Registration No. 02-35570
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
--------
POST-EFFECTIVE AMENDMENT NO. 39 TO
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
and
REGISTRATION STATEMENT
under
THE INVESTMENT COMPANY ACT OF 1940
--------
PRINCIPAL CAPITAL ACCUMULATION FUND, INC.
(Exact name of Registrant as specified in Charter)
The Principal Financial Group
Des Moines, Iowa 50392
(Address of principal executive offices)
--------
Telephone Number (515) 248-3842
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MICHAEL D. ROUGHTON Copy to:
The Principal Financial Group JOHN W. BLOUCH, L.L.P.
Des Moines, Iowa 50392 Suite 405 West
1025 Thomas Jefferson Street, N.W.
Washington, DC 20007-0805
(Name and address of agent for service)
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It is proposed that this filing will become effective (check appropriate box)
immediately upon filing pursuant to paragraph (b)of Rule 485
on (date) pursuant to paragraph (b) of Rule 485
60 days after filing pursuant to paragraph (a)(1) of Rule 485
X on January 1, 1997 pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
This post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
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Pursuant to the provisions of Rule 24f-2 under the Investment Company Act
of 1940, Registrant has registered an indefinite number of shares under the
Securities Act of 1933; Registrant filed a Rule 24f-2 Notice for the fiscal year
ended December 31, 1996 on February 27, 1997.
<PAGE>
The Principal Variable Contracts Fund, Inc. described in this Prospectus is
a diversified, open-end management investment company offering a variety of
Accounts each of which was formerly a separately incorporated investment
company. Together, the Accounts provide the following range of investment
objectives:
Growth-Oriented Accounts
Aggressive Growth Account (formerly known as Principal Aggressive Growth Fund,
Inc.) seeks to provide long-term capital appreciation by investing primarily in
growth-oriented common stocks of medium and large capitalization U.S.
corporations and, to a limited extent, foreign corporations.
Asset Allocation Account (formerly known as Principal Asset Allocation Fund,
Inc.) seeks to generate a total investment return consistent with the
preservation of capital.
Balanced Account (formerly known as Principal Balanced Fund, Inc.) seeks to
generate a total return consisting of current income and capital appreciation
while assuming reasonable risks in furtherance of the investment objective.
Capital Value Account (formerly known as Principal Capital Accumulation Fund,
Inc.) seeks to achieve primarily long-term capital appreciation and secondary
growth of investment income through the purchase primarily of common stocks, but
the Account may invest in other securities.
Growth Account (formerly known as Principal Growth Fund, Inc.) seeks growth of
capital through the purchase primarily of common stocks, but the Account may
invest in other securities.
International Account (formerly known as Principal World Fund, Inc.) seeks
long-term growth of capital by investing in a portfolio of equity securities of
companies domiciled in any of the nations of the world.
MidCap Account (formerly known as Principal Emerging Growth Fund, Inc.) seeks to
achieve capital appreciation by investing primarily in securities of emerging
and other growth-oriented companies.
Income-Oriented Accounts
Bond Account (formerly known as Principal Bond Fund, Inc.) seeks to provide as
high a level of income as is consistent with preservation of capital and prudent
investment risk.
Government Securities Account (formerly known as Principal Government Securities
Fund, Inc.) seeks a high level of current income, liquidity and safety of
principal. The Account seeks to achieve its objective through the purchase of
obligations issued or guaranteed by the United States Government or its
agencies, with emphasis on Government National Mortgage Association Certificates
("GNMA Certificates"). Account shares are not guaranteed by the United States
Government.
Money Market Account
Money Market Account (formerly known as Principal Money Market Fund, Inc.) seeks
as high a level of income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
An investment in the Money Market Account is neither insured nor guaranteed
by the U.S. Government. There can be no assurance the Money Market Account will
be able to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Variable
Contracts Fund, Inc. that an investor ought to know before investing. It should
be read and retained for future reference.
Additional information about the Fund has been filed with the Securities
and Exchange Commission, including a document called Statement of Additional
Information, dated ____________________. The Statement of Additional Information
is incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Variable Contracts Fund, Inc.
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is ___________________.
TABLE OF CONTENTS
Page
Summary ............................................................. 2
Financial Highlights.................................................. 5
Investment Objectives, Policies and Restrictions...................... 10
Certain Investment Policies and Restrictions.......................... 18
Manager and Sub-Advisors ............................................ 21
Duties Performed by the Manager and Sub-Advisors...................... 22
Managers' Comments.................................................... 23
Determination of Net Asset Value of Account Shares.................... 30
Performance Calculation............................................... 31
Income Dividends, Distributions and Tax Status........................ 31
Eligible Purchasers and Purchase of Shares............................ 32
Shareholder Rights ................................................... 33
Redemption of Shares.................................................. 33
Additional Information................................................ 34
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, shares of the Account in any jurisdiction in which such sale,
offer to sell, or solicitation may not be lawfully made. No dealer, salesperson,
or other person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund or the Fund's Manager.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Variable Contracts Fund, Inc. is an open-end diversified
management investment company offering multiple accounts.
Who may purchase shares of the Accounts?
Shares of the Accounts are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What does the Fund offer investors?
Professional Investment Management: Experienced securities analysts provide
each Account with professional investment management.
Diversification: Each Account will diversify by investing in securities
issued by a number of issuers doing business in a variety of industries and/or
located in different geographical regions. Diversification reduces investment
risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Accounts creates administrative efficiencies.
Redeemability: Upon request each Account will redeem its shares and
promptly pay the investor the current net asset value of the shares redeemed.
See "Redemption of Shares."
What are the Accounts' investment objectives?
Growth-Oriented Accounts
The investment objective of the Aggressive Growth Account is to provide
long-term capital appreciation by investing primarily in growth-oriented common
stocks of medium and large capitalization U.S. corporations and, to a limited
extent, foreign corporations.
The investment objective of the Asset Allocation Account is to generate a
total investment return consistent with the preservation of capital. The Account
intends to pursue a flexible investment policy in seeking to achieve this
investment objective.
The investment objective of the Balanced Account is to seek to generate a
total return consisting of current income and capital appreciation while
assuming reasonable risks in furtherance of this objective.
The primary investment objective of the Capital Value Account is long-term
capital appreciation and its secondary investment objective is growth of
investment income. The Account seeks to achieve its investment objectives
through the purchase primarily of common stocks, but the Account may invest in
other securities.
The investment objective of the Growth Account is growth of capital. The
Account seeks to achieve its objective through the purchase primarily of common
stocks, but the Account may invest in other securities.
The investment objective of the International Account is to seek long-term
growth of capital by investing in a portfolio of equity securities domiciled in
any of the nations of the world.
The investment objective of the MidCap Account is to achieve capital
appreciation by investing primarily in securities of emerging and other
growth-oriented companies.
Income-Oriented Accounts
The investment objective of the Bond Account is to provide as high a level
of income as is consistent with preservation of capital and prudent investment
risk.
The investment objective of the Government Securities Account is to seek a
high level of current income, liquidity and safety of principal. The Account
seeks to achieve its objective through the purchase of obligations issued or
guaranteed by the United States Government or its agencies, with emphasis on
Government National Mortgage Association Certificates ("GNMA Certificates").
Account shares are not guaranteed by the United States Government.
Money Market Account
The investment objective of the Money Market Account is to seek as high a
level of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
There can be no assurance that the investment objectives of any of the
Accounts will be realized. See "Investment Objectives,
Policies and Restrictions."
Who serves as Manager for the Accounts?
Principal Management Corporation (formerly known as Princor Management
Corporation), a corporation organized in 1969 by Principal Mutual Life Insurance
Company, is the Manager for each of the Accounts. It is also the dividend
disbursing and transfer agent for the Fund. In order to provide investment
advisory service for certain Accounts the Manager has executed sub-advisory
agreements with Invista Capital Management, Inc. (Balanced, Capital Value,
Government Securities, Growth, International and MidCap Accounts) and Morgan
Stanley Asset Management Inc. (Aggressive Growth Account and Asset Allocation
Account). Subsequent references to these corporations may be as "Invista",
"MSAM" or "Sub-Advisor". See "Manager and Sub-Advisors."
What fees and expenses apply to ownership of shares of the Accounts?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Accounts.
ANNUAL ACCOUNT OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Account Fee Expenses Expenses
Aggressive Growth Account .80% .05% .85%
Asset Allocation Account .80% .07% .87%
Balanced Account .60% .03% .63%
Bond Account .50% .03% .53%
Capital Value Account .48% .01% .49%
Government Securities Account .50% .02% .52%
Growth Account .50% .02% .52%
International Account .75% .15% .90%
MidCap Account .64% .02% .66%
Money Market Account .50% .06% .56%
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Period (in years)
Account 1 3 5 10
Aggressive Growth Account $9 $27 $47 $105
Asset Allocation Account $9 $28 $48 $107
Balanced Account $6 $20 $35 $79
Bond Account $5 $17 $30 $66
Capital Value Account $5 $16 $27 $62
Government Securities Account $5 $17 $29 $65
Growth Account $5 $17 $29 $65
International Account $9 $29 $50 $111
MidCap Account $7 $21 $37 $82
Money Market Account $6 $18 $31 $70
This Example is based on the Annual Account Operating expenses for each
Account described above. Please remember that the Example should not be
considered a representation of past or future expenses and that actual
expenses may be greater or less than shown.
The purpose of the above table is to assist you in understanding the
various expenses that an investor in the Accounts will bear directly or
indirectly. See "Duties Performed by the Manager and Sub-Advisors."
FINANCIAL HIGHLIGHTS
The following financial highlights for the periods ended December 31, 1996
and prior thereto are derived from financial statements which have been audited
by Ernst & Young LLP, independent auditors, whose report has been incorporated
by reference herein. The financial highlights should be read in conjunction with
the financial statements, related notes, and other financial information
incorporated by reference herein. Audited financial statements may be obtained
by shareholders, without charge, by telephoning 1-800-451-5447.
<TABLE>
<CAPTION>
Income from
Investment Operations
Net Realized
and
Net Asset Unrealized Total
Value at Net Gain from
Beginning Investment (Loss) on Investment
of Period Income Investments Operations
Aggressive Growth Account
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $12.94 $ .11 $ 3.38 $3.49
1995 10.11 .13 4.31 4.44
Period Ended
December 31, 1994(a) 9.92 .05 .24 .29
Asset Allocation Account
Year Ended December 31,
1996 11.11 .36 1.06 1.42
1995 9.79 .40 1.62 2.02
Period Ended December 31, 1994(a) 9.98 .23 (.18) .05
Balanced Account(d)
Year Ended December 31,
1996 13.97 .40 1.41 1.81
1995 11.95 .45 2.44 2.89
1994 12.77 .37 (.64) (.27)
1993 12.58 .42 .95 1.37
Six Months Ended
December 31, 1992(e) 12.93 .23 .75 .98
Year Ended June 30,
1992 11.33 .47 1.61 2.08
1991 10.79 .54 .59 1.13
1990 11.89 .60 (.48) .12
1989 11.75 .62 .30 .92
Period Ended June 30, 1988(f) 10.00 .27 1.51 1.78
Bond Account
Year Ended December 31,
1996 11.73 .68 (.40) .28
1995 10.12 .62 1.62 2.24
1994 11.16 .72 (1.04) (.32)
1993 10.77 .88 .38 1.26
Six Months Ended
December 31, 1992(e) 11.08 .45 .13 .58
Year Ended June 30,
1992 10.64 .91 .46 1.37
1991 10.72 .94 (.06) .88
1990 10.92 .95 (.21) .74
1989 10.68 1.15 .17 1.32
Period Ended June 30, 1988(f) 10.00 .32 .40 .72
Capital Value Account
Year Ended December 31,
1996 27.80 .57 5.82 6.39
1995 23.44 .60 6.69 7.29
1994 24.61 .62 (.49) .13
1993 25.19 .61 1.32 1.93
Six Months Ended
December 31, 1992(e) 26.03 .31 1.84 2.15
Year Ended June 30,
1992 23.35 .65 2.70 3.35
1991 22.48 .74 1.22 1.96
1990 23.63 .79 .14 .93
1989 23.23 .77 1.32 2.09
1988 27.51 .60 (1.50) (.90)
1987 25.48 .40 4.46 4.86
</TABLE>
<TABLE>
<CAPTION>
Less Distributions
Excess
Dividends Distributions Distributions
from Net from from
Investment Capital Capital Total
Income Gains Gains Distributions
Aggressive Growth Account
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $(.11) $(1.80) $ -- $(1.91)
1995 (.13) (1.48) -- (1.61)
Period Ended
December 31, 1994(a) (.05) (.05) -- (.10)
Asset Allocation Account
Year Ended December 31,
1996 (.36) (.69) -- (1.05)
1995 (.40) (.30) -- (.70)
Period Ended December 31, 1994(a) (.23) -- (.01) (.24)
Balanced Account(d)
Year Ended December 31,
1996 (.40) (.94) -- (1.34)
1995 (.45) (.42) -- (.87)
1994 (.37) (.18) -- (.55)
1993 (.42) (.76) -- (1.18)
Six Months Ended
December 31, 1992(e) (.47) (.86) -- (1.33)
Year Ended June 30,
1992 (.48) -- -- (.48)
1991 (.57) (.02) -- (.59)
1990 (.63) (.59) -- (1.22)
1989 (.55) (.23) -- (.78)
Period Ended June 30, 1988(f) (.03) -- -- (.03)
Bond Account
Year Ended December 31,
1996 (.68) -- -- (.68)
1995 (.63) -- -- (.63)
1994 (.72) -- -- (.72)
1993 (.87) -- -- (.87)
Six Months Ended
December 31, 1992(e) (.89) -- -- (.89)
Year Ended June 30,
1992 (.93) -- -- (.93)
1991 (.96) -- -- (.96)
1990 (.94) -- -- (.94)
1989 (.96) (.12) -- (1.08)
Period Ended June 30, 1988(f) (.04) -- -- (.04)
Capital Value Account
Year Ended December 31,
1996 (.58) (3.77) -- (4.35)
1995 (.60) (2.33) -- (2.93)
1994 (.61) (.69) -- (1.30)
1993 (.60) (1.91) -- (2.51)
Six Months Ended
December 31, 1992(e) (.64) (2.35) -- (2.99)
Year Ended June 30,
1992 (.67) -- -- (.67)
1991 (.79) (.30) -- (1.09)
1990 (.81) (1.27) -- (2.08)
1989 (.68) (1.01) -- (1.69)
1988 (.69) (2.69) -- (3.38)
1987 (.50) (2.33) -- (2.83)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
Aggressive Growth Account
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $14.52 28.05% $ 90,106 .85% 1.05% 166.9% $.0541
1995 12.94 44.19% 33,643 .90% 1.34% 172.9% N/A
Period Ended
December 31, 1994(a) 10.11 2.59%(b) 13,770 1.03%(c) 1.06%(c) 105.6%(c) N/A
Asset Allocation Account
Year Ended December 31,
1996 11.48 12.92% 61,631 .87% 3.45% 108.2% .0497
1995 11.11 20.66% 41,074 .89% 4.07% 47.1% N/A
Period Ended December 31, 1994(a) 9.79 .52%(b) 28,041 .95%(c) 4.27%(c) 60.7%(c) N/A
Balanced Account(d)
Year Ended December 31,
1996 14.44 13.13% 93,158 .63% 3.45% 22.6% .0417
1995 13.97 24.58% 45,403 .66% 4.12% 25.7% N/A
1994 11.95 (2.09)% 25,043 .69% 3.42% 31.5% N/A
1993 12.77 11.06% 21,399 .69% 3.30% 15.8% N/A
Six Months Ended
December 31, 1992(e) 12.58 8.00%(b) 18,842 .73%(c) 3.71%(c) 38.4%(c) N/A
Year Ended June 30,
1992 12.93 18.78% 17,344 .72% 3.80% 26.6% N/A
1991 11.33 11.36% 14,555 .73% 5.27% 27.1% N/A
1990 10.79 .87% 13,016 .74% 5.52% 33.1% N/A
1989 11.89 8.55% 12,751 .74% 5.55% 29.3% N/A
Period Ended June 30, 1988(f) 11.75 17.70%(b) 11,469 .80%(c) 4.96%(c) 41.7%(c) N/A
Bond Account
Year Ended December 31,
1996 11.33 2.36% 63,387 .53% 7.00% 1.7% N/A
1995 11.73 22.17% 35,878 .56% 7.28% 5.9% N/A
1994 10.12 (2.90)% 17,108 .58% 7.86% 18.2% N/A
1993 11.16 11.67% 14,387 .59% 7.57% 14.0% N/A
Six Months Ended
December 31, 1992(e) 10.77 5.33%(b) 12,790 .62%(c) 8.10%(c) 6.7%(c) N/A
Year Ended June 30,
1992 11.08 13.57% 12,024 .62% 8.47% 6.1% N/A
1991 10.64 8.94% 10,552 .63% 9.17% 2.7% N/A
1990 10.72 7.15% 9,658 .64% 9.09% 0.0% N/A
1989 10.92 13.51% 9,007 .64% 9.18% 12.2% N/A
Period Ended June 30, 1988(f) 10.68 6.06%(b) 17,598 .58%(c) 8.11%(c) 68.8%(c) N/A
Capital Value Account
Year Ended December 31,
1996 29.84 23.50% 205,019 .49% 2.06% 48.5% .0426
1995 27.80 31.91% 135,640 .51% 2.25% 49.2% N/A
1994 23.44 .49% 120,572 .51% 2.36% 44.5% N/A
1993 24.61 7.79% 128,515 .51% 2.49% 25.8% N/A
Six Months Ended
December 31, 1992(e) 25.19 8.81%(b) 105,355 .55%(c) 2.56%(c) 39.7%(c) N/A
Year Ended June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8% N/A
1991 23.35 9.46% 76,537 .53% 3.53% 14.0% N/A
1990 22.48 3.94% 74,008 .56% 3.56% 30.2% N/A
1989 23.63 10.02% 68,132 .57% 3.53% 23.5% N/A
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7% N/A
1987 27.51 22.17% 57,478 .63% 1.99% 16.1% N/A
</TABLE>
Notes to financial highlights
(a) Period from June 1, 1994, date shares first offered to public, through
December 31, 1994. Net investment income, aggregating $.01 per share
for Aggressive Growth Account and $.01 per share for the Asset
Allocation Account for the period from the initial purchase of shares
on May 23, 1994 through May 31, 1994, was recognized, none of which
was distributed to the sole stockholder, Principal Mutual Life
Insurance Company, during the period. Additionally, the Aggressive
Growth Account and the Asset Allocation Account incurred unrealized
losses on investments of $.09 and $.03 per share, respectively, during
the initial interim period. This represented activities of each
Account prior to the initial public offering of Account shares.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Effective May 1, 1994, the name of Principal Managed Fund, Inc. was
changed to Principal Balanced Fund, Inc.
(e) Effective July 1, 1992 the Account changed its fiscal year end from
June 30 to December 31.
(f) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating
$.01 per share for the period from the initial purchase of shares on
December 10, 1987 through December 17, 1987 was recognized, all of
which was distributed to the Account's sole stockholder, Principal
Mutual Life Insurance Company. This represented activity of the
Account prior to the initial offering of shares to eligible
purchasers.
<TABLE>
<CAPTION>
Income from
Investment Operations
Net Realized
and
Net Asset Unrealized Total
Value at Net Gain from
Beginning Investment (Loss) on Investment
of Period Income Investments Operations
Government Securities Account
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 10.55 .59 (.24) .35
1995 9.38 .60 1.18 1.78
1994 10.61 .76 (1.24) (.48)
1993 10.28 .71 .33 1.04
Six Months Ended
December 31, 1992(a) 10.93 .40 .04 .44
Year Ended June 30,
1992 10.24 .80 .71 1.51
1991 10.05 .80 .24 1.04
1990 10.05 .78 -- .78
1989 9.37 .80 .34 1.14
1988 9.47 .78 (.09) .69
Period Ended June 30, 1987(d) 10.00 .18 (.59) (.41)
Growth Account
Year Ended December 31,
1996 12.43 .16 1.39 1.55
1995 10.10 .17 2.42 2.59
Period Ended December 31, 1994(e) 9.60 .07 .51 .58
International Account
Year Ended December 31,
1996 10.72 .22 2.46 2.68
1995 9.56 .19 1.16 1.35
Period Ended December 31, 1994(e) 9.94 .03 (.33) (.30)
MidCap Account(f)
Year Ended December 31,
1996 $25.33 $.22 $5.07 $5.29
1995 19.97 .22 5.57 5.79
1994 20.79 .14 .03 .17
1993 18.91 .17 3.47 3.64
Six Months Ended
December 31, 1992(b) 15.97 .10 3.09 3.19
Year Ended June 30,
1992 13.93 .21 2.04 2.25
1991 14.25 .20 .50 .70
1990 13.35 .24 .87 1.11
1989 12.85 .16 1.35 1.51
Period Ended June 30, 1988(g) 10.00 .05 2.83 2.88
Money Market Account
Year Ended December 31,
1996 1.000 .049 -- .049
1995 1.000 .054 -- .054
1994 1.000 .037 -- .037
1993 1.000 .027 -- .027
Six Months Ended
December 31, 1992(a) 1.000 .016 -- .016
Year Ended June 30,
1992 1.000 .046 -- .046
1991 1.000 .070 -- .070
1990 1.000 .077 -- .077
1989 1.000 .083 -- .083
1988 1.000 .064 -- .064
1987 1.000 .057 -- .057
</TABLE>
<TABLE>
<CAPTION>
Less Distributions
Excess
Dividends Distributions Distributions
from Net from from
Investment Capital Capital Total
Income Gains Gains Distributions
Government Securities Account
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $(.59) $-- $-- $ (.59)
1995 (.61) -- -- (.61)
1994 (.75) -- -- (.75)
1993 (.71) -- -- (.71)
Six Months Ended
December 31, 1992(a) (.78) -- (.31) (1.09)
Year Ended June 30,
1992 (.81) -- (.01) (.82)
1991 (.81) -- (.04) (.85)
1990 (.78) -- -- (.78)
1989 (.46) -- -- (.46)
1988 (.79) -- -- (.79)
Period Ended June 30, 1987(d) (.12) -- -- (.12)
Growth Account
Year Ended December 31,
1996 (.16) (.03) -- (.19)
1995 (.17) -- (.09) (.26)
Period Ended December 31, 1994(e) (.08) -- -- (.08)
International Account
Year Ended December 31,
1996 (.22) (.16) -- (.38)
1995 (.18) -- (.01) (.19)
Period Ended December 31, 1994(e) (.05) (.02) (.01) (.08)
MidCap Account(f)
Year Ended December 31,
1996 (.22) (.66) -- (.88)
1995 (.22) (.21) -- (.43)
1994 (.14) (.85) -- (.99)
1993 (.17) (1.59) -- (1.76)
Six Months Ended
December 31, 1992(b) (.21) (.04) -- (.25)
Year Ended June 30,
1992 (.21) -- -- (.21)
1991 (.23) (.79) -- (1.02)
1990 (.20) (.01) -- (.21)
1989 (.11) (.90) -- (1.01)
Period Ended June 30, 1988(g) (.03) -- -- (.03)
Money Market Account
Year Ended December 31,
1996 (.049) -- -- (.049)
1995 (.054) -- -- (.054)
1994 (.037) -- -- (.037)
1993 (.027) -- -- (.027)
Six Months Ended
December 31, 1992(a) (.016) -- -- (.016)
Year Ended June 30,
1992 (.046) -- -- (.046)
1991 (.070) -- -- (.070)
1990 (.077) -- -- (.077)
1989 (.083) -- -- (.083)
1988 (.064) -- -- (.064)
1987 (.057) -- -- (.057)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
Government Securities Account
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 10.31 3.35% 85,100 .52% 6.46% 8.4% N/A
1995 10.55 19.07% 50,079 .55% 6.73% 9.8% N/A
1994 9.38 (4.53)% 36,121 .56% 7.05% 23.2% N/A
1993 10.61 10.07% 36,659 .55% 7.07% 20.4% N/A
Six Months Ended
December 31, 1992(a) 10.28 4.10%(b) 31,760 .59%(c) 7.35%(c) 34.5%(c) N/A
Year Ended June 30,
1992 10.93 15.34% 33,022 .58% 7.84% 38.9% N/A
1991 10.24 10.94% 26,021 .59% 8.31% 4.2% N/A
1990 10.05 8.16% 21,488 .61% 8.48% 18.7% N/A
1989 10.05 12.61% 15,890 .63% 8.68% 3.7% N/A
1988 9.37 7.69% 12,902 .66% 8.47% 2.7% N/A
Period Ended June 30, 1987(d) 9.47 (.94)%(b) 10,778 .64%(c) 8.50%(c) 0.2%(c) N/A
Growth Account
Year Ended December 31,
1996 13.79 12.51% 99,612 .52% 1.61% 2.0% .0401
1995 12.43 25.62% 42,708 .58% 2.08% 6.9% N/A
Period Ended December 31, 1994(e) 10.10 5.42%(b) 13,086 .75%(c) 2.39%(c) 0.9%(c) N/A
International Account
Year Ended December 31,
1996 13.02 25.09% 71,682 .90% 2.28% 12.5% .0120
1995 10.72 14.17% 30,566 .95% 2.26% 15.6% N/A
Period Ended December 31, 1994(e) 9.56 (3.37)%(b) 13,746 1.24%(c) 1.31%(c) 14.4%(c) N/A
MidCap Account(f)
Year Ended December 31,
1996 $ 29.74 21.11% $137,161 .66% 1.07% 8.8% $.0379
1995 25.33 29.01% 58,520 .70% 1.23% 13.1% N/A
1994 19.97 .78% 23,912 .74% 1.15% 12.0% N/A
1993 20.79 19.28% 12,188 .78% .89% 22.4% N/A
Six Months Ended
December 31, 1992(b) 18.91 20.12%(b) 9,693 .81%(c) 1.24%(c) 8.6%(c) N/A
Year Ended June 30,
1992 15.97 16.19% 7,829 .82% 1.33% 10.1% N/A
1991 13.93 5.72% 6,579 .89% 1.70% 11.1% N/A
1990 14.25 8.32% 6,067 .88% 1.74% 17.9% N/A
1989 13.35 13.08% 5,509 .90% 1.31% 21.4% N/A
Period Ended June 30, 1988(g) 12.85 28.72%(b) 4,857 .94%(c) .64%(c) 4.6%(c) N/A
Money Market Account
Year Ended December 31,
1996 1.000 5.07% 46,244 .56% 5.00% N/A N/A
1995 1.000 5.59% 32,670 .58% 5.32% N/A N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A N/A
Six Months Ended
December 31, 1992(a) 1.000 1.54%(b) 27,680 .59%(c) 3.10%(c) N/A N/A
Year Ended June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A N/A
</TABLE>
Notes to financial highlights
(a) Effective July 1, 1992 the Account changed its fiscal year end from June 30
to December 31.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Period from April 9, 1987, date shares first offered to the public, through
June 30, 1987. Net investment income, aggregating $.01 per share for the
period from the initial purchase of shares on October 31, 1987 through
December 17, 1987 was recognized, all of which was distributed to the
Account's sole stockholder, Principal Mutual Life Insurance Company. This
represented activity of the Account prior to the initial offering of shares
to eligible purchasers.
(e) Period from May 1, 1994, date shares first offered to the public, through
December 31, 1994. Net investment income, aggregating $.01 per share for the
Growth Account and $.04 per share for the International Account for the
period from the initial purchase of shares on March 23, 1994 through April
30, 1994, was recognized, none of which was distributed to the sole
stockholder, Principal Mutual Life Insurance Company, during the period.
Additionally, the Growth Account and the International Account incurred
unrealized losses on investments of $.41 and $.10 per share, respectively,
during the initial interim period. This represented activities of each
Account prior to the initial public offering of Account shares.
(f) Effective May 1, 1992, the name of Principal Aggressive Growth Fund, Inc.
was changed to Principal Emerging Growth Fund, Inc.
(g) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating $.01
per share for the period from the initial purchase of shares on December 10,
1987 through December 17, 1987 was recognized, all of which was distributed
to the Account's sole stockholder, Principal Mutual Life Insurance Company.
This represented activity of the Account prior to the initial offering of
shares to eligible purchasers.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Account are described below.
There can be no assurance that the objectives of the Accounts will be realized.
GROWTH-ORIENTED ACCOUNTS
The Fund currently includes five Accounts which seek capital appreciation
through investments in equity securities (Aggressive Growth Account, Capital
Value Account, Growth Account, International Account and MidCap Account) and two
Accounts which seek a total investment return including both capital
appreciation and income through investments in equity and debt securities (Asset
Allocation Account and Balanced Account). These seven Accounts are collectively
referred to as the Growth-Oriented Accounts.
The Growth-Oriented Accounts may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and American Depository Receipts based
on any of the foregoing securities. The Aggressive Growth, Capital Value,
Growth, International and MidCap Accounts will seek to be fully invested under
normal conditions in equity securities. When, in the opinion of the Manager or
Sub-Advisor, current market or economic conditions warrant, a Growth-Oriented
Account may for temporary defensive purposes place all or a portion of its
assets in cash, on which the Account would earn no income, cash equivalents,
bank certificates of deposit, bankers acceptances, repurchase agreements,
commercial paper, commercial paper master notes which are floating rate debt
instruments without a fixed maturity, United States Government securities, and
preferred stocks and debt securities, whether or not convertible into or
carrying rights for common stock. A Growth-Oriented Account may also maintain
reasonable amounts in cash or short-term debt securities for daily cash
management purposes or pending selection of particular long-term investments.
Aggressive Growth Account
The Aggressive Growth Account's investment objective is to provide
long-term capital appreciation by investing primarily in growth-oriented common
stocks of medium and large capitalization U.S. corporations and, to a limited
extent, foreign corporations. Common stocks for this purpose include common
stocks and equivalents, such as securities convertible into common stocks and
securities having common stock characteristics, such as rights and warrants to
purchase common stocks. Under normal circumstances, the Account will invest at
least 65% of the value of its total assets in common stocks.
The Account employs a flexible and eclectic investment process in pursuit
of its investment objective. In selecting stocks for the Account, the
Sub-Advisor, MSAM, concentrates on a universe of rapidly growing, high quality
companies and lower but accelerating earnings growth situations. The
Sub-Advisor's universe of potential investments generally comprises companies
with market capitalizations of $750 million or more and is not restricted to
specific market sectors. The Sub-Advisor uses its research capabilities,
analytical resources and judgment to assess economic, industry and market
trends, as well as individual company developments, to select promising growth
investments for the Account. The Sub-Advisor concentrates on companies with
strong, communicative managements and clearly defined strategies for growth. In
addition, the Sub-Advisor rigorously assesses company developments, including
changes in strategic direction, management focus and current and likely future
earnings results. Valuation is important to the Sub-Advisor but is viewed in the
context of prospects for sustainable earnings growth and the potential for
positive earnings surprises vis-a-vis consensus expectations. The Account is
free to invest in any common stock which in the Sub-Advisor's judgment provides
above average potential for capital appreciation.
In selecting investments for the Account, the Sub-Advisor emphasizes
individual security selection. The Account's investments will generally be
diversified by industry but concentrated sector positions may result from the
investment process. The Account has a long-term investment perspective; however,
the Sub-Advisor may take advantage of short-term opportunities that are
consistent with its objective by selling recently purchased securities which
have increased in value.
The Account may invest in common stock and convertible securities of
domestic and foreign corporations. However, the Account does not expect to
invest more than 25% of its total assets at the time of purchase in securities
of foreign companies. The Account may invest in securities of foreign issuers
directly or in the form of Depository Receipts. The Account may enter into
forward foreign currency exchange contracts which provide for the purchase or
sale of foreign currencies in connection with the settlement of foreign
securities transactions or to hedge the underlying currency exposure related to
foreign investments. The Account will not enter into these commitments for
speculative purposes. Investors should recognize that investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies. See "Foreign Securities" and
"Currency Contracts."
The Account may invest in convertible securities of domestic and, subject
to the above restrictions, foreign issuers on occasions when, due to market
conditions, it is more advantageous to purchase such securities than common
stock. Convertible securities entitle the holder to exchange the securities for
a specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time and to receive interest or
dividends until the holder elects to exercise the conversion privilege. Since
the Account invests in both common stocks and convertible securities, the risks
of investing in the general equity markets may be tempered to a degree by the
Account's investments in convertible securities which are often not as volatile
as equity securities.
Asset Allocation Account
The Asset Allocation Account seeks to generate a total investment return
consistent with preservation of capital. In seeking to achieve its objective,
the Account intends to pursue a flexible investment policy by investing
primarily in the common stock and other securities having common stock
characteristics of large and small domestic or foreign companies that appear to
be undervalued relative to their earnings results or potential, or whose
earnings growth prospects appear to be more attractive than the economy as a
whole, and domestic or foreign fixed-income securities, including high yield
securities when, in the judgement of the Sub-Advisor, MSAM, it is appropriate to
do so.
The securities in which the Account invests will be identified as belonging
to an "asset class." Asset classes may include, but are not limited to, small
capitalization (companies whose market value is less than $1 billion) value
stocks, large capitalization (companies with a market value in excess of $1
billion) value stocks, small capitalization growth stocks, large capitalization
growth stocks, common stocks of foreign corporations, domestic fixed-income
securities, domestic high yield fixed-income securities, foreign fixed-income
securities, and money market instruments (debt securities maturing in one year
or less). "Value" stocks are generally defined as companies with distinctly
below average stock price to earnings ratios and stock price to book value
ratios, and higher than average dividend yields. "Growth" stocks are generally
defined as those companies whose earnings are expected to grow more rapidly than
the economy as a whole.
The allocation among asset classes is designed to lessen overall investment
risk through participation in a variety of types of investments in several
markets. Reallocation among asset classes, or the elimination of an asset class
for a period of time, will occur when in the Sub-Advisor's judgement such shift
offers the investor better prospects of achieving the overall investment
objective of the Account. Under normal conditions, abrupt shifts among asset
classes will not occur and it is not the policy of the Sub-Advisor to attempt
market timing. The Sub-Advisor does not undertake to maintain a specific portion
of the Account in any asset class, but expects that over time the investment mix
will be within the following ranges: 25% to 75% in equities, 20% to 60% in
fixed-income securities and 0% to 40% in money market instruments. Factors
involved with this decision will depend upon the judgement of the Sub-Advisor as
to general market and economic conditions, trends and investment yields and
interest rates and changes in fiscal or monetary policies. The Sub-Advisor will
seek to minimize declines in the net asset value per share; however, there is no
guarantee this goal can be achieved.
The Account may invest in all types of common stocks and other equities and
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Account may invest in
both exchange listed and over-the-counter securities, including American
Depository Receipts ("ADRs") and closed end mutual funds. The Account's
investments in corporate bonds and debentures and money market instruments are
not restricted by credit ratings or other objective investment criteria, except
with respect to bank certificates of deposit as set forth below. See
"Below-Investment Grade Bonds" for a discussion of the risks associated with
these securities. Normally, investments in below investment grade bonds are not
expected to exceed 20% of Account assets. Securities purchases may be either
U.S. dollar or Non-U.S. dollar denominated.
To achieve its investment objective, the Account may at times emphasize the
generation of interest income by investing in short, medium or long-term
fixed-income securities. Investment in those securities may also be made with a
view to realizing capital appreciation when the Sub-Advisor believes that
declining interest rates may increase market values.
Money market instruments in which the Account may invest may include U.S.
Treasury bills, bank certificates of deposit, bankers acceptances, repurchase
agreements, commercial paper and commercial paper master notes which are
floating rate debt instruments without a fixed maturity, and non-U.S. dollar
denominated money market instruments. The Account will only invest in domestic
bank certificates of deposit issued by banks which are members of the Federal
Reserve System that have total deposits in excess of $1 billion.
The Account may invest in U.S. government securities including U.S.
Treasury obligations and obligations of certain agencies such as the Government
National Mortgage Association which are supported by the full faith and credit
of the United States, as well as obligations of certain other federal agencies
or instrumentalities which are backed only by the right of the issuer to borrow
limited funds from the U.S. Treasury, by the discretionary authority of the U.S.
government to purchase such obligations or by the credit of the agency or
instrumentality itself.
Balanced Account
The investment objective of Balanced Account is to generate a total return
consisting of current income and capital appreciation while assuming reasonable
risks in furtherance of the investment objective. The term "reasonable risks"
refers to investment decisions that in the judgment of the Sub-Advisor, Invista,
do not present a greater than normal risk of loss in light of current or
anticipated future market and economic conditions, trends in yields and interest
rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Account invests
primarily in growth and income-oriented common stocks (including securities
convertible into common stocks), corporate bonds and debentures and short-term
money market instruments. The Account may also invest in other equity
securities, and in debt securities issued or guaranteed by the United States
Government and its agencies or instrumentalities. The Account seeks to generate
real (inflation plus) growth during favorable investment periods and may
emphasize income and capital preservation strategies during uncertain investment
periods. The Sub-Advisor will seek to minimize declines in the net asset value
per share. However, there is no guarantee that the Sub-Advisor will be
successful in achieving this goal.
The portions of the Account's total assets invested in equity securities,
debt securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Account's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Sub-Advisor as to general market and economic conditions, trends in investment
yields and interest rates and changes in fiscal or monetary policies.
The Account may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Account may invest in
both exchange-listed and over-the-counter securities, in small or large
companies, and in well-established or unseasoned companies. Also, the Account's
investments in corporate bonds and debentures and money market instruments are
not restricted by credit ratings or other objective investment criteria, except
with respect to bank certificates of deposit as set forth below. Some of the
fixed income securities in which the Account may invest may be considered to
include speculative characteristics and the Account may purchase such securities
that are in default but does not currently intend to invest more than 5% of its
assets in securities rated below BBB by Standard & Poor's or Baa by Moody's. See
"Below Investment-Grade Bonds" for a discussion of the risks associated with
these securities. The rating services' descriptions of BBB or Baa securities are
as follows: Moody's Investors Service, Inc. Bond Ratings -- Baa: Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories. The Account will not concentrate its
investments in any industry.
In selecting common stocks, the Sub-Advisor seeks companies which it
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Sub-Advisor determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Sub-Advisor may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Account may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Account may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The short-term money market investments in which the Account may invest
include the following: U.S. Treasury bills, bank certificates of deposit,
bankers' acceptances, repurchase agreements, commercial paper and commercial
paper master notes which are floating rate debt instruments without a fixed
maturity. The Account will only invest in domestic bank certificates of deposit
issued by banks which are members of the Federal Reserve System that have total
deposits in excess of $1 billion.
