, at 10:00 a.m. C.S.T.
The meetings will be held simultaneously. The meetings are being held to
consider and vote on the following matters as well as any other issues that
properly come before the meeting and any adjournments:
1. Election of Board of Directors (all Accounts)
2. Ratification of selection of Ernst & Young LLP as the independent
auditors (all Accounts)
3. Amendment to Management Agreement to:
3A. Clarify changes to delegation provision (all Accounts)
3B. Modify management fee schedule (only applies to Capital Value,
Growth and International Accounts)
4. Approval of changes to fundamental investment restrictions regarding:
4A. Options and Financial Futures (only applies to Capital Value
Account)
4B. Short Sales (only applies to Capital Value Account)
4C. Lending of Portfolio Securities (only applies to Capital Value and
Money Market Accounts)
4D. Diversification (only applies to Balanced, Bond, Capital Value,
High Yield and MidCap Accounts)
5. Approval of a proposal to permit the Manager to select and contract
with sub-advisers for certain Accounts after approval by the Board of
Directors but without obtaining shareholder approval (only applies to
Aggressive Growth, Asset Allocation, LargeCap Growth, MicroCap, MidCap
Growth, MidCap Value, SmallCap Growth and SmallCap Value Accounts)
The close of business on August 27, 1999 is the record date for the meeting and
any adjournments. Shareholders as of that date are entitled to notice of and to
vote at the meeting.
Your vote is important. No matter how many shares you own, please vote. If you
own shares in more than one Account, you need to return all of the Proxy
ballots. To save your Fund from incurring the cost of additional solicitations,
please review the materials and vote today.
For the Board of Directors
A.S. Filean
Vice President and Secretary
Dated: September 20, 1999
Special meeting of shareholders of Principal Variable Contracts Fund, Inc.:
Aggressive Growth Account
Asset Allocation Account
Balanced Account
Blue Chip Account
Bond Account
Capital Value Account
Government Securities Account
Growth Account
High Yield Account
International Account
International SmallCap Account
LargeCap Growth Account
MicroCap Account
MidCap Account
MidCap Growth Account
MidCap Value Account
Money Market Account
Real Estate Account
SmallCap Account
SmallCap Growth Account
SmallCap Value Account
Stock Index 500 Account
Utilities Account
PROXY STATEMENT
The Principal Variable Contracts Fund, Inc. (the "Fund," or "we"), will
hold a shareholder meeting on November 2, 1999, at 10:00 a.m. C.S.T. at 680 8th
Street, Des Moines, Iowa 50392-0200. At the meeting, shareholders will vote on
the proposals described below.
We expect to begin sending the Proxy Statement and form of proxy ballot to
shareholders on or around September 20, 1999.
The sponsor of the Fund is Principal Life Insurance Company ("Principal
Life"), the investment adviser 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 Mutual Holding Company. Their address is
the Principal Financial Group, Des Moines, Iowa 50392-0200.
SUMMARY OF PROPOSALS
The Accounts whose
Proposal Shareholders will
Number Proposal Vote on the Proposal
1 Election of Board of Directors. All Accounts
2 Ratification of the selection of All Accounts
Ernst &Young LLP as the independent
auditors.
3 Amendment of Management Agreement to:
A. Clarify changes to delegation provision All Accounts
B. Modify management fee schedule Capital Value, Growth
and International
Accounts
4 Approval of changes to fundamental
investment restrictions regarding:
A. Options and Financial Futures Capital Value Account
B. Short sales Capital Value Account
C. Lending of portfolio securities Capital Value and Money
Market Accounts
D. Diversification Balanced, Bond, Capital
Value, High Yield and
MidCap Accounts
5 Approval of a proposal to permit the Aggressive Growth, Asset
Manager to select and contract with Allocation, LargeCap
subadvisers for certain Accounts after Growth, MicroCap,
approval by the Board of Directors but MidCap Growth, MidCap
without obtaining shareholder approval. Value, SmallCap Growth
and SmallCap Value
Accounts
VOTING INFORMATION
Voting procedures. We are furnishing this Proxy Statement to you in
connection with the solicitation on behalf of the Board of Directors of the Fund
(the "Board") of proxies to be used at the meeting of the Fund. The Board is
asking permission to vote for you. If you complete and return the enclosed proxy
ballot, the persons named on the ballot as proxies will vote your shares as you
indicate on the proxy ballot or for approval of each matter for which there is
no indication. If you change your mind after you send in the ballot, you may
change or revoke your vote by writing to the Principal Mutual Funds at the
Principal Financial Group, Des Moines, Iowa 50392-0200.
Please vote your shares by mailing the enclosed ballot and returning it in
the enclosed postage paid envelope.
Voting rights. Only shareholders of record at the close of business on
August 27, 1999 (the "Record Date") are entitled to vote. The shareholders of
each of the Accounts of the Fund will vote together on each proposal that we
intend to submit to the shareholders of that Account. You are entitled to one
vote on each proposal submitted to the shareholders of an Account for each share
of the Account which you hold. Certain of the proposals require for approval the
vote of a "majority of the outstanding voting securities," which is a term
defined in the Investment Company Act of 1940 (the "1940 Act") to mean the
affirmative vote of the lesser of (1) 67% or more of the voting securities of an
Account present at the meeting of that Account, if the holders of more than 50%
of the outstanding voting securities of the Account are present in person or by
proxy, or (2) more than 50% of the outstanding voting securities of the Account.
Principal Life owns and will vote all outstanding Fund shares. It will vote
the shares allocated to each of its separate accounts registered under the 1940
Act, and attributable to variable annuity contracts and variable life insurance
policies, in accordance with instructions received from contractholders, policy
holders, participants or annuitants. It will vote the shares allocated to those
accounts for which it does not receive instructions and the shares allocated to
its general account in proportion to the instructions received. Principal Life
may use this proxy statement in soliciting voting instructions.
Quorum requirements. A quorum must be present at the meeting for the
transaction of business. The presence in person or by proxy of one-third of the
shares of each of the Accounts outstanding at the close of business on the
Record Date constitutes a quorum for a meeting of that Account. Abstentions and
broker non-votes (proxies from brokers or nominees indicating that they have not
received instructions from the beneficial owners on an item for which the broker
or nominee does not have discretionary power) are counted toward a quorum but do
not represent votes cast for any issue. Under the 1940 Act, the affirmative vote
necessary to approve certain of the proposals may be determined with reference
to a percentage of votes present at the meeting, which would have the effect of
treating abstentions as if they were votes against a proposal.
Solicitation procedures. We intend to solicit proxies primarily by mail.
Officers or employees of the Fund, the Manager or their affiliates may make
additional solicitations by telephone, internet, facsimile or personal contact.
They will not be specially compensated for these services.