The United States government securities in which the Account may invest
include U.S. Treasury obligations and obligations of certain agencies, such as
the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Capital Value Account
The primary objective of Capital Value Account is long-term capital
appreciation. A secondary objective is growth of investment income.
The Account will invest primarily in common stocks, but it may invest in
other securities. In making selections for the Account's investment portfolio,
the Manager will use an approach described broadly as that of fundamental
analysis, which is discussed in the Statement of Additional Information. To
achieve the investment objective, Invista will invest in securities that have
"value" characteristics. This process is known as "value investing." Value
investing is purchasing securities of companies with above average dividend
yields and below average price to earnings (P/E) ratios. Securities chosen for
investment may include those of companies which the Manager believes can
reasonably be expected to share in the growth of the nation's economy over the
long term.
Growth Account
The objective of Growth Account is growth of capital. Realization of
current income will be incidental to the objective of growth of capital.
The Account will invest primarily in common stocks, but it may invest in
other equity securities. In making selections for the Account's investment
portfolio, the Sub-Advisor, Invista, will use an approach described broadly as
that of fundamental analysis, which is discussed in the Statement of Additional
Information. In pursuit of the Account's investment objective, investments will
be made in securities which as a group appear to possess potential for
appreciation in market value. Common stocks chosen for investment may include
those of companies which have a record of sales and earnings growth that exceeds
the growth rate of corporate profits of the S&P 500 or which offer new products
or new services. The policy of investing in securities which have a high
potential for growth of capital can mean that the assets of the Account may be
subject to greater risk than securities which do not have such potential.
International Account
The investment objective of International Account is to seek long-term
growth of capital through investment in a portfolio of equity securities of
companies domiciled in any of the nations of the world. In choosing investments
in equity securities of foreign and United States corporations, the Sub-Advisor,
Invista, intends to pay particular attention to long-term earnings prospects and
the relationship of then-current prices to such prospects. Short-term trading is
not generally intended, but occasional investments may be made for the purpose
of seeking short-term or medium-term gain. The Account expects its investment
objective to be met over long periods which may include several market cycles.
For a description of certain investment risks associated with foreign
securities, see "Foreign Securities."
For temporary defensive purposes, the International Account may invest in
the same kinds of securities as the other Growth-Oriented Accounts whether
issued by domestic or foreign corporations, governments, or governmental
agencies, instrumentalities or political subdivisions and whether denominated in
United States dollars or some other currency.
The Account intends that its investments normally will be allocated among
various countries. Although there is no limitation on the percentage of assets
that may be invested in any one country or denominated in any one currency, the
Account intends under normal market conditions to have at least 65% of its
assets invested in securities issued by corporations of at least five countries,
one of which may be the United States (although the Fund currently intends not
to invest in equity securities of United States companies). Investments may be
made anywhere in the world, but it is expected that primary consideration will
be given to investing in the securities issued by corporations of Western
Europe, North America and Australasia (Australia, Japan and Far East Asia) that
have developed economies. Changes in investments may be made as prospects change
for particular countries, industries or companies.
MidCap Account
The objective of MidCap Account is to achieve capital appreciation. The
strategy of this Account is to invest primarily in the common stocks and
securities (both debt and preferred stock) convertible into common stocks of
emerging and other growth-oriented companies that, in the judgment of the
Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the MidCap Account may invest, for any period of time, in
any industry, in any kind of growth-oriented company, whether new and unseasoned
or well known and established.
There can be, of course, no assurance that the Account will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Account invests, the Account believes that its shares are
suitable only for persons who are prepared to experience above-average
fluctuations in net asset value, to assume above-average investment risk in
search of above-average return, and to consider the Account as a long-term
investment and not as a vehicle for seeking short-term profits. Moreover, since
the Account will not be seeking current income, investors should not view a
purchase of Account shares as a complete investment program.
INCOME-ORIENTED ACCOUNTS
The Fund currently include two Accounts which seek a high level of income
through investments in fixed-income securities (Bond Account and Government
Securities Account) collectively referred to as the "Income-Oriented Accounts."
An investment in either of the Income-Oriented Accounts involves market risks
associated with movements in interest rates. The market value of the Accounts'
investments will fluctuate in response to changes in interest rates and other
factors. During periods of falling interest rates, the values of outstanding
long-term fixed-income securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. Changes
by recognized rating agencies in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities will affect the Accounts' net asset values but will not affect cash
income derived from the securities unless a change results from a failure of an
issuer to pay interest or principal when due. Each Account's rating limitations
apply at the time of acquisition of a security, and any subsequent change in a
rating by a rating service will not require elimination of a security from the
Account's portfolio. The Statement of Additional Information contains
descriptions of ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard and Poor's Corporation ("S&P").
Bond Account
The investment objective of the Bond Account is to provide as high a level
of income as is consistent with preservation of capital and prudent investment
risk.
In seeking to achieve the investment objective, the Account will
predominantly invest in marketable fixed-income securities. Investments will be
made generally on a long-term basis, but the Account may make short-term
investments from time to time as deemed prudent by the Manager. Longer
maturities typically provide better yields but will subject the Account to a
greater possibility of substantial changes in the values of its portfolio
securities as interest rates change.
Under normal circumstances, the Account will invest at least 65% of its
assets, exclusive of cash items, in one or more of the following kinds of
securities: (i) corporate debt securities and taxable municipal obligations,
which at the time of purchase have an investment grade rating within the four
highest grades used by Standard & Poor's Corporation (AAA, AA, A or BBB) or by
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa) or which, if lower-rated or
nonrated, are comparable in quality in the opinion of the Account's Manager;
(ii) similar Canadian corporate, Provincial and Federal Government securities
payable in U.S. funds; and (iii) securities issued or guaranteed by the United
States Government or its agencies or instrumentalities. The balance of the
Account's assets may be invested in other fixed income securities, including
domestic and foreign corporate debt securities or preferred stocks, in common
stocks that provide returns that compare favorably with the yields on fixed
income investments, and in common stocks acquired upon conversion of debt
securities or preferred stocks or upon exercise of warrants acquired with debt
securities or otherwise and foreign government securities. The debt securities
and preferred stocks in which the Account invests may be convertible or
nonconvertible. The Account does not intend to purchase debt securities rated
lower than Ba3 by Moody's or BB - by S & P (bonds which are judged to have
speculative elements; their future cannot be considered as well-assured). See
"Below Investment-Grade Bonds" for a discussion of the risks associated with
these securities. The rating services' descriptions of BBB or Baa securities are
as follows: Moody's Investors Service, Inc. Bond Ratings -- Baa: Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories.
During the year ended December 31, 1996, the percentage of the Account's
portfolio securities invested in the various ratings established by Moody's
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Aaa .18%
Aa .81%
A 24.05%
Baa 68.04%
Ba 6.92%
* The above percentages for A rated securities include .57% respectively,
unrated securities which have been determined by the Manager to be of comparable
quality.
Cash equivalents in which the Account invests include corporate commercial
paper rated A-1+, A-1 or A-2 by Standard & Poor's or P-1 or P-2 by Moody's,
unrated commercial paper issued by corporations with outstanding debt securities
rated in the four highest grades by Standard & Poor's and Moody's and bank
certificates of deposit and bankers' acceptances issued or guaranteed by
national or state banks and repurchase agreements considered by the Account to
have investment quality. Under unusual market or economic conditions, the
Account may for temporary defense purposes invest up to 100% of its assets in
cash or cash equivalents.
Government Securities Account
The objective of Government Securities Account is a high level of current
income, liquidity and safety of principal.
The Account will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities include
Government National Mortgage Association ("GNMA") Certificates of the modified
pass-through type, Federal National Mortgage Association ("FNMA") Obligations,
Federal Home Loan Mortgage Corporation ("FHLMC") Certificates and Student Loan
Marketing Association ("SLMA") Certificates and other U.S. Government
Securities. GNMA is a wholly-owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned
corporation, FHLMC, a federal corporation, and SLMA, a government sponsored
stockholder-owned organization, are instrumentalities of the United States. The
securities and guarantees of FNMA, FHLMC and SLMA are not backed, directly or
indirectly, by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Account may maintain reasonable
amounts of cash or short-term debt securities for daily cash management purposes
or pending selection of particular long-term investments.
Cash equivalents in which the Account invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Account to have investment quality.
Depending on market conditions, up to 55% of the assets may be invested in
GNMA Certificates. GNMA is a United States Government corporation within the
Department of Housing and Urban Development. GNMA Certificates are
mortgage-backed securities representing an interest in a pool of mortgage loans.
Such loans are made by lenders such as mortgage bankers, insurance companies,
commercial banks and savings and loan associations. Then, they are either
insured by the Federal Housing Administration (FHA) or they are guaranteed by
the Veterans Administration (VA) or Farmers Home Administration (FmHA). The
lender or other prospective issuer creates a specific pool of such mortgages,
which it submits to GNMA for approval. After approval, a GNMA Certificate is
typically offered by the issuer to investors through securities dealers.
GNMA Certificates differ from bonds in that the principal is scheduled to
be paid back by the borrower on a monthly basis over the life of the loan rather
than returned in a lump sum at maturity. Modified pass-through GNMA
certificates, which are the only kind in which the Account intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of whether or not the mortgagor has made such payment.
The timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government.
Although the payment of interest and principal is guaranteed, the guarantee
does not extend to the value of a GNMA Certificate or the value of the shares of
the Account. The market value of a GNMA Certificate typically will fluctuate to
reflect changes in prevailing interest rates. It falls when rates increase (as
does the market value of other debt securities) and it rises when rates decline
(but it may not rise on a comparable basis with other debt securities because of
its prepayment feature), and, therefore, may be more or less than the face
amount of the GNMA Certificate, which reflects the aggregate principal amount of
the underlying mortgages. As a result, the net asset value of Account shares
will fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Account at prevailing
interest rates which may be less than the rate on the GNMA Certificate.
Prepayments are likely to increase as the interest rate for new mortgages moves
lower than the rate on the GNMA Certificate. Moreover, if the GNMA Certificate
had been purchased at a premium above principal because its rate exceeded
prevailing rates, the premium is not guaranteed and a decline in value to par
may result in a loss of the premium especially in the event of prepayment.
To the extent deemed appropriate by the Account's Manager, the Account
intends to purchase GNMA Certificates directly from Principal Mutual Life
Insurance Company and other issuers as well as from securities dealers. The
Account will purchase directly from issuers only if it can obtain a price
advantage by not paying the commission or mark-up that would be required if the
Certificates were purchased from a securities dealer. The Securities and
Exchange Commission has issued an order under the Investment Company Act of 1940
that permits the Account to purchase GNMA Certificates directly from Principal
Mutual Life Insurance Company subject to certain conditions.
The FNMA and FHLMC securities in which the Account invests are very similar
to GNMA certificates as described above but are not guaranteed by the full faith
and credit of the United States but rather by the agency itself. FNMA and FHLMC
securities are rated Aaa by Moody's and AAA by Standard & Poor's. These ratings
reflect the status of FNMA and FHLMC as federal agencies as well as the
important role each plays in financing purchases of homes in the U.S.
Student Loan Marketing Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Account
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by the agency and is traded regularly in denominations similar to
those in which government obligations are traded.
The Account will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the
Account's investment objective. Accordingly, the Account may sell portfolio
securities in anticipation of a rise in interest rates and purchase securities
for inclusion in its portfolio in anticipation of a decline in interest rates.
As a hedge against changes in interest rates, the Account may enter into
contracts with dealers in GNMA Certificates whereby the Account agrees to
purchase or sell an agreed-upon principal amount of GNMA Certificates at a
specified price on a certain date. The Account may enter into similar purchase
agreements with issuers of GNMA Certificates other than Principal Mutual Life
Insurance Company. The Account may also purchase optional delivery standby
commitments which give the Account the right to sell particular GNMA
Certificates at a specified price on a specified date. Failure of the other
party to such a contract or commitment to abide by the terms thereof could
result in a loss to the Account. To the extent the Account engages in delayed
delivery transactions it will do so for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for the
purpose of investment leverage or to speculate on interest rate changes.
Liability accrues to the Account at the time it becomes obligated to purchase
such securities, although delivery and payment occur at a later date. From the
time the Account becomes obligated to purchase securities on a delayed delivery
basis the Account has all the rights and risks attendant to the ownership of a
security. At the time the Account enters into a binding obligation to purchase
such securities, Account assets of a dollar amount sufficient to make payment
for the securities to be purchased will be segregated. The availability of
liquid assets for this purpose and the effect of asset segregation on the
Account's ability to meet its current obligations, to honor requests for
redemption and to have its investment portfolio managed properly will limit the
extent to which the Account may engage in forward commitment agreements. Except
as may be imposed by these factors, there is no limit on the percent of the
Account's total assets that may be committed to transactions in such agreements.
MONEY MARKET ACCOUNT
The Fund also includes an Account which invests primarily in short-term
securities, the Money Market Account. Securities in which the Money Market
Account will invest may not yield as high a level of current income as
securities of low quality and longer maturities which generally have less
liquidity, greater market risk and more fluctuation.
The Money Market Account will limit its portfolio investments to United
States dollar denominated instruments that the board of directors determines
present minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in respect to
a class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security at the time of issuance was a long-term security that has a
remaining maturity of 397 calendar days or less, and whose issuer has
received from a nationally recognized statistical rating organization a
rating, with respect to a class of short-term debt obligations (or any
security within that class) that is now comparable in priority and
security with the security, in one of the two highest rating categories
for short-term debt obligations; or
(3) An unrated security that is of comparable quality to a security
meeting the requirements of (1) or (2) above, as determined by the
board of directors.
The Account will not invest more than 5% of its total assets in the
following securities:
(1) Securities which, when acquired by the Account (either initially or
upon any subsequent rollover), are rated below the highest rating
category for short-term debt obligations;
(2) Securities which, at the time of issuance were long-term securities but
when acquired by the Account have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Account's board
of directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Account
will maintain a dollar-weighted average portfolio maturity of 90 days
or less.
The objective of the Money Market Account is to seek as high a level of
current income available from short-term securities as is considered consistent
with preservation of principal and maintenance of liquidity by investing its
assets in a portfolio of money market instruments. These money market
instruments are U.S. Government Securities, U.S. Government Agency Securities,
Bank Obligations, Commercial Paper, Short-term Corporate Debt and Repurchase
Agreements, which are described briefly below and in more detail in the
Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
The Account intends to hold its investments until maturity, but may on
occasion trade securities to take advantage of market variations. Also, revised
valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at times when such sales might otherwise not be
desirable. The Account's right to borrow to facilitate redemptions may reduce
the need for such sales. It is the Account's policy to be as fully invested as
reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the Account
expects to usually transact purchases and sales of portfolio securities with
issuers or dealers on a net basis, it is not anticipated that the Account will
pay any significant brokerage commissions. The Account is free to dispose of
portfolio securities at any time, when changes in circumstances or conditions
make such a move desirable in light of the investment objective.
A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Account invests.
The rate of return and the net asset value will be affected by such other
factors as sales of portfolio securities prior to maturity and the Account's
operating expenses.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Accounts
may use in an effort to achieve their respective investment objectives.
Diversification
Each Account is subject to the diversification requirements of Section
817(h) of the Internal Revenue Code (the "Code") which must be met at the end of
each quarter of the year (or within 30 days thereafter). Regulations issued by
the Secretary of the Treasury have the effect of requiring each Account to
invest no more than 55% of its total assets in securities of any one issuer, no
more than 70% in the securities of any two issuers, no more than 80% in the
securities of any three issuers, and no more than 90% in the securities of any
four issuers. For this purpose, the United States Treasury and each U.S.
Government agency and instrumentality is considered to be a separate issuer.
Thus, the Government Securities Account intends to invest in U.S. Treasury
securities and in securities issued by at least four U.S. Government agencies or
instrumentalities in the amounts necessary to meet those diversification
requirements at the end of each quarter of the year (or within thirty days
thereafter).
In the event any of the Accounts do not meet the diversification
requirements of Section 817(h) of the Code, the contracts funded by shares of
the Accounts will not be treated as annuities or life insurance for Federal
income tax purposes and the owners of the Accounts will be subject to taxation
on their share of the dividends and distributions paid by the Accounts.
Foreign Securities
Each of the following Accounts has adopted investment restrictions that
limit its investments in foreign securities to the indicated percentage of its
assets: Asset Allocation and International Accounts - 100%; Aggressive Growth
Account - 25%; Bond and Capital Value Accounts - 20%; Balanced, Growth and
MidCap Accounts - 10%. Debt securities issued in the United States pursuant to a
registration statement filed with the Securities and Exchange Commission are not
considered "foreign securities" for purposes of this investment limitation.
Investment in foreign securities presents certain risks including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. An Account's investment in foreign securities may also
result in higher custodial costs and the costs associated with currency
conversions.
Currency Contracts
The Aggressive Growth, Asset Allocation and International Accounts may each
enter into forward currency contracts, currency futures contracts and options
thereon and options on currencies for hedging and other non-speculative
purposes. A forward currency contract involves a privately negotiated obligation
to purchase or sell a specific currency at a future date at a price set at the
time of the contract. The Accounts will not enter into a transaction to hedge
currency exposure to an extent greater in effect than the aggregate market value
of the securities held or to be purchased by the Accounts that are denominated
or generally quoted in or currently convertible into the currency. When the
Account enters into a contract to buy or sell a foreign currency, it generally
will hold an amount of that currency, liquid securities denominated in that
currency or a forward contract for such securities equal to the Account's
obligation, or it will segregate liquid high grade debt obligations equal to the
amount of the Account's obligations. The use of currency contracts involves many
of the same risks as transactions in futures contracts and options as well as
the risk of government action through exchange controls or otherwise that would
restrict the ability of the Account to deliver or receive currency.
Repurchase Agreements and Securities Loans
Each of the Accounts may enter into repurchase agreements with, and each of
the Accounts, except the Capital Value and Money Market Accounts, may lend its
portfolio securities to, unaffiliated broker-dealers and other unaffiliated
qualified financial institutions. These transactions must be fully
collateralized at all times, but involve some credit risk to the Account if the
other party should default on its obligations, and the Account is delayed or
prevented from recovering on the collateral. See the Accounts' Statement of
Additional Information for further information regarding the credit risks
associated with repurchase agreements and the standards adopted by the Fund's
Board of Directors to deal with those risks. None of the Accounts intend either
(i) to enter into repurchase agreements that mature in more than seven days if
any such investment, together with any other illiquid securities held by the
Account, would amount to more than 10% of its total assets or (ii) to loan
securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Accounts may enter into forward commitment
agreements which call for the Accounts to purchase or sell a security on a
future date and at a price fixed at the time the Account enters into the
agreement. Each of the Accounts may also acquire rights to sell its investments
to other parties, either on demand or at specific intervals.
Warrants
Each of the Accounts, except the Money Market and Government Securities
Accounts, may invest in warrants up to 5% of its assets, of which not more than
2% may be invested in warrants that are not listed on the New York or American
Stock Exchange. For the International Account, the 2% limitation also does not
apply to warrants listed on the Toronto Stock Exchange or the Chicago Board
Options Exchange.
Borrowing
As a matter of fundamental policy, each Account may borrow money only for
temporary or emergency purposes. The Balanced, Bond, Capital Value and Money
Market Accounts may borrow only from banks. Further, each may borrow only in an
amount not exceeding 5% of its assets, except the Capital Value Account which
may borrow only in an amount not exceeding the lesser of (i) 5% of the value of
its assets less liabilities other than such borrowings, or (ii) 10% of its
assets taken at cost at the time the borrowing is made, and the Money Market
Account which may borrow only in an amount not exceeding the lesser of (i) 5% of
the value of its assets, or (ii) 10% of the value of its net assets taken at
cost at the time the borrowing is made.
Options
The Aggressive Growth, Asset Allocation, Balanced, Bond, Government
Securities, Growth, International, and MidCap Accounts may purchase covered
spread options, which would give the Account the right to sell a security that
it owns at a fixed dollar spread or yield spread in relationship to another
security that the Account does not own, but which is used as a benchmark. These
same Accounts may also purchase and sell financial futures contracts, options on
financial futures contracts and options on securities and securities indices,
but will not invest more than 5% of their assets in the purchase of options on
securities, securities indices and financial futures contracts or in initial
margin and premiums on financial futures contracts and options thereon. The
Accounts may write options on securities and securities indices to generate
additional revenue and for hedging purposes and may enter into transactions in
financial futures contracts and options on those contracts for hedging purposes.
Below Investment Grade Bonds
Below investment-grade bonds are securities rated Ba1 or lower by Moody's
Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("S&P") or unrated securities which the Account's Manager or
Sub-Advisor believes are of comparable quality. These securities are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and to repay principal in accordance with the terms of the
obligation. The Accounts, except the Asset Allocation Account, do not intend to
invest in securities rated lower than Ba3 by Moody's or BB by S&P. The Asset
Allocation Account does not intend to invest in securities rated below Caa by
Moody's and below CCC by S&P. The Asset Allocation Account normally will not
invest more than 20% of its assets in below investment grade securities. The
Bond Account may not invest more than 35% of its assets in such securities. The
Balanced Account does not intend to invest more than 5% of its assets in such
securities.
The rating services' descriptions of below investment grade securities
rating categories in which the Accounts may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small. Caa:
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the high end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB, B, CCC, CC: Debt rated
"BB", "B", "CCC" and "CC" is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The "BB" rating may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
Below investment-grade securities present special risks to investors. The
market value of lower-rated securities may be more volatile than that of
higher-rated securities and generally tends to reflect the market's perception
of the creditworthiness of the issuer and short-term market developments to a
greater extent than more highly rated securities, which reflect primarily
fluctuations in general levels of interest rates. Periods of economic
uncertainty and change can be expected to result in increased volatility in the
market value of lower-rated securities. Further, such securities may be subject
to greater risks of loss of income and principal, particularly in the event of
adverse economic changes or increased interest rates, because their issuers
generally are not as financially secure or as creditworthy as issuers of
higher-rated securities. Additionally, to the extent that there is not a
national market system for secondary trading of lower-rated securities, there
may be a low volume of trading in such securities which may make it more
difficult to value or sell those securities than higher-rated securities.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield securities,
especially in a thinly traded market.
Investors should recognize that the market for below investment-grade
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the Accounts and the ability of the
issuers of the securities held by the Accounts to pay principal and interest. A
default by an issuer may result in an Account incurring additional expenses to
seek recovery of the amounts due it.
Some of the securities in which the Accounts invest may contain call
provisions. If the issuer of such a security exercises a call provision in a
declining interest rate market, the Account would have to replace the security
with a lower-yielding security, resulting in a decreased return for investors.
Further, a higher-yielding security's value will decrease in a rising interest
rate market, which will be reflected in the Account's net asset value per share.
The Statement of Additional Information includes further information
concerning the Accounts' investment policies and applicable investment
restrictions. Each Account's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for an Account are not fundamental
and may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISORS
The Manager for the Fund is Principal Management Corporation (formerly
known as Princor Management Corporation) (the "Manager"), an indirectly
wholly-owned subsidiary of Principal Mutual Life Insurance Company, a mutual
life insurance company organized in 1879 under the laws of the State of Iowa.
The address of the Manager is The Principal Financial Group, Des Moines, Iowa
50392. The Manager was organized on January 10, 1969, and since that time has
managed various mutual funds sponsored by Principal Mutual Life Insurance
Company. As of December 31, 1996, the Manager served as investment advisor for
26 such funds with assets totaling approximately $4.0 billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced, Capital Value,
Government Securities, Growth, International and MidCap Accounts. The Manager
will reimburse Invista for the cost of providing these services. Invista, an
indirectly wholly-owned subsidiary of Principal Mutual Life Insurance company
and an affiliate of the Manager, was founded in 1985 and manages investments for
institutional investors, including Principal Mutual Life. Assets under
management at December 31, 1996 were approximately $19.6 billion. Invista's
address is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.
The Manager has also executed an agreement with Morgan Stanley Asset
Management Inc. ("MSAM") under which MSAM has agreed to assume the obligations
of the Manager to provide investment advisory services for the Aggressive Growth
Account and Asset Allocation Account. The Manager pays MSAM a fee for such
investment advisory services. MSAM, with principal offices at 1221 Avenue of the
Americas, New York, NY 10020, provides a broad range of portfolio management
services to customers in the United States and abroad. At December 31, 1996,
MSAM managed investments totaling approximately $72.6 billion, including
approximately $54.9 billion under active management and $17.7 billion as Named
Fiduciary or Fiduciary Adviser.
The Manager, Invista, or MSAM has assigned certain individuals the primary
responsibility for the day-to-day management of each Account's portfolio. The
persons primarily responsible for the day-to-day management of each Account are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Account Responsible Since Person Primarily Responsible
<S> <C> <C>
Aggressive Growth May, 1994 Kurt Feuerman (MBA degree, Columbia University; M.A. degree, Syracuse
(Account's inception) University). Managing Director, Morgan Stanley Asset Management Inc. and
Morgan Stanley & Co. Incorporated.
Asset Allocation May, 1994 Francine J. Bovich (MBA degree, New York University). Principal, Morgan
(Account's inception) Stanley Asset Management Inc. and Morgan Stanley & Co. Incorporated.
May, 1994 Kurt Feuerman (MBA degree, Columbia University; M.A. degree, Syracuse
(Account's inception) University). Managing Director, Morgan Stanley Asset Management Inc. and
Morgan Stanley & Co. Incorporated.
April, 1996 Stephen C. Sexauer (MBA degree, University of Chicago). Principal,
Morgan Stanley Asset Management Inc. and Morgan Stanley & Co. Incorporated.
Balanced April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President, Invista
Capital Management, Inc.
Bond November, 1996 Scott A. Bennett, CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company.
Capital Value November, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice
(Account's inception) President, Invista Capital Management, Inc.; Co-Manager since November,
1996: Catherine A. Green, CFA, (MBA degree, Drake University). Vice
President, Invista Capital Management, Inc.
Government Securities April, 1987 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
(Account's inception) Capital Management, Inc.
Growth and MidCap May, 1994 Michael R. Hamilton, (BMBA degree, Bellarmine College). Vice President,
(Account's inception) Invista Capital Management, Inc.
and December, 1987
(Account's inception),
respectively
International April, 1994 Scott D. Opsal, CFA (MBA degree, University of Minnesota). Executive
Vice President, Invista Capital Management, Inc.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISORS
Under Maryland law, the business and affairs of the Fund are managed under
the direction of its Board of Directors. The investment services and certain
other services referred to under the heading "Cost of Manager's Services" in the
Statement of Additional Information are furnished to the Fund under the terms of
a Management Agreement between the Fund and the Manager and, for some of the
Accounts, a Sub-Advisory Agreement between the Manager and Invista or the
Manager and MSAM. The Manager, Invista, or MSAM, advises the Accounts on
investment policies and on the composition of the Accounts' portfolios. In this
connection, the Manager, or Sub-Advisor, furnishes to the Board of Directors of
the Fund a recommended investment program consistent with the Account's
investment objective and policies. The Manager, or Sub-Advisor, is authorized,
within the scope of the approved investment program, to determine which
securities are to be bought or sold, and in what amounts.
The compensation paid by each Account to the Manager for the fiscal year
ended December 31, 1996 was, on an annual basis, equal to the following
percentage of average net assets:
Total
Manager's Annualized
Account Fee Expenses
- -------------------------------------------------------------------
Aggressive Growth Account .80% .85%
Asset Allocation Account .80% .87%
Balanced Account .60% .63%
Bond Account .50% .53%
Capital Value Account .48% .49%
Government Securities Account .50% .52%
Growth Account .50% .52%
International Account .75% .90%
MidCap Account .64% .66%
Money Market Account .50% .56%
The compensation being paid by the Aggressive Growth Account, Asset
Allocation Account and International Account for investment management services
is higher than that paid by most funds to their advisor, but it is not higher
than the fees paid by many funds with similar investment objectives and
policies.
The Manager and Sub-Advisors may purchase at their own expense statistical
and other information or services from outside sources, including Principal
Mutual Life Insurance Company. An Investment Service Agreement between the
Manager, Principal Mutual Life Insurance Company and the Fund provides that
Principal Mutual Life Insurance Company will furnish certain personnel, services
and facilities required by the Manager in connection with its performance of the
Management Agreement for each Account except the Aggressive Growth and Asset
Allocation Accounts, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard.
The Accounts may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc., a broker-dealer that is an affiliate of the Distributor and
Manager of the Fund. The Account may also execute transactions for portfolio
securities through Morgan Stanley & Co. Incorporated and Morgan Stanley Trust
Company affiliates of Morgan Stanley Asset Management Inc.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company.
MANAGERS' COMMENTS
Principal Management Corporation, Invista and MSAM are staffed with
investment professionals who manage each individual Account. Comments by these
individuals in the following paragraphs summarize in capsule form the general
strategy and results of each Account through 1996. The accompanying charts
display results for the past 10 years or the life of the Account, whichever is
shorter. Average Annual Total Return figures provided for each Account in the
graphs below reflect all expenses of the Account and assume all distributions
are reinvested at net asset value. The figures do not reflect expenses of the
variable life insurance contracts or variable annuity contracts that purchase
Account shares; performance figures for the divisions of the contracts would be
lower than performance figures for the Accounts due to the additional contract
expenses. Past performance is not predictive of future performance. Returns and
net asset values fluctuate. Shares are redeemable at current net asset value,
which may be more or less than original cost.
The various indices included in the following graphs are unmanaged and do
not reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.
Growth-Oriented Accounts
Aggressive Growth Account
(Kurt Feuerman)
Since it first became available on June 1, 1994, the Aggressive Growth
Account has generated an annualized return of 28.05% versus 23.63% for the S&P
500 and 19.18% for the Lipper Growth Fund Average. In 1996 the Fund returned
28.05% versus 22.96% for the S&P 500 and 19.24% for the Lipper Growth Fund
Average.
For the third consecutive year, substantial overweighting of the portfolio
in the tobacco sector contributed positively to relative performance. After a
market-smashing total return of 62% in 1995 (including dividends), Philip Morris
stock surged late in 1996 for a full-year total return of 25%. Philip Morris was
the largest single holding in the portfolio throughout most of 1995 and 1996.
At year-end 1996, Philip Morris stock at $113 represented about 5% of the
Account's portfolio. Philip Morris as well as other positions in RJR Nabisco,
Loews and Consolidated Cigar as a group will clearly be subject to bouts of
selling pressure since the industry is under attack from a number of directions.
However, tobacco stocks are in the midst of a multi-year trend of upward
revaluation. Combined with strong underlying growth fundamentals, this creates a
powerful investment opportunity which many investors are missing.
Entering into 1997, the S&P 500 Index has outperformed the vast majority of
active managers for three consecutive years. Also, the Index has outpaced the
earnings growth of the underlying companies. One could argue that there are many
positive factors driving the U.S. markets higher and that these factors could
persist; stable interest rates, solid economic growth without inflationary
pressures, the opening up of emerging markets, the acceptance of shareholder
value as the key motivator of corporate managements, and the huge cash flow
coming into stocks supported by powerful demographic trends.
Still, there is no doubt that many large cap, "blue chip," stocks have
outperformed their own businesses. General Electric, for example, rose 40% in
1996 while earnings per share grew about 15%. Another example would be Merck, a
stock up 77% in 1995 and 24% in 1996, with earnings in those two years up only
12% and 20%, respectively.
Morgan Stanley's estimate is that active managers will have an easier time
beating the Index this year. This will be more likely to occur if smaller
company stocks do well. While large cap managers continue to feel comfortable
with many large cap names, at the margin there are opportunities in secondary
stocks, especially high beta growth issues that have missed the recent market
move, but where company fundamentals are intact.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year Since Inception Date 6/1/94 10 Year
28.05% 28.05% --
Comparison of Change in Value of $10,000 Investment in the
Aggressive Growth Account, S&P 500 and Lipper Growth Fund Average
--------------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Growth
December 31, Return Index Average
10,000 10,000 10,000
1994 10,259 10,230 10,055
1995 14,793 14,069 13,151
1996 18,942 17,297 15,681
Note: Past performance is not predictive of future performance.
Asset Allocation Account
(Francine J. Bovich)
In a volatile year for financial assets, the U.S. stock market continued
its strong performance (+23.2%) but ranked 11th in global markets beaten by
fully half of the international markets (in U.S. dollars), notably Spain
(+40.1%), Sweden (+37.2%) and Hong Kong (+33.1%). Markets were boosted by
abundant liquidity provided through loose monetary policy, moderate economic
growth and a benign inflation environment.
Bond markets in local currency also had a good year with returns ranging
from 5.9% in Japan to 24.2% in Italy. In the U.S., mixed economic data and
expectations of monetary tightening drove bond prices down well into the third
quarter until the Federal reserve announced that interest rates would remain
unchanged. In contrast, the European bond markets rallied throughout the year
driven by monetary easing from the core European central banks, weakening
currencies, optimism surrounding the prospects of the European Monetary Union,
and improving inflation data. Japanese bond yields fell to all-time lows on the
prospect of substantial fiscal tightening in 1997, the fragility of some
financial institutions, and doubts about the strength of the economic recovery.
Against a declining interest rate backdrop, high yielding debt rallied as
investors clamored for yield.
Throughout the year, we maintained our diversified investment policy. At
year-end 1996, the Account was invested: 32% domestic stocks, 26% international
stocks, 20% U.S. domestic bonds, 9% domestic high yield bonds, 11% real estate
investment trusts ("REITs"), and 2% short-term investments. For 1996, the
Account continued its positive performance gaining 12.9% relative to the Lipper
Flexible Portfolio Fund average gain of 13.6%.
Within domestic stocks, commitments to large cap growth companies and REITs
significantly enhanced returns. In the growth segment, overweight commitments to
consumer cyclicals, consumer staples and financial sectors were the primary
contributors to positive results. Our REIT portfolio benefited from an overall
positive backdrop and selected commitments to the office, industrial, and hotel
sectors. In addition, we allocated a portion of the portfolio to "California
Recovery" companies which performed well.
In aggregate, the international stock results lagged the S&P 500 primarily
due to the performance of Japan. Japanese stocks declined -15.5% based on the
same concerns that drove bond yields to historic lows. In contrast, European
stocks were a brighter spot thanks to the continuing efforts of most continental
governments to achieve the Maastricht criteria. Asian market returns were led by
Hong Kong, which benefited from lessened political fears and an improved
economic outlook. Latin America enjoyed stellar performance throughout the year
and was a primary contributor to the international ADR's outperformance (+11.3%)
relative to the EAFE benchmark gain of 6.1%. The economic recovery that began in
1995 and continued throughout 1996 attracted renewed capital flows to the region
and the Fund benefited from overweight positions in Brazil and Mexico.
Over the near term, we expect the U.S. market to be driven higher by the
continuation of the positive capital market trends experienced in 1996. However,
U.S. stocks are not cheap, the market cycle is very long in the tooth, and is
vulnerable to strong economic data and/or an untoward event. International
stocks have benefited from many of the same factors which propelled the U.S.
markets, but on a relative basis to the U.S., valuations are not as high. In
addition, prospects for further declines in interest rates and improved economic
and earnings growth in Asia, Latin America and Europe remain probable, albeit on
a lagged basis.
After a year of declining global interest rates, we expect increased
volatility as investors analyze every data point to detect a policy change. Fed
watchers will be particularly active given Mr. Greenspan's concern about
"irrational exuberance." We begin the year overweighted to yield sectors and
believe that a higher income strategy will serve to moderate price volatility.
Total Returns *
As of December 31, 1996
---------------------------------------------------------
1 Year Since Inception Date 6/1/94 10 Year
12.92% 12.95% --
Comparison of Change in Value of $10,000 Investment in the Asset
Allocation Account, S&P 500 and Lipper Flexible Portfolio Fund Average
------------------------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Flexible Portfolio
December 31, Return Index Index
10,000 10,000 10,000
1994 10,052 10,230 10,008
1995 12,128 14,069 12,518
1996 13,696 17,297 14,220
Note: Past performance is not predictive of future performance.
Balanced Account
(Judith A. Vogel)
This balanced portfolio combines stocks, bonds and cash in a relatively
conservative mix which seeks to provide both capital appreciation and income to
the shareholder without taking on undue risk. The asset allocation of the
Account generally approximates 60% stocks and 40% bonds. In the year ended
December 31, 1996 the stock market produced exceptional results. Aided by a
healthy economy, continued corporate profit growth, and a good dose of investor
enthusiasm, the S&P 500 Stock Index advanced nearly 23%. Conditions in the bond
market were less supportive over the year. Long-term interest rates rose 0.70%
in 1996, with a lot of volatility along the way, causing the bond returns to
hover between zero and 3% for the year. Demonstrating its balanced nature, the
Account produced a 13% annual return, about midway between stock and bond market
results and very near the Lipper Balanced Fund Average. The bond portion of the
Account's portfolio is comprised of U.S. Government notes and bonds with an
emphasis on safety of principal. The stock portion of the portfolio is
concentrated in companies with stable or growing earnings that are not terribly
sensitive to economic activity. After six years of economic expansion resulting
in high rates of resource utilization, corporate profit growth is likely to come
down, causing a scarcity of earnings growth. Companies that can continue to grow
earnings will be afforded premium valuations. There is no independent market
index against which to measure returns of balanced portfolios, however, we show
the S&P 500 Stock Index for your information.
Total Returns *
As of December 31, 1996
---------------------------------------------------
Since Inception
1 Year 5 Year Date 12/18/87
13.13% 11.57% 12.16%
Comparison of Change in Value of $10,000 Investment in the
Balanced Account, S&P 500 and Lipper Balanced Fund Average
----------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Mid Cap
December 31, Return Index Index
10,000 10,000 10,000
1988 11,637 11,661 11,229
1989 12,982 15,356 13,429
1990 12,147 14,877 13,355
1991 16,321 19,412 16,930
1992 18,410 20,891 18,122
1993 20,447 22,992 20,066
1994 20,019 23,294 19,561
1995 24,941 32,037 24,482
1996 28,215 39,388 27,851
Note: Past performance is not predictive of future performance.
Capital Value Account
(David L. White and Catherine A. Green)
The strategy with this portfolio is to hold common stocks of companies
based on a valuation that is attractive when compared to the market. The
analytical staff looks at companies' current valuations compared to the market,
then at historical information to compare valuations to historical averages. The
focus is on the fundamentals of an industry and the company to determine the
current and future outlook as these potential investments. From there the
portfolio is constructed to provide a diversified set of investments.
The Account outperformed the S&P 500 Index and Lipper Growth and Income
Fund Average for 1996. The strength of the market was in much fewer stocks than
in the past. The volatility between industries was much greater than the overall
results. The Account benefited from several areas of exposure. Banks and health
care were the strongest areas for the Account during the year. The focus has
been away from the more cyclical areas of the economy which also helped during
the year. As the economic cycle progresses, the market places more emphasis on
companies with consistent earnings growth, and we have tended to overweight
these areas of the market. As the market performance continues to narrow,
however, it becomes increasingly difficult to select the correct areas of
overperformance.
Total Returns *
As of December 31, 1996
----------------------------------------
1 Year 5 Year 10 Year
23.50% 14.08% 13.08%
Comparison of Change in Value of $10,000 Investment in the
Capital Value Account, S&P 500 and Lipper Growth and Income Fund Average
----------------------------------------------------------------------------
Fund S&P 500 Lipper
Year Ended Total Stock Growth & Income
December 31, Return Index Fund Average
10,000 10,000 10,000
1987 10,647 10,526 10,184
1988 12,183 12,274 11,814
1989 14,155 16,163 14,596
1990 12,759 15,659 13,946
1991 17,693 20,433 18,002
1992 19,377 21,990 19,618
1993 20,888 24,201 21,884
1994 20,990 24,519 21,678
1995 27,688 33,722 28,360
1996 34,193 41,460 34,253
Note: Past performance is not predictive of future performance.
Growth Account
(Michael R. Hamilton)
The Growth Account struggled against the market in 1996; struggle being
relative as 12.23% return is respectable from a historical perspective. The S&P
500 Index last year was heavily influenced by the top 25 holdings in the Index.
These are very large companies. The Account is more diversified than the Index
and therefore its results were more representative of the broader market. With
the market continuing to struggle against the potential of an economic boom on
one hand, versus a slowing or recession on the other, the market could be
subjected to emotional swings depending on the inflation outlook.
The Account's portfolio still has a large focus on health care given the
demographics of the United States. This was not a strong sector in 1996,
particularly the managed care companies of which the portfolio has a large
exposure. Also, the portfolio has large positions in technology and growth
cyclicals. These companies should do well if the economy continues to move
forward which is indicated by current data.
The portfolio contains many companies that are able to compete on a world
wide basis. This is important as global competition continues.
Total Returns *
As of December 31, 1996
-------------------------------------------------------
1 Year Since Inception Date 5/2/94 10 Year
12.51% 16.12% --
Comparison of Change in Value of $10,000 Investment in the
Growth Account, S&P 500 and Lipper Growth Fund Average
---------------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Growth
December 31, Return Index Index
10,000 10,000 10,000
1994 10,542 10,397 10,090
1995 13,243 14,299 13,197
1996 14,899 17,580 15,736
Note: Past performance is not predictive of future performance.
International Account
(Scott D. Opsal)
The International Account's 26.2% total return in 1996 was driven by broad
based market rallies across Europe. Several European markets have climbed more
than 20% in 1996, with Japan and Italy being the only major markets not
reflecting strong gains. The Account's investment strategy of holding stocks in
smaller European economies produced outperformance as interest rate moves have
been favorable this year. Long bond yields in secondary European markets fell
while rates in the stronger core countries have inched up. The Account's
overexposure to the falling rate markets and underexposure to the rising rate
markets was a significant positive factor producing returns that exceeded EAFE's
6.1% and the average international fund in 1996.
The Account also benefited from non-cyclical stockholdings in Europe. Food,
drug, technology, and stable growth cyclicals have outperformed the heavier
cyclical industries. The Account's move into non-cyclical growth stocks early in
the year proved timely. The Account remains underweighted in Japan due to poor
valuations and a weak economic outlook. Japan has been the worst performing
major market, and the Account's lack of exposure to this market also boosted
relative returns.
Adverse currency changes diminished the Account's returns as measured in
U.S. dollars by an estimated 2%. We believe the EAFE index has suffered a
currency loss exceeding 4%, and the average manager has lost an estimated 3%.
Thus, the Account's investment strategy placed it in markets suffering
relatively small foreign exchange losses thereby aiding relative return
performance.
The Account is subject to specific risks associated with foreign currency
rates, foreign taxation and foreign economies.
Total Returns *
As of December 31, 1996
----------------------------------------------------
1 Year Since Inception Date 5/2/94 10 Year
25.09% 12.83% --
Comparison of Change in Value of $10,000 Investment in the
International Account, EAFE and Lipper International Fund Average
------------------------------------------------------------
Fund Morgan Stanley Lipper
Year Ended Total EAFE International
December 31, Return Index Index
10,000 10,000 10,000
1994 9,663 9,990 9,758
1995 11,032 11,110 10,676
1996 13,800 11,781 11,934
Note: Past performance is not predictive of future performance.
MidCap Account
(Michael R. Hamilton)
The equity market was strong in 1996, but within the market there were two
different trends. Large-cap stocks performed much better than small-cap stocks.
The MidCap Account returned 19.13% compared with the Lipper Mid Cap Average of
17.9%. The Account and the Lipper Average trailed the S&P 500 Index because of
their emphasis on small cap stocks. While both trailed the S&P 500, this was a
good year for the Account.
The financial market continues to grapple with the paradox of strong
economic growth with no apparent inflation. Productivity will be key in 1997 if
inflation is to remain benign. The Account's portfolio continues to be focused
on companies that should enhance productivity of both labor and capital. Several
of the technology, service and cyclical areas support this emphasis. The
portfolio is also overweighted in the financial sector as bank consolidation
continues.
Continued profit growth will be important in 1997 as well. Companies with
more predictable and visible earnings growth are preferred. This continues to be
those that are low cost producers and have competitive barriers to entry.
Selectivity in all sectors will be crucial to outperformance.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
21.11% 16.64% 17.73%
Comparison of Change in Value of $10,000 Investment
in the MidCap Account, S&P 500 and
Lipper Mid Cap Fund Average
-----------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 MID CAP
December 31, Return Index Index
10,000 10,000 10,000
1988 12,369 11,661 11,476
1989 15,070 15,356 14,586
1990 13,186 14,877 14,067
1991 20,240 19,412 21,275
1992 23,264 20,891 23,213
1993 27,750 22,992 26,625
1994 27,967 23,294 26,079
1995 36,080 32,037 34,469
1996 43,697 39,388 40,646
Note: Past performance is not predictive of future performance.
Important Notes of the Growth-Oriented Accounts:
Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Growth Fund Average: This average consists of funds which normally invest
in companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices. The one-year average at December 31, 1996 contained 669 funds.
Lipper Flexible Portfolio Fund Average: This average consists of funds which
allocate their investments across various asset classes, including domestic
common stocks, bonds and money market instruments, with a focus on total return.
The one-year average at December 31, 1996 contained 186 funds.
Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average at December 31, 1996 contained 272 mutual funds.
Lipper Growth & Income Fund Average: this average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one year average at December 31, 1996 contained 522
funds.
Lipper Mid Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average at December 31, 1996 contained 154
funds.
Morgan Stanley Capital International EAFE (Europe, Australia and Far East)
Index: This average reflects an arithmetic, market value weighted average of
performance of 1,920 listed securities which are listed on the stock exchanges
of the following countries: Australia, Austria, Belgium, Denmark, Netherlands,
New Zealand, Norway, Singapore/Malaysia, Spain, Sweden, Switzerland, and the
United Kingdom.
Lipper International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average at December 31, 1996 contained 331 funds.
Income-Oriented Accounts:
Bond Account
(Scott A. Bennett)
The Bond Account's performance in 1996 lagged when compared to 1995. 1995
was a banner year, mainly because of dramatically declining interest rates.
During 1996 interest rates increased throughout most of the year based on fears
of increasing inflation. This hurt the Account's relative performance as the
duration target of 7 years (actual duration at 12/31/96 was 6.98 years) is
longer than the average BBB rated bond fund and the BAA Lehman Corporate Index.
Relative performance was also negatively impacted by the lack of a significant
amount of less than investment grade bonds in the portfolio. High yield (less
than investment grade) debt performed extremely well during 1996, with many of
the top performing funds in the Lipper BAA universe having significant exposures
to this asset class.
Over the long-term, the Account continues to outperform the average BBB
fund. This is attributed to remaining fully invested and not trying to guess
interest rates. The BBB corporate bond class continued to be an attractive asset
class in 1996, outperforming all other taxable investment grade classes. Spreads
continued to narrow during the year with defaults low and a large amount of
funds chasing the available bonds.
Total Returns *
As of December 31, 1996
- --------------------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
2.36% 8.20% 9.55%
Comparison of Change in Value of $10,000 Investment in the Bond Account, Lehman
Brothers BAA Corporate Index and Lipper Corporate Debt BBB Rated Fund Average
-----------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total BAA BBB
December 31, Return Index Avg
10,000 10,000 10,000
1988 10,991 11,129 10,900
1989 12,514 12,699 12,060
1990 13,167 13,595 12,751
1991 15,369 16,113 15,020
1992 16,810 17,512 16,258
1993 18,771 19,665 18,261
1994 18,227 18,707 17,447
1995 22,268 22,959 20,948
1996 22,794 23,882 21,616
Note: Past performance is not predictive of future performance.
Government Securities Account
(Martin J. Schafer)
Interest rates rose in 1996, which dampened absolute fixed income returns.
The Account underperformed the Lipper U.S. Mortgage Fund Average and the Lehman
MBS Index in 1996 due to its slightly longer duration. However, since the
Account's inception of 4/9/87 it has outperformed the Lipper U.S. Mortgage Fund
Average and is competitive with the Lehman MBS Index.
Results were enhanced last year through identification and selection of
certain undervalued sectors of mortgage-backed securities for a portion of the
portfolio. These securities have now become very popular with Wall Street and
other investors, resulting in their increasing in value.
The current portfolio is well positioned for the period ahead. It has a
number of securities that are "seasoned" (e.g., original 30 year loans that have
been outstanding for three years or more) and therefore valued more highly in
the marketplace. There are few securities priced above par, so prepayment risk
is negligible. If the future continues to be an era of economic prosperity we
should continue to see strong housing markets and housing turnover that will
cause prepayments on our securities to exceed market expectations. These
repayments are welcomed, as the portfolio is priced at a discount and the
Account will be paid-off at par.
Total Returns *
As of December 31, 1996
- --------------------------------------------------
1 Year 5 Year Since Inception Date 4/9/87
3.35% 6.68% 8.63%
Comparison of Change in Value of $10,000 Investment in the Government Securities
Account, Lehman Brothers Mortgage Index and Lipper U.S. Mortgage Fund Average
- --------------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total Mortgage U.S. Mortgage
December 31, Return Index Index
10,000 10,000 10,000
1987 10,099 10,204 10,104
1988 10,939 11,094 10,858
1989 12,645 12,808 12,224
1990 13,852 14,183 13,370
1991 16,200 16,410 15,348
1992 17,308 17,551 16,285
1993 19,051 18,751 17,499
1994 18,188 18,450 16,769
1995 21,656 21,549 19,491
1996 22,381 22,702 20,245
Note: Past performance is not predictive of future performance.
Important Notes of the Income-Oriented Accounts:
Lehman Brothers, BAA Corporate Index: an unmanaged index of all publicly issued
fixed rate nonconvertible, dollar-denominated, SEC-registered corporate debt
rated Baa or BBB by Moody's or S&P.
Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average at
December 31, 1996 contained 102 mutual funds.
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgages/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average at December 31, 1996 contained 59 mutual
funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES
The net asset value of each Account's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange,
except on days on which changes in the value of the Account's portfolio
securities will not materially affect the current net asset value of the
Account's redeemable securities, on days during which an Account receives no
order for the purchase or sale of its redeemable securities and no tender of
such a security for redemption, and on customary national business holidays. The
net asset value per share of each Account is determined by dividing the value of
the Account's securities plus all other assets, less all liabilities, by the
number of Account shares outstanding.
Growth-Oriented and Income-Oriented Accounts
The following valuation information applies to the Growth-Oriented and
Income-Oriented Accounts. Securities for which market quotations are readily
available are valued using those quotations. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.
As previously described, some of the Accounts may purchase foreign
securities whose trading is substantially completed each day at various times
prior to the close of the New York Stock Exchange. The values of such securities
used in computing net asset value per share are usually determined as of such
times. Occasionally, events which affect the values of such securities and
foreign currency exchange rates may occur between the times at which they are
generally determined and the close of the New York Stock Exchange and would
therefore not be reflected in the computation of the Account's net asset value.
If events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the Manager or Sub-Advisor under procedures established and
regularly reviewed by the Board of Directors. To the extent the Account invests
in foreign securities listed on foreign exchanges which trade on days on which
the Account does not determine its net asset value, for example Saturdays and
other customary national U.S. Holidays, the Account's net asset value could be
significantly affected on days when shareholders have no access to the Account.
Money Market Account
The Money Market Account values its securities at amortized cost. For a
description of this calculation procedure see the Fund's Statement of Additional
Information.
PERFORMANCE CALCULATION
From time to time, the Accounts may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Accounts. The Account's yield and total return
figures described below will vary depending upon market conditions, the
composition of the Account's portfolios and operating expenses. These factors
and possible differences in the methods used in calculating yield and total
return should be considered when comparing the Accounts' performance figures to
performance figures published for other investment vehicles. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices. Any performance data quoted for the Accounts represents only
historical performance and is not intended to indicate future performance of the
Accounts. The calculation of average annual total return and yield for the
Accounts does not include fees and charges of the separate accounts that invest
in the Accounts and, therefore, does not reflect the investment performance of
those separate accounts. For further information on how the Accounts calculate
yield and total return figures, see the Statement of Additional Information.
Average Annual Total Return
Each Account may advertise its respective average annual total return.
Average annual total return for each Account is computed by calculating the
average annual compounded rate of return over the stated period that would
equate an initial $1,000 investment to the ending redeemable value assuming the
reinvestment of all dividends and capital gains distributions at net asset
value. The same assumptions are made when computing cumulative total return by
dividing the ending redeemable value by the initial investment. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices.
Yield and Effective Yield
From time to time the Money Market Account may advertise its respective
yield and effective yield. The yield of the Account refers to the income
generated by an investment in the Account over a seven-day period. This income
is then annualized. That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the
Account is assumed to be reinvested. The effective yield will be slightly higher
than the yield because of the compounding effect of this assumed reinvestment.
The yield for the Money Market Account will fluctuate daily as the income
earned on the investments of the Account fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Account is one of a Series of Accounts issued by an
open-end investment company and there is no guarantee that the net asset value
or any stated rate of return will remain constant. A shareholder's investment in
the Account is not insured. Investors comparing results of the Account with
investment results and yields from other sources such as banks or savings and
loan associations should understand these distinctions. Historical and
comparative yield information may, from time to time, be presented by the
Account.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
It is the policy of each Account to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which
the Fund so qualifies it will be exempt from federal income tax upon the amounts
so distributed to investors.
Any dividends from the net investment income of the Accounts (except the
Money Market Account) will normally be payable to the shareholders annually, and
any net realized gains will be distributed annually. All dividends and capital
gains distributions are applied to purchase additional Account shares at net
asset value as of the payment date without the imposition of any sales charge.
Each Account will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Accounts to consult with tax advisors on the federal
and state tax aspects of their investments and redemptions.
Money Market Account
The Money Market Account declares dividends of all its daily net investment
income on each day the Account's net asset value per share is determined.
Dividends are payable daily and are automatically reinvested in full and
fractional shares of the Account at the then current net asset value unless a
shareholder requests payment in cash.
Net investment income, for dividend purposes, consists of (1) accrued
interest income plus or minus accrued discount or amortized premium; plus or
minus (2) all net short-term realized gains and losses; minus (3) all accrued
expenses of the Account. Expenses of the Account are accrued each day. Net
income will be calculated immediately prior to the determination of net asset
value per share of the Account.
Since the Account's policy is, under normal circumstances, to hold
portfolio securities to maturity and to value portfolio securities at amortized
cost, it does not expect any capital gains or losses. If the Account does
experience gains, however, it could result in an increase in dividends. Capital
losses could result in a decrease in dividends. If for some extraordinary reason
the Account realizes net long-term capital gains, it will distribute them once
every 12 months.
Since the net income of the Account (including realized gains and losses on
the portfolio securities) is declared as a dividend each time the net income of
the Account is determined, the net asset value per share of the Account normally
remains at $1.00 immediately after each determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Account,
representing reinvestment of dividend income, is reflected by an increase in the
number of shares of the Account.
Normally the Account will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Account
determined at any time is a negative amount, the net asset value per share will
be reduced below $1.00. If this happens, the Account may endeavor to restore the
net asset value per share to $1.00 by reducing the number of outstanding shares
by redeeming proportionately from shareholders without the payment of any
monetary consideration, such number of full and fractional shares as is
necessary to maintain a net asset value per share of $1.00. Each shareholder
will be deemed to have agreed to such a redemption in these circumstances by
investing in the Account. The Account may seek to achieve the same objective of
restoring the net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share would increase to the extent of positive net income which
is not declared as a dividend, or any other method approved by the Board of
Directors.
The Board of Directors may revise the above dividend policy, or postpone
the payment of dividends, if the Account should have or anticipate any large
presently unexpected expense, loss or fluctuation in net assets which in the
opinion of the Board might have a significant adverse affect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Accounts. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Account shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
Each Account serves an underlying investment medium for variable annuity
contracts and variable life insurance policies that are funded in separate
accounts established by Principal Mutual Life Insurance Company. It is
conceivable that in the future it may be disadvantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest in
the Accounts simultaneously. Although neither Principal Mutual Life Insurance
Company nor the Accounts currently foresee any such disadvantages either to
variable life insurance policy owners or to variable annuity contract owners,
the Fund's Board of Directors intends to monitor events in order to identify any
material conflicts between such policy owners and contract owners and to
determine what action, if any, should be taken in response thereto. Such action
could include the sale of Account shares by one or more of the separate
accounts, which could have adverse consequences. Material conflicts could result
from, for example, (1) changes in state insurance laws, (2) changes in Federal
income tax law, (3) changes in the investment management of an Account, or (4)
differences in voting instructions between those given by policy owners and
those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Fund. There are no sales charges on the Accounts'
shares. There are no restrictions on amounts to be invested in the Accounts'
shares.
Shareholder accounts for each Account will be maintained under an open
account system. Under this system, an account is automatically opened and
maintained for each new investor. Each investment is confirmed by sending the
investor a statement of account showing the current purchase and the total
number of shares then owned. The statement of account is treated by each Account
as evidence of ownership of Account shares in lieu of stock certificates, and
unless written request is made to the Account, stock certificates will not be
issued or delivered to investors. Certificates, which can be stolen or lost, are
unnecessary except for special purposes such as collateral for a loan.
Fractional interests in the Account's shares are reflected to three decimal
places in the statement of account, but any stock certificates will be issued
only for full shares owned.
If an offer to purchase shares is received by any of the Accounts before
the close of trading on the New York Stock Exchange, the shares will be issued
at the offering price (net asset value of Account shares) computed on that day.
If an offer is received after the close of trading or on a day which is not a
trading day, the shares will be issued at the offering price computed on the
first succeeding day on which a price is determined. Dividends on the Money
Market Account shares will be paid on the next day following the effective date
of a purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each Account of the Principal
Variable Contracts Fund, Inc. Each Account share is entitled to one vote either
in person or by proxy at all shareholder meetings for that Account. This
includes the right to vote on the election of directors, selection of
independent accountants and other matters submitted to meetings of shareholders
of the Account. Each share has equal rights with every other share of the
Account as to dividends, earnings, voting, assets and redemption. Shares are
fully paid and non-assessable, and have no preemptive or conversion rights.
Shares of an Account may be issued as full or fractional shares, and each
fractional share has proportionately the same rights, including voting, as are
provided for a full share. Shareholders of the Fund may remove any director with
or without cause by the vote of a majority of the votes entitled to be cast at a
meeting of all Account shareholders.
The bylaws of the Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of the Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Fund intends to hold shareholder meetings only when required by
law and at such other times as may be deemed appropriate by the Board of
Directors.
Shareholder inquiries should be directed to the Principal Variable
Contracts Fund, Inc. at The Principal Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Fund's shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of the Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Account's shares
allocated to each of its separate accounts registered under the Investment
Company Act of 1940 and attributable to variable annuity contracts or variable
life insurance policies participating therein in accordance with instructions
received from contract or policy holders, participants and annuitants. Other
shares of each Account held by each registered separate account, including those
for which no timely instructions are received, are voted in proportion to the
instructions that are received with respect to contracts or policies
participating in that separate account. Shares of each of the Accounts held in
the general account of Principal Mutual Life Insurance Company or in its
unregistered separate accounts are voted in proportion to the instructions that
are received with respect to contracts and policies participating in its
registered and unregistered separate accounts. If Principal Mutual determines
pursuant to applicable law that an Account's shares held in one or more separate
accounts or in its general account need not be voted pursuant to instructions
received with respect to participating contracts or policies, it then may vote
those Account shares in its own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Account will redeem its shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Account requesting redemption of any part or all of
the shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, the Account will not require a signature guarantee as a part of a
proper endorsement; otherwise the shareholder's signature must be guaranteed by
either a commercial bank, trust company, credit union, savings and loan
association, national securities exchange member, or by a brokerage firm. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Account in proper and complete form. The amount received for
shares upon redemption may be more or less than the cost of such shares
depending upon the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Account may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Account of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Account
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Account. An Account
will redeem only those shares for which it has received good payment. To avoid
the inconvenience of such a delay, shares may be purchased with a certified
check, bank cashier's check or money order. During the period prior to the time
a redemption from the Money Market Account is effective, dividends on such
shares will accrue and be payable and the shareholder will be entitled to
exercise all other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Accounts may be transferred to
an Eligible Purchaser. However, whenever any of the Accounts is requested to
transfer shares to other than an Eligible Purchaser, the Account has the right
at its election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Account must notify the transferee or transferees of such
shares in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Accounts
except the International Account. The custodian for the International Account is
Chase Manhattan Bank, Global Securities Services, Chase Metro Tech Center,
Brooklyn, New York 11245. The custodians perform no managerial or policymaking
functions for the Fund.
Organization and Share Ownership: Effective January 1, 1998, an Agreement
and Plan of Reorganization and Liquidation was implemented under which a Series
of the Principal Variable Contracts Fund, Inc. adopted the assets and
liabilities of the corresponding Fund. The Funds were incorporated in the state
of Maryland on the following dates: Aggressive Growth Fund - August 20, 1993;
Asset Allocation Fund - august 20, 1993; Balanced Fund - November 26, 1986; Bond
Fund - November 26, 1986; Capital Accumulation Fund - May 26, 1989 (effective
November 1, 1989 succeeded to the business of a predecessor Fund that had been
incorporated in Delaware on February 6, 1969); Emerging Growth Fund - February
20, 1987; Government Securities Fund - June 7, 1985; Growth Fund August 20,
1993; Money Market Fund - June 10, 1982; and World Fund - August 20, 1993.
Principal Mutual Life Insurance Company owns 100% of each Fund's outstanding
shares.
Capitalization: The authorized capital stock of each Account consists of
100,000,000 shares of common stock (500,000,000 for Money Market Account), $.01
par value.
Financial Statements: Copies of the financial statements of each Account
will be mailed to each shareholder of that Account semi-annually. At the close
of each fiscal year, each Account's financial statements will be audited by a
firm of independent auditors. The firm of Ernst & Young LLP has been appointed
to audit the financial statements of the Fund for the present fiscal year.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the Fund
has filed with the Securities and Exchange Commission. The Fund's Statement of
Additional Information is hereby incorporated by reference into this Prospectus.
A copy of the Fund's Statement of Additional Information can be obtained upon
request, free of charge, by writing or telephoning the Fund. You may obtain a
copy of Part C of the Registration Statements filed with the Securities and
Exchange Commission, Washington, D.C., from the Commission upon payment of the
prescribed fees.
Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for the Principal Variable Contracts Fund, Inc.
The Principal Variable Contracts Fund, Inc. described in this Prospectus is
a diversified, open-end management investment company which offers a variety of
Accounts each of which was formerly a separately incorporated investment
company. Together the Accounts provide the following range of investment
objectives:
Growth-Oriented Accounts
Balanced Account (formerly known as Principal Balanced Fund, Inc.) seeks to
generate a total return consisting of current income and capital appreciation
while assuming reasonable risks in furtherance of the investment objective.
Capital Value Account (formerly known as Principal Capital Accumulation Fund,
Inc.) seeks to achieve primarily long-term capital appreciation and secondary
growth of investment income through the purchase primarily of common stocks, but
the Account may invest in other securities.
MidCap Account (formerly known as Principal Emerging Growth Fund, Inc.) seeks to
achieve capital appreciation by investing primarily in securities of emerging
and other growth-oriented companies.
Income-Oriented Accounts
Bond Account (formerly known as Principal Bond Fund, Inc.) seeks to provide as
high a level of income as is consistent with preservation of capital and prudent
investment risk.
High Yield Account (formerly known as Principal High Yield Fund, Inc.) seeks
high current income. Capital growth is a secondary objective when consistent
with the objective of high current income. The Account seeks to achieve its
objective primarily through the purchase of high yielding, lower or non-rated
fixed income securities commonly referred to as "junk bonds." Bonds of this type
are considered to be speculative with regard to payment of interest and return
of principal. Purchasers should carefully assess the risks associated with an
investment in this Account.
Money Market Account
Money Market Account (formerly known as Principal Money Market Fund, Inc.) seeks
as high a level of income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
An investment in any of the Accounts is neither insured nor guaranteed by
the U.S. Government. There can be no assurance the Money Market Account will be
able to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Variable
Contracts Fund, Inc. that an investor ought to know before investing. It should
be read and retained for future reference.
Additional information about the Fund has been filed with the Securities
and Exchange Commission, including a document called Statement of Additional
Information, dated __________________. The Statement of Additional Information
is incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Variable Contracts Fund, Inc.
A Member of
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is__________________.
TABLE OF CONTENTS
Page
Summary .......................................................... 3
Financial Highlights............................................... 5
Investment Objectives, Policies and Restrictions................... 10
Certain Investment Policies and Restrictions....................... 15
Manager and Sub-Advisor .......................................... 16
Duties Performed by the Manager and Sub-Advisor.................... 17
Managers' Comments................................................. 17
Determination of Net Asset Value of Account Shares................. 20
Performance Calculation............................................ 21
Income Dividends, Distributions and Tax Status..................... 21
Eligible Purchasers and Purchase of Shares......................... 22
Shareholder Rights ................................................ 23
Redemption of Shares............................................... 23
Additional Information............................................. 24
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, shares of the Fund in any jurisdiction in which such sale,
offer to sell, or solicitation may not be lawfully made. No dealer, salesperson,
or other person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund or the Fund's Managers.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Variable Contracts Fund, Inc. ("Fund") is an incorporated,
open-end diversified management investment company offering multiple accounts.
Who may purchase shares of the Accounts?
Shares of the Accounts are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Accounts offer investors?
Professional Investment Management: Experienced securities analysts provide
each Account with professional investment management.
Diversification: Each Account will diversify by investing in securities
issued by a number of issuers doing business in a variety of industries and/or
located in different geographical regions. Diversification reduces investment
risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Accounts creates administrative efficiencies.
Redeemability: Upon request each Account will redeem its shares and
promptly pay the investor the current net asset value of the shares redeemed.
See "Redemption of Shares."
What are the Accounts' investment objectives?
Growth-Oriented Accounts
The investment objective of Balanced Account is to seek to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of this objective. The Account intends to pursue
a flexible investment policy in seeking to achieve this investment objective.
The primary investment objective of Capital Value Account is long-term
capital appreciation and its secondary investment objective is growth of
investment income. The Account seeks to achieve its investment objectives
through the purchase primarily of common stocks, but the Account may invest in
other securities.
The investment objective of MidCap Account is to achieve capital
appreciation by investing primarily in securities of emerging and other
growth-oriented companies.
Income-Oriented Accounts
The investment objective of Bond Account is to provide as high a level of
income as is consistent with preservation of capital and prudent investment
risk.
The primary investment objective of High Yield Account is to seek high
current income. Capital growth is a secondary objective when consistent with the
objective of high current income. The Account will invest primarily in high
yielding, lower or non-rated fixed income securities.
Money Market Account
The investment objective of Money Market Account is to seek as high a level
of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
There can be no assurance that the investment objectives of any of the
Accounts will be realized. See "Investment Objectives, Policies and
Restrictions."
Who serves as Manager for the Accounts?
Principal Management Corporation (formerly known as Princor Management
Corporation), a corporation organized in 1969 by Principal Mutual Life Insurance
Company, is the Manager for each of the Accounts. It is also the dividend
disbursing and transfer agent for the Fund. In order to provide investment
advisory services for the Balanced Account, Capital Value Account and MidCap
Account, the Manager has executed a sub-advisory agreement with Invista Capital
Management, Inc. ("Invista" or "Sub-Advisor"). See "Manager and Sub-Advisor."
What fees and expenses apply to ownership of shares of the Accounts?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Accounts.
ANNUAL ACCOUNT OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Account Fee Expenses Expenses
Balanced Account .60% .03% .63%
Bond Account .50% .03% .53%
Capital Value Account .48% .01% .49%
High Yield Account .60% .10% .70%
MidCap Account .64% .02% .66%
Money Market Account .50% .06% .56%
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Period (in years)
Account 1 3 5 10
Balanced Account $6 $20 $35 $79
Bond Account $5 $17 $30 $66
Capital Value Account $5 $16 $27 $62
High Yield Account $7 $22 $39 $87
MidCap Account $7 $21 $37 $82
Money Market Account $6 $18 $31 $70
This Example is based on the Annual Account Operating expenses for each
Account described above. Please remember that the Example should not be
considered a representation of past or future expenses and that actual
expenses may be greater or less than shown.
The purpose of the above table is to assist you in understanding the
various expenses that an investor in the Accounts will bear directly or
indirectly. See "Duties Performed by the Manager."
FINANCIAL HIGHLIGHTS
The following financial highlights for the periods ended December 31, 1996
and prior thereto are derived from financial statements which have been audited
by Ernst & Young LLP, independent auditors, whose report has been incorporated
by reference herein. The financial highlights should be read in conjunction with
the financial statements, related notes, and other financial information
incorporated by reference herein. Audited financial statements may be obtained
by shareholders, without charge, by telephoning 1-800-451-5447. INVESTMENT
<TABLE>
<CAPTION>
Income from
Investment Operations
Net Realized
and
Net Asset Unrealized Total
Value at Net Gain from
Beginning Investment (Loss) on Investment
of Period Income Investments Operations
Balanced Account(a)
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $13.97 $ .40 $ 1.41 $1.81
1995 11.95 .45 2.44 2.89
1994 12.77 .37 (.64) (.27)
1993 12.58 .42 .95 1.37
Six Months Ended
December 31, 1992(b) 12.93 .23 .75 .98
Year Ended June 30,
1992 11.33 .47 1.61 2.08
1991 10.79 .54 .59 1.13
1990 11.89 .60 (.48) .12
1989 11.75 .62 .30 .92
Period Ended June 30, 1988(e) 10.00 .27 1.51 1.78
Bond Account
Year Ended December 31,
1996 11.73 .68 (.40) .28
1995 10.12 .62 1.62 2.24
1994 11.16 .72 (1.04) (.32)
1993 10.77 .88 .38 1.26
Six Months Ended
December 31, 1992(b) 11.08 .45 .13 .58
Year Ended June 30,
1992 10.64 .91 .46 1.37
1991 10.72 .94 (.06) .88
1990 10.92 .95 (.21) .74
1989 10.68 1.15 .17 1.32
Period Ended June 30, 1988(e) 10.00 .32 .40 .72
Capital Value Account
Year Ended December 31,
1996 27.80 .57 5.82 6.39
1995 23.44 .60 6.69 7.29
1994 24.61 .62 (.49) .13
1993 25.19 .61 1.32 1.93
Six Months Ended
December 31, 1992(b) 26.03 .31 1.84 2.15
Year Ended June 30,
1992 23.35 .65 2.70 3.35
1991 22.48 .74 1.22 1.96
1990 23.63 .79 .14 .93
1989 23.23 .77 1.32 2.09
1988 27.51 .60 (1.50) (.90)
1987 25.48 .40 4.46 4.86
</TABLE>
<TABLE>
<CAPTION>
Less Distributions
Excess
Dividends Distributions Distributions
from Net from from
Investment Capital Capital Total
Income Gains Gains Distributions
Balanced Account(a)
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $(.40) $ (.94) $ -- $(1.34)
1995 (.45) (.42) -- (.87)
1994 (.37) (.18) -- (.55)
1993 (.42) (.76) -- (1.18)
Six Months Ended
December 31, 1992(b) (.47) (.86) -- (1.33)
Year Ended June 30,
1992 (.48) -- -- (.48)
1991 (.57) (.02) -- (.59)
1990 (.63) (.59) -- (1.22)
1989 (.55) (.23) -- (.78)
Period Ended June 30, 1988(e) (.03) -- -- (.03)
Bond Account
Year Ended December 31,
1996 (.68) -- -- (.68)
1995 (.63) -- -- (.63)
1994 (.72) -- -- (.72)
1993 (.87) -- -- (.87)
Six Months Ended
December 31, 1992(b) (.89) -- -- (.89)
Year Ended June 30,
1992 (.93) -- -- (.93)
1991 (.96) -- -- (.96)
1990 (.94) -- -- (.94)
1989 (.96) (.12) -- (1.08)
Period Ended June 30, 1988(e) (.04) -- -- (.04)
Capital Value Account
Year Ended December 31,
1996 (.58) (3.77) -- (4.35)
1995 (.60) (2.33) -- (2.93)
1994 (.61) (.69) -- (1.30)
1993 (.60) (1.91) -- (2.51)
Six Months Ended
December 31, 1992(b) (.64) (2.35) -- (2.99)
Year Ended June 30,
1992 (.67) -- -- (.67)
1991 (.79) (.30) -- (1.09)
1990 (.81) (1.27) -- (2.08)
1989 (.68) (1.01) -- (1.69)
1988 (.69) (2.69) -- (3.38)
1987 (.50) (2.33) -- (2.83)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
Balanced Account(a)
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $14.44 13.13% $ 93,158 .63% 3.45% 22.6% $.0417
1995 13.97 24.58% 45,403 .66% 4.12% 25.7% N/A
1994 11.95 (2.09)% 25,043 .69% 3.42% 31.5% N/A
1993 12.77 11.06% 21,399 .69% 3.30% 15.8% N/A
Six Months Ended
December 31, 1992(b) 12.58 8.00%(c) 18,842 .73%(d) 3.71%(d) 38.4%(d) N/A
Year Ended June 30,
1992 12.93 18.78% 17,344 .72% 3.80% 26.6% N/A
1991 11.33 11.36% 14,555 .73% 5.27% 27.1% N/A
1990 10.79 .87% 13,016 .74% 5.52% 33.1% N/A
1989 11.89 8.55% 12,751 .74% 5.55% 29.3% N/A
Period Ended June 30, 1988(e) 11.75 17.70%(c) 11,469 .80%(d) 4.96%(d) 41.7%(d) N/A
Bond Account
Year Ended December 31,
1996 11.33 2.36% 63,387 .53% 7.00% 1.7% N/A
1995 11.73 22.17% 35,878 .56% 7.28% 5.9% N/A
1994 10.12 (2.90)% 17,108 .58% 7.86% 18.2% N/A
1993 11.16 11.67% 14,387 .59% 7.57% 14.0% N/A
Six Months Ended
December 31, 1992(b) 10.77 5.33%(c) 12,790 .62%(d) 8.10%(d) 6.7%(d) N/A
Year Ended June 30,
1992 11.08 13.57% 12,024 .62% 8.47% 6.1% N/A
1991 10.64 8.94% 10,552 .63% 9.17% 2.7% N/A
1990 10.72 7.15% 9,658 .64% 9.09% 0.0% N/A
1989 10.92 13.51% 9,007 .64% 9.18% 12.2% N/A
Period Ended June 30, 1988(e) 10.68 6.06%(c) 17,598 .58%(d) 8.11%(d) 68.8%(d) N/A
Capital Value Account
Year Ended December 31,
1996 29.84 23.50% 205,019 .49% 2.06% 48.5% .0426
1995 27.80 31.91% 135,640 .51% 2.25% 49.2% N/A
1994 23.44 .49% 120,572 .51% 2.36% 44.5% N/A
1993 24.61 7.79% 128,515 .51% 2.49% 25.8% N/A
Six Months Ended
December 31, 1992(b) 25.19 8.81%(c) 105,355 .55%(d) 2.56%(d) 39.7%(d) N/A
Year Ended June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8% N/A
1991 23.35 9.46% 76,537 .53% 3.53% 14.0% N/A
1990 22.48 3.94% 74,008 .56% 3.56% 30.2% N/A
1989 23.63 10.02% 68,132 .57% 3.53% 23.5% N/A
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7% N/A
1987 27.51 22.17% 57,478 .63% 1.99% 16.1% N/A
</TABLE>
Notes to financial highlights
(a) Effective May 1, 1994, the name of Principal Managed Fund, Inc. was
changed to Principal Balanced Fund, Inc.
(b) Effective July 1, 1992 the fund changed its fiscal year end from June
30 to December 31.
(c) Total return amounts have not been annualized.
(d) Computed on an annualized basis.
(e) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating
$.01 per share for the period from the initial purchase of shares on
December 10, 1987 through December 17, 1987 was recognized, all of
which was distributed to the Account's sole stockholder, Principal
Mutual Life Insurance Company. This represented activity of the
Account prior to the initial offering of shares to eligible
purchasers.