Expenses of the meetings. Except as noted below, each Account will pay the
expenses of its meeting, including those associated with the preparation and
distribution of proxy materials and the solicitation of proxies. To avoid the
cost of further solicitation, it is important for you to vote promptly. The
Manager has agreed to pay one-half of the costs incurred by the Capital Value,
Growth and International Accounts in connection with their meetings.
Shareholder proposals. If you would like to include a proposal on the
agenda at a shareholder meeting, you should send the proposal to the Principal
Mutual Funds at the Principal Financial Group, Des Moines, Iowa 50392-0200. To
consider your proposal for presentation at a shareholder's meeting, we must
receive it a reasonable time before we begin a solicitation for that meeting.
Timely submission of a proposal does not necessarily mean that such proposal
will be included.
Fund reports. You may obtain a copy of the Fund's most recent annual and
semiannual reports without charge. Send your request to the Principal Mutual
Funds at the Principal Financial Group, Des Moines, Iowa 50392-0200 or call
1-800-247-4123.
PROPOSAL 1
ELECTION OF THE BOARD OF DIRECTORS
(All Accounts)
The Board has set the number of Directors at eight. Each Director will
serve until the next meeting of shareholders or until a successor is elected and
qualified. Unless you do not authorize it, your proxy will be voted in favor of
the eight nominees listed below.
The affirmative vote of the holders of a plurality of the shares voted at
the meeting of the Fund is required for the election of a Director of the Fund.
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 Fund has an Audit and Nominating Committee. Its members are identified
below. The committee reviews activities of each Account of the Fund and reports
filed with the Securities and Exchange Commission ("SEC") and then takes
appropriate action. It meets with the independent auditors to discuss results of
the audits and reports to the full Board of the Fund. The committee also
nominates candidates when necessary to fill Board vacancies of directors who are
not "interested persons" (as defined in the 1940 Act).
During the last fiscal year of the Fund, the Board held four meetings and
its Audit and Nominating Committee held one meeting. The Directors of the Fund
attended 100% of the meetings of the Board and of the committees of which they
are members.
All Directors hold similar positions with 18 funds sponsored by Principal
Life. If elected, William C. Kimball will also hold similar positions with 18
funds sponsored by Principal Life. Directors Davis, Eucher, Ferguson, Griswell
and Lukavsky also serve on the Board of one other mutual fund sponsored by
Principal Life.
Nominees for Director
Name/Age/Position Director
with the Fund Principal Occupation Since
* John E. Aschenbrenner Senior Vice-President, Principal Life 1998
(50) Director Insurance Company, since 1996.
@ James D. Davis Attorney. Vice-President, Deere and 1974
(65) Director Company, Retired.
*& Ralph C. Eucher Vice President, Principal Life 1999
(47) Director and Insurance Company, since 1999.
President Director and President, Principal
Management Corporation and Princor
Financial Services Corporation.
Pamela A. Ferguson Professor of Mathematics, Grinnell 1993
(56) Director College, since 1998. Prior thereto,
President, Grinnell College.
@ Richard W. Gilbert President, Gilbert Communications, Inc., 1985
(59) Director since 1993. Prior thereto, President and
Publisher, Pioneer Press.
*& J. Barry Griswell President, Principal Life Insurance 1995
(50) Director and Company, since 1998; Executive Vice-
Chairman of the Board President, 1996-1998; Senior Vice-
President, 1991-1996. Director and
Chairman of the Board, Principal
Management Corporation and Princor
Financial Services Corporation.
William C. Kimball Chairman and CEO, Medicap Pharmacies,
(51) Nominee Inc. since 1998; President and CEO,
1983-1998.
Barbara A. Lukavsky President and CEO, Barbican Enterprises, 1987
(58) Director Inc., since 1997; President and CEO,
Lu San ELITE USA, L.C., 1985-1998.
* Considered to be "Interested Persons" as defined in the 1940 Act because of
current affiliation with the Manager or Principal Life.
@ Member of Audit and Nominating Committee
& Member of Executive Committee (which is selected by the Board and which 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.)
The following table provides information regarding the compensation
received by the Directors from the Fund and from the Fund Complex during the
fiscal year ended December 31, 1998. On that date, there were 20 funds in the
Fund Complex. The Fund does not provide retirement benefits to any of the
directors.
Director the Fund Fund Complex
James D. Davis $24,225 $53,375
Pamela A. Ferguson $22,800 $46,250
Richard W. Gilbert $24,225 $51,525
Barbara A. Lukavsky $24,225 $50,675
PROPOSAL 2
RATIFICATION OF SELECTION OF ERNST & YOUNG LLP
AS INDEPENDENT AUDITORS
(All Accounts)
The Board has selected Ernst & Young LLP as the independent auditors for
the Fund. The members of the Board, including those who are not interested
persons, made the selection unanimously and are asking shareholders to ratify
the selection at the meeting.
Ernst & Young LLP has been the auditor of the Fund since the Fund was
organized. It also serves as auditor for the Manager and other members of the
Principal Financial Group. The audit services Ernst & Young LLP provides to the
Fund include examination of the annual financial statements and review of the
filings with the SEC. Ernst & Young LLP has no financial interest in the Fund.
We do not expect any representative of Ernst & Young LLP to be at the
shareholder meeting.
The vote required for ratification by the Fund is the affirmative vote of
the majority of the votes cast.
The Board of Directors recommends that you vote
to approve the proposal.
PROPOSAL 3
AMENDMENT OF MANAGEMENT AGREEMENT
The Fund has entered into a Management Agreement with the Manager. The
Manager was organized on January 10, 1969, and since that time has managed
various mutual funds sponsored by Principal Life. The Manager and Principal Life
are wholly-owned subsidiaries of Principal Financial Services, Inc., which is a
wholly-owned subsidiary of Principal Financial Group, Inc., which is a
wholly-owned subsidiary of Principal Mutual Holding Company. The address of each
of the parents of the Manager is the Principal Financial Group, Des Moines, Iowa
50392-0200.
At a meeting held on June 14, 1999, the Board approved amendments to the
Fund's Management Agreement that would have the effect of clarifying changes to
the delegation provision of the Management Agreement. The Board also approved a
modification of the management fee schedule for the Capital Value, Growth
and International Accounts. If the shareholders of those Accounts approve
the proposed amendments, the amended Management Agreement for the Fund will
become effective on January 1, 2000.
PROPOSAL 3A - CLARIFYING CHANGES TO DELEGATION
PROVISION OF MANAGEMENT AGREEMENT
(All Accounts)
Section 3 of the Management Agreement of the Fund provides that the Manager
"in assuming responsibility for the various services as set forth in [the] . . .
Agreement 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." The Manager has delegated responsibilities to
Invista Capital Management LLC ("Invista"), an affiliate of the Manager, and
other subadvisers in reliance on this provision.