<TABLE>
<CAPTION>
Income from
Investment Operations
Net Realized
and
Net Asset Unrealized Total
Value at Net Gain from
Beginning Investment (Loss) on Investment
of Period Income Investments Operations
High Yield Account
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $ 8.39 $ .80 $ .30 $1.10
1995 7.91 .76 .51 1.27
1994 8.62 .77 (.72) .05
1993 8.38 .80 .23 1.03
Six Months Ended
December 31, 1992(a) 8.93 .45 (.10) .35
Year Ended June 30,
1992 8.28 .92 .66 1.58
1991 8.96 .99 (.53) .46
1990 10.37 1.21 (1.35) (.14)
1989 11.01 1.23 (.45) .78
Period Ended June 30, 1988(d) 10.00 .67 .49 1.16
MidCap Account(d)
Year Ended December 31,
1996 25.33 .22 5.07 5.29
1995 19.97 .22 5.57 5.79
1994 20.79 .14 .03 .17
1993 18.91 .17 3.47 3.64
Six Months Ended
December 31, 1992(b) 15.97 .10 3.09 3.19
Year Ended June 30,
1992 13.93 .21 2.04 2.25
1991 14.25 .20 .50 .70
1990 13.35 .24 .87 1.11
1989 12.85 .16 1.35 1.51
Period Ended June 30, 1988(e) 10.00 .05 2.83 2.88
Money Market Account
Year Ended December 31,
1996 1.000 .049 -- .049
1995 1.000 .054 -- .054
1994 1.000 .037 -- .037
1993 1.000 .027 -- .027
Six Months Ended
December 31, 1992(a) 1.000 .016 -- .016
Year Ended June 30,
1992 1.000 .046 -- .046
1991 1.000 .070 -- .070
1990 1.000 .077 -- .077
1989 1.000 .083 -- .083
1988 1.000 .064 -- .064
1987 1.000 .057 -- .057
</TABLE>
<TABLE>
<CAPTION>
Less Distributions
Excess
Dividends Distributions Distributions
from Net from from
Investment Capital Capital Total
Income Gains Gains Distributions
High Yield Account
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $ (.77) $ -- $ -- $ (.77)
1995 (.77) (.02) -- (.79)
1994 (.76) -- -- (.76)
1993 (.79) -- -- (.79)
Six Months Ended
December 31, 1992(a) (.90) -- -- (.90)
Year Ended June 30,
1992 (.93) -- -- (.93)
1991 (1.14) -- -- (1.14)
1990 (1.22) (.05) -- (1.27)
1989 (1.21) (.21) -- (1.42)
Period Ended June 30, 1988(d) (.15) -- -- (.15)
MidCap Account(d)
Year Ended December 31,
1996 (.22) (.66) -- (.88)
1995 (.22) (.21) -- (.43)
1994 (.14) (.85) -- (.99)
1993 (.17) (1.59) -- (1.76)
Six Months Ended
December 31, 1992(b) (.21) (.04) -- (.25)
Year Ended June 30,
1992 (.21) -- -- (.21)
1991 (.23) (.79) -- (1.02)
1990 (.20) (.01) -- (.21)
1989 (.11) (.90) -- (1.01)
Period Ended June 30, 1988(e) (.03) -- -- (.03)
Money Market Account
Year Ended December 31,
1996 (.049) -- -- (.049)
1995 (.054) -- -- (.054)
1994 (.037) -- -- (.037)
1993 (.027) -- -- (.027)
Six Months Ended
December 31, 1992(a) (.016) -- -- (.016)
Year Ended June 30,
1992 (.046) -- -- (.046)
1991 (.070) -- -- (.070)
1990 (.077) -- -- (.077)
1989 (.083) -- -- (.083)
1988 (.064) -- -- (.064)
1987 (.057) -- -- (.057)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
High Yield Account
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $ 8.72 13.13% $13,740 .70% 9.21% 32.0% N/A
1995 8.39 16.08% 11,830 .73% 9.09% 35.1% N/A
1994 7.91 .62% 9,697 .73% 9.02% 30.6% N/A
1993 8.62 12.31% 9,576 .74% 8.80% 28.7% N/A
Six Months Ended
December 31, 1992(a) 8.38 4.06%(b) 8,924 .77%(c) 10.33%(c) 20.6%(c) N/A
Year Ended June 30,
1992 8.93 20.70% 8,556 .77% 11.00% 31.3% N/A
1991 8.28 6.35% 7,085 .82% 12.58% 6.4% N/A
1990 8.96 (1.46)% 6,643 .83% 13.07% 24.2% N/A
1989 10.37 7.88% 6,741 .95% 11.89% 27.8% N/A
Period Ended June 30, 1988(d) 11.01 11.25%(b) 6,703 .78%(c) 11.71%(c) 58.2%(c) N/A
MidCap Account(d)
Year Ended December 31,
1996 29.74 21.11% 137,161 .66% 1.07% 8.8% .0379
1995 25.33 29.01% 58,520 .70% 1.23% 13.1% N/A
1994 19.97 .78% 23,912 .74% 1.15% 12.0% N/A
1993 20.79 19.28% 12,188 .78% .89% 22.4% N/A
Six Months Ended
December 31, 1992(b) 18.91 20.12%(c) 9,693 .81%(d) 1.24%(e) 8.6%(e) N/A
Year Ended June 30,
1992 15.97 16.19% 7,829 .82% 1.33% 10.1% N/A
1991 13.93 5.72% 6,579 .89% 1.70% 11.1% N/A
1990 14.25 8.32% 6,067 .88% 1.74% 17.9% N/A
1989 13.35 13.08% 5,509 .90% 1.31% 21.4% N/A
Period Ended June 30, 1988(e) 12.85 28.72%(c) 4,857 .94%(d) .64%(e) 4.6%(e) N/A
Money Market Account
Year Ended December 31,
1996 1.000 5.07% 46,244 .56% 5.00% N/A N/A
1995 1.000 5.59% 32,670 .58% 5.32% N/A N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A N/A
Six Months Ended
December 31, 1992(a) 1.000 1.54%(b) 27,680 .59%(c) 3.10%(c) N/A N/A
Year Ended June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A N/A
</TABLE>
Notes to financial highlights
(a) Effective July 1, 1992 the fund changed its fiscal year end from June
30 to December 31.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Effective May 1, 1992, the name of Principal Aggressive Growth Fund,
Inc. was changed to Principal Emerging Growth Fund, Inc.
(e) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating
$.01 per share for the period from the initial purchase of shares on
December 10, 1987 through December 17, 1987 was recognized, all of
which was distributed to the Account's sole stockholder, Principal
Mutual Life Insurance Company. This represented activity of the
Account prior to the initial offering of shares to eligible
purchasers.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Account are described below.
There can be no assurance that the objectives of the Accounts will be realized.
GROWTH-ORIENTED ACCOUNTS
The Fund includes two Accounts which seek capital appreciation through
investments in equity securities (Capital Value Account and MidCap Account) and
one Account which seeks a total investment return including both capital
appreciation and income through investments in equity and debt securities
(Balanced Account). These three Accounts are collectively referred to as the
Growth-Oriented Accounts.
The Growth-Oriented Accounts may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and American Depository Receipts based
on any of the foregoing securities. The Capital Value and MidCap Accounts will
seek to be fully invested under normal conditions in equity securities. When in
the opinion of the Manager current market or economic conditions warrant, a
Growth-Oriented Account may for temporary defensive purposes place all or a
portion of its assets in cash, on which the Account would earn no income, cash
equivalents, bank certificates of deposit, bankers acceptances, repurchase
agreements, commercial paper, commercial paper master notes which are floating
rate debt instruments without a fixed maturity, United States Government
securities, and preferred stocks and debt securities, whether or not convertible
into or carrying rights for common stock. A Growth-Oriented Account may also
maintain reasonable amounts in cash or short-term debt securities for daily cash
management purposes or pending selection of particular long-term investments.
Balanced Account
The investment objective of the Balanced Account is to generate a total
return consisting of current income and capital appreciation while assuming
reasonable risks in furtherance of the investment objective. The term
"reasonable risks" refers to investment decisions that in the Manager's judgment
do not present a greater than normal risk of loss in light of current or
anticipated future market and economic conditions, trends in yields and interest
rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Account invests
primarily in growth and income-oriented common stocks (including securities
convertible into common stocks), corporate bonds and debentures and short-term
money market instruments. The Account may also invest in other equity
securities, and in debt securities issued or guaranteed by the United States
Government and its agencies or instrumentalities. The Account seeks to generate
real (inflation plus) growth during favorable investment periods and may
emphasize income and capital preservation strategies during uncertain investment
periods. The Manager will seek to minimize declines in the net asset value per
share. However, there is no guarantee that the Manager will be successful in
achieving this goal.
The portions of the Account's total assets invested in equity securities,
debt securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Account's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Manager as to general market and economic conditions, trends in investment
yields and interest rates and changes in fiscal or monetary policies.
The Account may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Account may invest in
both exchange-listed and over-the-counter securities, in small or large
companies, and in well-established or unseasoned companies. Also, the Account's
investments in corporate bonds and debentures and money market instruments are
not restricted by credit ratings or other objective investment criteria, except
with respect to bank certificates of deposit as set forth below. Some of the
fixed income securities in which the Account may invest may be considered to
include speculative characteristics and the Account may purchase such securities
that are in default but does not currently intend to invest more than 5% of its
assets in securities rated below BBB by Standard & Poor's or Baa by Moody's. See
the discussion of the High Yield Account for information concerning risks
associated with below-investment grade bonds. The Account will not concentrate
its investments in any industry.
In selecting common stocks, the Manager seeks companies which the Manager
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Manager determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Manager may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Account may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Account may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The short-term money market investments in which the Account may invest
include the following: U.S. Treasury bills, bank certificates of deposit,
bankers' acceptances, repurchase agreements, commercial paper and commercial
paper master notes which are floating rate debt instruments without a fixed
maturity. The Account will only invest in domestic bank certificates of deposit
issued by banks which are members of the Federal Reserve System that have total
deposits in excess of one billion dollars.
The United States government securities in which the Account may invest
include U.S. Treasury obligations and obligations of certain agencies, such as
the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Capital Value Account
The primary objective of the Capital Value Account is long-term capital
appreciation. A secondary objective is growth of investment income.
The Account will invest primarily in common stocks, but it may invest in
other securities. In making selections for the Account's investment portfolio,
the Manager will use an approach described broadly as that of fundamental
analysis, which is discussed in the Statement of Additional Information. To
achieve the investment objective, Invista will invest in securities that have
"value" characteristics. This process is known as "value investing." Value
investing is purchasing securities of companies with above average dividend
yields and below average price to earnings (P/E) ratios. Securities chosen for
investment may include those of companies which the Manager believes can
reasonably be expected to share in the growth of the nation's economy over the
long term.
MidCap Account
The objective of the MidCap Account is to achieve capital appreciation. The
strategy of this Account is to invest primarily in the common stocks and
securities (both debt and preferred stock) convertible into common stocks of
emerging and other growth-oriented companies that, in the judgment of the
Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the MidCap Account may invest, for any period of time, in
any industry, in any kind of growth-oriented company, whether new and unseasoned
or well known and established.
There can be, of course, no assurance that the Account will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Account invests, the Account believes that its shares are
suitable only for persons who are prepared to experience above-average
fluctuations in net asset value, to assume above-average investment risk in
search of above-average return, and to consider the Account as a long-term
investment and not as a vehicle for seeking short-term profits. Moreover, since
the Account will not be seeking current income, investors should not view a
purchase of Account shares as a complete investment program.
INCOME-ORIENTED ACCOUNTS
The Fund currently includes two Accounts which seek a high level of income
through investments in fixed-income securities (Bond Account and High Yield
Account) collectively referred to as the "Income-Oriented Accounts." An
investment in any of the Income-Oriented Accounts involves market risks
associated with movements in interest rates. The market value of the Accounts'
investments will fluctuate in response to changes in interest rates and other
factors. During periods of falling interest rates, the values of outstanding
long-term fixed-income securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. Changes
by recognized rating agencies in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities will affect the Accounts' net asset values but will not affect cash
income derived from the securities unless a change results from a failure of an
issuer to pay interest or principal when due. Each Account's rating limitations
apply at the time of acquisition of a security, and any subsequent change in a
rating by a rating service will not require elimination of a security from the
Account's portfolio. The Statement of Additional Information contains
descriptions of ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard and Poor's Corporation ("S&P").
Bond Account
The investment objective of the Bond Account is to provide as high a level
of income as is consistent with preservation of capital and prudent investment
risk.
In seeking to achieve the investment objective, the Account will
predominantly invest in marketable fixed-income securities. Investments will be
made generally on a long-term basis, but the Account may make short-term
investments from time to time as deemed prudent by the Manager. Longer
maturities typically provide better yields but will subject the Account to a
greater possibility of substantial changes in the values of its portfolio
securities as interest rates change.
Under normal circumstances, the Account will invest at least 65% of its
assets, exclusive of cash items, in one or more of the following kinds of
securities: (i) corporate debt securities and taxable municipal obligations,
which at the time of purchase have an investment grade rating within the four
highest grades used by Standard & Poor's Corporation (AAA, AA, A or BBB) or by
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa) or which, if lower-rated or
nonrated, are comparable in quality in the opinion of the Account's Manager;
(ii) similar Canadian corporate, Provincial and Federal Government securities
payable in U.S. funds; and (iii) securities issued or guaranteed by the United
States Government or its agencies or instrumentalities. The balance of the
Account's assets may be invested in other fixed income securities, including
domestic and foreign corporate debt securities or preferred stocks, in common
stocks that provide returns that compare favorably with the yields on fixed
income investments, and in common stocks acquired upon conversion of debt
securities or preferred stocks or upon exercise of warrants acquired with debt
securities or otherwise and foreign government securities. The debt securities
and preferred stocks in which the Account invests may be convertible or
nonconvertible. The Account does not intend to purchase debt securities rated
lower than Ba3 by Moody's or BB - by S & P (bonds which are judged to have
speculative elements; their future cannot be considered as well-assured). See
the discussion of the High Yield Account for information concerning risks
associated with below investment grade bonds.
During the year ended December 31, 1996, the percentage of the Account's
portfolio securities invested in the various ratings established by Moody's
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Aaa .18%
Aa .81%
A 24.05%
Baa 68.04%
Ba 6.92%
* The above percentages for A rated securities include .57% unrated
securities which have been determined by the Manager to be of comparable
quality.
Cash equivalents in which the Account invests include corporate commercial
paper rated A-1+, A-1 or A-2 by Standard & Poor's or P-1 or P-2 by Moody's,
unrated commercial paper issued by corporations with outstanding debt securities
rated in the four highest grades by Standard & Poor's and Moody's and bank
certificates of deposit and bankers' acceptances issued or guaranteed by
national or state banks and repurchase agreements considered by the Account to
have investment quality. Under unusual market or economic conditions, the
Account may for temporary defense purposes invest up to 100% of its assets in
cash or cash equivalents.
High Yield Account
The High Yield Account's primary investment objective is high current
income. Capital growth is a secondary objective when consistent with the
objective of high current income. This Account is designed for investors willing
to assume additional risk in return for above average income.
In seeking to attain the Account's objective of high current income, the
Account invests primarily in high yielding, lower or non-rated (high risk)
fixed-income securities, commonly known as "junk bonds," constituting a
diversified portfolio which the Account Manager believes does not involve undue
risk to income or principal. Normally, at least 80% of the Account's assets will
be invested in debt securities, convertible securities (both debt and preferred
stock) or preferred stocks that are consistent with its primary investment
objective of high current income. The Account's remaining assets may be held in
cash or cash equivalents, or invested in common stocks and other equity
securities when these types of investments are consistent with the objective of
high current income.
The Account seeks to invest its assets in securities rated Ba1 or lower by
Moody's Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("S&P") or in unrated securities which the Account's Manager
believes are of comparable quality. These securities are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and to repay principal in accordance with the terms of the obligation.
The Account will not invest in securities rated Caa or lower by Moody's and CCC
or lower by S&P.
The rating services' descriptions of securities rating categories in which
the Account may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class. B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its bond rating system. The modifier 1
indicates that the security ranks in the high end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB, B, CCC, CC: Debt rated
"BB", "B", "CCC" and "CC" is regarded, on balance, as predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation. "BB" indicates the lowest degree of speculation and
"CC" the highest degree of speculation. While such debt will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
The higher-yielding, lower-rated securities in which the High Yield Account
invests present special risks to investors. The market value of lower-rated
securities may be more volatile than that of higher-rated securities and
generally tends to reflect the market's perception of the creditworthiness of
the issuer and short-term market developments to a greater extent than more
highly rated securities, which reflect primarily fluctuations in general levels
of interest rates. Periods of economic uncertainty and change can be expected to
result in increased volatility in the market value of lower-rated securities.
Further, such securities may be subject to greater risks of loss of income and
principal, particularly in the event of adverse economic changes or increased
interest rates, because their issuers generally are not as financially secure or
as creditworthy as issuers of higher-rated securities. Additionally, to the
extent that there is not a national market system for secondary trading of
lower-rated securities, there may be a low volume of trading in such securities
which may make it more difficult to value or sell those securities than
higher-rated securities. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of high
yield securities, especially in a thinly traded market.
Investors should recognize that the market for higher yielding, lower-rated
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the High Yield Account and the
ability of the issuers of the securities held by it to pay principal and
interest. A default by an issuer may result in the Account incurring additional
expenses to seek recovery of the amounts due it.
Some of the securities in which the Account invests contain call
provisions. If the issuer of such a security exercises a call provision in a
declining interest rate market, the Account would have to replace the security
with a lower-yielding security, resulting in a decreased return for investors.
Further, a higher-yielding security's value will decrease in a rising interest
rate market, which will be reflected in the Account's net asset value per share.
Investors should carefully consider their ability to assume the risks of
investing in lower-rated securities before making an investment in the High
Yield Account and should be prepared to maintain their investment during periods
of adverse market conditions. Investors should not rely on the Account for their
short-term financial needs.
The Account seeks to minimize the risks of investing in lower-rated
securities through diversification, investment analysis and attention to current
developments in interest rates and economic conditions. Because the Account
invests primarily in securities in the lower rating categories, the achievement
of the Account's goals is more dependent on the Manager's ability than would be
the case if the Account were investing in securities in the higher rating
categories. Although the Account's Manager considers security ratings when
making investment decisions, it performs its own investment analysis and does
not rely principally on the ratings assigned by the rating services. There are
risks in applying credit ratings as a method for evaluating high yield
securities. For example, credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield securities, and
credit rating agencies may fail to make timely changes in credit ratings to
reflect subsequent events. The Manager's analysis includes traditional security
analysis considerations such as the issuer's experience and managerial strength,
changing financial condition, borrowing requirements or debt maturity schedules,
and its responsiveness to changes in business conditions and interest rates. It
also considers relative values based on anticipated cash flow, interest or
dividend coverage, asset coverage and earnings prospects. In addition, the
Manager analyzes general business conditions and other factors such as
anticipated changes in economic activity and interest rates, the availability of
new investment opportunities, and the economic outlook for specific industries.
The Manager continuously monitors the issuers of portfolio securities to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments and to assure the securities' liquidity
so the Account can meet redemption requests. During the year ended December 31,
1996 the percentage of the Account's portfolio securities invested in the
various ratings established by Moody's, based upon the weighted average ratings
of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Baa 2.63%
Ba 38.86%
B 56.47%
C 2.04%
The above percentages for B and Ba rated securities include 2.72% and
- -1.13%, respectively, unrated securities which have been determined by the
Manager to be of comparable quality.
There may be times when, in the Manager's judgment, unusual market or
economic conditions make pursuing the Account's basic investment strategy
inconsistent with the best interests of its shareholders. At such times the
Manager may employ alternative strategies, primarily seeking to reduce
fluctuations in the value of the Account's assets. In implementing these
"defensive" strategies, the Account may temporarily invest in money-market
instruments of all types, higher-rated fixed-income securities or any other
fixed-income securities that the Account considers consistent with such
strategy. The yield to maturity on these securities would generally be lower
than the yield to maturity on lower-rated fixed-income securities. It is
impossible to predict when, or for how long, such alternative strategies will be
utilized.
The Account's Manager buys and sells securities for the Account principally
in response to its evaluation of an issuer's continuing ability to meet its
obligations, the availability of better investment opportunities, and its
assessment of changes in business conditions and interest rates. From time to
time, consistent with its investment objectives, the Account may sell securities
that have appreciated in value because of declines in interest rates. It may
also trade securities for the purpose of seeking short-term profits. Securities
may be sold in anticipation of a market decline or bought in anticipation of a
market rise. They may also be traded for securities of comparable quality and
maturity to take advantage of perceived short-term disparities in market values
or yields.
MONEY MARKET ACCOUNT
The Fund also includes an Account which invests primarily in short-term
securities, Money Market Account. Securities in which the Money Market Account
will invest may not yield as high a level of current income as securities of low
quality and longer maturities which generally have less liquidity, greater
market risk and more fluctuation.
The Money Market Account will limit its portfolio investments to United
States dollar denominated instruments that the board of directors determines
present minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in respect to
a class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security at the time of issuance was a long-term security that has a
remaining maturity of 397 calendar days or less, and whose issuer has
received from a nationally recognized statistical rating organization a
rating, with respect to a class of short-term debt obligations (or any
security within that class) that is now comparable in priority and
security with the security, in one of the two highest rating categories
for short-term debt obligations; or
(3) An unrated security that is of comparable quality to a security meeting
the requirements of (1) or (2) above, as determined by the board of
directors.
The Account will not invest more than 5% of its total assets in the
following securities:
(1) Securities which, when acquired by the Account (either initially or
upon any subsequent rollover), are rated below the highest rating
category for short-term debt obligations;
(2) Securities which, at the time of issuance were long-term securities but
when acquired by the Account have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Account
will maintain a dollar-weighted average portfolio maturity of 90 days
or less.
The objective of Money Market Account is to seek as high a level of current
income available from short-term securities as is considered consistent with
preservation of principal and maintenance of liquidity by investing its assets
in a portfolio of money market instruments. These money market instruments are
U.S. Government Securities, U.S. Government Agency Securities, Bank Obligations,
Commercial Paper, Short-term Corporate Debt and Repurchase Agreements, which are
described briefly below and in more detail in the Statement of Additional
Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
The Account intends to hold its investments until maturity, but may on
occasion trade securities to take advantage of market variations. Also, revised
valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at times when such sales might otherwise not be
desirable. The Account's right to borrow to facilitate redemptions may reduce
the need for such sales. It is the Account's policy to be as fully invested as
reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the Account
expects to usually transact purchases and sales of portfolio securities with
issuers or dealers on a net basis, it is not anticipated that the Account will
pay any significant brokerage commissions. The Account is free to dispose of
portfolio securities at any time, when changes in circumstances or conditions
make such a move desirable in light of the investment objective.
A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Account invests.
The rate of return and the net asset value will be affected by such other
factors as sales of portfolio securities prior to maturity and the Account's
operating expenses.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Accounts
may use in an effort to achieve their respective investment objectives.
Diversification
Each Account is subject to the diversification requirements of Section
817(h) of the Internal Revenue Code (the "Code") which must be met at the end of
each quarter of the year (or within 30 days thereafter). Regulations issued by
the Secretary of the Treasury have the effect of requiring each Account to
invest no more than 55% of its total assets in securities of any one issuer, no
more than 70% in the securities of any two issuers, no more than 80% in the
securities of any three issuers, and no more than 90% in the securities of any
four issuers. For this purpose, the United States Treasury and each U.S.
Government agency and instrumentality is considered to be a separate issuer.
In the event any of the Accounts do not meet the diversification
requirements of Section 817(h) of the Code, the contracts funded by shares of
the Accounts will not be treated as annuities or life insurance for Federal
income tax purposes and the owners of the Accounts will be subject to taxation
on their share of the dividends and distributions paid by the Accounts.
Foreign Securities
Each of the following Accounts has adopted investment restrictions that
limit its investments in foreign securities to the indicated percentage of its
assets: Bond, Capital Value and High Yield - 20%; Balanced and MidCap - 10%.
Debt securities issued in the United States pursuant to a registration statement
filed with the Securities and Exchange Commission are not considered "foreign
securities" for purposes of this investment limitation. Investment in foreign
securities presents certain risks including those resulting from fluctuations in
currency exchange rates, revaluation of currencies, the imposition of foreign
taxes, future political and economic developments including war, expropriations,
nationalization, the possible imposition of currency exchange controls and other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers, and the fact that foreign issuers are not
generally subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic issuers. Moreover, securities of many foreign issuers may
be less liquid and their prices more volatile than those of comparable domestic
issuers. In addition, transactions in foreign securities may be subject to
higher costs, and the time for settlement of transactions in foreign securities
may be longer than the settlement period for domestic issuers. An Account's
investment in foreign securities may also result in higher custodial costs and
the costs associated with currency conversions.
Repurchase Agreements
Each of the Accounts, may enter into repurchase agreements with, and each
of the Accounts, except the Capital Value and Money Market Accounts, may lend
its portfolio securities to, unaffiliated broker-dealers and other unaffiliated
qualified financial institutions. These transactions must be fully
collateralized at all times, but involve some credit risk to the Account if the
other party should default on its obligations, and the Account is delayed or
prevented from recovering on the collateral. See the Fund's Statement of
Additional Information for further information regarding the credit risks
associated with repurchase agreements and the standards adopted by the Board of
Directors to deal with those risks. None of the Accounts intend either (i) to
enter into repurchase agreements that mature in more than seven days if any such
investment, together with any other illiquid securities held by the Account,
would amount to more than 10% of its total assets or (ii) to loan securities in
excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Accounts may enter into forward commitment
agreements which call for the Account to purchase or sell a security on a future
date and at a price fixed at the time the Account enters into the agreement.
Each of these Accounts may also acquire rights to sell its investments to other
parties, either on demand or at specific intervals.
Warrants
Each of the Accounts, except the Money Market Account, may invest in
warrants up to 5% of its assets, of which not more than 2% may be invested in
warrants that are not listed on the New York or American Stock Exchange.
Borrowing
As a matter of fundamental policy, each Account may borrow money only for
temporary or emergency purposes. The Balanced, Bond, Capital Value, High Yield
and Money Market Accounts may borrow only from banks. Further, each may borrow
only in an amount not exceeding 5% of its assets, except the Capital Value
Account which may borrow only in an amount not exceeding the lesser of (i) 5% of
the value of its assets less liabilities other than such borrowings, or (ii) 10%
of its assets taken at cost at the time the borrowing is made, and the Money
Market Account which may borrow only in an amount not exceeding the lesser of
(i) 5% of the value of its assets, or (ii) 10% of the value of its net assets
taken at cost at the time the borrowing is made.
Options
The Balanced, Bond, High Yield and MidCap Accounts may purchase covered
spread options, which would give the Account the right to sell a security that
it owns at a fixed dollar spread or yield spread in relationship to another
security that the Account does not own, but which is used as a benchmark. These
same Accounts may also purchase and sell financial futures contracts, options on
financial futures contracts and options on securities and securities indices,
but will not invest more than 5% of their assets in the purchase of options on
securities, securities indices and financial futures contracts or in initial
margin and premiums on financial futures contracts and options thereon. The
Accounts may write options on securities and securities indices to generate
additional revenue and for hedging purposes and may enter into transactions in
financial futures contracts and options on those contracts for hedging purposes.
The Statement of Additional Information includes further information
concerning the Accounts' investment policies and applicable investment
restrictions. Each Account's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for an Account are not fundamental
and may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISOR
The Manager for the Fund is Principal Management Corporation (the
"Manager"), an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the State of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969,
and since that time has managed various mutual funds sponsored by Principal
Mutual Life Insurance Company. As of December 31, 1996, the Manager served as
investment advisor for 26 such funds with assets totaling approximately $4.0
billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced, Capital Value
and MidCap Accounts. The Manager will reimburse Invista for the cost of
providing these services. Invista, an indirectly wholly-owned subsidiary of
Principal Mutual Life Insurance company and an affiliate of the Manager, was
founded in 1985 and manages investments for institutional investors, including
Principal Mutual Life. Assets under management at December 31, 1996 were
approximately $19.6 billion. Invista's address is 1800 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
The Manager or Invista has assigned certain individuals the primary
responsibility for the day-to-day management of each Account's portfolio. The
persons primarily responsible for the day-to-day management of each Account are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Account Responsible Since Person Primarily Responsible
<S> <C> <C>
Balanced April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice
President, Invista Capital Management, Inc.
Bond November, 1996 Scott A. Bennett, CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company.
Capital Value November, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice President,
(Account's inception) Invista Capital Management, Inc.; Co-Manager since November, 1996: Catherine A.
Green, CFA, (MBA degree, Drake University). Vice President, Invista Capital
Management, Inc.
High Yield December, 1987 James K. Hovey, CFA (MBA degree University of Iowa). Director - Investment
(Account's inception) Securities, Principal Mutual Life Insurance Company.
MidCap December, 1987 Michael R. Hamilton, (BMBA degree, Bellarmine College). Vice President, Invista
(Account's inception) Capital Management, Inc.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISOR
Under Maryland law, the business and affairs of each of the Accounts are
managed under the direction of the Board of Directors. The investment services
and certain other services referred to under the heading "Cost of Manager's
Services" in the Statement of Additional Information are furnished to the
Accounts under the terms of a Management Agreement between the Fund and the
Manager, and for the Balanced, Capital Value and MidCap Accounts, a Sub-Advisory
Agreement between the Manager and Invista. The Manager, or Invista, advises the
Accounts on investment policies and on the composition of the Accounts'
portfolios. In this connection, the Manager, or Invista, furnishes to the Board
of Directors of the Fund a recommended investment program consistent with the
Account's investment objective and policies. The Manager, or Invista, is
authorized, within the scope of the approved investment program, to determine
which securities are to be bought or sold, and in what amounts.
The compensation paid by each Account to the Manager for the fiscal year
ended December 31, 1996 was, on an annual basis, equal to the following
percentage of average net assets:
Total
Manager's Annualized
Account Fee Expenses
Balanced Account .60% .63%
Bond Account .50% .53%
Capital Value Account .48% .49%
High Yield Account .60% .70%
MidCap Account .64% .66%
Money Market Account .50% .56%
The Manager, or Invista, may purchase at its own expense statistical and
other information or services from outside sources, including Principal Mutual
Life Insurance Company. An Investment Service Agreement between the Fund, the
Manager and Principal Mutual Life Insurance Company provides that Principal
Mutual Life Insurance Company will furnish certain personnel, services and
facilities required by the Manager in connection with its performance of the
Management Agreements, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard.
The Accounts may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to, Principal Financial
Securities, Inc., a broker-dealer that is an affiliate of the Distributor and
Manager for the Fund.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company.
MANAGERS' COMMENTS
Principal Management Corporation and Invista are staffed with investment
professionals who manage each individual Account. Comments by these individuals
in the following paragraphs summarize in capsule form the general strategy and
results of each Account through 1996. The accompanying charts display results
for the past 10 years or the life of the Account, whichever is shorter. Average
Annual Total Return figures provided for each Account in the graphs below
reflect all expenses of the Account and assume all distributions are reinvested
at net asset value. The figures do not reflect expenses of the variable life
insurance contracts or variable annuity contracts that purchase Account shares;
performance figures for the divisions of the contracts would be lower than
performance figures for the Accounts due to the additional contract expenses.
Past performance is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
The various indices included in the graphs below are unmanaged and do not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.
Growth-Oriented Accounts
Balanced Account
(Judith A. Vogel)
This balanced portfolio combines stocks, bonds and cash in a relatively
conservative mix which seeks to provide both capital appreciation and income to
the shareholder without taking on undue risk. The asset allocation of the
Account generally approximates 60% stocks and 40% bonds. In the year ended
December 31, 1996 the stock market produced exceptional results. Aided by a
healthy economy, continued corporate profit growth, and a good dose of investor
enthusiasm, the S&P 500 Stock Index advanced nearly 23%. Conditions in the bond
market were less supportive over the year. Long-term interest rates rose 0.70%
in 1996, with a lot of volatility along the way, causing the bond returns to
hover between zero and 3% for the year. Demonstrating its balanced nature, the
Account produced a 13% annual return, about midway between stock and bond market
results and very near the Lipper Balanced Fund Average. The bond portion of the
Account's portfolio is comprised of U.S. Government notes and bonds with an
emphasis on safety of principal. The stock portion of the portfolio is
concentrated in companies with stable or growing earnings that are not terribly
sensitive to economic activity. After six years of economic expansion resulting
in high rates of resource utilization, corporate profit growth is likely to come
down, causing a scarcity of earnings growth. Companies that can continue to grow
earnings will be afforded premium valuations. There is no independent market
index against which to measure returns of balanced portfolios, however, we show
the S&P 500 Stock Index for your information.
Total Returns *
As of December 31, 1996
---------------------------------------------------
Since Inception
1 Year 5 Year Date 12/18/87
13.13% 11.57% 12.16%
Comparison of Change in Value of $10,000 Investment in the
Balanced Account, S&P 500 and Lipper Balanced Fund Average
----------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Mid Cap
December 31, Return Index Index
10,000 10,000 10,000
1988 11,637 11,661 11,229
1989 12,982 15,356 13,429
1990 12,147 14,877 13,355
1991 16,321 19,412 16,930
1992 18,410 20,891 18,122
1993 20,447 22,992 20,066
1994 20,019 23,294 19,561
1995 24,941 32,037 24,482
1996 28,215 39,388 27,851
Note: Past performance is not predictive of future performance.
Capital Value Account
(David L. White and Catherine A. Green)
The strategy with this portfolio is to hold common stocks of companies
based on a valuation that is attractive when compared to the market. The
analytical staff looks at companies' current valuations compared to the market,
then at historical information to compare valuations to historical averages. The
focus is on the fundamentals of an industry and the company to determine the
current and future outlook as these potential investments. From there the
portfolio is constructed to provide a diversified set of investments.
The Account outperformed the S&P 500 Index and Lipper Growth and Income
Fund Average for 1996. The strength of the market was in much fewer stocks than
in the past. The volatility between industries was much greater than the overall
results. The Account benefited from several areas of exposure. Banks and health
care were the strongest areas for the Account during the year. The focus has
been away from the more cyclical areas of the economy which also helped during
the year. As the economic cycle progresses, the market places more emphasis on
companies with consistent earnings growth, and we have tended to overweight
these areas of the market. As the market performance continues to narrow,
however, it becomes increasingly difficult to select the correct areas of
overperformance.
Total Returns *
As of December 31, 1996
----------------------------------------
1 Year 5 Year 10 Year
23.50% 14.08% 13.08%
Comparison of Change in Value of $10,000 Investment in the
Capital Value Account, S&P 500 and Lipper Growth and Income Fund Average
----------------------------------------------------------------------------
Fund S&P 500 Lipper
Year Ended Total Stock Growth & Income
December 31, Return Index Fund Average
10,000 10,000 10,000
1987 10,647 10,526 10,184
1988 12,183 12,274 11,814
1989 14,155 16,163 14,596
1990 12,759 15,659 13,946
1991 17,693 20,433 18,002
1992 19,377 21,990 19,618
1993 20,888 24,201 21,884
1994 20,990 24,519 21,678
1995 27,688 33,722 28,360
1996 34,193 41,460 34,253
Note: Past performance is not predictive of future performance.
MidCap Account
(Michael R. Hamilton)
The equity market was strong in 1996, but within the market there were two
different trends. Large-cap stocks performed much better than small-cap stocks.
The MidCap Account returned 19.13% compared with the Lipper Mid Cap Average of
17.9%. The Account and the Lipper Average trailed the S&P 500 Index because of
their emphasis on small cap stocks. While both trailed the S&P 500, this was a
good year for the Account.
The financial market continues to grapple with the paradox of strong
economic growth with no apparent inflation. Productivity will be key in 1997 if
inflation is to remain benign. The Account's portfolio continues to be focused
on companies that should enhance productivity of both labor and capital. Several
of the technology, service and cyclical areas support this emphasis. The
portfolio is also overweighted in the financial sector as bank consolidation
continues.
Continued profit growth will be important in 1997 as well. Companies with
more predictable and visible earnings growth are preferred. This continues to be
those that are low cost producers and have competitive barriers to entry.
Selectivity in all sectors will be crucial to outperformance.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
21.11% 16.64% 17.73%
Comparison of Change in Value of $10,000 Investment
in the Emerging Growth Account, S&P 500 and
Lipper Mid Cap Fund Average
-----------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 MID CAP
December 31, Return Index Index
10,000 10,000 10,000
1988 12,369 11,661 11,476
1989 15,070 15,356 14,586
1990 13,186 14,877 14,067
1991 20,240 19,412 21,275
1992 23,264 20,891 23,213
1993 27,750 22,992 26,625
1994 27,967 23,294 26,079
1995 36,080 32,037 34,469
1996 43,697 39,388 40,646
Note: Past performance is not predictive of future performance.
Important Notes of the Growth-Oriented Accounts:
Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average at December 31, 1996 contained 272 mutual funds.
Lipper Growth & Income Fund Average: this average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one year average contained 522 funds on December
31, 1996.
Lipper Mid Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average contained 154 funds on December 31,
1996.
Income-Oriented Accounts
Bond Account
(Scott A. Bennett)
The Bond Account's performance in 1996 lagged when compared to 1995. 1995
was a banner year, mainly because of dramatically declining interest rates.
During 1996 interest rates increased throughout most of the year based on fears
of increasing inflation. This hurt the Account's relative performance as the
duration target of 7 years (actual duration at 12/31/96 was 6.98 years) is
longer than the average BBB rated bond fund and the BAA Lehman Corporate Index.
Relative performance was also negatively impacted by the lack of a significant
amount of less than investment grade bonds in the portfolio. High yield (less
than investment grade) debt performed extremely well during 1996, with many of
the top performing funds in the Lipper BAA universe having significant exposures
to this asset class.
Over the long-term, the Account continues to outperform the average BBB
fund. This is attributed to remaining fully invested and not trying to guess
interest rates. The BBB corporate bond class continued to be an attractive asset
class in 1996, outperforming all other taxable investment grade classes. Spreads
continued to narrow during the year with defaults low and a large amount of
funds chasing the available bonds.
Total Returns *
As of December 31, 1996
- --------------------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
2.36% 8.20% 9.55%
Comparison of Change in Value of $10,000 Investment in the Bond Account, Lehman
Brothers BAA Corporate Index and Lipper Corporate Debt BBB Rated Fund Average
-----------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total BAA BBB
December 31, Return Index Avg
10,000 10,000 10,000
1988 10,991 11,129 10,900
1989 12,514 12,699 12,060
1990 13,167 13,595 12,751
1991 15,369 16,113 15,020
1992 16,810 17,512 16,258
1993 18,771 19,665 18,261
1994 18,227 18,707 17,447
1995 22,268 22,959 20,948
1996 22,794 23,882 21,616
Note: Past performance is not predictive of future performance.
High Yield Account
(James K. Hovey)
While most bond investments had very low returns for 1996, high yield bonds
in general and the High Yield Account included had a good year. The Account's
total return for 1996 was 13.13% which compares to 11.35% for the Lehman
Brothers High Yield Index and 13.67% for the Lipper High Current Yield Fund
Average. For comparison, 10 year U.S. Treasury bonds had a total return for 1996
of 0.04%. This low return was caused by increasing interest rates causing the
value of Treasury bonds to fall.
High yield bonds are somewhat insulated from interest rate movements due to
their characteristic of a large risk premium or spread that can offset general
interest rate movements for assets with less credit risk. In 1996, the risk
premium for high yield bonds declined enough to not only offset the risk free
interest rate increase, but also to allow price increases of many high yield
bonds. While the annual total return performance was similar to both Lipper and
Lehman, the Account underperformed both during the first two quarters and
outperformed during the third and fourth quarters of the year. Our Account has a
B+ average credit rating and has approximately the same amount of BB exposure as
B exposure. This more closely resembles the Lehman index while high yield mutual
funds, as reflected by the Lipper average, typically have a riskier credit
profile than our Account. This risk profile was an advantage to the Lipper
average over the first two quarters as risk premium tightening was more
pronounced in riskier bonds. Our Account significantly outperformed in the
fourth quarter due to excellent performance by individual securities that were
upgraded or for which tender offers had been received at attractive levels. Our
Account also benefited over the course of the year by not having any credit
defaults. The return performance of the Account during 1996 is a good indicator
of how high yield is a worthwhile asset class that can enhance diversification.
The decline of risk premiums will make outperformance of other types of income
oriented funds more difficult going forward, but also makes our conservative
risk position even more appropriate.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
13.13% 11.20% 9.89%
Comparison of Change in Value of $10,000 Investment in the High Yield Account,
Lehman Brothers High Yield Index and Lipper High Current Yield Fund Average
Fund Lehman Lipper
Year Ended Total High Yield Narrow
December 31, Return Index Index
10,000 10,000 10,000
1988 11,492 11,524 11,298
1989 11,735 11,620 11,239
1990 10,831 10,506 10,059
1991 13,788 15,346 13,876
1992 15,798 17,764 16,352
1993 17,743 20,803 19,500
1994 17,854 20,593 18,753
1995 20,725 24,549 21,844
1996 23,446 27,335 24,830
Note: Past performance is not predictive of future performance.
Important Notes of the Income-Oriented Accounts:
Lehman Brothers, BAA Corporate Index: an unmanaged index of all publicly issued
fixed rate nonconvertible, dollar-denominated, SEC-registered corporate debt
rated Baa or BBB by Moody's or S&P.
Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average on
December 31, 1996 contained 102 mutual funds.
Lehman Brothers High Yield Index: an unmanaged index of all publicly issued
fixed, dollar-denominated, SEC-registered corporate debt rated Ba1 or lower with
at least $100 million outstanding and one-year or more to maturity.
Lipper High Current Yield Fund Average: this average consists of mutual funds
investing in high (relative) current yield fixed income securities with no
quality or maturity restrictions. The mutual funds tend to invest in lower grade
debt issues. The one year average on December 31, 1996 contained 148 mutual
funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES
The net asset value of each Account's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange,
except on days on which changes in the value of the Account's portfolio
securities will not materially affect the current net asset value of the
Account's redeemable securities, on days during which an Account receives no
order for the purchase or sale of its redeemable securities and no tender of
such a security for redemption, and on customary national business holidays. The
net asset value per share of each Account is determined by dividing the value of
the Account's securities plus all other assets, less all liabilities, by the
number of Account shares outstanding.
Growth-Oriented and Income-Oriented Accounts
The following valuation information applies to the Growth-Oriented and
Income-Oriented Accounts. Securities for which market quotations are readily
available are valued using those quotations. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.
As previously described, some of the Accounts may purchase foreign
securities whose trading is substantially completed each day at various times
prior to the close of the New York Stock Exchange. The values of such securities
used in computing net asset value per share are usually determined as of such
times. Occasionally, events which affect the values of such securities and
foreign currency exchange rates may occur between the times at which they are
generally determined and the close of the New York Stock Exchange and would
therefore not be reflected in the computation of the Account's net asset value.
If events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the Manager under procedures established and regularly reviewed
by the Board of Directors. To the extent the Account invests in foreign
securities listed on foreign exchanges which trade on days on which the Account
does not determine its net asset value, for example Saturdays and other
customary national U.S. Holidays, the Account's net asset value could be
significantly affected on days when shareholders have no access to the Account.
Money Market Account
The Money Market Account values its securities at amortized cost. For a
description of this calculation procedure see the Fund's Statement of Additional
Information.
PERFORMANCE CALCULATION
From time to time, the Accounts may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Accounts. The Accounts' yield and total return
figures described below will vary depending upon market conditions, the
composition of the Accounts' portfolios and operating expenses. These factors
and possible differences in the methods used in calculating yield and total
return should be considered when comparing the Accounts' performance figures to
performance figures published for other investment vehicles. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices. Any performance data quoted for the Accounts represents only
historical performance and is not intended to indicate future performance of the
Accounts. The calculation of average annual total return and yield for the
Accounts does not include fees and charges of the separate accounts that invest
in the Accounts and, therefore, does not reflect the investment performance of
those separate accounts. For further information on how the Accounts calculate
yield and total return figures, see the Statement of Additional Information.
Average Annual Total Return
Each Account may advertise its respective average annual total return.
Average annual total return for each Account is computed by calculating the
average annual compounded rate of return over the stated period that would
equate an initial $1,000 investment to the ending redeemable value assuming the
reinvestment of all dividends and capital gains distributions at net asset
value. The same assumptions are made when computing cumulative total return by
dividing the ending redeemable value by the initial investment. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices.
Yield and Effective Yield
From time to time the Money Market Account may advertise its respective
yield and effective yield. The yield of the Account refers to the income
generated by an investment in the Account over a seven-day period. This income
is then annualized. That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the
Account is assumed to be reinvested. The effective yield will be slightly higher
than the yield because of the compounding effect of this assumed reinvestment.
The yield for the Money Market Account will fluctuate daily as the income
earned on the investments of the Account fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. There is no guarantee that the net asset value or any stated
rate of return will remain constant. A shareholder's investment in the Account
is not insured. Investors comparing results of the Account with investment
results and yields from other sources such as banks or savings and loan
associations should understand these distinctions. Historical and comparative
yield information may, from time to time, be presented by the Account.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
It is the policy of each Account to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which
the Fund so qualifies it will be exempt from federal income tax upon the amounts
so distributed to investors.
Any dividends from the net investment income of the Accounts (except the
Money Market Account) will normally be payable to the shareholders annually, and
any net realized gains will be distributed annually. All dividends and capital
gains distributions are applied to purchase additional Account shares at net
asset value as of the payment date without the imposition of any sales charge.
Each Account will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Accounts to consult with tax advisors on the federal
and state tax aspects of their investments and redemptions.
Money Market Account
The Money Market Account declares dividends of all its daily net investment
income on each day the Account's net asset value per share is determined.
Dividends are payable daily and are automatically reinvested in full and
fractional shares of the Account at the then current net asset value unless a
shareholder requests payment in cash.
Net investment income, for dividend purposes, consists of (1) accrued
interest income plus or minus accrued discount or amortized premium; plus or
minus (2) all net short-term realized gains and losses; minus (3) all accrued
expenses of the Account. Expenses of the Account are accrued each day. Net
income will be calculated immediately prior to the determination of net asset
value per share of the Account.
Since the Account's policy is, under normal circumstances, to hold
portfolio securities to maturity and to value portfolio securities at amortized
cost, it does not expect any capital gains or losses. If the Account does
experience gains, however, it could result in an increase in dividends. Capital
losses could result in a decrease in dividends. If for some extraordinary reason
the Account realizes net long-term capital gains, it will distribute them once
every 12 months.
Since the net income of the Account (including realized gains and losses on
the portfolio securities) is declared as a dividend each time the net income of
the Account is determined, the net asset value per share of the Account normally
remains at $1.00 immediately after each determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Account,
representing reinvestment of dividend income, is reflected by an increase in the
number of shares of the Account .
Normally the Account will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Account
determined at any time is a negative amount, the net asset value per share will
be reduced below $1.00. If this happens, the Account may endeavor to restore the
net asset value per share to $1.00 by reducing the number of outstanding shares
by redeeming proportionately from shareholders without the payment of any
monetary consideration, such number of full and fractional shares as is
necessary to maintain a net asset value per share of $1.00. Each shareholder
will be deemed to have agreed to such a redemption in these circumstances by
investing in the Account. The Account may seek to achieve the same objective of
restoring the net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share would increase to the extent of positive net income which
is not declared as a dividend, or any other method approved by the Board of
Directors.
The Board of Directors may revise the above dividend policy, or postpone
the payment of dividends, if the Account should have or anticipate any large
presently unexpected expense, loss or fluctuation in net assets which in the
opinion of the Board might have a significant adverse affect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Accounts. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Account shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of each
Account reserves the right to broaden or limit the designation of Eligible
Purchasers.
The Balanced, Bond, Capital Value, MidCap and Money Market Accounts each
serve as an underlying investment medium for variable annuity contracts and
variable life insurance policies that are funded in separate accounts
established by Principal Mutual Life Insurance Company. It is conceivable that
in the future it may be disadvantageous for variable life insurance separate
accounts and variable annuity separate accounts to invest in the Accounts
simultaneously. Although neither Principal Mutual Life Insurance Company nor the
Accounts currently foresee any such disadvantages either to variable life
insurance policy owners or to variable annuity contract owners, the Board of
Directors intends to monitor events in order to identify any material conflicts
between such policy owners and contract owners and to determine what action, if
any, should be taken in response thereto. Such action could include the sale of
Account shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in Federal income tax law, (3) changes in the
investment management of the Account, or (4) differences in voting instructions
between those given by policy owners and those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Fund. There are no sales charges on the Accounts'
shares. There are no restrictions on amounts to be invested in the Accounts'
shares.
Shareholder accounts for each Account will be maintained under an open
account system. Under this system, an account is automatically opened and
maintained for each new investor. Each investment is confirmed by sending the
investor a statement of account showing the current purchase and the total
number of shares then owned. The statement of account is treated by each Account
as evidence of ownership of Account shares in lieu of stock certificates, and
unless written request is made to the Account, stock certificates will not be
issued or delivered to investors. Certificates, which can be stolen or lost, are
unnecessary except for special purposes such as collateral for a loan.
Fractional interests in the Account's shares are reflected to three decimal
places in the statement of account, but any stock certificates will be issued
only for full shares owned.
If an offer to purchase shares is received by any of the Accounts before
the close of trading on the New York Stock Exchange, the shares will be issued
at the offering price (net asset value of Account shares) computed on that day.
If an offer is received after the close of trading or on a day which is not a
trading day, the shares will be issued at the offering price computed on the
first succeeding day on which a price is determined. Dividends on the Money
Market Account shares will be paid on the next day following the effective date
of a purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each Account of the Principal
Variable Contracts Fund, Inc. Each Account share is entitled to one vote either
in person or by proxy at all shareholder meetings for that Account. This
includes the right to vote on the election of directors, selection of
independent accountants and other matters submitted to meetings of shareholders
of the Account. Each share has equal rights with every other share as to
dividends, earnings, voting, assets and redemption. Shares are fully paid and
non-assessable, and have no preemptive or conversion rights. Shares may be
issued as full or fractional shares, and each fractional share has
proportionately the same rights, including voting, as are provided for a full
share. Shareholders of each of these Accounts may remove any director with or
without cause by the vote of a majority of the votes entitled to be cast at a
meeting of all Account shareholders.
The bylaws of the Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of the Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Fund intends to hold shareholder meetings only when required by
law and at such other times as may be deemed appropriate by their respective
Boards of Directors.
Shareholder inquiries should be directed to the Principal Variable
Contracts Fund, Inc. at The Principal Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Fund's shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of the Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Account's shares
allocated to each of its separate accounts registered under the Investment
Company Act of 1940 and attributable to variable annuity contracts or variable
life insurance policies participating therein in accordance with instructions
received from contract or policy holders, participants and annuitants. Other
shares of each Account held by each registered separate account, including those
for which no timely instructions are received, are voted in proportion to the
instructions that are received with respect to contracts or policies
participating in that separate account. Shares of each of the Accounts held in
the general account of Principal Mutual Life Insurance Company or in its
unregistered separate accounts are voted in proportion to the instructions that
are received with respect to contracts and policies participating in its
registered and unregistered separate accounts. If Principal Mutual determines
pursuant to applicable law that an Account's shares held in one or more separate
accounts or in its general account need not be voted pursuant to instructions
received with respect to participating contracts or policies, it then may vote
those Account shares in its own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Account will redeem its shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Account requesting redemption of any part or all of
the shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, the Account will not require a signature guarantee as a part of a
proper endorsement; otherwise the shareholder's signature must be guaranteed by
either a commercial bank, trust company, credit union, savings and loan
association, national securities exchange member, or by a brokerage firm. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Account in proper and complete form. The amount received for
shares upon redemption may be more or less than the cost of such shares
depending upon the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Account may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Account of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Account
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Account. An Account
will redeem only those shares for which it has good payment. To avoid the
inconvenience of such a delay, shares may be purchased with a certified check,
bank cashier's check or money order. During the period prior to the time a
redemption from the Money Market Account is effective, dividends on such shares
will accrue and be payable and the shareholder will be entitled to exercise all
other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Accounts may be transferred to
an Eligible Purchaser. However, whenever any of the Accounts is requested to
transfer shares to other than an Eligible Purchaser, the Account has the right
at its election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Account must notify the transferee or transferees of such
shares in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Accounts.
The custodian performs no managerial or policymaking functions for the Accounts.
Organization and Share Ownership: Effective January 1, 1998, an Agreement
and Plan of Reorganization and Liquidation was implemented under which a Series
of the Principal Variable Contracts Fund, Inc. adopted the assets and
liabilities of a corresponding Fund. The Funds were incorporated in the state of
Maryland on the following dates: Balanced Fund - November 26, 1986; Bond Fund -
November 26, 1986; Capital Accumulation Fund - May 26, 1989 (effective November
1, 1989 succeeded to the business of a predecessor Fund that had been
incorporated in Delaware on February 6, 1969); Emerging Growth Fund - February
20, 1987; High Yield Fund - December 2, 1986; and Money Market Fund - June 10,
1982. Principal Mutual Life Insurance Company owns 100% of each Fund's
outstanding shares.
Capitalization: The authorized capital stock of each Account consists of
100,000,000 shares of common stock (500,000,000 for Money Market Account), $.01
par value.
Financial Statements: Copies of the financial statements of each Account
will be mailed to each shareholder of that Account semi-annually. At the close
of each fiscal year, each Account's financial statements will be audited by a
firm of independent auditors. The firm of Ernst & Young LLP has been appointed
to audit the financial statements of each Account for their respective present
fiscal years.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the Fund
has filed with the Securities and Exchange Commission. The Fund's Statement of
Additional Information is hereby incorporated by reference into this Prospectus.
A copy of the Statement of Additional Information can be obtained upon request,
free of charge, by writing or telephoning the Fund. You may obtain a copy of
Part C of the Registration Statements filed with the Securities and Exchange
Commission, Washington, D.C., from the Commission upon payment of the prescribed
fees.
Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for the Fund.
The Principal Variable Contracts Fund, Inc. described in this Prospectus is
a diversified, open-end management investment company offering a variety of
Accounts each of which was formerly a separately incorporated investment
company. Together, the Accounts provide the following range of investment
objectives:
Growth-Oriented Accounts
Balanced Account (formerly known as Principal Balanced Fund, Inc.) seeks to
generate a total return consisting of current income and capital appreciation
while assuming reasonable risks in furtherance of the investment objective.
Capital Value Account (formerly known as Principal Capital Accumulation Fund,
Inc.) seeks to achieve primarily long-term capital appreciation and secondary
growth of investment income through the purchase primarily of common stocks, but
the Account may invest in other securities.
Growth Account (formerly known as Principal Growth Fund, Inc.) seeks growth of
capital through the purchase primarily of common stocks, but the Account may
invest in other securities.
International Account (formerly known as Principal World Fund, Inc.) seeks
long-term growth of capital by investing in a portfolio of equity securities of
companies domiciled in any of the nations of the world.
MidCap Account (formerly known as Principal Emerging Growth Fund, Inc.) seeks to
achieve capital appreciation by investing primarily in securities of emerging
and other growth-oriented companies.
Income-Oriented Accounts
Bond Account (formerly known as Principal Bond Fund, Inc.) seeks to provide as
high a level of income as is consistent with preservation of capital and prudent
investment risk.
Government Securities Account (formerly known as Principal Government Securities
Fund, Inc.) seeks a high level of current income, liquidity and safety of
principal. The Account seeks to achieve its objective through the purchase of
obligations issued or guaranteed by the United States Government or its
agencies, with emphasis on Government National Mortgage Association Certificates
("GNMA Certificates"). Account shares are not guaranteed by the United States
Government.
Money Market Account
Money Market Account (formerly known as Principal Money Market Fund, Inc.) seeks
as high a level of income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
An investment in the Money Market Account is neither insured nor guaranteed
by the U.S. Government. There can be no assurance the Money Market Account will
be able to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Variable
Contracts Fund, Inc. that an investor ought to know before investing. It should
be read and retained for future reference.
Additional information about the Fund has been filed with the Securities
and Exchange Commission, including a document called Statement of Additional
Information, dated ____________________. The Statement of Additional Information
is incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Variable Contracts Fund, Inc.
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Date of this Prospectus is ___________________.
TABLE OF CONTENTS
Page
Summary ......................................................... 3
Financial Highlights.............................................. 5
Investment Objectives, Policies and Restrictions.................. 10
Certain Investment Policies and Restrictions...................... 16
Manager and Sub-Advisor ......................................... 19
Duties Performed by the Manager and Sub-Advisor................... 20
Managers' Comments................................................ 21
Determination of Net Asset Value of Account Shares................ 25
Performance Calculation........................................... 26
Income Dividends, Distributions and Tax Status.................... 27
Eligible Purchasers and Purchase of Shares........................ 28
Shareholder Rights ............................................... 28
Redemption of Shares.............................................. 29
Additional Information............................................ 30
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, shares of the Account in any jurisdiction in which such sale,
offer to sell, or solicitation may not be lawfully made. No dealer, salesperson,
or other person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund or the Fund's Manager.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Variable Contracts Fund, Inc. is an open-end diversified
management investment company offering multiple Accounts.
Who may purchase shares of the Accounts?
Shares of the Accounts are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Accounts offer investors?
Professional Investment Management: Experienced securities analysts provide
each Account with professional investment management.
Diversification: Each Account will diversify by investing in securities
issued by a number of issuers doing business in a variety of industries and/or
located in different geographical regions. Diversification reduces investment
risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Accounts creates administrative efficiencies.
Redeemability: Upon request each Account will redeem its shares and
promptly pay the investor the current net asset value of the shares redeemed.
See "Redemption of Shares."
What are the Accounts' investment objectives?
Growth-Oriented Accounts
The investment objective of the Balanced Account is to seek to generate a
total return consisting of current income and capital appreciation while
assuming reasonable risks in furtherance of this objective.
The primary investment objective of the Capital Value Account is long-term
capital appreciation and its secondary investment objective is growth of
investment income. The Account seeks to achieve its investment objectives
through the purchase primarily of common stocks, but the Account may invest in
other securities.
The investment objective of the Growth Account is growth of capital. The
Account seeks to achieve its objective through the purchase primarily of common
stocks, but the Account may invest in other securities.
The investment objective of the International Account is to seek long-term
growth of capital by investing in a portfolio of equity securities domiciled in
any of the nations of the world.
The investment objective of the MidCap Account is to achieve capital
appreciation by investing primarily in securities of emerging and other
growth-oriented companies.
Income-Oriented Accounts
The investment objective of the Bond Account is to provide as high a level
of income as is consistent with preservation of capital and prudent investment
risk.
The investment objective of the Government Securities Account is to seek a
high level of current income, liquidity and safety of principal. The Account
seeks to achieve its objective through the purchase of obligations issued or
guaranteed by the United States Government or its agencies, with emphasis on
Government National Mortgage Association Certificates ("GNMA Certificates").
Account shares are not guaranteed by the United States Government.
Money Market Account
The investment objective of the Money Market Account is to seek as high a
level of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
There can be no assurance that the investment objectives of any of the
Accounts will be realized. See "Investment Objectives, Policies and
Restrictions."
Who serves as Manager for the Accounts?
Principal Management Corporation (formerly known as Princor Management
Corporation) ("Manager"), a corporation organized in 1969 by Principal Mutual
Life Insurance Company, is the Manager for each of the Accounts. It is also the
dividend disbursing and transfer agent for the Fund. In order to provide
investment advisory services for the Balanced, Capital Value, Government
Securities, Growth, International and MidCap Accounts the Manager has executed
sub-advisory agreements with Invista Capital Management, Inc. ("Invista" or
"Sub-Advisor"). See "Manager and Sub-Advisor."
What fees and expenses apply to ownership of shares of the Accounts?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Accounts.
ANNUAL ACCOUNT OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Account Fee Expenses Expenses
Balanced Account .60 .03 .63
Bond Account .50 .03 .53
Capital Value Account .48 .01 .49
Government Securities Account .50 .02 .52
Growth Account .50 .02 .52
International Account .75 .15 .90
MidCap Account .64 .02 .66
Money Market Account .50 .06 .56
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Period (in years)
Account 1 3 5 10
Balanced Account $6 $20 $35 $79
Bond Account $5 $17 $30 $66
Capital Value Account $5 $16 $27 $62
Government Securities Account $5 $17 $29 $65
Growth Account $5 $17 $29 $65
International Account $9 $29 $50 $111
MidCap Account $7 $21 $37 $82
Money Market Account $6 $18 $31 $70
This Example is based on the Annual Account Operating expenses for each
Account described above. Please remember that the Example should not be
considered a representation of past or future expenses and that actual
expenses may be greater or less than shown.
The purpose of the above table is to assist you in understanding the
various expenses that an investor in the Accounts will bear directly or
indirectly. See "Duties Performed by the Manager and Sub-Advisor."
FINANCIAL HIGHLIGHTS
The following financial highlights for the periods ended December 31, 1996
and prior thereto are derived from financial statements which have been audited
by Ernst & Young LLP, independent auditors, whose report has been incorporated
by reference herein. The financial highlights should be read in conjunction with
the financial statements, related notes, and other financial information
incorporated by reference herein. Audited financial statements may be obtained
by shareholders, without charge, by telephoning 1-800-451-5447.
<TABLE>
<CAPTION>
Income from
Investment Operations
Net Realized
and
Net Asset Unrealized Total
Value at Net Gain from
Beginning Investment (Loss) on Investment
of Period Income Investments Operations
Balanced Account(d)
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $13.97 $.40 $1.41 $1.81
1995 11.95 .45 2.44 2.89
1994 12.77 .37 (.64) (.27)
1993 12.58 .42 .95 1.37
Six Months Ended
December 31, 1992(d) 12.93 .23 .75 .98
Year Ended June 30,
1992 11.33 .47 1.61 2.08
1991 10.79 .54 .59 1.13
1990 11.89 .60 (.48) .12
1989 11.75 .62 .30 .92
Period Ended June 30, 1988(e) 10.00 .27 1.51 1.78
Bond Account
Year Ended December 31,
1996 11.73 .68 (.40) .28
1995 10.12 .62 1.62 2.24
1994 11.16 .72 (1.04) (.32)
1993 10.77 .88 .38 1.26
Six Months Ended
December 31, 1992(d) 11.08 .45 .13 .58
Year Ended June 30,
1992 10.64 .91 .46 1.37
1991 10.72 .94 (.06) .88
1990 10.92 .95 (.21) .74
1989 10.68 1.15 .17 1.32
Period Ended June 30, 1988(e) 10.00 .32 .40 .72
Capital Value Account
Year Ended December 31,
1996 27.80 .57 5.82 6.39
1995 23.44 .60 6.69 7.29
1994 24.61 .62 (.49) .13
1993 25.19 .61 1.32 1.93
Six Months Ended
December 31, 1992(d) 26.03 .31 1.84 2.15
Year Ended June 30,
1992 23.35 .65 2.70 3.35
1991 22.48 .74 1.22 1.96
1990 23.63 .79 .14 .93
1989 23.23 .77 1.32 2.09
1988 27.51 .60 (1.50) (.90)
1987 25.48 .40 4.46 4.86
</TABLE>
<TABLE>
<CAPTION>
Less Distributions
Excess
Dividends Distributions Distributions
from Net from from
Investment Capital Capital Total
Income Gains Gains Distributions
Balanced Account(d)
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $(.40) $(.94) $ -- $(1.34)
1995 (.45) (.42) -- (.87)
1994 (.37) (.18) -- (.55)
1993 (.42) (.76) -- (1.18)
Six Months Ended
December 31, 1992(d) (.47) (.86) -- (1.33)
Year Ended June 30,
1992 (.48) -- -- (.48)
1991 (.57) (.02) -- (.59)
1990 (.63) (.59) -- (1.22)
1989 (.55) (.23) -- (.78)
Period Ended June 30, 1988(e) (.03) -- -- (.03)
Bond Account
Year Ended December 31,
1996 (.68) -- -- (.68)
1995 (.63) -- -- (.63)
1994 (.72) -- -- (.72)
1993 (.87) -- -- (.87)
Six Months Ended
December 31, 1992(d) (.89) -- -- (.89)
Year Ended June 30,
1992 (.93) -- -- (.93)
1991 (.96) -- -- (.96)
1990 (.94) -- -- (.94)
1989 (.96) (.12) -- (1.08)
Period Ended June 30, 1988(e) (.04) -- -- (.04)
Capital Value Account
Year Ended December 31,
1996 (.58) (3.77) -- (4.35)
1995 (.60) (2.33) -- (2.93)
1994 (.61) (.69) -- (1.30)
1993 (.60) (1.91) -- (2.51)
Six Months Ended
December 31, 1992(d) (.64) (2.35) -- (2.99)
Year Ended June 30,
1992 (.67) -- -- (.67)
1991 (.79) (.30) -- (1.09)
1990 (.81) (1.27) -- (2.08)
1989 (.68) (1.01) -- (1.69)
1988 (.69) (2.69) -- (3.38)
1987 (.50) (2.33) -- (2.83)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
Balanced Account(d)
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $14.44 13.13% 93,158 .63% 3.45% 22.6% $.0417
1995 13.97 24.58% 45,403 .66% 4.12% 25.7% N/A
1994 11.95 (2.09)% 25,043 .69% 3.42% 31.5% N/A
1993 12.77 11.06% 21,399 .69% 3.30% 15.8% N/A
Six Months Ended
December 31, 1992(d) 12.58 8.00%(b) 18,842 .73%(c) 3.71%(c) 38.4%(c) N/A
Year Ended June 30,
1992 12.93 18.78% 17,344 .72% 3.80% 26.6% N/A
1991 11.33 11.36% 14,555 .73% 5.27% 27.1% N/A
1990 10.79 .87% 13,016 .74% 5.52% 33.1% N/A
1989 11.89 8.55% 12,751 .74% 5.55% 29.3% N/A
Period Ended June 30, 1988(e) 11.75 17.70%(b) 11,469 .80%(c) 4.96%(c) 41.7%(c) N/A
Bond Account
Year Ended December 31,
1996 11.33 2.36% 63,387 .53% 7.00% 1.7% N/A
1995 11.73 22.17% 35,878 .56% 7.28% 5.9% N/A
1994 10.12 (2.90)% 17,108 .58% 7.86% 18.2% N/A
1993 11.16 11.67% 14,387 .59% 7.57% 14.0% N/A
Six Months Ended
December 31, 1992(d) 10.77 5.33%(b) 12,790 .62%(c) 8.10%(c) 6.7%(c) N/A
Year Ended June 30,
1992 11.08 13.57% 12,024 .62% 8.47% 6.1% N/A
1991 10.64 8.94% 10,552 .63% 9.17% 2.7% N/A
1990 10.72 7.15% 9,658 .64% 9.09% 0.0% N/A
1989 10.92 13.51% 9,007 .64% 9.18% 12.2% N/A
Period Ended June 30, 1988(e) 10.68 6.06%(b) 17,598 .58%(c) 8.11%(c) 68.8%(c) N/A
Capital Value Account
Year Ended December 31,
1996 29.84 23.50% 205,019 .49% 2.06% 48.5% .0426
1995 27.80 31.91% 135,640 .51% 2.25% 49.2% N/A
1994 23.44 .49% 120,572 .51% 2.36% 44.5% N/A
1993 24.61 7.79% 128,515 .51% 2.49% 25.8% N/A
Six Months Ended
December 31, 1992(d) 25.19 8.81%(b) 105,355 .55%(c) 2.56%(c) 39.7%(c) N/A
Year Ended June 30,
1992 26.03 14.53% 94,596 .54% 2.65% 34.8% N/A
1991 23.35 9.46% 76,537 .53% 3.53% 14.0% N/A
1990 22.48 3.94% 74,008 .56% 3.56% 30.2% N/A
1989 23.63 10.02% 68,132 .57% 3.53% 23.5% N/A
1988 23.23 (2.67)% 62,696 .60% 2.76% 26.7% N/A
1987 27.51 22.17% 57,478 .63% 1.99% 16.1% N/A
</TABLE>
Notes to financial highlights
(a) Effective May 1, 1994, the name of Principal Managed Fund, Inc. was
changed to Principal Balanced Fund, Inc.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Effective July 1, 1992 the Account changed its fiscal year end from
June 30 to December 31.
(e) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating
$.01 per share for the period from the initial purchase of shares on
December 10, 1987 through December 17, 1987 was recognized, all of
which was distributed to the Account's sole stockholder, Principal
Mutual Life Insurance Company. This represented activity of the
Account prior to the initial offering of shares to eligible
purchasers.
<TABLE>
<CAPTION>
Income from
Investment Operations
Net Realized
and
Net Asset Unrealized Total
Value at Net Gain from
Beginning Investment (Loss) on Investment
of Period Income Investments Operations
Government Securities Account
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $10.55 $.59 $ (.24) $ .35
1995 9.38 .60 1.18 1.78
1994 10.61 .76 (1.24) (.48)
1993 10.28 .71 .33 1.04
Six Months Ended
December 31, 1992(a) 10.93 .40 .04 .44
Year Ended June 30,
1992 10.24 .80 .71 1.51
1991 10.05 .80 .24 1.04
1990 10.05 .78 -- .78
1989 9.37 .80 .34 1.14
1988 9.47 .78 (.09) .69
Period Ended June 30, 1987(d) 10.00 .18 (.59) (.41)
Growth Account
Year Ended December 31,
1996 12.43 .16 1.39 1.55
1995 10.10 .17 2.42 2.59
Period Ended December 31, 1994(e) 9.60 .07 .51 .58
International Account
Year Ended December 31,
1996 10.72 .22 2.46 2.68
1995 9.56 .19 1.16 1.35
Period Ended December 31, 1994(e) 9.94 .03 (.33) (.30)
MidCap Account(f)
Year Ended December 31,
1996 25.33 .22 5.07 5.29
1995 19.97 .22 5.57 5.79
1994 20.79 .14 .03 .17
1993 18.91 .17 3.47 3.64
Six Months Ended
December 31, 1992(a) 15.97 .10 3.09 3.19
Year Ended June 30,
1992 13.93 .21 2.04 2.25
1991 14.25 .20 .50 .70
1990 13.35 .24 .87 1.11
1989 12.85 .16 1.35 1.51
Period Ended June 30, 1988(g) 10.00 .05 2.83 2.88
Money Market Account
Year Ended December 31,
1996 1.000 .049 -- .049
1995 1.000 .054 -- .054
1994 1.000 .037 -- .037
1993 1.000 .027 -- .027
Six Months Ended
December 31, 1992(a) 1.000 .016 -- .016
Year Ended June 30,
1992 1.000 .046 -- .046
1991 1.000 .070 -- .070
1990 1.000 .077 -- .077
1989 1.000 .083 -- .083
1988 1.000 .064 -- .064
1987 1.000 .057 -- .057
</TABLE>
<TABLE>
<CAPTION>
Less Distributions
Excess
Dividends Distributions Distributions
from Net from from
Investment Capital Capital Total
Income Gains Gains Distributions
Government Securities Account
Year Ended December 31,
<S> <C> <C> <C> <C>
1996 $(.59) $-- $ -- $ (.59)
1995 (.61) -- -- (.61)
1994 (.75) -- -- (.75)
1993 (.71) -- -- (.71)
Six Months Ended
December 31, 1992(a) (.78) -- (.31) (1.09)
Year Ended June 30,
1992 (.81) -- (.01) (.82)
1991 (.81) -- (.04) (.85)
1990 (.78) -- -- (.78)
1989 (.46) -- -- (.46)
1988 (.79) -- -- (.79)
Period Ended June 30, 1987(d) (.12) -- -- (.12)
Growth Account
Year Ended December 31,
1996 (.16) (.03) -- (.19)
1995 (.17) -- (.09) (.26)
Period Ended December 31, 1994(e) (.08) -- -- (.08)
International Account
Year Ended December 31,
1996 (.22) (.16) -- (.38)
1995 (.18) -- (.01) (.19)
Period Ended December 31, 1994(e) (.05) (.02) (.01) (.08)
MidCap Account(f)
Year Ended December 31,
1996 (.22) (.66) -- (.88)
1995 (.22) (.21) -- (.43)
1994 (.14) (.85) -- (.99)
1993 (.17) (1.59) -- (1.76)
Six Months Ended
December 31, 1992(a) (.21) (.04) -- (.25)
Year Ended June 30,
1992 (.21) -- -- (.21)
1991 (.23) (.79) -- (1.02)
1990 (.20) (.01) -- (.21)
1989 (.11) (.90) -- (1.01)
Period Ended June 30, 1988(g) (.03) -- -- (.03)
Money Market Account
Year Ended December 31,
1996 (.049) -- -- (.049)
1995 (.054) -- -- (.054)
1994 (.037) -- -- (.037)
1993 (.027) -- -- (.027)
Six Months Ended
December 31, 1992(a) (.016) -- -- (.016)
Year Ended June 30,
1992 (.046) -- -- (.046)
1991 (.070) -- -- (.070)
1990 (.077) -- -- (.077)
1989 (.083) -- -- (.083)
1988 (.064) -- -- (.064)
1987 (.057) -- -- (.057)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
Government Securities Account
Year Ended December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $10.31 3.35% $ 85,100 .52% 6.46% 8.4% N/A
1995 10.55 19.07% 50,079 .55% 6.73% 9.8% N/A
1994 9.38 (4.53)% 36,121 .56% 7.05% 23.2% N/A
1993 10.61 10.07% 36,659 .55% 7.07% 20.4% N/A
Six Months Ended
December 31, 1992(a) 10.28 4.10%(b) 31,760 .59%(c) 7.35%(c) 34.5%(c) N/A
Year Ended June 30,
1992 10.93 15.34% 33,022 .58% 7.84% 38.9% N/A
1991 10.24 10.94% 26,021 .59% 8.31% 4.2% N/A
1990 10.05 8.16% 21,488 .61% 8.48% 18.7% N/A
1989 10.05 12.61% 15,890 .63% 8.68% 3.7% N/A
1988 9.37 7.69% 12,902 .66% 8.47% 2.7% N/A
Period Ended June 30, 1987(d) 9.47 (.94)%(b) 10,778 .64%(c) 8.50%(c) 0.2%(c) N/A
Growth Account
Year Ended December 31,
1996 13.79 12.51% 99,612 .52% 1.61% 2.0% $.0401
1995 12.43 25.62% 42,708 .58% 2.08% 6.9% N/A
Period Ended December 31, 1994(e) 10.10 5.42%(b) 13,086 .75%(c) 2.39%(c) 0.9%(c) N/A
International Account
Year Ended December 31,
1996 13.02 25.09% 71,682 .90% 2.28% 12.5% .0120
1995 10.72 14.17% 30,566 .95% 2.26% 15.6% N/A
Period Ended December 31, 1994(e) 9.56 (3.37)%(b) 13,746 1.24%(c) 1.31%(c) 14.4%(c) N/A
MidCap Account(f)
Year Ended December 31,
1996 29.74 21.11% 137,161 .66% 1.07% 8.8% .0379
1995 25.33 29.01% 58,520 .70% 1.23% 13.1% N/A
1994 19.97 .78% 23,912 .74% 1.15% 12.0% N/A
1993 20.79 19.28% 12,188 .78% .89% 22.4% N/A
Six Months Ended
December 31, 1992(a) 18.91 20.12%(b) 9,693 .81%(c) 1.24%(c) 8.6%(c) N/A
Year Ended June 30,
1992 15.97 16.19% 7,829 .82% 1.33% 10.1% N/A
1991 13.93 5.72% 6,579 .89% 1.70% 11.1% N/A
1990 14.25 8.32% 6,067 .88% 1.74% 17.9% N/A
1989 13.35 13.08% 5,509 .90% 1.31% 21.4% N/A
Period Ended June 30, 1988(g) 12.85 28.72%(b) 4,857 .94%(c) .64%(c) 4.6%(c) N/A
Money Market Account
Year Ended December 31,
1996 1.000 5.07% 46,244 .56% 5.00% N/A N/A
1995 1.000 5.59% 32,670 .58% 5.32% N/A N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A N/A
Six Months Ended
December 31, 1992(a) 1.000 1.54%(b) 27,680 .59%(c) 3.10%(c) N/A N/A
Year Ended June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A N/A
</TABLE>
Notes to financial highlights
(a) Effective July 1, 1992 the Account changed its fiscal year end from
June 30 to December 31.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Period from April 9, 1987, date shares first offered to the public,
through June 30, 1987. Net investment income, aggregating $.01 per
share for the period from the initial purchase of shares on October
31, 1987 through December 17, 1987 was recognized, all of which was
distributed to the Account's sole stockholder, Principal Mutual Life
Insurance Company. This represented activity of the Account prior to
the initial offering of shares to eligible purchasers.
(e) Period from May 1, 1994, date shares first offered to the public,
through December 31, 1994. Net investment income, aggregating $.01 per
share for the Growth Account, Inc. and $.04 per share for the
International Account for the period from the initial purchase of
shares on March 23, 1994 through April 30, 1994, was recognized, none
of which was distributed to the sole stockholder, Principal Mutual
Life Insurance Company, during the period. Additionally, the Growth
Account and the International Account incurred unrealized losses on
investments of $.41 and $.10 per share, respectively, during the
initial interim period. This represented activities of each Account
prior to the initial public offering of Account shares.
(f) Effective May 1, 1992, the name of Principal Aggressive Growth Fund,
Inc. was changed to Principal Emerging Growth Fund, Inc.
(g) Period from December 18, 1987, date shares first offered to eligible
purchasers, through June 30, 1988. Net investment income aggregating
$.01 per share for the period from the initial purchase of shares on
December 10, 1987 through December 17, 1987 was recognized, all of
which was distributed to the Account's sole stockholder, Principal
Mutual Life Insurance Company. This represented activity of the
Account prior to the initial offering of shares to eligible
purchasers.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The investment objectives and policies of each Account are described below.
There can be no assurance that the objectives of the Accounts will be realized.