The Manager and the Board of Directors believe that the Manager's
delegation of investment management and other responsibilities pursuant to this
paragraph does not relieve it of a duty to review and monitor the performance of
the persons with whom it contracts to the extent provided in the agreements with
such persons or as determined by the Board of Directors of the Fund. In order to
clarify the understanding of the parties to the Management Agreement in this
regard, the Board of Directors has approved an amendment to the Management
Agreement that would replace the period at the end of Section 3, as set forth
above, with a semi-colon and add the following:
"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."
The vote required to approve the change for each the Accounts is a majority
of the outstanding voting securities of that Account (as defined in the 1940
Act).
The Board of Directors recommends that you vote
to approve the proposal.
PROPOSAL 3B - APPROVAL OF MODIFIED MANAGEMENT FEE SCHEDULE
(Capital Value, Growth and International Accounts)
At a meeting held on June 14, 1999, the Board of Directors, including all
the Directors who are not "interested persons" of the Fund (the "Independent
Directors"), unanimously approved a modified management fee schedule for certain
of the Accounts of the Fund.
The Manager proposed a modified management fee schedule for each of the
Accounts because it believed that the management fee schedule currently
applicable to the Accounts did not accurately reflect the complexity and related
costs of managing the Accounts, including those required to maintain qualified
personnel and sophisticated information systems and other technology, and thus
did not reflect a level of compensation that was fair and reasonable.
The Independent Directors considered the proposal at meetings held over the
course of several months before it was formally presented to the Board. They
were assisted in their consideration by an independent consultant retained to
advise them. The directors, including the Independent Directors, requested and
were provided substantial information to assist them in their evaluation of the
proposal, including studies prepared by Lipper, Inc., an independent statistical
service, at the direction of the consultant. The Lipper data showed that the
current investment management fee ratios of the Accounts are lower than the
average and median investment management fee ratios of a group of mutual funds
identified by the consultant as the Accounts' comparison group. The Lipper data
also showed that the same is true for each Account's total operating expense
ratio.
After consideration of all of the data and information provided to them and
after meeting separately to evaluate the new management fee schedule proposed by
the Manager, the Independent Directors unanimously approved and recommended to
the Board of Directors, and the Board approved, the modified management fee
schedule set forth below. In making their decisions, the Independent Directors
and the Board considered among other factors:
o their favorable experience in overseeing, on an ongoing basis, the
nature, quality and extent of the Manager's investment management
services to each Account;
o the necessity of the Manager maintaining and enhancing its ability to
retain and attract capable personnel to serve each Account;
o current and developing conditions in the financial services industry,
including the presence of large and highly capitalized companies which
are spending, and appear to be prepared to continue to spend,
substantial sums to engage personnel and to provide services to
competing investment companies;
o the complexity of research and investment activities in the securities
market;
o the investment record of the Manager in managing each Account and
other similar investment companies for which it acts as investment
adviser;
o the Manager's level of overall profitability in connection with its
activities on behalf of each Account;
o the effect of the proposed investment advisory fee increase on the
expense ratio of each Account;
o possible economies of scale;
o data as to investment performance, advisory fees and expense ratios of
other investment companies not advised by the Manager but believed to
be generally comparable to each Account;
o other benefits to the Manager from serving as investment adviser to
each Account, as well as benefits to its affiliates serving as
principal underwriter of the Accounts or providing other services to
the Account and its shareholders; and
o the desirability of appropriate incentives to assure that the Manager
will continue to furnish high quality services to each Account.
The following table sets forth the current management fee schedule for each
of the three Accounts:
Net Asset Value of Account
(in millions)
First Next Next Next Over
Account $100 $100 $100 $100 $400
Capital Value and Growth .50% .45% .40% .35% .30%
International .75% .70% .65% .60% .55%
The following table sets forth the modified fee schedule that will apply to
each of the three Accounts if the proposal is approved:
Net Asset Value of Account
(in millions)
First Next Next Next Over
Account $250 $250 $250 $250 $1,000
Capital Value and Growth .60% .55% .50% .45% .40%
International .85% .80% .75% .70% .65%
The following table shows:
o the effective rate of management fee that each Account is currently
obligated to pay the Manager;
o the effective rate of management fee that would currently be payable
by each Account if the amended Management Agreement were in effect;
o the amount of the management fee that each Account paid during the
fiscal year ended December 31, 1998; and
o the amount of, and percentage increase in, the management fee that
would have resulted if the amended Management Agreement had been in
effect for that year.
Current Effective Rate of For Fiscal Year Ended December 31, 1998
Management Fee Under Amount of Management Fee Under
Existing Amended Existing Amended
Management Management Management Management
Account Agreement Agreement Agreement Agreement Increase
Capital Value 0.43% 0.59% $1,480,275 $1,982,991 34%
Growth 0.47 0.60 989,512 1,268,388 28
International 0.73 0.85 1,045,627 1,213,126 16
Appendix A contains information relating to management fees and other
important information relating to the Management Agreement and the Manager. For
additional information on the actual operating expenses of each Account for the
fiscal year ended December 31, 1998 and what those expenses would have been
under the modified management fee schedule, see Appendix B.
The vote required to approve the modification of the management agreement
schedule for each of the four Accounts is a majority of the outstanding voting
securities of that Account (as defined in the 1940 Act).
The Board of Directors recommends that you vote
to approve the proposal.
PROPOSAL 4
APPROVAL OF CHANGES TO INVESTMENT RESTRICTIONS
Certain investment restrictions of the Accounts are matters of fundamental
policy and may not be changed without shareholder approval. The Manager has
recommended to the Board that certain fundamental restrictions be amended to
update them to current industry practices and conform them to the investment
restrictions applicable to many of the other Accounts. Making common investment
policies of the Accounts consistent with one another contributes to the
efficient administration of the Accounts. The Board believes that the proposed
amendments will generally increase investment management opportunities and
provide the Accounts and the Manager with greater flexibility in responding to
regulatory and/or market developments.
PROPOSAL 4A - OPTIONS AND FINANCIAL FUTURES
(Capital Value Account)
All of the growth-oriented Accounts, other than the Capital Value Account,
may engage in certain investment techniques to attempt to hedge the value of
portfolio securities, to attempt to hedge the portfolio's market and interest
rate risks, and, in certain cases, to attempt to enhance portfolio income. These
investment techniques are: (i) the purchase and sale of options on securities
and securities indices; (ii) the entry into futures contracts on financial
instruments and indices; and (iii) the purchase and sale of options on such
futures contracts.
The Capital Value Account may not engage in these techniques. The futures
contracts and options on futures contracts used in these techniques are
commodities contracts, and the Account has a fundamental investment restriction
which provides it will not "engage in the purchase and sale of commodities or
commodity contracts." The Account also has a fundamental restriction which
provides that "the Account will not issue or acquire put and call options."