GROWTH-ORIENTED ACCOUNTS
The Fund includes four Accounts which seek capital appreciation through
investments in equity securities (Capital Value, Growth, International and
MidCap Accounts) and one Account which seeks a total investment return including
both capital appreciation and income through investments in equity and debt
securities (Balanced Account). These five Accounts are collectively referred to
as the Growth-Oriented Accounts.
The Growth-Oriented Accounts may invest in the following equity securities:
common stocks; preferred stocks and debt securities that are convertible into
common stock, that carry rights or warrants to purchase common stock or that
carry rights to participate in earnings; rights or warrants to subscribe to or
purchase any of the foregoing securities; and American Depository Receipts based
on any of the foregoing securities. The Capital Value, Growth, International and
MidCap Accounts will seek to be fully invested under normal conditions in equity
securities. When, in the opinion of the Manager or Sub-Advisor, current market
or economic conditions warrant, a Growth-Oriented Account may for temporary
defensive purposes place all or a portion of its assets in cash, on which the
Account would earn no income, cash equivalents, bank certificates of deposit,
bankers acceptances, repurchase agreements, commercial paper, commercial paper
master notes which are floating rate debt instruments without a fixed maturity,
United States Government securities, and preferred stocks and debt securities,
whether or not convertible into or carrying rights for common stock. A
Growth-Oriented Account may also maintain reasonable amounts in cash or
short-term debt securities for daily cash management purposes or pending
selection of particular long-term investments.
Balanced Account
The investment objective of Balanced Account is to generate a total return
consisting of current income and capital appreciation while assuming reasonable
risks in furtherance of the investment objective. The term "reasonable risks"
refers to investment decisions that in the judgment of the Sub-Advisor, Invista,
do not present a greater than normal risk of loss in light of current or
anticipated future market and economic conditions, trends in yields and interest
rates, and fiscal and monetary policies.
In seeking to achieve the investment objective, the Account invests
primarily in growth and income-oriented common stocks (including securities
convertible into common stocks), corporate bonds and debentures and short-term
money market instruments. The Account may also invest in other equity
securities, and in debt securities issued or guaranteed by the United States
Government and its agencies or instrumentalities. The Account seeks to generate
real (inflation plus) growth during favorable investment periods and may
emphasize income and capital preservation strategies during uncertain investment
periods. The Sub-Advisor will seek to minimize declines in the net asset value
per share. However, there is no guarantee that the Sub-Advisor will be
successful in achieving this goal.
The portions of the Account's total assets invested in equity securities,
debt securities and short-term money market instruments are not fixed, although
ordinarily 40% to 70% of the Account's portfolio will be invested in equity
securities with the balance of the portfolio invested in debt securities. The
investment mix will vary from time to time depending upon the judgment of the
Sub-Advisor as to general market and economic conditions, trends in investment
yields and interest rates and changes in fiscal or monetary policies.
The Account may invest in all types of common stocks and other equity
investments, without regard to any objective investment criteria such as size of
the issue or issuer, exchange listing or seasoning. The Account may invest in
both exchange-listed and over-the-counter securities, in small or large
companies, and in well-established or unseasoned companies. Also, the Account's
investments in corporate bonds and debentures and money market instruments are
not restricted by credit ratings or other objective investment criteria, except
with respect to bank certificates of deposit as set forth below. Some of the
fixed income securities in which the Account may invest may be considered to
include speculative characteristics and the Account may purchase such securities
that are in default but does not currently intend to invest more than 5% of its
assets in securities rated below BBB by Standard & Poor's or Baa by Moody's. See
"Below Investment-Grade Bonds" for a discussion of the risks associated with
these securities. The rating services' descriptions of BBB or Baa securities are
as follows: Moody's Investors Service, Inc. Bond Ratings -- Baa: Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories. The Account will not concentrate its
investments in any industry.
In selecting common stocks, the Sub-Advisor seeks companies which it
believes have predictable earnings increases and which, based on their future
growth prospects, may be currently undervalued in the market place. During
periods when the Sub-Advisor determines that general economic conditions are
favorable, it will generally purchase common stocks with the objective of
long-term capital appreciation. From time to time, and in periods of economic
uncertainty, the Sub-Advisor may purchase common stocks with the expectation of
price appreciation over a relatively short period of time.
To achieve its investment objective, the Account may at times emphasize the
generation of interest income by investing in short, medium or long-term debt
securities. Investment in debt securities may also be made with a view to
realizing capital appreciation when the Manager believes that declining interest
rates may increase market values. The Account may also purchase "deep discount
bonds," i.e., bonds which are selling at a substantial discount from their face
amount, with a view to realizing capital appreciation.
The short-term money market investments in which the Account may invest
include the following: U.S. Treasury bills, bank certificates of deposit,
bankers' acceptances, repurchase agreements, commercial paper and commercial
paper master notes which are floating rate debt instruments without a fixed
maturity. The Account will only invest in domestic bank certificates of deposit
issued by banks which are members of the Federal Reserve System that have total
deposits in excess of $1 billion.
The United States government securities in which the Account may invest
include U.S. Treasury obligations and obligations of certain agencies, such as
the Government National Mortgage Association, which are supported by the full
faith and credit of the United States, as well as obligations of certain other
Federal agencies or instrumentalities, such as the Federal National Mortgage
Association, Federal Land Banks and the Federal Farm Credit Administration,
which are backed only by the right of the issuer to borrow limited funds from
the U.S. Treasury, by the discretionary authority of the U.S. Government to
purchase such obligations or by the credit of the agency or instrumentality
itself.
Capital Value Account
The primary objective of Capital Value Account is long-term capital
appreciation. A secondary objective is growth of investment income.
The Account will invest primarily in common stocks, but it may invest in
other securities. In making selections for the Account's investment portfolio,
the Manager will use an approach described broadly as that of fundamental
analysis, which is discussed in the Statement of Additional Information. To
achieve the investment objective, Invista will invest in securities that have
"value" characteristics. This process is known as "value investing." Value
investing is purchasing securities of companies with above average dividend
yields and below average price to earnings (P/E) ratios. Securities chosen for
investment may include those of companies which the Manager believes can
reasonably be expected to share in the growth of the nation's economy over the
long term.
Growth Account
The objective of Growth Account is growth of capital. Realization of
current income will be incidental to the objective of growth of capital.
The Account will invest primarily in common stocks, but it may invest in
other equity securities. In making selections for the Account's investment
portfolio, the Sub-Advisor, Invista, will use an approach described broadly as
that of fundamental analysis, which is discussed in the Statement of Additional
Information. In pursuit of the Account's investment objective, investments will
be made in securities which as a group appear to possess potential for
appreciation in market value. Common stocks chosen for investment may include
those of companies which have a record of sales and earnings growth that exceeds
the growth rate of corporate profits of the S&P 500 or which offer new products
or new services. The policy of investing in securities which have a high
potential for growth of capital can mean that the assets of the Account may be
subject to greater risk than securities which do not have such potential.
International Account
The investment objective of International Account is to seek long-term
growth of capital through investment in a portfolio of equity securities of
companies domiciled in any of the nations of the world. In choosing investments
in equity securities of foreign and United States corporations, the Sub-Advisor,
Invista, intends to pay particular attention to long-term earnings prospects and
the relationship of then-current prices to such prospects. Short-term trading is
not generally intended, but occasional investments may be made for the purpose
of seeking short-term or medium-term gain. The Account expects its investment
objective to be met over long periods which may include several market cycles.
For a description of certain investment risks associated with foreign
securities, see "Foreign Securities."
For temporary defensive purposes, the International Account may invest in
the same kinds of securities as the other Growth-Oriented Accounts whether
issued by domestic or foreign corporations, governments, or governmental
agencies, instrumentalities or political subdivisions and whether denominated in
United States dollars or some other currency.
The Account intends that its investments normally will be allocated among
various countries. Although there is no limitation on the percentage of assets
that may be invested in any one country or denominated in any one currency, the
Account intends under normal market conditions to have at least 65% of its
assets invested in securities issued by corporations of at least five countries,
one of which may be the United States (although the Fund currently intends not
to invest in equity securities of United States companies). Investments may be
made anywhere in the world, but it is expected that primary consideration will
be given to investing in the securities issued by corporations of Western
Europe, North America and Australasia (Australia, Japan and Far East Asia) that
have developed economies. Changes in investments may be made as prospects change
for particular countries, industries or companies.
MidCap Account
The objective of MidCap Account is to achieve capital appreciation. The
strategy of this Account is to invest primarily in the common stocks and
securities (both debt and preferred stock) convertible into common stocks of
emerging and other growth-oriented companies that, in the judgment of the
Manager, are responsive to changes within the marketplace and have the
fundamental characteristics to support growth. In pursuing its objective of
capital appreciation, the MidCap Account may invest, for any period of time, in
any industry, in any kind of growth-oriented company, whether new and unseasoned
or well known and established.
There can be, of course, no assurance that the Account will attain its
objective. Investment in emerging and other growth-oriented companies may
involve greater risk than investment in other companies. The securities of
growth-oriented companies may be subject to more abrupt or erratic market
movements, and many of them may have limited product lines, markets, financial
resources or management. Because of these factors and of the length of time that
may be required for full development of the growth prospects of some of the
companies in which the Account invests, the Account believes that its shares are
suitable only for persons who are prepared to experience above-average
fluctuations in net asset value, to assume above-average investment risk in
search of above-average return, and to consider the Account as a long-term
investment and not as a vehicle for seeking short-term profits. Moreover, since
the Account will not be seeking current income, investors should not view a
purchase of Account shares as a complete investment program.
INCOME-ORIENTED ACCOUNTS
The Fund currently include two Accounts which seek a high level of income
through investments in fixed-income securities (Bond Account and Government
Securities Account) collectively referred to as the "Income-Oriented Accounts."
An investment in either of the Income-Oriented Accounts involves market risks
associated with movements in interest rates. The market value of the Accounts'
investments will fluctuate in response to changes in interest rates and other
factors. During periods of falling interest rates, the values of outstanding
long-term fixed-income securities generally rise. Conversely, during periods of
rising interest rates, the values of such securities generally decline. Changes
by recognized rating agencies in their ratings of any fixed-income security and
in the ability of an issuer to make payments of interest and principal may also
affect the value of these investments. Changes in the value of portfolio
securities will affect the Accounts' net asset values but will not affect cash
income derived from the securities unless a change results from a failure of an
issuer to pay interest or principal when due. Each Account's rating limitations
apply at the time of acquisition of a security, and any subsequent change in a
rating by a rating service will not require elimination of a security from the
Account's portfolio. The Statement of Additional Information contains
descriptions of ratings of Moody's Investors Service, Inc. ("Moody's") and
Standard and Poor's Corporation ("S&P").
Bond Account
The investment objective of the Bond Account is to provide as high a level
of income as is consistent with preservation of capital and prudent investment
risk.
In seeking to achieve the investment objective, the Account will
predominantly invest in marketable fixed-income securities. Investments will be
made generally on a long-term basis, but the Account may make short-term
investments from time to time as deemed prudent by the Manager. Longer
maturities typically provide better yields but will subject the Account to a
greater possibility of substantial changes in the values of its portfolio
securities as interest rates change.
Under normal circumstances, the Account will invest at least 65% of its
assets, exclusive of cash items, in one or more of the following kinds of
securities: (i) corporate debt securities and taxable municipal obligations,
which at the time of purchase have an investment grade rating within the four
highest grades used by Standard & Poor's Corporation (AAA, AA, A or BBB) or by
Moody's Investors Service, Inc. (Aaa, Aa, A or Baa) or which, if lower-rated or
nonrated, are comparable in quality in the opinion of the Account's Manager;
(ii) similar Canadian corporate, Provincial and Federal Government securities
payable in U.S. funds; and (iii) securities issued or guaranteed by the United
States Government or its agencies or instrumentalities. The balance of the
Account's assets may be invested in other fixed income securities, including
domestic and foreign corporate debt securities or preferred stocks, in common
stocks that provide returns that compare favorably with the yields on fixed
income investments, and in common stocks acquired upon conversion of debt
securities or preferred stocks or upon exercise of warrants acquired with debt
securities or otherwise and foreign government securities. The debt securities
and preferred stocks in which the Account invests may be convertible or
nonconvertible. The Account does not intend to purchase debt securities rated
lower than Ba3 by Moody's or BB - by S & P (bonds which are judged to have
speculative elements; their future cannot be considered as well-assured). See
"Below Investment-Grade Bonds" for a discussion of the risks associated with
these securities. The rating services' descriptions of BBB or Baa securities are
as follows: Moody's Investors Service, Inc. Bond Ratings -- Baa: Bonds which are
rated Baa are considered as medium grade obligations, i.e., they are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well. Standard & Poor's Corporation Bond Ratings -- BBB: Debt
rated "BBB" is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in this category
than for debt in higher-rated categories.
During the year ended December 31, 1996, the percentage of the Account's
portfolio securities invested in the various ratings established by Moody's
based upon the weighted average ratings of the portfolio, was as follows:
Moody's Rating Portfolio Percentage
Aaa .18%
Aa .81%
A 24.05%
Baa 68.04%
Ba 6.92%
* The above percentages for A rated securities include .57% respectively,
unrated securities which have been determined by the Manager to be of comparable
quality.
Cash equivalents in which the Account invests include corporate commercial
paper rated A-1+, A-1 or A-2 by Standard & Poor's or P-1 or P-2 by Moody's,
unrated commercial paper issued by corporations with outstanding debt securities
rated in the four highest grades by Standard & Poor's and Moody's and bank
certificates of deposit and bankers' acceptances issued or guaranteed by
national or state banks and repurchase agreements considered by the Account to
have investment quality. Under unusual market or economic conditions, the
Account may for temporary defense purposes invest up to 100% of its assets in
cash or cash equivalents.
Government Securities Account
The objective of Government Securities Account is a high level of current
income, liquidity and safety of principal.
The Account will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities include
Government National Mortgage Association ("GNMA") Certificates of the modified
pass-through type, Federal National Mortgage Association ("FNMA") Obligations,
Federal Home Loan Mortgage Corporation ("FHLMC") Certificates and Student Loan
Marketing Association ("SLMA") Certificates and other U.S. Government
Securities. GNMA is a wholly-owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned
corporation, FHLMC, a federal corporation, and SLMA, a government sponsored
stockholder-owned organization, are instrumentalities of the United States. The
securities and guarantees of FNMA, FHLMC and SLMA are not backed, directly or
indirectly, by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Account may maintain reasonable
amounts of cash or short-term debt securities for daily cash management purposes
or pending selection of particular long-term investments.
Cash equivalents in which the Account invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Account to have investment quality.
Depending on market conditions, up to 55% of the assets may be invested in
GNMA Certificates. GNMA is a United States Government corporation within the
Department of Housing and Urban Development. GNMA Certificates are
mortgage-backed securities representing an interest in a pool of mortgage loans.
Such loans are made by lenders such as mortgage bankers, insurance companies,
commercial banks and savings and loan associations. Then, they are either
insured by the Federal Housing Administration (FHA) or they are guaranteed by
the Veterans Administration (VA) or Farmers Home Administration (FmHA). The
lender or other prospective issuer creates a specific pool of such mortgages,
which it submits to GNMA for approval. After approval, a GNMA Certificate is
typically offered by the issuer to investors through securities dealers.
GNMA Certificates differ from bonds in that the principal is scheduled to
be paid back by the borrower on a monthly basis over the life of the loan rather
than returned in a lump sum at maturity. Modified pass-through GNMA
certificates, which are the only kind in which the Account intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of whether or not the mortgagor has made such payment.
The timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government.
Although the payment of interest and principal is guaranteed, the guarantee
does not extend to the value of a GNMA Certificate or the value of the shares of
the Account. The market value of a GNMA Certificate typically will fluctuate to
reflect changes in prevailing interest rates. It falls when rates increase (as
does the market value of other debt securities) and it rises when rates decline
(but it may not rise on a comparable basis with other debt securities because of
its prepayment feature), and, therefore, may be more or less than the face
amount of the GNMA Certificate, which reflects the aggregate principal amount of
the underlying mortgages. As a result, the net asset value of Account shares
will fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Account at prevailing
interest rates which may be less than the rate on the GNMA Certificate.
Prepayments are likely to increase as the interest rate for new mortgages moves
lower than the rate on the GNMA Certificate. Moreover, if the GNMA Certificate
had been purchased at a premium above principal because its rate exceeded
prevailing rates, the premium is not guaranteed and a decline in value to par
may result in a loss of the premium especially in the event of prepayment.
To the extent deemed appropriate by the Account's Manager, the Account
intends to purchase GNMA Certificates directly from Principal Mutual Life
Insurance Company and other issuers as well as from securities dealers. The
Account will purchase directly from issuers only if it can obtain a price
advantage by not paying the commission or mark-up that would be required if the
Certificates were purchased from a securities dealer. The Securities and
Exchange Commission has issued an order under the Investment Company Act of 1940
that permits the Account to purchase GNMA Certificates directly from Principal
Mutual Life Insurance Company subject to certain conditions.
The FNMA and FHLMC securities in which the Account invests are very similar
to GNMA certificates as described above but are not guaranteed by the full faith
and credit of the United States but rather by the agency itself. FNMA and FHLMC
securities are rated Aaa by Moody's and AAA by Standard & Poor's. These ratings
reflect the status of FNMA and FHLMC as federal agencies as well as the
important role each plays in financing purchases of homes in the U.S.
Student Loan Marketing Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Account
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by the agency and is traded regularly in denominations similar to
those in which government obligations are traded.
The Account will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the
Account's investment objective. Accordingly, the Account may sell portfolio
securities in anticipation of a rise in interest rates and purchase securities
for inclusion in its portfolio in anticipation of a decline in interest rates.
As a hedge against changes in interest rates, the Account may enter into
contracts with dealers in GNMA Certificates whereby the Account agrees to
purchase or sell an agreed-upon principal amount of GNMA Certificates at a
specified price on a certain date. The Account may enter into similar purchase
agreements with issuers of GNMA Certificates other than Principal Mutual Life
Insurance Company. The Account may also purchase optional delivery standby
commitments which give the Account the right to sell particular GNMA
Certificates at a specified price on a specified date. Failure of the other
party to such a contract or commitment to abide by the terms thereof could
result in a loss to the Account. To the extent the Account engages in delayed
delivery transactions it will do so for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for the
purpose of investment leverage or to speculate on interest rate changes.
Liability accrues to the Account at the time it becomes obligated to purchase
such securities, although delivery and payment occur at a later date. From the
time the Account becomes obligated to purchase securities on a delayed delivery
basis the Account has all the rights and risks attendant to the ownership of a
security. At the time the Account enters into a binding obligation to purchase
such securities, Account assets of a dollar amount sufficient to make payment
for the securities to be purchased will be segregated. The availability of
liquid assets for this purpose and the effect of asset segregation on the
Account's ability to meet its current obligations, to honor requests for
redemption and to have its investment portfolio managed properly will limit the
extent to which the Account may engage in forward commitment agreements. Except
as may be imposed by these factors, there is no limit on the percent of the
Account's total assets that may be committed to transactions in such agreements.
MONEY MARKET ACCOUNT
The Fund also includes an Account which invests primarily in short-term
securities, the Money Market Account. Securities in which the Money Market
Account will invest may not yield as high a level of current income as
securities of low quality and longer maturities which generally have less
liquidity, greater market risk and more fluctuation.
The Money Market Account will limit its portfolio investments to United
States dollar denominated instruments that the board of directors determines
present minimal credit risks and which are at the time of acquisition "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in respect to
a class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security at the time of issuance was a long-term security that has a
remaining maturity of 397 calendar days or less, and whose issuer has
received from a nationally recognized statistical rating organization a
rating, with respect to a class of short-term debt obligations (or any
security within that class) that is now comparable in priority and
security with the security, in one of the two highest rating categories
for short-term debt obligations; or
(3) An unrated security that is of comparable quality to a security
meeting the requirements of (1) or (2) above, as determined by the
board of directors.
The Account will not invest more than 5% of its total assets in the
following securities:
(1) Securities which, when acquired by the Account (either initially or
upon any subsequent rollover), are rated below the highest rating
category for short-term debt obligations;
(2) Securities which, at the time of issuance were long-term securities but
when acquired by the Account have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Account's board
of directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations. The Account
will maintain a dollar-weighted average portfolio maturity of 90 days
or less.
The objective of the Money Market Account is to seek as high a level of
current income available from short-term securities as is considered consistent
with preservation of principal and maintenance of liquidity by investing its
assets in a portfolio of money market instruments. These money market
instruments are U.S. Government Securities, U.S. Government Agency Securities,
Bank Obligations, Commercial Paper, Short-term Corporate Debt and Repurchase
Agreements, which are described briefly below and in more detail in the
Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
The Account intends to hold its investments until maturity, but may on
occasion trade securities to take advantage of market variations. Also, revised
valuations of an issuer or redemptions may result in sales of portfolio
investments prior to maturity or at times when such sales might otherwise not be
desirable. The Account's right to borrow to facilitate redemptions may reduce
the need for such sales. It is the Account's policy to be as fully invested as
reasonably practical at all times to maximize current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the Account
expects to usually transact purchases and sales of portfolio securities with
issuers or dealers on a net basis, it is not anticipated that the Account will
pay any significant brokerage commissions. The Account is free to dispose of
portfolio securities at any time, when changes in circumstances or conditions
make such a move desirable in light of the investment objective.
A shareholder's rate of return will vary with the general interest rate
levels applicable to the money market instruments in which the Account invests.
The rate of return and the net asset value will be affected by such other
factors as sales of portfolio securities prior to maturity and the Account's
operating expenses.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Accounts
may use in an effort to achieve their respective investment objectives.
Diversification
Each Account is subject to the diversification requirements of Section
817(h) of the Internal Revenue Code (the "Code") which must be met at the end of
each quarter of the year (or within 30 days thereafter). Regulations issued by
the Secretary of the Treasury have the effect of requiring each Account to
invest no more than 55% of its total assets in securities of any one issuer, no
more than 70% in the securities of any two issuers, no more than 80% in the
securities of any three issuers, and no more than 90% in the securities of any
four issuers. For this purpose, the United States Treasury and each U.S.
Government agency and instrumentality is considered to be a separate issuer.
Thus, the Government Securities Account intends to invest in U.S. Treasury
securities and in securities issued by at least four U.S. Government agencies or
instrumentalities in the amounts necessary to meet those diversification
requirements at the end of each quarter of the year (or within thirty days
thereafter).
In the event any of the Accounts do not meet the diversification
requirements of Section 817(h) of the Code, the contracts funded by shares of
the Accounts will not be treated as annuities or life insurance for Federal
income tax purposes and the owners of the Accounts will be subject to taxation
on their share of the dividends and distributions paid by the Accounts.
Foreign Securities
Each of the following Accounts has adopted investment restrictions that
limit its investments in foreign securities to the indicated percentage of its
assets: International Account - 100%; `Bond and Capital Value Accounts - 20%;
Balanced, Growth and MidCap Accounts - 10%. Debt securities issued in the United
States pursuant to a registration statement filed with the Securities and
Exchange Commission are not considered "foreign securities" for purposes of this
investment limitation. Investment in foreign securities presents certain risks
including those resulting from fluctuations in currency exchange rates,
revaluation of currencies, the imposition of foreign taxes, future political and
economic developments including war, expropriations, nationalization, the
possible imposition of currency exchange controls and other foreign governmental
laws or restrictions, reduced availability of public information concerning
issuers, and the fact that foreign issuers are not generally subject to uniform
accounting, auditing and financial reporting standards or to other regulatory
practices and requirements comparable to those applicable to domestic issuers.
Moreover, securities of many foreign issuers may be less liquid and their prices
more volatile than those of comparable domestic issuers. In addition,
transactions in foreign securities may be subject to higher costs, and the time
for settlement of transactions in foreign securities may be longer than the
settlement period for domestic issuers. An Accounts investment in foreign
securities may also result in higher custodial costs and the costs associated
with currency conversions.
Currency Contracts
The International Account may enter into forward currency contracts,
currency futures contracts and options thereon and options on currencies for
hedging and other non-speculative purposes. A forward currency contract involves
a privately negotiated obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract. The Account will not
enter into a transaction to hedge currency exposure to an extent greater in
effect than the aggregate market value of the securities held or to be purchased
by the Account that are denominated or generally quoted in or currently
convertible into the currency. When the Account enters into a contract to buy or
sell a foreign currency, it generally will hold an amount of that currency,
liquid securities denominated in that currency or a forward contract for such
securities equal to the Account's obligation, or it will segregate liquid high
grade debt obligations equal to the amount of the Account's obligations. The use
of currency contracts involves many of the same risks as transactions in futures
contracts and options as well as the risk of government action through exchange
controls or otherwise that would restrict the ability of the Account to deliver
or receive currency.
Repurchase Agreements and Securities Loans
Each of the Accounts may enter into repurchase agreements with, and each of
the Accounts, except the Capital Value and Money Market Accounts, may lend its
portfolio securities to, unaffiliated broker-dealers and other unaffiliated
qualified financial institutions. These transactions must be fully
collateralized at all times, but involve some credit risk to the Account if the
other party should default on its obligations, and the Account is delayed or
prevented from recovering on the collateral. See the Accounts' Statement of
Additional Information for further information regarding the credit risks
associated with repurchase agreements and the standards adopted by the Fund's
Board of Directors to deal with those risks. None of the Accounts intend either
(i) to enter into repurchase agreements that mature in more than seven days if
any such investment, together with any other illiquid securities held by the
Account, would amount to more than 10% of its total assets or (ii) to loan
securities in excess of 30% of its total assets.
Forward Commitments
From time to time, each of the Accounts may enter into forward commitment
agreements which call for the Accounts to purchase or sell a security on a
future date and at a price fixed at the time the Account enters into the
agreement. Each of the Accounts may also acquire rights to sell its investments
to other parties, either on demand or at specific intervals.
Warrants
Each of the Accounts, except the Money Market and Government Securities
Accounts, may invest in warrants up to 5% of its assets, of which not more than
2% may be invested in warrants that are not listed on the New York or American
Stock Exchange. For the International Account, the 2% limitation also does not
apply to warrants listed on the Toronto Stock Exchange or the Chicago Board
Options Exchange.
Borrowing
As a matter of fundamental policy, each Account may borrow money only for
temporary or emergency purposes. The Balanced, Bond, Capital Value and Money
Market Accounts may borrow only from banks. Further, each may borrow only in an
amount not exceeding 5% of its assets, except the Capital Value Account which
may borrow only in an amount not exceeding the lesser of (i) 5% of the value of
its assets less liabilities other than such borrowings, or (ii) 10% of its
assets taken at cost at the time the borrowing is made, and the Money Market
Account which may borrow only in an amount not exceeding the lesser of (i) 5% of
the value of its assets, or (ii) 10% of the value of its net assets taken at
cost at the time the borrowing is made.
Options
The Balanced, Bond, Government Securities, Growth, International, and
MidCap Accounts may each purchase covered spread options, which would give the
Account the right to sell a security that it owns at a fixed dollar spread or
yield spread in relationship to another security that the Account does not own,
but which is used as a benchmark. These same Accounts may also purchase and sell
financial futures contracts, options on financial futures contracts and options
on securities and securities indices, but will not invest more than 5% of their
assets in the purchase of options on securities, securities indices and
financial futures contracts or in initial margin and premiums on financial
futures contracts and options thereon. The Accounts may write options on
securities and securities indices to generate additional revenue and for hedging
purposes and may enter into transactions in financial futures contracts and
options on those contracts for hedging purposes.
Below Investment Grade Bonds
Below investment-grade bonds are securities rated Ba1 or lower by Moody's
Investors Service, Inc. ("Moody's") or BB+ or lower by Standard & Poor's
Corporation ("S&P") or unrated securities which the Account's Manager or
Sub-Advisor believes are of comparable quality. These securities are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay interest and to repay principal in accordance with the terms of the
obligation. The Accounts do not intend to invest in securities rated lower than
Ba3 by Moody's or BB by S&P. The Bond Account may not invest more than 35% of
its assets in such securities. The Balanced Account does not intend to invest
more than 5% of its assets in such securities.
The rating services' descriptions of below investment grade securities
rating categories in which the Accounts may normally invest are as follows:
Moody's Investors Service, Inc. Bond Ratings - Ba: Bonds which are rated Ba
are judged to have speculative elements; their future cannot be considered as
well-assured. Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in this class.
Moody's may apply numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through Ba in its bond rating system. The modifier 1
indicates that the security ranks in the high end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and a modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Standard & Poor's Corporation Bond Ratings - BB: Debt rated "BB" is
regarded, on balance, as predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the terms of the obligation.
"BB" indicates the lowest degree of speculation. While such debt will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Plus (+) or Minus (-): The "BB" rating may be modified by the addition of a
plus or minus sign to show relative standing within the major rating categories.
Below investment-grade securities present special risks to investors. The
market value of lower-rated securities may be more volatile than that of
higher-rated securities and generally tends to reflect the market's perception
of the creditworthiness of the issuer and short-term market developments to a
greater extent than more highly rated securities, which reflect primarily
fluctuations in general levels of interest rates. Periods of economic
uncertainty and change can be expected to result in increased volatility in the
market value of lower-rated securities. Further, such securities may be subject
to greater risks of loss of income and principal, particularly in the event of
adverse economic changes or increased interest rates, because their issuers
generally are not as financially secure or as creditworthy as issuers of
higher-rated securities. Additionally, to the extent that there is not a
national market system for secondary trading of lower-rated securities, there
may be a low volume of trading in such securities which may make it more
difficult to value or sell those securities than higher-rated securities.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high yield securities,
especially in a thinly traded market.
Investors should recognize that the market for below investment-grade
securities is a relatively recent development that has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
such securities and cause financial stress to the issuers which may adversely
affect the value of the securities held by the Accounts and the ability of the
issuers of the securities held by the Accounts to pay principal and interest. A
default by an issuer may result in an Account incurring additional expenses to
seek recovery of the amounts due it.
Some of the securities in which the Accounts invest may contain call
provisions. If the issuer of such a security exercises a call provision in a
declining interest rate market, the Account would have to replace the security
with a lower-yielding security, resulting in a decreased return for investors.
Further, a higher-yielding security's value will decrease in a rising interest
rate market, which will be reflected in the Account's net asset value per share.
The Statement of Additional Information includes further information
concerning the Accounts' investment policies and applicable investment
restrictions. Each Account's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for an Account are not fundamental
and may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISOR
The Manager for the Fund is Principal Management Corporation (the
"Manager"), an indirectly wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the State of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969,
and since that time has managed various mutual funds sponsored by Principal
Mutual Life Insurance Company. As of December 31, 1996, the Manager served as
investment advisor for 26 such funds with assets totaling approximately $4.0
billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced, Capital Value,
Government Securities, Growth, International and MidCap Accounts. The Manager
will reimburse Invista for the cost of providing these services. Invista, an
indirectly wholly-owned subsidiary of Principal Mutual Life Insurance company
and an affiliate of the Manager, was founded in 1985 and manages investments for
institutional investors, including Principal Mutual Life. Assets under
management at December 31, 1996 were approximately $19.6 billion. Invista's
address is 1800 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.
The Manager or Invista has assigned certain individuals the primary
responsibility for the day-to-day management of each Account's portfolio. The
persons primarily responsible for the day-to-day management of each Account are
identified in the table below:
<TABLE>
<CAPTION>
Primarily
Account Responsible Since Person Primarily Responsible
<S> <C> <C>
Balanced April, 1993 Judith A. Vogel, CFA (BA degree, Central College). Vice President, Invista
Capital Management, Inc.
Bond November, 1996 Scott A. Bennett, CFA (MBA degree, University of Iowa) Assistant Director
Investment Securities, Principal Mutual Life Insurance Company.
Capital Value November, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice
(Account's inception) President, Invista Capital Management, Inc.; Co-Manager since November,
1996: Catherine A. Green, CFA, (MBA degree, Drake University).
Vice President, Invista Capital Management, Inc.
Government Securities April, 1987 Martin J. Schafer (BBA degree, University of Iowa). Vice President, Invista
(Account's inception) Capital Management, Inc.
Growth and MidCap May, 1994 Michael R. Hamilton, (BMBA degree, Bellarmine College). Vice President,
(Account's inception) Invista Capital Management, Inc.
and December, 1987
(Account's inception),
respectively
International April, 1994 Scott D. Opsal, CFA (MBA degree, University of Minnesota). Executive Vice
President, Invista Capital Management, Inc.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISOR
Under Maryland law, the business and affairs of the Fund are managed under
the direction of its Board of Directors. The investment services and certain
other services referred to under the heading "Cost of Manager's Services" in the
Statement of Additional Information are furnished to the Fund under the terms of
a Management Agreement between the Fund and the Manager and, for some of the
Accounts, a Sub-Advisory Agreement between the Manager and Invista. The Manager,
or Invista, advises the Accounts on investment policies and on the composition
of the Accounts' portfolios. In this connection, the Manager, or Invista,
furnishes to the Board of Directors of the Fund a recommended investment program
consistent with the Account's investment objective and policies. The Manager, or
Invista, is authorized, within the scope of the approved investment program, to
determine which securities are to be bought or sold, and in what amounts.
The compensation paid by each Account to the Manager for the fiscal year
ended December 31, 1996 was, on an annual basis, equal to the following
percentage of average net assets:
Total
Manager's Annualized
Account Fee Expenses
- ------------------------------------------------------------------
Balanced Account .60% .63%
Bond Account .50% .53%
Capital Value Account .48% .49%
Government Securities Account .50% .52%
Growth Account .50% .52%
International Account .75% .90%
MidCap Account .64% .66%
Money Market Account .50% .56%
The compensation being paid by the International Account for investment
management services is higher than that paid by most funds to their advisor, but
it is not higher than the fees paid by many funds with similar investment
objectives and policies.
The Manager and Sub-Advisor may purchase at their own expense statistical
and other information or services from outside sources, including Principal
Mutual Life Insurance Company. An Investment Service Agreement between the
Manager, Principal Mutual Life Insurance Company and the Fund, provides that
Principal Mutual Life Insurance Company will furnish certain personnel, services
and facilities required by the Manager in connection with its performance of the
Management Agreements, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard.
The Accounts may from time to time execute transactions for portfolio
securities with, and pay related brokerage commissions to Principal Financial
Securities, Inc., a broker-dealer that is an affiliate of the Distributor and
Manager for the Fund.
The Manager serves as investment advisor, dividend disbursing agent and,
directly and through an affiliate, as transfer agent for each of the Funds
sponsored by Principal Mutual Life Insurance Company.
MANAGERS' COMMENTS
Princor Management Corporation and Invista are staffed with investment
professionals who manage each individual Account. Comments by these individuals
in the following paragraphs summarize in capsule form the general strategy and
results of each Account through 1996. The accompanying charts display results
for the past 10 years or the life of the Account, whichever is shorter. Average
Annual Total Return figures provided for each Account in the graphs below
reflect all expenses of the Account and assume all distributions are reinvested
at net asset value. The figures do not reflect expenses of the variable life
insurance contracts or variable annuity contracts that purchase Account shares;
performance figures for the divisions of the contracts would be lower than
performance figures for the Accounts due to the additional contract expenses.
Past performance is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
The various indices included in the graphs below are unmanaged and do not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.
Growth-Oriented Accounts
Balanced Account
(Judith A. Vogel)
This balanced portfolio combines stocks, bonds and cash in a relatively
conservative mix which seeks to provide both capital appreciation and income to
the shareholder without taking on undue risk. The asset allocation of the
Account generally approximates 60% stocks and 40% bonds. In the year ended
December 31, 1996 the stock market produced exceptional results. Aided by a
healthy economy, continued corporate profit growth, and a good dose of investor
enthusiasm, the S&P 500 Stock Index advanced nearly 23%. Conditions in the bond
market were less supportive over the year. Long-term interest rates rose 0.70%
in 1996, with a lot of volatility along the way, causing the bond returns to
hover between zero and 3% for the year. Demonstrating its balanced nature, the
Account produced a 13% annual return, about midway between stock and bond market
results and very near the Lipper Balanced Fund Average. The bond portion of the
Account's portfolio is comprised of U.S. Government notes and bonds with an
emphasis on safety of principal. The stock portion of the portfolio is
concentrated in companies with stable or growing earnings that are not terribly
sensitive to economic activity. After six years of economic expansion resulting
in high rates of resource utilization, corporate profit growth is likely to come
down, causing a scarcity of earnings growth. Companies that can continue to grow
earnings will be afforded premium valuations. There is no independent market
index against which to measure returns of balanced portfolios, however, we show
the S&P 500 Stock Index for your information.
Total Returns *
As of December 31, 1996
---------------------------------------------------
Since Inception
1 Year 5 Year Date 12/18/87
13.13% 11.57% 12.16%
Comparison of Change in Value of $10,000 Investment in the
Balanced Account, S&P 500 and Lipper Balanced Fund Average
----------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Mid Cap
December 31, Return Index Index
10,000 10,000 10,000
1988 11,637 11,661 11,229
1989 12,982 15,356 13,429
1990 12,147 14,877 13,355
1991 16,321 19,412 16,930
1992 18,410 20,891 18,122
1993 20,447 22,992 20,066
1994 20,019 23,294 19,561
1995 24,941 32,037 24,482
1996 28,215 39,388 27,851
Note: Past performance is not predictive of future performance.
Capital Value Account
(David L. White and Catherine A. Green)
The strategy with this portfolio is to hold common stocks of companies
based on a valuation that is attractive when compared to the market. The
analytical staff looks at companies' current valuations compared to the market,
then at historical information to compare valuations to historical averages. The
focus is on the fundamentals of an industry and the company to determine the
current and future outlook as these potential investments. From there the
portfolio is constructed to provide a diversified set of investments.
The Account outperformed the S&P 500 Index and Lipper Growth and Income
Fund Average for 1996. The strength of the market was in much fewer stocks than
in the past. The volatility between industries was much greater than the overall
results. The Account benefited from several areas of exposure. Banks and health
care were the strongest areas for the Account during the year. The focus has
been away from the more cyclical areas of the economy which also helped during
the year. As the economic cycle progresses, the market places more emphasis on
companies with consistent earnings growth, and we have tended to overweight
these areas of the market. As the market performance continues to narrow,
however, it becomes increasingly difficult to select the correct areas of
overperformance.