The Manager has recommended, and the Board of Directors of the Fund has
determined, that the investment techniques set forth above should also be made
available to the Account so that it would have the same investment flexibility
as the other growth-oriented Accounts. Accordingly, the Board proposes that the
Account:
o delete the two investment restrictions quoted in the preceding
paragraph;
o add in lieu of the first of those restrictions a fundamental
restriction which provides that the Account may not "Invest in
commodities or commodity contracts, but it may purchase and sell
financial futures contracts and options on such contracts";
o add to the Account's fundamental restriction that prohibits the
purchase of securities on margin the following clarifying statement:
"The deposit or payment of margin in connection with transactions in
options and financial futures contracts is not considered the purchase
of securities on margin";
o add to the Account's fundamental investment restriction that it "may
not pledge, mortgage, or hypothecate its assets (at value) at an
extent greater than 15% of the gross assets taken at cost" the
following clarifying statement: "The deposit of underlying securities
and other assets in escrow and other collateral arrangements in
connection with transactions in put and call options, futures
contracts and options on futures contracts are not deemed to be
pledges or other encumbrances"; and
o add two non-fundamental restrictions which provide that it is contrary
to the Account's present policy to:
"Invest more than 5% of its total assets in the purchase of covered
spread options and the purchase of put and call options on securities,
securities indices and financial futures contracts. Options on
financial futures contracts and options on securities indices will be
used solely for hedging purposes, not for speculation."
"Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts."
If the Account's shareholders approve the proposed revisions to the
Account's investment restrictions, the Account may enter into transactions in
futures contracts, options on futures contracts and certain options solely for
hedging purposes. The use of such hedging techniques does, however, involve
certain risks. For example, a lack of correlation between the value of an
instrument underlying an options or futures contract and the assets being
hedged, or unexpected adverse price movements, could render the Account's
hedging strategy unsuccessful and could result in losses. The Account also may
enter into transactions in certain options, such as those on securities, for
other than hedging purposes, which involves greater risk. In addition, a liquid
secondary market may not exist for any contract purchased or sold, and the
Account may be required to maintain a position until exercise or expiration,
which could result in losses.
The vote required to approve the change in fundamental investment
restrictions for the Account is a majority of the outstanding voting securities
of the Account (as defined in the 1940 Act).
The Board of Directors recommends that you vote
to approve the proposal.
PROPOSAL 4B - SHORT SALES
(Capital Value Account)
The Account's current investment restriction dealing with short sales is
fundamental and states as follows: "The Account will not effect a short sale of
a security."
If approved by its shareholders, the Account's fundamental investment
restriction will be deleted and replaced by a fundamental restriction which
states that the Account may not "sell securities short (except where the Account
holds or has the right to obtain at no added cost a long position in the
securities sold that equals or exceeds the securities sold short)."
In a short sale, the Account would sell a borrowed security and have a
corresponding obligation to the lender to return the identical security. In an
investment technique known as short sale "against the box," which would be
permitted by the change in investment restriction, the Account may sell short
while owning the same security in the same amount, or having the right to obtain
an equivalent security through, for example, its ownership of options or
convertible bonds.
Specifying that the Account may sell securities short "against the box"
would permit the Account to engage in short sales that do not involve the
leveraging risks associated with other short sales. The Board of Directors
believes that permitting the Account to engage in such transactions when the
Manager concludes that it is advisable is in the interest of the Account and its
shareholders. Whether or not a specific short sale "against the box" would prove
to be beneficial would depend upon whether the Manager had accurately
anticipated subsequent price movements of the security sold short.
The vote required to approve the change in investment restriction for the
Account is a majority of the outstanding voting securities of the Account (as
defined in the 1940 Act).
The Board of Directors recommends that you vote
to approve the proposal.
PROPOSAL 4C - LENDING OF PORTFOLIO SECURITIES
(Capital Value and Money Market Accounts)
The current investment restriction of the Capital Value Account dealing
with the lending of portfolio securities is fundamental. The restriction for the
Account states that "the Account may make loans through the purchase in private
offerings of debentures or other evidences of indebtedness of types customarily
purchased by institutional investors."
The current investment restriction of the Money Market Account dealing with
the lending of portfolio securities is also fundamental. The restriction for
that Account states that "the Account may not make loans to others except
through the purchase of debt obligations in which the Account is authorized to
invest and by entering into repurchase agreements."
If approved by shareholders, each of those fundamental investment
restrictions will be deleted and replaced by a fundamental restriction which
states that the Account may not "make loans, except that the Account may (i)
purchase and hold debt obligations in accordance with its investment objective
and policies, (ii) enter into repurchase agreements, and (iii) lend its
portfolio securities without limitation against collateral (consisting of cash
or securities issued or guaranteed by the United States Government or its
agencies or instrumentalities) equal at all times to not less than 100% of the
value of the securities loaned." The Manager expects that the practice of
lending securities will generate income for the Accounts.
Each Account does not intend to lend its portfolio securities if as a
result the aggregate of the Account's loans would exceed 30% of its total
assets. An Account may loan portfolio securities to unaffiliated broker-dealers
and other unaffiliated qualified financial institutions provided that such loans
are callable at any time on not more than five business days' notice and that
cash or government securities equal to at least 100% of the market value of the
securities loaned, determined daily, is deposited by the borrower with the
Account and is maintained each business day in a segregated account. While such
securities are on loan, the borrower pays the Account any income accruing
thereon. An Account may invest any cash collateral, thereby earning additional
income and may receive an agreed-upon fee from the borrower. Borrowed securities
must be returned when the loan is terminated. Any gain or loss in the market
price of the borrowed securities which occurs during the term of the loan
belongs to the Account and its shareholders. An Account pays reasonable
administrative, custodial and other fees in connection with such loans and may
pay a negotiated portion of the interest earned on the cash or governmental
securities pledged as collateral to the borrower or placing broker. An Account
does not vote securities that have been loaned, but it will call loaned
securities in anticipation of an important vote.
The vote required to approve the change in investment restriction for an
Account is a majority of the outstanding voting securities of the Account (as
defined in the 1940 Act).
The Board of Directors recommends that you vote
to approve the proposal.
PROPOSAL 4D - DIVERSIFICATION
(Balanced, Bond, Capital Value, High Yield and MidCap Accounts)
Under the 1940 Act, a "diversified" fund is permitted to invest, with
respect to 75% of its assets, up to 5% of its assets in one issuer, provided
that the investment represents less than 10% of the issuer's voting securities.
Each of these Accounts has fundamental investment restrictions that apply the 5%
per issuer limitation and the 10% voting securities limitation to 100% of the
Account's assets. The Capital Value Account also applies the 10% limitation to
any class of securities of an issuer. The Board believes that these restrictions
should be standardized and conformed to the statutory definition of
diversification under the 1940 Act in order to enhance each Account's ability to
pursue its investment objective by investing a larger but still limited amount
of its assets in a single issuer. If approved by shareholders, the Account's new
policy on diversification will permit the Account to invest, with respect to 25%
of its assets, more than 5% of its assets in an issuer and in more than 10% of
the voting securities of an issuer. To the extent that the Account invests a
greater proportion of its assets in a single issuer, it will be subject to a
correspondingly greater degree of risk associated with that investment. Each of
the Account's has a non-fundamental policy which provides that it will not
invest in companies for the purpose of exercising control or management. The
Board has no present intention to change this policy.
If approved by shareholders, the fundamental investment restrictions of
each of these Accounts that address the 5% per issuer limitation and the 10%
voting securities limitation will be deleted and replaced by a fundamental
investment restriction which states that the Account may not:
"Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities) or purchase
more than 10% of the outstanding voting securities of any one issuer,
except that these limitations shall apply only with respect to 75% of
the Account's total assets."
The vote required to approve the change in investment restriction for each
Account is a majority of the outstanding voting securities of the Account (as
defined in the 1940 Act).
The Board of Directors recommends that you vote
to approve the proposal.
PROPOSAL 5
APPROVAL OF A PROPOSAL TO PERMIT THE MANAGER TO
SELECT AND CONTRACT WITH SUBADVISERS FOR CERTAIN
ACCOUNTS AFTER OBTAINING BOARD APPROVAL BUT
WITHOUT OBTAINING SHAREHOLDER APPROVAL
(Aggressive Growth, Asset Allocation, LargeCap Growth, MicroCap, MidCap Growth,
MidCap Value, SmallCap Growth and SmallCap Value Accounts)
As a result of an application for exemptive relief previously filed by
them, the Fund and the Manager on January 19, 1999, received an order from the
Securities and Exchange Commission ("SEC") granting relief from the requirement
of Section 15 of the 1940 Act that any subadviser to an Account that is party to
a contract with the Manager may serve only pursuant to a written contract
approved by the shareholders of such Account. Under the order, a subadviser to
an Account may serve as subadviser to such Account pursuant to a written
contract with the Manager that has not been approved by shareholders of such
Account. The relief granted by the order also would apply where a subadviser to
an Account is serving pursuant to a contract that is terminated as a result of
an assignment of the contract due to a change of control of the subadviser. In
such case, the subadviser could continue to act as subadviser to such Account
under a new agreement that had not been approved by shareholders of the Account.
The Board, including the directors who are not interested persons of the Fund,
will continue to approve new contracts between the Manager and a subadviser as
well as changes to existing contracts. The requested relief will not apply to
the Management Agreement between the Manager and the Fund, and changes to that
agreement will continue to require approval of shareholders.
One of the conditions to the relief granted by the SEC is that this change
be approved by shareholders of each Account prior to becoming effective for such
Account. Although the Board has not at this time determined to have any Account
managed in the manner contemplated by the SEC order, it believes that
shareholder approval should be obtained for certain Accounts so that managing
the Accounts in reliance on the order can be implemented thereafter by Board
action without the delay associated with then having to obtain shareholder
approval.
The Accounts for which the Board is seeking shareholder approval are the
Accounts that currently utilize the services of subadvisers that are not
affiliated with the Manager, namely, the Aggressive Growth, Asset Allocation,
LargeCap Growth, MicroCap, MidCap Growth, MidCap Value, SmallCap Growth and
SmallCap Value Accounts. Certain of these Accounts received approval to operate
in reliance on the order from the initial shareholder of the Accounts before
shares of those Accounts became available to fund variable contracts issued to
the public. However, the Board has determined that notwithstanding such approval
it will not have the Accounts managed in reliance on the order absent
shareholder approval at the scheduled meeting of shareholders or at a later
time.
If shareholder approval is obtained for an Account proposal and the Board
subsequently determines to manage that Account in reliance on the order, the
Fund and the Manager will be required to follow conditions imposed by the SEC in
connection with the relief, which are described below. These conditions include
the requirements that any Account managed in reliance on the order be held out
to the public as employing the management strategy described in the application
and that the prospectus for the Account prominently disclose that the Manager
has ultimate responsiblitity for the investment performance of such Account due
to its responsibility to oversee the subadvisers and recommend their hiring,
termination and replacement. Therefore, upon a determination by the Board to
commence management of any Account in reliance on the order, the Fund's
prospectus will be revised to reflect such reliance and disclose the Manager's
ultimate responsibility for the investment performance of the Account.
The conditions imposed by the SEC include the following requirements:
(1) The Manager will not enter into a subadvisory agreement with any
affiliated subadviser without that agreement, including the
compensation to be paid thereunder, being approved by the shareholders
of the applicable Account (and by the contract owners with assets
allocated to any registered separate account for which the Account
serves as a funding medium ("Interested Contract Owners")).
(2) At all times, a majority of the Board of Directors of the Fund will
continue to be persons each of whom is not an "interested person" of
the Fund as defined in Section 2(a)(19) of the Act ("Independent
Directors"), and the nomination of new or additional Independent
Directors will be at the discretion of the then existing Independent
Directors.
(3) When a subadviser change is proposed for an Account with an affiliated
subadviser, the Fund's directors, including a majority of the
Independent Directors, will make a separate finding, reflected in the
Fund's board minutes, that the change is in the best interests of the
Account and its shareholders (Interested Contract Owners) and does not
involve a conflict of interest from which the Manager or the affiliated
subadviser derives an inappropriate advantage.
(4) Before the Fund may rely on the requested order as to any Account, the
operation of that Account in the manner described in the application
will be approved by a majority of its outstanding voting securities (as
defined in the 1940 Act) (and pursuant to voting instructions provided
by Interested Contract Owners). Before an Account that did not have an
effective registration statement when the SEC issued its order may rely
on the order, the operation of the Account in the manner described in
the application must be approved by its initial shareholder before
shares of such Account are made available to the public.
(5) The Manager will provide general management services to the Accounts
and their portfolios, including overall supervisory responsibility for
the general management and investment of each Account's securities
portfolio, and subject to review and approval by the Fund's Board, will
(i) set the portfolio's overall investment strategies; (ii) recommend
and select subadvisers; (iii) when appropriate, allocate and reallocate
the portfolio's assets among multiple subadvisers, (iv) monitor and
evaluate the performance of subadvisers; and (v) implement procedures
reasonably designed to ensure that the subadvisers comply with the
portfolio's investment objectives, policies, and restrictions.