Total Returns *
As of December 31, 1996
----------------------------------------
1 Year 5 Year 10 Year
23.50% 14.08% 13.08%
Comparison of Change in Value of $10,000 Investment in the
Capital Value Account, S&P 500 and Lipper Growth and Income Fund Average
----------------------------------------------------------------------------
Fund S&P 500 Lipper
Year Ended Total Stock Growth & Income
December 31, Return Index Fund Average
10,000 10,000 10,000
1987 10,647 10,526 10,184
1988 12,183 12,274 11,814
1989 14,155 16,163 14,596
1990 12,759 15,659 13,946
1991 17,693 20,433 18,002
1992 19,377 21,990 19,618
1993 20,888 24,201 21,884
1994 20,990 24,519 21,678
1995 27,688 33,722 28,360
1996 34,193 41,460 34,253
Note: Past performance is not predictive of future performance.
Growth Account
(Michael R. Hamilton)
The Growth Account struggled against the market in 1996; struggle being
relative as 12.23% return is respectable from a historical perspective. The S&P
500 Index last year was heavily influenced by the top 25 holdings in the Index.
These are very large companies. The Account is more diversified than the Index
and therefore its results were more representative of the broader market. With
the market continuing to struggle against the potential of an economic boom on
one hand, versus a slowing or recession on the other, the market could be
subjected to emotional swings depending on the inflation outlook.
The Account's portfolio still has a large focus on health care given the
demographics of the United States. This was not a strong sector in 1996,
particularly the managed care companies of which the portfolio has a large
exposure. Also, the portfolio has large positions in technology and growth
cyclicals. These companies should do well if the economy continues to move
forward which is indicated by current data.
The portfolio contains many companies that are able to compete on a world
wide basis. This is important as global competition continues.
Total Returns *
As of December 31, 1996
-------------------------------------------------------
1 Year Since Inception Date 5/2/94 10 Year
12.51% 16.12% --
Comparison of Change in Value of $10,000 Investment in the
Growth Account, S&P 500 and Lipper Growth Fund Average
---------------------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 Growth
December 31, Return Index Index
10,000 10,000 10,000
1994 10,542 10,397 10,090
1995 13,243 14,299 13,197
1996 14,899 17,580 15,736
Note: Past performance is not predictive of future performance.
International Account
(Scott D. Opsal)
The International Account's 26.2% total return in 1996 was driven by broad
based market rallies across Europe. Several European markets have climbed more
than 20% in 1996, with Japan and Italy being the only major markets not
reflecting strong gains. The Account's investment strategy of holding stocks in
smaller European economies produced outperformance as interest rate moves have
been favorable this year. Long bond yields in secondary European markets fell
while rates in the stronger core countries have inched up. The Account's
overexposure to the falling rate markets and underexposure to the rising rate
markets was a significant positive factor producing returns that exceeded EAFE's
6.1% and the average international fund in 1996.
The Account also benefited from non-cyclical stockholdings in Europe. Food,
drug, technology, and stable growth cyclicals have outperformed the heavier
cyclical industries. The Account's move into non-cyclical growth stocks early in
the year proved timely. The Account remains underweighted in Japan due to poor
valuations and a weak economic outlook. Japan has been the worst performing
major market, and the Account's lack of exposure to this market also boosted
relative returns.
Adverse currency changes diminished the Account's returns as measured in
U.S. dollars by an estimated 2%. We believe the EAFE index has suffered a
currency loss exceeding 4%, and the average manager has lost an estimated 3%.
Thus, the Account's investment strategy placed it in markets suffering
relatively small foreign exchange losses thereby aiding relative return
performance.
The Account is subject to specific risks associated with foreign currency
rates, foreign taxation and foreign economies.
Total Returns *
As of December 31, 1996
----------------------------------------------------
1 Year Since Inception Date 5/2/94 10 Year
25.09% 12.83% --
Comparison of Change in Value of $10,000 Investment in the
International Account, EAFE and Lipper International Fund Average
------------------------------------------------------------
Fund Morgan Stanley Lipper
Year Ended Total EAFE International
December 31, Return Index Index
10,000 10,000 10,000
1994 9,663 9,990 9,758
1995 11,032 11,110 10,676
1996 13,800 11,781 11,934
Note: Past performance is not predictive of future performance.
MidCap Account
(Michael R. Hamilton)
The equity market was strong in 1996, but within the market there were two
different trends. Large-cap stocks performed much better than small-cap stocks.
The MidCap Account returned 19.13% compared with the Lipper Mid Cap Average of
17.9%. The Account and the Lipper Average trailed the S&P 500 Index because of
their emphasis on small cap stocks. While both trailed the S&P 500, this was a
good year for the Account.
The financial market continues to grapple with the paradox of strong
economic growth with no apparent inflation. Productivity will be key in 1997 if
inflation is to remain benign. The Account's portfolio continues to be focused
on companies that should enhance productivity of both labor and capital. Several
of the technology, service and cyclical areas support this emphasis. The
portfolio is also overweighted in the financial sector as bank consolidation
continues.
Continued profit growth will be important in 1997 as well. Companies with
more predictable and visible earnings growth are preferred. This continues to be
those that are low cost producers and have competitive barriers to entry.
Selectivity in all sectors will be crucial to outperformance.
Total Returns *
As of December 31, 1996
- ---------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
21.11% 16.64% 17.73%
Comparison of Change in Value of $10,000 Investment
in the MidCap Account, S&P 500 and
Lipper Mid Cap Fund Average
-----------------------------------------------------
Fund Lipper
Year Ended Total S&P 500 MID CAP
December 31, Return Index Index
10,000 10,000 10,000
1988 12,369 11,661 11,476
1989 15,070 15,356 14,586
1990 13,186 14,877 14,067
1991 20,240 19,412 21,275
1992 23,264 20,891 23,213
1993 27,750 22,992 26,625
1994 27,967 23,294 26,079
1995 36,080 32,037 34,469
1996 43,697 39,388 40,646
Note: Past performance is not predictive of future performance.
Important Notes of the Growth-Oriented Accounts:
Standard & Poor's 500 Stock Index: an unmanaged index of 500 widely held common
stocks representing industrial, financial, utility and transportation companies
listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Lipper Growth Fund Average: This average consists of funds which normally invest
in companies whose long-term earnings are expected to grow significantly faster
than the earnings of the stocks represented in the major unmanaged stock
indices. The one-year average at December 31, 1996 contained 669 funds.
Lipper Flexible Portfolio Fund Average: This average consists of funds which
allocate their investments across various asset classes, including domestic
common stocks, bonds and money market instruments, with a focus on total return.
The one-year average at December 31, 1996 contained 186 funds.
Lipper Balanced Fund Average: this average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average at December 31, 1996 contained 272 mutual funds.
Lipper Growth & Income Fund Average: this average consists of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends. The one year average at December 31, 1996 contained 522
funds.
Lipper Mid Cap Fund Average: This average consists of funds which by prospectus
or portfolio practice, limit their investments to companies with average market
capitalizations and/or revenues between $800 million and the average market
capitalization of the Wilshire 4500 Index (as captured by the Vanguard Index
Extended Market Fund). The one-year average at December 31, 1996 contained 154
funds.
Morgan Stanley Capital International EAFE (Europe, Australia and Far East)
Index: This average reflects an arithmetic, market value weighted average of
performance of 1,920 listed securities which are listed on the stock exchanges
of the following countries: Australia, Austria, Belgium, Denmark, Netherlands,
New Zealand, Norway, Singapore/Malaysia, Spain, Sweden, Switzerland, and the
United Kingdom.
Lipper International Fund Average: This average consists of funds which invest
in securities primarily traded in markets outside of the United States. The
one-year average at December 31, 1996 contained 331 funds.
Income-Oriented Accounts:
Bond Account
(Scott A. Bennett)
The Bond Account's performance in 1996 lagged when compared to 1995. 1995
was a banner year, mainly because of dramatically declining interest rates.
During 1996 interest rates increased throughout most of the year based on fears
of increasing inflation. This hurt the Account's relative performance as the
duration target of 7 years (actual duration at 12/31/96 was 6.98 years) is
longer than the average BBB rated bond fund and the BAA Lehman Corporate Index.
Relative performance was also negatively impacted by the lack of a significant
amount of less than investment grade bonds in the portfolio. High yield (less
than investment grade) debt performed extremely well during 1996, with many of
the top performing funds in the Lipper BAA universe having significant exposures
to this asset class.
Over the long-term, the Account continues to outperform the average BBB
fund. This is attributed to remaining fully invested and not trying to guess
interest rates. The BBB corporate bond class continued to be an attractive asset
class in 1996, outperforming all other taxable investment grade classes. Spreads
continued to narrow during the year with defaults low and a large amount of
funds chasing the available bonds.
Total Returns *
As of December 31, 1996
- --------------------------------------------------------------
1 Year 5 Year Since Inception Date 12/18/87
2.36% 8.20% 9.55%
Comparison of Change in Value of $10,000 Investment in the Bond Account,
Lehman Brothers BAA Corporate Index and Lipper Corporate Debt BBB Rated Fund
Average
-----------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total BAA BBB
December 31, Return Index Avg
10,000 10,000 10,000
1988 10,991 11,129 10,900
1989 12,514 12,699 12,060
1990 13,167 13,595 12,751
1991 15,369 16,113 15,020
1992 16,810 17,512 16,258
1993 18,771 19,665 18,261
1994 18,227 18,707 17,447
1995 22,268 22,959 20,948
1996 22,794 23,882 21,616
Note: Past performance is not predictive of future performance.
Government Securities Account
(Martin J. Schafer)
Interest rates rose in 1996, which dampened absolute fixed income returns.
The Account underperformed the Lipper U.S. Mortgage Fund Average and the Lehman
MBS Index in 1996 due to its slightly longer duration. However, since the
Account's inception of 4/9/87 it has outperformed the Lipper U.S. Mortgage Fund
Average and is competitive with the Lehman MBS Index.
Results were enhanced last year through identification and selection of
certain undervalued sectors of mortgage-backed securities for a portion of the
portfolio. These securities have now become very popular with Wall Street and
other investors, resulting in their increasing in value.
The current portfolio is well positioned for the period ahead. It has a
number of securities that are "seasoned" (e.g., original 30 year loans that have
been outstanding for three years or more) and therefore valued more highly in
the marketplace. There are few securities priced above par, so prepayment risk
is negligible. If the future continues to be an era of economic prosperity we
should continue to see strong housing markets and housing turnover that will
cause prepayments on our securities to exceed market expectations. These
repayments are welcomed, as the portfolio is priced at a discount and the
Account will be paid-off at par.
Total Returns *
As of December 31, 1996
- --------------------------------------------------
1 Year 5 Year Since Inception Date 4/9/87
3.35% 6.68% 8.63%
Comparison of Change in Value of $10,000 Investment in the Government Securities
Account, Lehman Brothers Mortgage Index and Lipper U.S. Mortgage Fund Average
- --------------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total Mortgage U.S. Mortgage
December 31, Return Index Index
10,000 10,000 10,000
1987 10,099 10,204 10,104
1988 10,939 11,094 10,858
1989 12,645 12,808 12,224
1990 13,852 14,183 13,370
1991 16,200 16,410 15,348
1992 17,308 17,551 16,285
1993 19,051 18,751 17,499
1994 18,188 18,450 16,769
1995 21,656 21,549 19,491
1996 22,381 22,702 20,245
Note: Past performance is not predictive of future performance.
Important Notes of the Income-Oriented Accounts:
Lehman Brothers, BAA Corporate Index: an unmanaged index of all publicly issued
fixed rate nonconvertible, dollar-denominated, SEC-registered corporate debt
rated Baa or BBB by Moody's or S&P.
Lipper Corporate Debt BBB Rated Funds Average: this average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average at
December 31, 1996 contained 102 mutual funds.
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and Federal
National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgages/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average at December 31, 1996 contained 59 mutual
funds.
Note: Mutual fund data from Lipper Analytical Services, Inc.
DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES
The net asset value of each Account's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange,
except on days on which changes in the value of the Account's portfolio
securities will not materially affect the current net asset value of the
Account's redeemable securities, on days during which an Account receives no
order for the purchase or sale of its redeemable securities and no tender of
such a security for redemption, and on customary national business holidays. The
net asset value per share of each Account is determined by dividing the value of
the Account's securities plus all other assets, less all liabilities, by the
number of Account shares outstanding.
Growth-Oriented and Income-Oriented Accounts
The following valuation information applies to the Growth-Oriented and
Income-Oriented Accounts. Securities for which market quotations are readily
available are valued using those quotations. Other securities are valued by
using market quotations, prices provided by market makers or estimates of market
values obtained from yield data and other factors relating to instruments or
securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board that amortized cost reflects fair value. Other assets are valued at
fair value as determined in good faith by the Board of Directors of the Fund.
As previously described, some of the Accounts may purchase foreign
securities whose trading is substantially completed each day at various times
prior to the close of the New York Stock Exchange. The values of such securities
used in computing net asset value per share are usually determined as of such
times. Occasionally, events which affect the values of such securities and
foreign currency exchange rates may occur between the times at which they are
generally determined and the close of the New York Stock Exchange and would
therefore not be reflected in the computation of the Account's net asset value.
If events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the Manager or Sub-Advisor under procedures established and
regularly reviewed by the Board of Directors. To the extent the Account invests
in foreign securities listed on foreign exchanges which trade on days on which
the Account does not determine its net asset value, for example Saturdays and
other customary national U.S. Holidays, the Account's net asset value could be
significantly affected on days when shareholders have no access to the Account.
Money Market Account
The Money Market Account values its securities at amortized cost. For a
description of this calculation procedure see the Fund's Statement of Additional
Information.
PERFORMANCE CALCULATION
From time to time, the Accounts may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Accounts. The Account's yield and total return
figures described below will vary depending upon market conditions, the
composition of the Account's portfolios and operating expenses. These factors
and possible differences in the methods used in calculating yield and total
return should be considered when comparing the Accounts' performance figures to
performance figures published for other investment vehicles. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices. Any performance data quoted for the Accounts represents only
historical performance and is not intended to indicate future performance of the
Accounts. The calculation of average annual total return and yield for the
Accounts does not include fees and charges of the separate accounts that invest
in the Accounts and, therefore, does not reflect the investment performance of
those separate accounts. For further information on how the Accounts calculate
yield and total return figures, see the Statement of Additional Information.
Average Annual Total Return
Each Account may advertise its respective average annual total return.
Average annual total return for each Account is computed by calculating the
average annual compounded rate of return over the stated period that would
equate an initial $1,000 investment to the ending redeemable value assuming the
reinvestment of all dividends and capital gains distributions at net asset
value. The same assumptions are made when computing cumulative total return by
dividing the ending redeemable value by the initial investment. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices.
Yield and Effective Yield
From time to time the Money Market Account may advertise its respective
yield and effective yield. The yield of the Account refers to the income
generated by an investment in the Account over a seven-day period. This income
is then annualized. That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the
Account is assumed to be reinvested. The effective yield will be slightly higher
than the yield because of the compounding effect of this assumed reinvestment.
The yield for the Money Market Account will fluctuate daily as the income
earned on the investments of the Account fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Account is one of a Series of Accounts issued by an
open-end investment company and there is no guarantee that the net asset value
or any stated rate of return will remain constant. A shareholder's investment in
the Account is not insured. Investors comparing results of the Account with
investment results and yields from other sources such as banks or savings and
loan associations should understand these distinctions. Historical and
comparative yield information may, from time to time, be presented by the
Account.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
It is the policy of each Account to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which
the Fund so qualifies it will be exempt from federal income tax upon the amounts
so distributed to investors.
Any dividends from the net investment income of the Accounts (except the
Money Market Account) will normally be payable to the shareholders annually, and
any net realized gains will be distributed annually. All dividends and capital
gains distributions are applied to purchase additional Account shares at net
asset value as of the payment date without the imposition of any sales charge.
Each Account will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Accounts to consult with tax advisors on the federal
and state tax aspects of their investments and redemptions.
Money Market Account
The Money Market Account declares dividends of all its daily net investment
income on each day the Account's net asset value per share is determined.
Dividends are payable daily and are automatically reinvested in full and
fractional shares of the Account at the then current net asset value unless a
shareholder requests payment in cash.
Net investment income, for dividend purposes, consists of (1) accrued
interest income plus or minus accrued discount or amortized premium; plus or
minus (2) all net short-term realized gains and losses; minus (3) all accrued
expenses of the Account. Expenses of the Account are accrued each day. Net
income will be calculated immediately prior to the determination of net asset
value per share of the Account.
Since the Account's policy is, under normal circumstances, to hold
portfolio securities to maturity and to value portfolio securities at amortized
cost, it does not expect any capital gains or losses. If the Account does
experience gains, however, it could result in an increase in dividends. Capital
losses could result in a decrease in dividends. If for some extraordinary reason
the Account realizes net long-term capital gains, it will distribute them once
every 12 months.
Since the net income of the Account (including realized gains and losses on
the portfolio securities) is declared as a dividend each time the net income of
the Account is determined, the net asset value per share of the Account normally
remains at $1.00 immediately after each determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Account,
representing reinvestment of dividend income, is reflected by an increase in the
number of shares of the Account.
Normally the Account will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Account
determined at any time is a negative amount, the net asset value per share will
be reduced below $1.00. If this happens, the Account may endeavor to restore the
net asset value per share to $1.00 by reducing the number of outstanding shares
by redeeming proportionately from shareholders without the payment of any
monetary consideration, such number of full and fractional shares as is
necessary to maintain a net asset value per share of $1.00. Each shareholder
will be deemed to have agreed to such a redemption in these circumstances by
investing in the Account. The Account may seek to achieve the same objective of
restoring the net asset value per share to $1.00 by not declaring dividends from
net income on subsequent days until restoration, with the result that the net
asset value per share would increase to the extent of positive net income which
is not declared as a dividend, or any other method approved by the Board of
Directors.
The Board of Directors may revise the above dividend policy, or postpone
the payment of dividends, if the Account should have or anticipate any large
presently unexpected expense, loss or fluctuation in net assets which in the
opinion of the Board might have a significant adverse affect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Accounts. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Account shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
Each Account serves as an underlying investment medium for variable annuity
contracts and variable life insurance policies that are funded in separate
accounts established by Principal Mutual Life Insurance Company. It is
conceivable that in the future it may be disadvantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest in
the Accounts simultaneously. Although neither Principal Mutual Life Insurance
Company nor the Accounts currently foresee any such disadvantages either to
variable life insurance policy owners or to variable annuity contract owners,
the Fund's Board of Directors intends to monitor events in order to identify any
material conflicts between such policy owners and contract owners and to
determine what action, if any, should be taken in response thereto. Such action
could include the sale of Account shares by one or more of the separate
accounts, which could have adverse consequences. Material conflicts could result
from, for example, (1) changes in state insurance laws, (2) changes in Federal
income tax law, (3) changes in the investment management of an Account, or (4)
differences in voting instructions between those given by policy owners and
those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Fund. There are no sales charges on the Accounts'
shares. There are no restrictions on amounts to be invested in the Accounts'
shares.
Shareholder accounts for each Account will be maintained under an open
account system. Under this system, an account is automatically opened and
maintained for each new investor. Each investment is confirmed by sending the
investor a statement of account showing the current purchase and the total
number of shares then owned. The statement of account is treated by each Account
as evidence of ownership of Account shares in lieu of stock certificates, and
unless written request is made to the Account, stock certificates will not be
issued or delivered to investors. Certificates, which can be stolen or lost, are
unnecessary except for special purposes such as collateral for a loan.
Fractional interests in the Account's shares are reflected to three decimal
places in the statement of account, but any stock certificates will be issued
only for full shares owned.
If an offer to purchase shares is received by any of the Accounts before
the close of trading on the New York Stock Exchange, the shares will be issued
at the offering price (net asset value of Account shares) computed on that day.
If an offer is received after the close of trading or on a day which is not a
trading day, the shares will be issued at the offering price computed on the
first succeeding day on which a price is determined. Dividends on the Money
Market Account shares will be paid on the next day following the effective date
of a purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each Account of the Principal
Variable Contracts Fund, Inc. Each Account share is entitled to one vote either
in person or by proxy at all shareholder meetings for that Account. This
includes the right to vote on the election of directors, selection of
independent accountants and other matters submitted to meetings of shareholders
of the Account. Each share has equal rights with every other share of the
Account as to dividends, earnings, voting, assets and redemption. Shares are
fully paid and non-assessable, and have no preemptive or conversion rights.
Shares of an Account may be issued as full or fractional shares, and each
fractional share has proportionately the same rights, including voting, as are
provided for a full share. Shareholders of the Fund may remove any director with
or without cause by the vote of a majority of the votes entitled to be cast at a
meeting of all Account shareholders.
The bylaws of the Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of the Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Fund intends to hold shareholder meetings only when required by
law and at such other times as may be deemed appropriate by the Board of
Directors.
Shareholder inquiries should be directed to the Principal Variable
Contracts Fund, Inc. at The Principal Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Fund's shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of the Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Account's shares
allocated to each of its separate accounts registered under the Investment
Company Act of 1940 and attributable to variable annuity contracts or variable
life insurance policies participating therein in accordance with instructions
received from contract or policy holders, participants and annuitants. Other
shares of each Account held by each registered separate account, including those
for which no timely instructions are received, are voted in proportion to the
instructions that are received with respect to contracts or policies
participating in that separate account. Shares of each of the Accounts held in
the general account of Principal Mutual Life Insurance Company or in its
unregistered separate accounts are voted in proportion to the instructions that
are received with respect to contracts and policies participating in its
registered and unregistered separate accounts. If Principal Mutual determines
pursuant to applicable law that an Account's shares held in one or more separate
accounts or in its general account need not be voted pursuant to instructions
received with respect to participating contracts or policies, it then may vote
those Account shares in its own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Account will redeem its shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Account requesting redemption of any part or all of
the shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, the Account will not require a signature guarantee as a part of a
proper endorsement; otherwise the shareholder's signature must be guaranteed by
either a commercial bank, trust company, credit union, savings and loan
association, national securities exchange member, or by a brokerage firm. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Account in proper and complete form. The amount received for
shares upon redemption may be more or less than the cost of such shares
depending upon the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Account may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Account of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Account
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Account. An Account
will redeem only those shares for which it has received good payment. To avoid
the inconvenience of such a delay, shares may be purchased with a certified
check, bank cashier's check or money order. During the period prior to the time
a redemption from the Money Market Account is effective, dividends on such
shares will accrue and be payable and the shareholder will be entitled to
exercise all other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Accounts may be transferred to
an Eligible Purchaser. However, whenever any of the Accounts is requested to
transfer shares to other than an Eligible Purchaser, the Account has the right
at its election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Account must notify the transferee or transferees of such
shares in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Accounts
except the International Account. The custodian for the International Account is
Chase Manhattan Bank, Global Securities Services, Chase Metro Tech Center,
Brooklyn, New York 11245. The custodians perform no managerial or policymaking
functions for the funds.
Organization and Share Ownership: Effective January 1, 1998, an Agreement
and Plan of Reorganization and Liquidation was implemented under which a Series
of the Principal Variable Contracts Fund, Inc. adopted the assets and
liabilities of the corresponding Fund. The Funds were incorporated in the state
of Maryland on the following dates: Balanced Fund - November 26, 1986; Bond Fund
- - November 26, 1986; Capital Accumulation Fund - May 26, 1989 (effective
November 1, 1989 succeeded to the business of a predecessor Fund that had been
incorporated in Delaware on February 6, 1969); Emerging Growth Fund - February
20, 1987; Government Securities Fund - June 7, 1985; Growth Fund - August 20,
1993; Money Market Fund - June 10, 1982; and World Fund - August 20, 1993.
Principal Mutual Life Insurance Company owns 100% of each Fund's outstanding
shares.
Capitalization: The authorized capital stock of each Account consists of
100,000,000 shares of common stock (500,000,000 for Money Market Account), $.01
par value.
Financial Statements: Copies of the financial statements of each Account
will be mailed to each shareholder of that Account semi-annually. At the close
of each fiscal year, each Account's financial statements will be audited by a
firm of independent auditors. The firm of Ernst & Young LLP has been appointed
to audit the financial statements of each Account for their respective present
fiscal years.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the Fund
has filed with the Securities and Exchange Commission. The Funds' Statement of
Additional Information is hereby incorporated by reference into this Prospectus.
A copy of the Statement of Additional Information can be obtained upon request,
free of charge, by writing or telephoning the Fund. You may obtain a copy of
Part C of the Registration Statements filed with the Securities and Exchange
Commission, Washington, D.C., from the Commission upon payment of the prescribed
fees.
Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for the Fund.
The Principal Variable Contracts Fund, Inc. described in this prospectus is
a diversified, open-end management investment company which offers a variety of
Accounts each of which was formerly a separately incorporated investment
company. Together the Accounts provide the following range of investment
objectives:
Capital Value Account (formerly known as Principal Capital Accumulation Fund,
Inc.) seeks to achieve primarily long-term capital appreciation and secondarily
growth of investment income through the purchase primarily of common stocks, but
the Account may invest in other securities.
Government Securities Account (formerly known as Principal Government Securities
Fund, Inc.) seeks a high level of current income, liquidity and safety of
principal. The Account seeks to achieve its objective through the purchase of
obligations issued or guaranteed by the United States Government or its
agencies, with emphasis on Government National Mortgage Association Certificates
("GNMA Certificates"). Account shares are not guaranteed by the United States
Government.
Money Market Account (formerly known as Principal Money Market Fund, Inc.) seeks
as high a level of income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
An investment in the Money Market Account is neither insured nor guaranteed
by the U.S. Government. There can be no assurance the Money Market Accounts will
be able to maintain a stable net asset value of $1.00 per share.
This Prospectus concisely states information about the Principal Variable
Contracts Fund, Inc. that an investor ought to know before investing. It should
be read and retained for future reference.
Additional information about the Fund has been filed with the Securities
and Exchange Commission, including documents called Statements of Additional
Information, dated __________________. The Statement of Additional Information
is incorporated by reference into this Prospectus. A copy of the Statement of
Additional Information can be obtained free of charge by writing or telephoning:
Principal Variable Contracts Fund, Inc.
a Member of
The Principal Financial Group
Des Moines, IA 50392
Telephone 1-800-247-4123
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is _______________________ .
TABLE OF CONTENTS
Page
Summary .................................................... 2
Financial Highlights......................................... 4
Investment Objectives, Policies and Restrictions............. 6
Certain Investment Policies and Restrictions................. 8
Manager ..................................................... 10
Duties Performed by the Manager.............................. 10
Managers' Comments........................................... 11
Determination of Net Asset Value of Account Shares........... 12
Performance Calculation...................................... 13
Income Dividends, Distributions and Tax Status............... 13
Eligible Purchasers and Purchase of Shares................... 14
Shareholder Rights .......................................... 15
Redemption of Shares......................................... 15
Additional Information....................................... 16
This Prospectus does not constitute an offer to sell, or a solicitation of
an offer to buy, shares of the Accounts in any jurisdiction in which such sale,
offer to sell, or solicitation may not be lawfully made. No dealer, salesperson,
or other person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund or the Fund's Manager.
SUMMARY
The following summarized information should be read in conjunction with the
detailed information appearing elsewhere in this Prospectus.
The Principal Variable Contracts Fund, Inc. ("Fund") is an open-end
diversified management investment company offering multiple Accounts.
Who may purchase shares of the Accounts?
Shares of the Accounts are available only to Eligible Purchasers which are
limited to: (a) separate accounts of Principal Mutual Life Insurance Company or
of other insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
What do the Accounts offer investors?
Professional Investment Management: Experienced securities analysts provide
each Account with professional investment management.
Diversification: Each Account will diversify by investing in securities
issued by a number of issuers doing business in a variety of industries, located
in different geographical regions and/or securities which have varying
maturities. Diversification reduces investment risk.
Economies of Scale: Pooling individual shareholder's investments in any of
the Accounts creates administrative efficiencies.
Redeemability: Upon request each Account will redeem its shares and
promptly pay the investor the current net asset value of the shares redeemed.
See "Redemption of Shares."
What are the Accounts' investment objectives?
The investment objective of the Capital Value Account is long-term capital
appreciation and its secondary investment objective is growth of investment
income. The Account seeks to achieve its investment objectives through the
purchase primarily of common stocks but the Account may invest in other
securities.
The investment objective of the Government Securities Account is to seek a
high level of current income, liquidity and safety of principal. The Account
seeks to achieve its objective through the purchase of obligations issued or
guaranteed by the United States Government or its agencies, with emphasis on
Government National Mortgage Association Certificates ("GNMA Certificates").
Account shares are not guaranteed by the United States Government.
The investment objective of the Money Market Account is to seek as high a
level of current income available from short-term securities as is considered
consistent with preservation of principal and maintenance of liquidity by
investing all of its assets in a portfolio of money market instruments.
There can be no assurance that the investment objectives of any of the
Accounts will be realized. See "Investment Objectives, Policies and
Restrictions."
Who serves as Manager for the Accounts?
Principal Management Corporation (formerly known as Princor Management
Corporation), a corporation organized in 1969 by Principal Mutual Life Insurance
Company, is the Manager for the Fund. It is also the dividend disbursing and
transfer agent for the Fund. See "Manager."
What fees and expenses apply to ownership of shares of the Accounts?
The following table depicts fees and expenses applicable to the purchase
and ownership of shares of each of the Accounts.
ANNUAL ACCOUNT OPERATING EXPENSES
(As a Percentage of Average Net Assets)
Management Other Total Operating
Account Fee Expenses Expenses
Capital Value Account .48 .01 .49
Government Securities Account .50 .02 .52
Money Market Account .50 .06 .56
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Period (in years)
Account 1 3 5 10
Capital Value Account $5 $16 $27 $62
Government Securities Account $5 $17 $29 $65
Money Market Account $6 $18 $31 $70
This Example is based on the Annual Account Operating Expenses for each
Account described above. Please remember that the Example should not be
considered a representation of past or future expenses and that actual
expenses may be greater or less than those shown.
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in the Accounts will bear directly or
indirectly. The Fee Table and Example do not reflect expenses and charges of the
Separate Accounts that invest in the Accounts. See "Duties Performed by the
Manager."
FINANCIAL HIGHLIGHTS
The following financial highlights for the periods ended December 31, 1996
are derived from the financial statements which have been audited by Ernst &
Young LLP, independent auditors whose report has been incorporated by reference
herein. The financial highlights should be read in conjunction with the
financial statements, related notes, and other financial information
incorporated by reference herein. The financial statements may be obtained by
investors, without charge, by telephoning 1-800-451-5447.
<TABLE>
<CAPTION>
Income from
Investment Operations
Net Realized
and
Net Asset Unrealized Total
Value at Net Gain from
Beginning Investment (Loss) on Investment
of Period Income Investments Operations
<S> <C> <C> <C> <C>
Capital Value Account
Year Ended December 31,
1996 $27.80 $.57 $ 5.82 $6.39
1995 23.44 .60 6.69 7.29
1994 24.61 .62 (.49) .13
1993 25.19 .61 1.32 1.93
Six Months Ended December 31, 1992(a) 26.03 .31 1.84 2.15
Year Ended June 30,
1992 23.35 .65 2.70 3.35
1991 22.48 .74 1.22 1.96
1990 23.63 .79 .14 .93
1989 23.23 .77 1.32 2.09
1988 27.51 .60 (1.50) (.90)
1987 25.48 .40 4.46 4.86
Government Securities Account
Year Ended December 31,
1996 10.55 .59 (.24) .35
1995 9.38 .60 1.18 1.78
1994 10.61 .76 (1.24) (.48)
1993 10.28 .71 .33 1.04
Six Months Ended December 31, 1992(a) 10.93 .40 .04 .44
Year Ended June 30,
1992 10.24 .80 .71 1.51
1991 10.05 .80 .24 1.04
1990 10.05 .78 -- .78
1989 9.37 .80 .34 1.14
1988 9.47 .78 (.09) .69
Period Ended June 30, 1987(d) 10.00 .18 (.59) (.41)
Money Market Account
Year Ended December 31,
1996 1.000 .049 -- .049
1995 1.000 .054 -- .054
1994 1.000 .037 -- .037
1993 1.000 .027 -- .027
Six Months Ended December 31, 1992(a) 1.000 .016 -- .016
Year Ended June 30,
1992 1.000 .046 -- .046
1991 1.000 .070 -- .070
1990 1.000 .077 -- .077
1989 1.000 .083 -- .083
1988 1.000 .064 -- .064
1987 1.000 .057 -- .057
</TABLE>
<TABLE>
<CAPTION>
Less Distributions
Dividends Excess
from Net Distributions Distributions
Investment from from Total
Income Capital Gains Capital Gains Distributions
<S> <C> <C> <C> <C>
Capital Value Account
Year Ended December 31, $(.58) $(3.77) $ -- $(4.35)
1996 (.60) (2.33) -- (2.93)
1995 (.61) (.69) -- (1.30)
1994 (.60) (1.91) -- (2.51)
1993 (.64) (2.35) -- (2.99)
Six Months Ended December 31, 1992(a)
Year Ended June 30, (.67) -- -- (.67)
1992 (.79) (.30) -- (1.09)
1991 (.81) (1.27) -- (2.08)
1990 (.68) (1.01) -- (1.69)
1989 (.69) (2.69) -- (3.38)
1988 (.50) (2.33) -- (2.83)
1987
Government Securities Account
Year Ended December 31, (.59) -- -- (.59)
1996
1995 (.61) -- -- (.61)
1994 (.75) -- -- (.75)
1993 (.71) -- -- (.71)
Six Months Ended December 31, 1992(a) (.78) -- (.31) (1.09)
Year Ended June 30,
1992 (.81) -- (.01) (.82)
1991 (.81) -- (.04) (.85)
1990 (.78) -- -- (.78)
1989 (.46) -- -- (.46)
1988 (.79) -- -- (.79)
Period Ended June 30, 1987(d) (.12) -- -- (.12)
Money Market Account
Year Ended December 31,
1996 (.049) -- -- (.049)
1995 (.054) -- -- (.054)
1994 (.037) -- -- (.037)
1993 (.027) -- -- (.027)
Six Months Ended December 31, 1992(a) (.016) -- -- (.016)
Year Ended June 30,
1992 (.046) -- -- (.046)
1991 (.070) -- -- (.070)
1990 (.077) -- -- (.077)
1989 (.083) -- -- (.083)
1988 (.064) -- -- (.064)
1987 (.057) -- -- (.057)
</TABLE>
<TABLE>
<CAPTION>
Ratios/Supplemental Data
Ratio of Net
Net Asset Ratio of Investment
Value at Net Assets at Expenses to Income to Portfolio Average
End of Total End of Period Average Average Turnover Commission
Period Return (in thousands) Net Assets Net Assets Rate Rate
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Value Account
Year Ended December 31, $29.84 23.50% $205,019 .49% 2.06% 48.5% $.0426
1996 27.80 31.91% 135,640 .51% 2.25% 49.2% N/A
1995 23.44 .49% 120,572 .51% 2.36% 44.5% N/A
1994 24.61 7.79% 128,515 .51% 2.49% 25.8% N/A
1993 25.19 8.81%(b) 105,355 .55%(c) 2.56%(c) 39.7%(c) N/A
Six Months Ended December 31, 1992(a)
Year Ended June 30, 26.03 14.53% 94,596 .54% 2.65% 34.8% N/A
1992 23.35 9.46% 76,537 .53% 3.53% 14.0% N/A
1991 22.48 3.94% 74,008 .56% 3.56% 30.2% N/A
1990 23.63 10.02% 68,132 .57% 3.53% 23.5% N/A
1989 23.23 (2.67)% 62,696 .60% 2.76% 26.7% N/A
1988 27.51 22.17% 57,478 .63% 1.99% 16.1% N/A
1987
Government Securities Account
Year Ended December 31, 10.31 3.35% 85,100 .52% 6.46% 8.4% N/A
1996
1995 10.55 19.07% 50,079 .55% 6.73% 9.8% N/A
1994 9.38 (4.53)% 36,121 .56% 7.05% 23.2% N/A
1993 10.61 10.07% 36,659 .55% 7.07% 20.4% N/A
Six Months Ended December 31, 1992(a) 10.28 4.10%(b) 31,760 .59%(c) 7.35%(c) 34.5%(c) N/A
Year Ended June 30,
1992 10.93 15.34% 33,022 .58% 7.84% 38.9% N/A
1991 10.24 10.94% 26,021 .59% 8.31% 4.2% N/A
1990 10.05 8.16% 21,488 .61% 8.48% 18.7% N/A
1989 10.05 12.61% 15,890 .63% 8.68% 3.7% N/A
1988 9.37 7.69% 12,902 .66% 8.47% 2.7% N/A
Period Ended June 30, 1987(d) 9.47 (.94)%(b) 10,778 .64%(c) 8.50%(c) 0.2%(c) N/A
Money Market Account
Year Ended December 31,
1996 1.000 5.07% 46,244 .56% 5.00% N/A N/A
1995 1.000 5.59% 32,670 .58% 5.32% N/A N/A
1994 1.000 3.76% 29,372 .60% 3.81% N/A N/A
1993 1.000 2.69% 22,753 .60% 2.64% N/A N/A
Six Months Ended December 31, 1992(a) 1.000 1.54%(b) 27,680 .59%(c) 3.10%(c) N/A N/A
Year Ended June 30,
1992 1.000 4.64% 25,194 .57% 4.54% N/A N/A
1991 1.000 7.20% 26,509 .56% 6.94% N/A N/A
1990 1.000 8.37% 26,588 .57% 8.05% N/A N/A
1989 1.000 8.59% 20,707 .61% 8.40% N/A N/A
1988 1.000 6.61% 14,571 .64% 6.39% N/A N/A
1987 1.000 5.78% 11,902 .65% 5.68% N/A N/A
</TABLE>
Notes to financial highlights
(a) Effective July 1, 1992 the fund changed its fiscal year end from June
30 to December 31.
(b) Total return amounts have not been annualized.
(c) Computed on an annualized basis.
(d) Period from April 9, 1987, date shares first offered to the public,
through June 30, 1987. Net investment income, aggregating $.01 per
share for the period from the initial purchase of shares on October
31, 1987 through December 17, 1987 was recognized, all of which was
distributed to the Account's sole stockholder, Principal Mutual Life
Insurance Company. This represented activity of the Account prior to
the initial offering of shares to eligible purchasers.
Investment Objectives, Policies and Restrictions
The investment objectives and policies of each Account are described below.
There can be no assurance that the objectives of the Accounts will be realized.
Capital Value Account
The objective of Capital Value Account is long-term capital appreciation. A
secondary objective is growth of investment income.
The Account will invest primarily in common stocks, but may invest in other
securities. In making selections for the Account's investment portfolio, the
Account will use an approach described broadly as that of fundamental analysis
which is discussed in the Statement of Additional Information. To achieve the
investment objective, Invista will invest in securities that have "value"
characteristics. This process is known as "value investing." Value investing is
purchasing securities of companies with above average dividend yields and below
average price to earnings (P/E) ratios. Securities chosen for investment may
include those of companies which the Manager believes can reasonably be expected
to share in the growth of the nation's economy over the long term.