(6) Within 90 days of the hiring of any new subadvisers, shareholders will
be furnished with all information about the subadvisers that would be
included in a proxy statement. The Manager will meet this condition by
providing to shareholders an information statement meeting the
requirements of Regulation 14C and Schedule 14C under the Securities
Exchange Act of 1934. The information statement will also meet the
requirements of Item 22 of Schedule 14A. The Fund will insure that the
information statement is furnished to Interested Contract Owners.
(7) The Fund will disclose in its prospectus the existence, substance, and
effect of the order. In addition, the Fund will hold itself out to the
public as employing the "Manager of Managers Strategy" described in the
application. The prospectus relating to the Fund will prominently
disclose that the Manager has ultimate responsibility for the
investment performance of each portfolio employing subadvisers due to
its responsibility to oversee the subadvisers and recommend their
hiring, termination and replacement.
(8) No director or officer of the Fund or director or officer of the
Manager will own directly or indirectly (other than through a pooled
investment vehicle that is not controlled by that director or officer)
any interest in a subadviser except for (i) ownership of interests in
the Manager or any entity that controls, is controlled by, or is under
common control with the Manager; or (ii) ownership of less than 1% of
the outstanding securities of any class of equity or debt of a
publicly-traded company that is either a subadviser or an entity that
controls, is controlled by or is under common control with a
subadviser.
If shareholders of an Account approve this proposal, and the Board
subsequently determines to manage that Account in reliance on the order, the
Manager will have the ability, subject to the approval of the Board, to hire and
terminate subadvisers to the Account and to change materially the terms of the
subadvisory contracts, including the compensation paid to the subadvisers,
without the approval of the shareholders of the Account. Such changes in
subadvisory arrangements would not increase the fees paid by an Account for
investment advisory services since subadvisory fees are paid by the Manager out
of its advisory fee and are not additional charges to an Account.
While the Manager expects its relationship with the subadvisers to the
Accounts, including those Accounts for which the Board determines to implement
the investment strategy contemplated by the SEC order, to be long-term and
stable over time, approval of this proposal will permit the Board to implement
that strategy without the delay of a shareholder meeting and thereafter permit
the Manager to act quickly in situations where the Manager and the Board believe
that a change in subadvisers or to a subadvisory agreement, including any fee
paid to a subadviser, is warranted.
The vote required to approve this proposal for any Account is a majority of
the outstanding voting securities of the Account (as defined in the 1940 Act).
The Board of Directors recommends that you vote
to approve the proposal.
The table below shows outstanding shares, by Account, of the Fund as of
Record Date.
Account Number of Shares Outstanding
Aggressive Growth 9,998,780.303
Asset Allocation 4,097,121.851
Balanced 29,155,580.704
Blue Chip 23,269.857
Bond 16,851,139.459
Capital Value 42,513,300.476
Government Securities 20,162,973.152
Growth 34,435,568.695
High Yield 98,175.627
International 20,219,747.004
International SmallCap 831,824.362
LargeCap Growth 10,854.225
MicroCap 254,346.640
MidCap 26,302,844.308
MidCap Growth 660,763.644
MidCap Value 9,134.209
Money Market 18,030,652.516
Real Estate 270,175.348
SmallCap 1,022,688.967
SmallCap Growth 720,609.791
SmallCap Value 522,129.022
Stock Index 500 1,629,333.937
Utilities 1,382,193.755
All of the outstanding shares of the Fund are owned by Principal Life.
OTHER BUSINESS
We do not know of any other matter that may properly be brought before the
meeting. However, any other business that does come before the meeting will be
voted upon by the persons named in the proxy ballot according to their best
judgment.
<PAGE>
APPENDIX A
ADDITIONAL INFORMATION REGARDING THE MANAGEMENT
AGREEMENT AND THE MANAGER
(All Accounts)
Services provided by the Manager. The Management Agreement applies to all
Accounts. Under the agreement, the Manager is to provide certain services. These
services include providing portfolio management; clerical, recordkeeping and
bookkeeping services; and keeping the financial and accounting records required
by the Accounts. The Manager has entered into sub-advisory agreements with
Invista Capital Management, LLC ("Invista"), which is a wholly-owned subsidiary
of Principal Life; Morgan Stanley Dean Witter Investment Management, Inc.; Janus
Capital Corporation; Goldman Sachs Asset Management; The Dreyfus Corporation;
Neuberger Berman Management, Inc.; Berger Associates, Inc.; and J.P. Morgan
Investment Management (the "subadvisers"). Under these sub-advisory agreements,
the subadvisers provide portfolio management functions for certain of the
Accounts. The Manager or the subadvisers provide the Board of Directors a
recommended investment program for each Account. Each program must be consistent
with the Account's investment objectives and policies. Within the scope of the
approved investment program, the Manager or the subadvisers advise each Account
on its investment policies and determine which securities are bought and sold,
and in what amounts. The Manager is paid a fee by each Account for its services
and it compensates the subadvisers for their sub-advisory services. The Manager
has also agreed to furnish certain additional services, including transfer
agency services to the Accounts, for which it is separately compensated.
Account Expenses. The Manager is responsible for expenses, administrative
duties and services including the following: expenses incurred in connection
with the registration of the Fund and Fund shares with the Securities and
Exchange Commission and state regulatory agencies; office space, facilities and
costs of keeping the books of the Fund; compensation of personnel and officers
and any directors who are also affiliated with the Manager; fees for auditors
and legal counsel; preparing and printing Fund prospectuses; administration of
shareholder accounts, including issuance, maintenance of open account system,
dividend disbursement, reports to shareholders, and redemption. However, some or
all of these expenses may be assumed by Principal Life Insurance Company and
some or all of the administrative duties and services may be delegated by the
Manager to Principal Life Insurance Company or affiliate thereof.
Each Account pays for certain corporate expenses incurred in its operation.
Among such expenses, the Account pays brokerage commissions on portfolio
transactions, transfer taxes and other charges and fees attributable to
investment transactions, and any other local, state or federal taxes, fees and
expenses of all directors of the Fund who are not persons affiliated with the
Manager, interest, fees for Custodian of the Account, and the cost of meetings
of shareholders.
Management fees. The following tables show the management fees that each
Account of the Fund pays to the Manager under the terms of the Management
Agreement. The fees are computed and accrued daily and paid monthly at the
annual rates shown in the table. The rates shown are current rates; they do not
reflect the proposed increases described in this Proxy Statement.
Net Asset Value of Account
(in millions)
First Next Next Next
Account $250 $250 $250 $250 Thereafter
Blue Chip .60% .55% .50% .45% .40%
LargeCap Growth 1.10 1.05 1.00 .95 .90
MidCap Value 1.05 1.00 .95 .90 .85
Overall Fee
Stock Index 500 .35%
Net Asset Value of Account
(in millions)
First Next Next Next Over
Account $100 $100 $100 $100 $400
Aggressive Growth and Asset Allocation .80% .75% .70% .65% .60%
Balanced, High Yield and Utilities .60 .55 .50 .45 .40
International .75 .70 .65 .60 .55
International SmallCap 1.20 1.15 1.10 1.05 1.00
MicroCap and SmallCap Growth 1.00 .95 .90 .85 .80
MidCap .65 .60 .55 .50 .45
MidCap Growth and Real Estate .90 .85 .80 .75 .70
SmallCap .85 .80 .75 .70 .65
SmallCap Value 1.10 1.05 1.00 .95 .90
All Other .50 .45 .40 .35 .30
The following table shows the net assets of each Account as of December 31,
1998 and, for the fiscal year ended December 31, 1998, the effective rate and
amount of the management fee which each Account paid to the Manager: and the
amount which the Account reimbursed the Manager for certain costs:
Management Fee
Account Net Assets Rate Amount
Aggressive Growth $224,058,066 .77% $1,436,590
Asset Allocation 84,089,285 .80 650,963
Balanced 198,603,294 .57 958,526
Bond 121,972,775 .49 488,898
Capital Value 385,723,793 .43 1,480,275
Government Securities 141,317,226 .49 576,926
Growth 259,827,613 .47 989,512
High Yield 14,042,632 .60 87,806
International 153,587,915 .73 1,045,627
International SmallCap* 13,075,152 1.20 94,388
MicroCap* 5,383,599 1.00 36,591
MidCap 259,470,208 .61 1,504,567
MidCap Growth* 8,533,511 .90 36,858
Money Market 83,262,822 .50 306,233
Real Estate* 10,908,756 .90 64,493
SmallCap* 12,094,305 .85 60,975
SmallCap Growth* 8,462,628 1.00 42,319
SmallCap Value* 6,895,386 1.10 42,234
Utilities* 18,298,074 .60 56,185
*These Accounts commenced operations in April 1998.
The Blue Chip, LargeCap Growth, MidCap Value and Stock Index 500 Accounts
commenced operations in April 1999.
For the year ended December 31, 1999, Manager intends to waive a portion of
its fee and, if necessary, pay expenses of the Account to maintain the total
operating expenses at a level that will not exceed the indicated percent for
MicroCap Account (1.06%), MidCap Growth Account (.96%), SmallCap Growth Account
(1.06%), SmallCap Value Account (1.16%), LargeCap Growth Account (1.20%), MidCap
Value Account (1.20%) and Stock Index 500 Account (.40%).
Approvals. The Management Agreement continues 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 Fund, provided that in either case such continuation
shall be approved by vote of a majority of the Directors who are not "interested
persons" (as defined in the 1940 Act) of the Manager, Principal Life or the
Fund, cast in person at a meeting called for the purpose of voting on such
approval. The agreement may be terminated at any time on 60 days written notice
by the Board of Directors of the Fund, by a vote of a majority of outstanding
voting securities of the Fund or by the Manager. The agreement will
automatically terminate if it is assigned.
The Management Agreement is dated July 1, 1997. It was last approved by the
Board of Directors on September 14, 1998. The following table provides
information with respect to the approval of the Management Agreement by the
shareholders of each Account:
Date Last
Submitted to Vote Purpose of Such
Account of Shareholders Submission
Aggressive Growth 9/16/97 Modification
Asset Allocation 9/16/97 Modification
Balanced 9/16/97 Modification
Blue Chip 4/27/99 Initial Approval
Bond 9/16/97 Modification
Capital Value 9/16/97 Modification
Government Securities 9/16/97 Modification
Growth 9/16/97 Modification
High Yield 9/16/97 Modification
International 9/16/97 Modification
International SmallCap 4/27/98 Initial Approval
LargeCap Growth 4/27/99 Initial Approval
MicroCap 4/27/98 Initial Approval
MidCap 9/16/97 Modification
MidCap Growth 4/27/98 Initial Approval
MidCap Value 4/27/99 Initial Approval
Money Market 9/16/97 Modification
Real Estate 4/27/98 Initial Approval
SmallCap 4/27/98 Initial Approval
SmallCap Growth 4/27/98 Initial Approval
SmallCap Value 4/27/98 Initial Approval
Stock Index 500 4/27/99 Initial Approval
Utilities 4/27/98 Initial Approval
The Manager. The following table shows the name and principal occupation of
the principal executive officer and each director of the Manager and of each
other person who is an officer or employee of the Manager and also an officer or
director of the Fund. The address for each of the persons named is the Principal
Financial Group, Des Moines, Iowa 50392-0200.
Position with the Manager
Name Position with the Fund and Principal Occupation
John E. Aschenbrenner Director Director; Senior Vice
President, Principal Life
David J. Drury Director; Chairman and CEO,
Principal Life
Ralph C. Eucher Director and President Director and President; Vice
President, Principal Life
Dennis P. Francis Director; Senior Vice
President, Principal Life
Thomas J. Graf Director; Senior Vice
President, Principal Life
J. Barry Griswell Director and Chairman Director and Chairman of the
of the Board Board; President,
Principal Life
Ellen Z. Lamale Director; Senior Vice
President, Principal Life
Julia M. Lawler Director; Vice President,
Principal Life
Gregg R. Narber Director; Senior Vice
President and General
Counsel, Principal Life
Richard L. Prey Director; Senior Vice
President, Principal Life
Craig L. Bassett Treasurer Treasurer; Second Vice
President and Treasurer,
Principal Life
Michael J. Beer Financial Officer Executive Vice President
Arthur S. Filean Vice President and Vice President
Secretary
Ernest H. Gillum Assistant Secretary Vice President - Compliance
and Product Development
Michael D. Roughton Counsel Counsel; Vice President and
Senior Securities Counsel,
Principal Life
The Manager serves as the investment adviser for the following funds and
portfolio which have investment objectives similar to the investment objectives
of the Capital Value, Growth and International Accounts. The following table
shows the name of each Fund or portfolio, net assets and the annual effective
management fee for the most recent fiscal year as a percentage of average net
assets:
Annual Effective
Management Fee
Net Assets as of as a Percentage of
Fund Name October 31, 1998 Average Net Assets
(in thousands)
Principal Capital Value Fund, Inc. $647,492 0.38%
Principal Growth Fund, Inc. 491,320 0.41
Principal International Fund, Inc. 362,172 0.68
Annual Effective
Management Fee
Net Assets as of as a Percentage of
Portfolio Name December 31, 1998 Average Net Assets
(in thousands)
Principal Special Markets Fund, Inc.
International Securities Portfolio $47,912 0.90%
Affiliated brokers. During the fiscal year ended December 31, 1998, each of
Goldman Sachs & Co., J.P. Morgan Securities and Morgan Stanley and Co. may be
deemed to have been an affiliated broker of the Fund because it or an affiliate
served as sub-adviser to one or more of the Accounts. The following table
provides information regarding brokerage commissions for portfolio transactions
paid by the Fund to each of those brokers for the fiscal year ended December 31,
1998:
Commissions Paid to Goldman Sachs & Co.
Total Dollar As Percent of Total
Account Amount Commissions
Aggressive Growth $30,744 5.07%
Asset Allocation 11,868 5.54
Balanced 3,630 4.51
Growth 4,620 4.55
International 25,436 8.39
International SmallCap 1,424 2.73
MicroCap 2,737 12.77
MidCap 640 0.47
MidCap Growth 3,853 31.47
SmallCap 300 0.90
SmallCap Growth 325 3.65
Commissions Paid to J.P. Morgan Securities
Total Dollar As Percent of Total
Account Amount Commissions
Aggressive Growth $ 34,133 5.63%
Asset Allocation 10,678 4.98
Balanced 1,330 1.65
Capital Value 4,375 1.84
Growth 3,496 3.44
International 1,261 0.42
MicroCap 827 3.86
MidCap 1,040 0.76
MidCap Growth 78 0.64
Real Estate 2,355 9.70
SmallCap 120 0.36
Commissions Paid to Morgan Stanley and Co.
Total Dollar As Percent of Total
Account Amount Commissions
Asset Allocation $ 751 0.35%
Balanced 3,155 3.92
Capital Value 4,620 1.94
Growth 6,598 6.49
International 25,872 8.53
International SmallCap 5,697 10.91
MicroCap 30 0.14
MidCap 2,248 1.64
MidCap Growth 210 1.72
Real Estate 4,600 18.94
SmallCap 220 0.66
SmallCap Value 158 1.90
APPENDIX B
FEE TABLE
(Capital Value, Growth and International Accounts)
The following tables show the actual operating expenses incurred by each of
the indicated Accounts as of December 31, 1998 and what those expenses would
have been if the amended Management Agreement had been in effect. The
accompanying examples illustrate the expenses on an investment in each Account
under the management fee schedules in the existing and the amended Management
Agreements, assuming 1) an investment of $10,000, 2) a 5% annual return and 3)
expenses the same as the most recent fiscal year expenses. The tables do not
reflect separate account expenses including sales load.
Capital Value Actual Pro Forma
Account Operating Expenses
Management Fees 0.43% 0.59%
Other Expenses 0.01 0.01
Total 0.44% 0.60%
Examples
If you redeem your shares at the end of:
1 Year $ 45 $ 61
3 Year 141 192
5 Years 246 335
10 Years 555 750
Growth Actual Pro Forma
Account Operating Expenses
Management Fees 0.47% 0.60%
Other Expenses 0.01 0.01
Total 0.48% 0.61%
Examples
If you redeem your shares at the end of:
1 Year $ 49 $ 62
3 Years 154 195
5 Years 269 340
10 Years 604 762
International Actual Pro Forma
Account Operating Expenses
Management Fees 0.73% 0.85%
Other Expenses 0.04 0.04
Total 0.77% 0.89%
Examples
If you redeem your shares at the end of:
1 Year $ 79 $ 91
3 Years 246 284
5 Years 428 493
10 Years 954 1,096
The examples assume reinvestment of all dividends and distributions. The
examples should not be considered a representation of future expenses or annual
return; actual expenses or annual returns may be greater or less than those
shown. The purpose of these tables is to assist you in understanding the
expenses an investor in each of the Accounts will bear.
<PAGE>
Principal Variable Contracts Fund, Inc
Des Moines, Iowa 50392-0200
VOTING INSTRUCTION FORM FOR A SPECIAL MEETING OF SHAREHOLDERS
November 2, 1999
The Board of Directors is soliciting instructions for voting shares of the
Principal Variable Contracts Fund, Inc. held by Principal Life Insurance Company
at the Special Meeting of the Fund to be held on November 2, 1999 at 10:00 a.m.
C.S.T., and at any adjournments thereof, on the issues listed on the reverse
side of this form. In the discretion of Principal Life Insurance Company, votes
will also be authorized for such other matters as may properly come before the
meeting.
Check the appropriate boxes on the reverse side of this form, date this form and
sign exactly as your name appears. Your signature acknowledges receipt of Notice
of Special Meeting of Shareholders and Proxy Statement dated September 20, 1999.
If you complete, sign and return the form, Principal Life Insurance Company will
vote as you have instructed. If you simply sign and return the form, it will be
voted FOR electing the Directors and FOR the other proposals. If your
instructions are not received, votes will be cast in proportion to the
instructions received from all contracts with a voting interest in this Account.
NOTE: Please sign exactly as your name appears on this form. Please mark,
sign, date and mail your form in the enclosed postage paid envelope.
If shares are held jointly, either party may sign. If executed by a
corporation, an authorized officer must sign. Executors,
administrators and trustees should so indicate when signing.
__________________________________ ______________________________________
Signature Signature (if held jointly)
__________________________ , 1999
Date
<PAGE>
The Board of Directors of the Fund recommends that you vote FOR the following
proposals.
Please mark your choices by filling in the appropriate boxes below.
Sign and return the ballot as soon as possible in the enclosed envelope, or if
more convenient, vote by phone or via the internet.
<TABLE>
<CAPTION>
1. Elect Members of Board of Directors. (all Accounts)
<S> <C> <C> <C>
For Withhold For all except
J. E. Aschenbrenner J. D. Davis R. C. Eucher
P. A. Ferguson R. W. Gilbert J. B. Griswell
B. A. Lukavsky W. C. Kimball
To withhold authority to vote for any particular nominee, mark the "for all
except" box and strike a line through the nominee's name.
For Against Abstain
2. Ratify selection of Ernst & Young LLP as independent auditors of the Fund. ___ ____ ____
(all Accounts)
For Against Abstain
3. Approve modification of Management Agreement to:
3A. Clarify changes to delegation provision. (all Accounts) ___ ____ ____
3B. Modify management fee schedule. (Capital Value, Growth,
and International Accounts only) ___ ____ ____
For Against Abstain
4. Amend fundamental investment restriction with regard to:
4A. Options and Financial Futures (Capital Value Account only) ___ ____ ____
4B. Short Sales (Capital Value Account only) ___ ____ ____
4C. Lending of Portfolio Securities (Capital Value and Money
Market Accounts only) ___ ____ ____
4D. Diversification (Balanced, Bond, Capital Value, High Yield
and MidCap Accounts only) ___ ____ ____
5. Approval of a proposal to permit the Manager to select and contract with
sub-advisors (Aggressive Growth, Asset Allocation, LargeCap Growth,
MicroCap, MidCap Growth, MidCap Value, SmallCap Growth and SmallCap Value
Accounts only) ___ ____ ____
</TABLE>