Government Securities Account
The objective of Government Securities Account is a high level of current
income, liquidity and safety of principal.
The Account will invest in obligations issued or guaranteed by the United
States Government or by its agencies or instrumentalities and in repurchase
agreements collateralized by such obligations. Such securities include
Government National Mortgage Association ("GNMA") Certificates of the modified
pass-through type, Federal National Mortgage Association ("FNMA") Obligations,
Federal Home Loan Mortgage Corporation ("FHLMC") Certificates and Student Loan
Marketing Association ("SLMA") Certificates and other U.S. Government
Securities. GNMA is a wholly-owned corporate instrumentality of the United
States whose securities and guarantees are backed by the full faith and credit
of the United States. FNMA, a federally chartered and privately-owned
corporation, FHLMC, a federal corporation, and SLMA, a government sponsored
stockholder-owned organization, are instrumentalities of the United States. The
securities and guarantees of FNMA, FHLMC and SLMA are not backed, directly or
indirectly, by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend FNMA up to $2.25 billion outstanding at any time, neither the United States
nor any agency thereof is obligated to finance FNMA's or FHLMC's operations or
to assist FNMA or FHLMC in any other manner. The Account may maintain reasonable
amounts of cash or short-term debt securities for daily cash management purposes
or pending selection of particular long-term investments.
Cash equivalents in which the Account invests include corporate commercial
paper rated A-1+, A-1 or A-2 by S&P or P-1 or P-2 by Moody's, unrated commercial
paper issued by corporations with outstanding debt securities rated in the four
highest grades by S&P and Moody's and bank certificates of deposit and bankers'
acceptances issued or guaranteed by national or state banks and repurchase
agreements considered by the Account to have investment quality.
Depending on market conditions, up to 55% of the assets may be invested in
GNMA Certificates. GNMA is a United States Government corporation within the
Department of Housing and Urban Development. GNMA Certificates are
mortgage-backed securities representing an interest in a pool of mortgage loans.
Such loans are made by lenders such as mortgage bankers, insurance companies,
commercial banks and savings and loan associations. Then, they are either
insured by the Federal Housing Administration (FHA) or they are guaranteed by
the Veterans Administration (VA) or Farmers Home Administration (FmHA). The
lender or other prospective issuer creates a specific pool of such mortgages,
which it submits to GNMA for approval. After approval, a GNMA Certificate is
typically offered by the issuer to investors through securities dealers.
GNMA Certificates differ from bonds in that the principal is scheduled to
be paid back by the borrower on a monthly basis over the life of the loan rather
than returned in a lump sum at maturity. Modified pass-through GNMA
certificates, which are the only kind in which the Account intends to invest,
entitle the holder to receive all interest and principal payments owed on the
mortgages in the pool (net of the issuer and GNMA fee of .5% prescribed by
regulation), regardless of whether or not the mortgagor has made such payment.
The timely payment of interest and principal is guaranteed by the full faith and
credit of the United States Government.
Although the payment of interest and principal is guaranteed, the guarantee
does not extend to the value of a GNMA Certificate or the value of the shares of
the Account. The market value of a GNMA Certificate typically will fluctuate to
reflect changes in prevailing interest rates. It falls when rates increase (as
does the market value of other debt securities) and it rises when rates decline
(but it may not rise on a comparable basis with other debt securities because of
its prepayment feature), and, therefore, may be more or less than the face
amount of the GNMA Certificate, which reflects the aggregate principal amount of
the underlying mortgages. As a result, the net asset value of Account shares
will fluctuate as interest rates change.
Mortgagors may pay off their mortgages at any time. Expected prepayments of
the mortgages can affect the market value of the GNMA Certificate, and actual
prepayments can affect the return ultimately received. Prepayments, like
scheduled payments of principal, are reinvested by the Account at prevailing
interest rates which may be less than the rate on the GNMA Certificate.
Prepayments are likely to increase as the interest rate for new mortgages moves
lower than the rate on the GNMA Certificate. Moreover, if the GNMA Certificate
had been purchased at a premium above principal because its rate exceeded
prevailing rates, the premium is not guaranteed and a decline in value to par
may result in a loss of the premium especially in the event of prepayment.
To the extent deemed appropriate by the Account's Manager, the Account
intends to purchase GNMA Certificates directly from Principal Mutual Life
Insurance Company and other issuers as well as from securities dealers. The
Account will purchase directly from issuers only if it can obtain a price
advantage by not paying the commission or mark-up that would be required if the
Certificates were purchased from a securities dealer. The Securities and
Exchange Commission has issued an order under the Investment Company Act of 1940
that permits the Account to purchase GNMA Certificates directly from Principal
Mutual Life Insurance Company subject to certain conditions.
The FNMA and FHLMC securities in which the Account invests are very similar
to GNMA certificates as described above but are not guaranteed by the full faith
and credit of the United States but rather by the agency itself. FNMA and FHLMC
securities are rated Aaa by Moody's and AAA by Standard & Poor's. These ratings
reflect the status of FNMA and FHLMC as federal agencies as well as the
important role each plays in financing purchases of homes in the U.S.
Student Loan Marketing Association is a government sponsored
stockholder-owned organization whose goal is to provide liquidity to financial
and educational institutions. SLMA provides liquidity by purchasing student
loans, which are principally government guaranteed loans issued under the
Federal Guaranteed Student Loan Program and the Health Education Assistance Loan
Program. SLMA securities are not guaranteed by the U.S. Government but are
obligations solely of the agency. SLMA senior debt issues in which the Account
invests are rated AAA by Standard & Poor's and Aaa by Moody's.
There are other obligations issued or guaranteed by the United States
Government (such as U.S. Treasury securities) or by its agencies or
instrumentalities that are either supported by the full faith and credit of the
U.S. Treasury or the credit of a particular agency or instrumentality. Included
in the latter category are Federal Home Loan Bank and Farm Credit Banks.
Obligations not guaranteed by the United States Government are highly rated
because they are issued by indirect branches of government. Such paper is issued
as needs arise by the agency and is traded regularly in denominations similar to
those in which government obligations are traded.
The Account will not engage in the trading of securities for the purpose of
realizing short-term profits, but it will adjust its portfolio as considered
advisable in view of prevailing or anticipated market conditions and the
Account's investment objective. Accordingly, the Account may sell portfolio
securities in anticipation of a rise in interest rates and purchase securities
for inclusion in its portfolio in anticipation of a decline in interest rates.
As a hedge against changes in interest rates, the Account may enter into
contracts with dealers in GNMA Certificates whereby the Account agrees to
purchase or sell an agreed-upon principal amount of GNMA Certificates at a
specified price on a certain date. The Account may enter into similar purchase
agreements with issuers of GNMA Certificates other than Principal Mutual Life
Insurance Company. The Account may also purchase optional delivery standby
commitments which give the Account the right to sell particular GNMA
Certificates at a specified price on a specified date. Failure of the other
party to such a contract or commitment to abide by the terms thereof could
result in a loss to the Account. To the extent the Account engages in delayed
delivery transactions it will do so for the purpose of acquiring portfolio
securities consistent with its investment objective and policies and not for the
purpose of investment leverage or to speculate on interest rate changes.
Liability accrues to the Account at the time it becomes obligated to purchase
such securities, although delivery and payment occur at a later date. From the
time the Account becomes obligated to purchase securities on a delayed delivery
basis, the Account has all the rights and risks attendant to the ownership of a
security. At the time the Account enters into a binding obligation to purchase
such securities, Account assets of a dollar amount sufficient to make payment
for the securities to be purchased will be segregated. The availability of
liquid assets for this purpose and the effect of asset segregation on the
Account's ability to meet its current obligations, to honor requests for
redemption and to have its investment portfolio managed properly will limit the
extent to which the Account may engage in forward commitment agreements. Except
as may be imposed by these factors, there is no limit on the percent of the
Account's total assets that may be committed to transactions in such agreements.
Money Market Account
The Fund also includes an Account which invests primarily in short-term
securities, the Money Market Account. Securities in which this Account invests
may not yield as high a level of current income as securities of lower quality
and longer maturities which generally have less liquidity, greater market risk
and more fluctuation.
The Money Market Account will limit its portfolio investments to United
States dollar denominated instruments that the board of directors determines
present minimal credit risks and which at the time of acquisition are "Eligible
Securities" as that term is defined in regulations issued under the Investment
Company Act of 1940. Eligible Securities include:
(1) A security with the remaining maturity of 397 days or less that is
rated (or that has been issued by an issuer that is rated in respect to
a class of short-term debt obligations, or any security within that
class, that is comparable in priority and security with the security)
by a nationally recognized statistical rating organization in one of
the two highest rating categories for short-term debt obligations; or
(2) A security at the time of issuance was a long-term security that has a
remaining maturity of 397 calendar days or less, and whose issuer has
received from a nationally recognized statistical rating organization a
rating, with respect to a class of short-term debt obligations (or any
security within that class) that is now comparable in priority and
security with the security, in one of the two highest rating categories
for short-term debt obligations; or
(3) an unrated security that is of comparable quality to a security
meeting the requirements of (1) or (2) above, as determined by the
board of directors.
The Account will not invest more than 5% of its total assets in the
following securities:
(1) Securities which, when acquired by the Account (either initially or
upon any subsequent rollover), are rated below the highest rating
category for short-term debt obligations;
(2) Securities which, at the time of issuance were long-term securities but
when acquired by the Account have a remaining maturity of 397 calendar
days or less, if the issuer of such securities is rated, with respect
to a class of comparable short-term debt obligations, below the highest
rating category for short-term obligations;
(3) Securities which are unrated but are determined by the Fund's board of
directors to be of comparable quality to securities rated below the
highest rating category for short-term debt obligations.
The Account will maintain a dollar-weighted average portfolio maturity of
90 days or less.
The objective of the Money Market Account is to seek as high a level of
income available from short-term securities as is considered consistent with
preservation of principal and maintenance of liquidity by investing all of its
assets in a portfolio of money market instruments. These money market
instruments are U.S. Government Securities, U.S. Government Agency Securities,
Bank Obligations, Commercial Paper, Short-term Corporate Debt and Repurchase
Agreements, which are described briefly below and in more detail in the
Statement of Additional Information.
U.S. Government Securities are securities issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
U.S. Government Agency Securities are obligations issued or guaranteed by
agencies or instrumentalities of the U.S. Government whether supported by the
full faith and credit of the U.S. Treasury or only by the credit of a particular
agency or instrumentality.
Bank Obligations consist of certificates of deposit which are generally
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return and bankers acceptances
which are time drafts drawn on a commercial bank by a borrower, usually in
connection with international commercial transactions.
Commercial Paper is short-term promissory notes issued by corporations
primarily to finance short-term credit needs.
Short-term Corporate Debt consists of notes, bonds or debentures which at
the time of purchase have one year or less remaining to maturity.
Repurchase Agreements are transactions under which securities are purchased
from a bank or securities dealer with an agreement by the seller to repurchase
the securities at the same price plus interest at a specified rate. Generally,
Repurchase Agreements are of short duration, usually less than a week but on
occasion for longer periods.
The Account intends to hold its investments until maturity. However, it may
attempt from time to time to increase its yield by trading to take advantage of
market variations. Also, revised valuations of an issuer or redemptions may
result in sales of portfolio investments prior to maturity or at times when such
sales might otherwise not be desirable. The Account's right to borrow to
facilitate redemptions may reduce the need for such sales. It is the Account's
policy to be as fully invested as reasonably practical at all times to maximize
current income.
Since portfolio assets will consist of short-term instruments, replacement
of portfolio securities will occur frequently. However, since the Account
expects to usually transact purchases and sales of portfolio securities with
issuers or dealers on a net basis, it is not anticipated that the Account will
pay any significant brokerage commissions. The Account is free to dispose of
portfolio securities at any time, when changes in circumstances or conditions
make such a move desirable in light of the investment objective.
CERTAIN INVESTMENT POLICIES AND RESTRICTIONS
Following is a discussion of certain investment practices that the Accounts
may use in an effort to achieve their respective investment objectives.
Diversification
Each Account is subject to the diversification requirements of Section
817(h) of the Internal Revenue Code (the "Code") which must be met at the end of
each quarter of the year (or within 30 days thereafter). Regulations issued by
the Secretary of the Treasury have the effect of requiring the Account to invest
no more than 55% of its total assets in securities of any one issuer, no more
than 70% in the securities of any two issuers, no more than 80% in the
securities of any three issuers, and no more than 90% in the securities of any
four issuers. For this purpose, the United States Treasury and each U.S.
Government agency and instrumentality is considered to be a separate issuer.
Thus, the Government Securities Account intends to invest in U.S. Treasury
securities and in securities issued by at least four U.S. Government agencies or
instrumentalities in the amounts necessary to meet those diversification
requirements at the end of each quarter of the year (or within thirty days
thereafter).
In the event any of the Accounts do not meet the diversification
requirements of Section 817(h) of the Code, the contracts funded by shares of
the Accounts will not be treated as annuities or life insurance for Federal
income tax purposes and the owners of the Accounts will be subject to taxation
on their share of the dividends and distributions paid by the Accounts.
Foreign Securities
The Capital Value Account may invest up to 20% of its assets in foreign
securities. Debt securities issued in the United States pursuant to a
registration statement filed with the Securities and Exchange Commission are not
considered "foreign securities," for purposes of this investment limitation.
Investment in foreign securities presents certain risks including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. The Account's investment in foreign securities may also
result in higher custodial costs and the costs associated with currency
conversions.
Investment Hedges
The Government Securities Account may purchase covered spread options,
which give the Account the right to sell a security that it owns at a fixed
dollar spread or yield spread in relationship to another security that the
Account does not own, but which is used as a benchmark. In addition, the Account
may write call and put options on securities and securities indices to generate
additional income, and it may purchase and sell those kinds of options,
financial futures contracts and options on financial futures contracts in
anticipation of a decline in the value of securities owned by the Account or an
increase in the price of securities the Account plans to purchase. Financial
futures contracts are commodities contracts based on financial instruments such
as U.S. Treasury bonds or bills or on securities indices such as the S&P 500
Index. The Account will not invest more than 5% of its assets in the purchase of
covered spread options and the purchase of put and call options on securities,
securities indices and financial futures contracts. The Account will also not
invest more than 5% of its assets in initial margin and premiums on financial
futures contracts and options thereon. Risks associated with options
transactions include the risk that movements in the market prices of underlying
securities could cause the Account to lose the amount of the premium paid for an
option or to have to sell securities for less than their current market price or
purchase securities for more than their current market price, and the risk that
trading markets could become illiquid thereby precluding closing transactions.
Futures contracts have similar risks and, in addition, are subject to the risk
of imperfect correlation between changes in the prices of futures contracts and
the securities being hedged. A more complete statement of these investment
practices and their associated risks is contained in the Fund's Statement of
Additional Information.
Other Investment Practices
Each of the Accounts may enter into repurchase agreements with, and the
Government Securities Account may lend its portfolio securities to, unaffiliated
broker-dealers and other unaffiliated qualified financial institutions. These
transactions must be fully collateralized at all times, but involve some credit
risk to the Account if the other party should default on its obligations, and
the Account is delayed or prevented from recovering on the collateral. See the
Fund's Statement of Additional Information for further information regarding the
credit risks associated with repurchase agreements and the standards adopted by
the Fund's Board of Directors to deal with those risks. None of the Accounts
intends either (i) to enter into repurchase agreements that mature in more than
seven days if any such investment, together with any other illiquid securities
held by the Account, would amount to more than 10% of its total assets or (ii)
to loan securities in excess of 30% of its total assets.
The Capital Value Account may invest in warrants up to 5% of its assets, of
which 2% may be invested in warrants that are not listed on the New York or
American Stock Exchange.
As a matter of fundamental policy, each of the Accounts may borrow money
only for temporary or emergency purposes. The Capital Value Account and Money
Market Account may borrow only from banks. The Government Securities Account may
borrow only in an amount not exceeding 5% of its assets. The Capital Value
Account may borrow only in an amount not exceeding the lesser of (i) 5% of the
value of the Account's assets less liabilities other than such borrowings, or
(ii) 10% of the Account's assets taken at cost at the time the borrowing is
made. The Money Market Account may borrow only in an amount not exceeding the
lesser of (i) 5% of the value of its assets, or (ii) 10% of the value of its net
assets taken at cost at the time the borrowing is made.
The Capital Value Account from time to time executes transactions for
portfolio securities with, and pays related brokerage commissions to, Principal
Financial Securities, Inc., a broker-dealer that is an affiliate of the Manager
for the Fund.
The Statement of Additional Information includes further information
concerning the Accounts' investment policies and applicable investment
restrictions. Each Account's investment objective and certain investment
restrictions designated as such in this Prospectus or the Statement of
Additional Information are fundamental policies that may not be changed without
shareholder approval. All other investment policies described in the Prospectus
and the Statement of Additional Information for an Account are not fundamental
and may be changed by the Board of Directors of the Fund without shareholder
approval.
MANAGER AND SUB-ADVISOR
The Manager for the Fund is Principal Management Corporation (formerly
known as Princor Management Corporation) (the "Manager"), which is an indirectly
wholly-owned subsidiary of Principal Mutual Life Insurance Company, a mutual
life insurance company organized in 1879 under the laws of the State of Iowa.
The address of the Manager is The Principal Financial Group, Des Moines, Iowa
50392. The Manager was organized on January 10, 1969, and since that time has
managed various mutual funds sponsored by Principal Mutual Life Insurance
Company. As of December 31, 1996, the Manager served as investment advisor for
26 such funds with assets totaling approximately $4.0 billion.
The Manager has executed an agreement with Invista Capital Management, Inc.
("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Capital Value and
Government Securities Accounts. The Manager will reimburse Invista for the cost
of providing these services. Invista, an indirectly wholly-owned subsidiary of
Principal Mutual Life Insurance company and an affiliate of the Manager, was
founded in 1985 and manages investments for institutional investors, including
Principal Mutual Life. Assets under management at December 31, 1996 were
approximately $19.6 billion. Invista's address is 1800 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
The Manager has assigned certain individuals the primary responsibility
for the day-to-day management of each Account's portfolio. The persons primarily
responsible for the day-to-day management of each Account are identified in the
table below:
<TABLE>
<CAPTION>
Primarily
Account Responsible Since Person Primarily Responsible
<S> <C> <C>
Capital Value November, 1969 David L. White, CFA (BBA degree, University of Iowa). Executive Vice
(Account's inception) President, Invista Capital Management, Inc.; Co-Manager since November,
1996: Catherine A. Green, CFA, (MBA degree, Drake University). Vice
President, Invista Capital Management, Inc.
Government Securities April, 1987 Martin J. Schafer (BBA degree, University of Iowa). Vice President,
(Account's inception) Invista Capital Management, Inc.
</TABLE>
DUTIES PERFORMED BY THE MANAGER AND SUB-ADVISOR
Under Maryland law, the business and affairs of the Fund are managed under
the direction of its Board of Directors. The Manager or Invista advises the
Accounts on investment policies and on the composition of the Accounts'
portfolios. In this connection, the Manager or Sub-Advisor furnishes to the
Board of Directors a recommended investment program consistent with each
Account's investment objective and policies. The Manager is authorized, within
the scope of the approved investment program, to determine which securities are
to be bought or sold, and in what amounts.
The investment services and certain other services referred to under the
heading "Cost of Manager's Services" in the Statements of Additional Information
are furnished to the Accounts under the terms of a Management Agreement between
the Fund and the Manager. The compensation paid by the Government Securities
Account and Money Market Account to the Manager for the year ended December 31,
1996 was equal to .50% of their respective average net assets. The compensation
paid by the Capital Value Account to the Manager for the fiscal year ended
December 31, 1996 was equal to .48% of the Account's average net assets. Total
expenses for the Accounts for the year ended December 31, 1996 were equal to the
following percentage of average net assets: Capital Value Account, .49%;
Government Securities Account, .52%; and Money Market Account, .56%.
The Manager or Sub-Advisor may purchase at their own expense statistical
and other information or services from outside sources, including Principal
Mutual Life Insurance Company. An Investment Service Agreement between the Fund,
the Manager and Principal Mutual Life Insurance Company provides that Principal
Mutual Life Insurance Company will furnish certain personnel, services and
facilities required by the Manager in connection with its performance of the
Management Agreement, and that the Manager will reimburse Principal Mutual Life
Insurance Company for its costs incurred in this regard.
Among the expenses paid by each Account are its taxes (if any), brokerage
commissions on portfolio transactions, interest, custodial fees, fees and
expenses of unaffiliated directors and the cost of shareholder meetings. The
Manager is the dividend disbursing and transfer agent for the Fund and also
serves as investment advisor and dividend disbursing and transfer agent for each
of the other funds sponsored by Principal Mutual Life Insurance Company.
MANAGERS' COMMENTS
Principal Management Corporation is staffed with investment professionals
who manage each individual Account. Comments by these individuals in the
following paragraphs summarize in capsule form the general strategy and results
of each Account through 1996. The accompanying charts display results for the
past 10 years or the life of the Account, whichever is shorter. Average Annual
Total Return figures provided for each Account in the graphs below reflect all
expenses of the Account and assume all distributions are reinvested at net asset
value. The figures do not reflect expenses of the variable life insurance
contracts or variable annuity contracts that purchase Account shares;
performance figures for the divisions of the contracts would be lower than
performance figures for the Accounts due to the additional contract expenses.
Past performance is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
The various indices included in the following graphs are unmanaged and do
not reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.
CAPITAL VALUE ACCOUNT
David L. White and Catherine A. Green
The strategy with this portfolio is to hold common stocks of companies
based on a valuation that is attractive when compared to the market. The
analytical staff looks at companies' current valuations compared to the market,
then at historical information to compare valuations to historical averages. The
focus is on the fundamentals of an industry and the company to determine the
current and future outlook as these potential investments. From there the
portfolio is constructed to provide a diversified set of investments.
The Account outperformed the S&P 500 Index and Lipper Growth and Income
Fund Average for 1996. The strength of the market was in much fewer stocks than
in the past. The volatility between industries was much greater than the overall
results. The Account benefited from several areas of exposure. Banks and health
care were the strongest areas for the Account during the year. The focus has
been away from the more cyclical areas of the economy which also helped during
the year. As the economic cycle progresses, the market places more emphasis on
companies with consistent earnings growth, and we have tended to overweight
these areas of the market. As the market performance continues to narrow,
however, it becomes increasingly difficult to select the correct areas of
overperformance.
Total Returns *
As of December 31, 1996
----------------------------------------
1 Year 5 Year 10 Year
23.50% 14.08% 13.08%
Comparison of Change in Value of $10,000 Investment in the
Capital Value Account, S&P 500 and Lipper Growth and Income Fund Average
----------------------------------------------------------------------------
Fund S&P 500 Lipper
Year Ended Total Stock Growth & Income
December 31, Return Index Fund Average
10,000 10,000 10,000
1987 10,647 10,526 10,184
1988 12,183 12,274 11,814
1989 14,155 16,163 14,596
1990 12,759 15,659 13,946
1991 17,693 20,433 18,002
1992 19,377 21,990 19,618
1993 20,888 24,201 21,884
1994 20,990 24,519 21,678
1995 27,688 33,722 28,360
1996 34,193 41,460 34,253
Note: Past performance is not predictive of future performance.
Important Notes:
Standard and Poor's 500 Stock Index: an unmanaged index of 500 widely held
common stocks representing industrial, financial, utility and
transportation companies listed on the New York Stock Exchange, American
Stock Exchange and the Over-the-Counter market.
Lipper Growth and Income Fund Average: this average consists of mutual
funds which combine a growth of earnings orientation and an income
requirement for level and/or rising dividends. The one year average at
December 31, 1996 contained 522 mutual funds.
GOVERNMENT SECURITIES ACCOUNT
Martin J. Schafer
Interest rates rose in 1996, which dampened absolute fixed income returns.
The Account underperformed the Lipper U.S. Mortgage Fund Average and the Lehman
MBS Index in 1996 due to its slightly longer duration. However, since the
Account's inception of 4/9/87 it has outperformed the Lipper U.S. Mortgage Fund
Average and is competitive with the Lehman MBS Index.
Results were enhanced last year through identification and selection of
certain undervalued sectors of mortgage-backed securities for a portion of the
portfolio. These securities have now become very popular with Wall Street and
other investors, resulting in their increasing in value.
The current portfolio is well positioned for the period ahead. It has a
number of securities that are "seasoned" (e.g., original 30 year loans that have
been outstanding for three years or more) and therefore valued more highly in
the marketplace. There are few securities priced above par, so prepayment risk
is negligible. If the future continues to be an era of economic prosperity we
should continue to see strong housing markets and housing turnover that will
cause prepayments on our securities to exceed market expectations. These
repayments are welcomed, as the portfolio is priced at a discount and the
Account will be paid-off at par.
Total Returns *
As of December 31, 1996
- --------------------------------------------------
1 Year 5 Year Since Inception Date 4/9/87
3.35% 6.68% 8.63%
Comparison of Change in Value of $10,000 Investment in the Government Securities
Account, Lehman Brothers Mortgage Index and Lipper U.S. Mortgage Fund Average
- --------------------------------------------------------------------------------
Fund Lehman Lipper
Year Ended Total Mortgage U.S. Mortgage
December 31, Return Index Index
10,000 10,000 10,000
1987 10,099 10,204 10,104
1988 10,939 11,094 10,858
1989 12,645 12,808 12,224
1990 13,852 14,183 13,370
1991 16,200 16,410 15,348
1992 17,308 17,551 16,285
1993 19,051 18,751 17,499
1994 18,188 18,450 16,769
1995 21,656 21,549 19,491
1996 22,381 22,702 20,245
Note: Past performance is not predictive of future performance.
Important Notes:
Lehman Brothers Mortgage Index: an unmanaged index of 15- and 30-year fixed
rate securities backed by mortgage pools of the Government National
Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation
(FHLMC), and Federal National Mortgage Association (FNMA).
Lipper U.S. Mortgage Fund Average: this average consists of mutual funds
investing at least 65% of their assets in mortgage/securities issued or
guaranteed as to principal and interest by the U.S. Government and certain
federal agencies. The one year average at December 31, 1996 contained 59
mutual funds.
DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES
The net asset value of each Account's shares is determined daily, Monday
through Friday, as of the close of trading on the New York Stock Exchange except
on days on which changes in the value of the Account's portfolio securities will
not materially affect the current net asset value of the Account's redeemable
securities, on days during which the Account receives no order for the purchase
or sale of its redeemable securities and no tender of such a security for
redemption, and on customary national business holidays. The net asset value per
share of each Account is determined by dividing the value of the Account's
securities plus all other assets, less all liabilities, by the number of Account
shares outstanding.
The portfolios of the Capital Value Account and Government Securities
Account are valued as follows. Securities for which market quotations are
readily available are valued using those quotations. Other securities are valued
by using market quotations, prices provided by market makers or estimates of
market values obtained from yield data and other factors relating to instruments
or securities with similar characteristics in accordance with procedures
established in good faith by the Board of Directors. Securities with remaining
maturities of 60 days or less are valued at amortized cost when it is determined
by the Board of Directors that amortized cost reflects fair value. Other assets
are valued at fair value as determined in good faith by the Board of Directors
of the Fund.
As previously described, the Capital Value Account may purchase foreign
securities, whose trading is substantially completed each day at various times
prior to the close of the New York Stock Exchange. The values of such securities
used in computing net asset value per share are usually determined as of such
times. Occasionally, events which affect the values of such securities and
foreign currency exchange rates may occur between the times at which they are
generally determined and the close of the New York Stock Exchange and would
therefore not be reflected in the computation of the Account's net asset value.
If events materially affecting the value of such securities occur during such
period, then these securities will be valued at their fair value as determined
in good faith by the Manager under procedures established and regularly reviewed
by the Board of Directors. To the extent the Account invests in foreign
securities listed on foreign exchanges which trade on days on which the Account
does not determine its net asset value, for example Saturdays and other
customary national U.S. Holidays, the Account's net asset value could be
significantly affected on days when shareholders have no access to the Account.
The Money Market Account values its securities at amortized cost. For a
description of this calculation procedure see the Statement of Additional
Information. The Money Market Account reserves the right to calculate or
estimate its net asset value more frequently than once per day if it deems it
desirable.
PERFORMANCE CALCULATION
From time to time, the Accounts may publish advertisements containing
information (including graphs, charts, tables and examples) about the
performance of one or more of the Accounts. The Accounts' yield and total return
figures described below will vary depending upon market conditions, the
composition of the Accounts' portfolios and operating expenses. These factors
and possible differences in the methods used in calculating yield and total
return should be considered when comparing the Accounts' performance figures to
performance figures published for other investment vehicles. The Accounts may
also quote rankings, yields or returns as published by independent statistical
services or publishers, and information regarding the performance of certain
market indices. Any performance data quoted for the Accounts represents only
historical performance and is not intended to indicate future performance of the
Accounts. The calculation of average annual total return and yield for the
Accounts does not include fees and charges of the separate accounts that invest
in the Accounts and, therefore, does not reflect the investment performance of
those separate accounts. For further information on how the Accounts calculate
yield and total return figures, see the Statement of Additional Information.
The Capital Value Account and Government Securities Account may advertise
their respective average annual total returns. Average annual total return for
each Account is computed by calculating the average annual compounded rate of
return over the stated period that would equate an initial $1,000 investment to
the ending redeemable value assuming the reinvestment of all dividends and
capital gains distributions at net asset value. The same assumptions are made
when computing cumulative total return by dividing the ending redeemable value
by the initial investment.
The Money Market Account may advertise its "yield" and "effective yield."
The "yield" of the Account refers to the income generated by an investment in
the Account over a seven-day period. This income is then "annualized." That is,
the amount of income generated by the investment during that week is assumed to
be generated each week over a 52-week period and is shown as a percentage of the
investment. The "effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Account is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment.
The yield for the Money Market Account will fluctuate daily as the income
earned on the investments of the Account fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. The Account is one of a series of Accounts issued by an
open-end investment company and there is no guarantee that the net asset value
or any stated rate of return will remain constant. A shareholder's investment in
the Account is not insured. Investors comparing results of the Account with
investment results and yields from other sources such as banks or savings and
loan associations should understand these distinctions. Historical and
comparative yield information may, from time to time, be presented by the
Account.
INCOME DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
It is the policy of each Account to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which
the Fund so qualifies it will be exempt from federal income tax upon the amounts
so distributed to investors.
Any dividends from the net investment income of the Accounts (except the
Money Market Account) will normally be payable to the shareholders annually, and
any net realized gains will be distributed annually. All dividends and capital
gains distributions are applied to purchase additional Account shares at net
asset value as of the payment date without the imposition of any sales charge.
Each Account will notify shareholders of the portion of each distribution
which constitutes investment income or capital gain. In view of the complexity
of tax considerations, it is advisable for Eligible Purchasers considering the
purchase of shares of the Accounts to consult with tax advisors on the federal
and state tax aspects of their investments and redemptions.
Money Market Account
The Money Market Account declares dividends of all its daily net investment
income on each day the Account's net asset value per share is determined.
Dividends are declared and payable daily and are automatically reinvested in
full and fractional shares of the Account at the then current net asset value
unless a shareholder requests payment in cash.
Net investment income, for dividend purposes, consists of (1) accrued
interest income plus or minus accrued discount or amortized premium; plus or
minus (2) all net short-term realized gains and losses; minus (3) all accrued
expenses of the Account. Expenses of the Account are accrued each day. Net
income will be calculated immediately prior to the determination of net asset
value per share of the Account.
Since the Account's policy is, under normal circumstances, to hold
portfolio securities to maturity and to value portfolio securities at amortized
cost, it does not expect any capital gains or losses. If the Account does
experience gains, however, it could result in an increase in dividends. Capital
losses could result in a decrease in dividends. If for some extraordinary reason
the Account realizes net long-term capital gains, it will distribute them once
every 12 months.
Since the net income of the Account (including realized gains and losses on
the portfolio securities) is declared as a dividend each time the net income of
the Account is determined, the net asset value per share of the Account normally
remains at $1.00 immediately after each determination and dividend declaration.
Any increase in the value of a shareholder's investment in the Account,
representing reinvestment of dividend income, is reflected by an increase in the
number of shares of the Account in the account.
Normally the Account will have a positive net income at the time of each
determination thereof. Net income may be negative if an unexpected liability
must be accrued or a loss is realized. If the net income of the Account
determined at any time is a negative amount, the net asset value per share will
be reduced below $1.00. The Account may endeavor to restore the net asset value
per share to $1.00 by reducing the number of outstanding shares by redeeming
proportionately from shareholders without the payment of any monetary
consideration, such number of full and fractional shares as is necessary to
maintain a net asset value per share of $1.00. Each shareholder will be deemed
to have agreed to such a redemption in these circumstances by investing in the
Account. The Account may seek to achieve the same objective of restoring the net
asset value per share to $1.00 by not declaring dividends from net income on
subsequent days until restoration, with the result that the net asset value per
share would increase to the extent of positive net income which is not declared
as a dividend, or any other method approved by the Board of Directors.
The Board of Directors may revise the above dividend policy, or postpone
the payment of dividends, if the Account should have or anticipate any large
presently unexpected expense, loss or fluctuation in net assets which in the
opinion of the Board might have a significant adverse effect on shareholders.
ELIGIBLE PURCHASERS AND PURCHASE OF SHARES
Only Eligible Purchasers may purchase shares of the Accounts. Eligible
Purchasers are limited to (a) separate accounts of Principal Mutual Life
Insurance Company or of other insurance companies; (b) Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof; (c) trustees or other
managers of any qualified profit sharing, incentive or bonus plan established by
Principal Mutual Life Insurance Company or any subsidiary or affiliate thereof
for the employees of such company, subsidiary or affiliate. Such trustees or
managers may purchase Account shares only in their capacities as trustees or
managers and not for their personal accounts. The Board of Directors of the Fund
reserves the right to broaden or limit the designation of Eligible Purchasers.
Each Account serves as an underlying investment medium for variable annuity
contracts and variable life insurance policies that are funded in separate
accounts established by Principal Mutual Life Insurance Company. It is
conceivable that in the future it may be disadvantageous for variable life
insurance separate accounts and variable annuity separate accounts to invest in
the Accounts simultaneously. Although neither Principal Mutual Life Insurance
Company nor the Accounts currently foresee any such disadvantages either to
variable life insurance policy owners or to variable annuity contract owners,
the Board of Directors intends to monitor events in order to identify any
material conflicts between such policy owners and contract owners and to
determine what action, if any, should be taken in response thereto. Such action
could include the sale of Account shares by one or more of the separate
accounts, which could have adverse consequences. Material conflicts could result
from, for example, (1) changes in state insurance laws, (2) changes in Federal
income tax law, (3) changes in the investment management of the Account, or (4)
differences in voting instructions between those given by policy owners and
those given by contract owners.
Shares are purchased from Princor Financial Services Corporation, the
principal underwriter for the Fund. There are no sales charges on the Accounts'
shares. There are no restrictions on amounts to be invested in the Accounts'
shares.
Shareholder accounts for each Account will be maintained under an open
account system. Under this system, an account is automatically opened and
maintained for each new investor. Each investment is confirmed by sending the
investor a statement of account showing the current purchase and the total
number of shares then owned. The statement of account is treated by each Account
as evidence of ownership of Account shares in lieu of stock certificates, and
unless written request is made to the Account, stock certificates will not be
issued or delivered to investors. Certificates, which can be stolen or lost, are
unnecessary except for special purposes such as collateral for a loan.
Fractional interests in the Accounts' shares are reflected to three decimal
places in the statement of account, but any stock certificates will be issued
only for full shares owned.
If an offer to purchase shares is received by any of the Accounts before
the close of trading on the New York Stock Exchange, the shares will be issued
at the offering price (net asset value of Account shares) computed on that day.
If an offer is received after the close of trading or on a day which is not a
trading day, the shares will be issued at the offering price computed on the
first succeeding day on which a price is determined. Dividends on the Money
Market Account shares will be paid on the next day following the effective date
of a purchase order.
SHAREHOLDER RIGHTS
The following information is applicable to each Account of the Principal
Variable Contracts Fund, Inc. Each Account share is entitled to one vote either
in person or by proxy at all shareholder meetings for that Account. This
includes the right to vote for the election of directors, selection of
independent accountants and on other matters submitted to meetings of
shareholders of the Account. Each share of an Account has equal rights with
every other share of the Account as to dividends, earnings, voting, assets and
redemption. Shares are fully paid and non-assessable, and have no preemptive or
conversion rights. Shares may be issued as full or fractional shares, and each
fractional share has proportionately the same rights, including voting, as are
provided for a full share. Shareholders of the Fund may remove any director with
or without cause by the vote of a majority of the votes entitled to be cast at a
meeting of all Account shareholders.
The bylaws of the Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares which the Fund has authority
to issue without a shareholder vote.
The bylaws of the Fund also provide that the Fund need not hold an annual
meeting of shareholders in any year in which none of the following is required
to be acted on by shareholders under the Investment Company Act of 1940:
election of directors; approval of investment advisory agreement; ratification
of selection of independent public accountants; and approval of distribution
agreement. The Fund intends to hold shareholder meetings only when required by
law and at such other times as may be deemed appropriate by the Board of
Directors.
Shareholder inquiries should be directed to the Fund at The Principal
Financial Group, Des Moines, Iowa 50392.
NON-CUMULATIVE VOTING: The Fund's shares have non-cumulative voting rights
which means that the holders of more than 50% of the shares voting for the
election of directors of the Fund can elect 100% of the directors if they choose
to do so, and in such event, the holders of the remaining shares voting for the
election of directors will not be able to elect any directors.
Principal Mutual Life Insurance Company votes each Account's shares
allocated to each of its separate accounts registered under the Investment
Company Act of 1940 and attributable to variable annuity contracts or variable
life insurance policies participating therein in accordance with instructions
received from contract or policy holders, participants and annuitants. Other
shares of each Account held by each registered separate account, including those
for which no timely instructions are received, are voted in proportion to the
instructions that are received with respect to contracts or policies
participating in that separate account. Shares of each of the Accounts held in
the general account of Principal Mutual Life Insurance Company or in its
unregistered separate accounts are voted in proportion to the instructions that
are received with respect to contracts and policies participating in its
registered and unregistered separate accounts. If Principal Mutual determines
pursuant to applicable law that an Account's shares held in one or more separate
accounts or in its general account need not be voted pursuant to instructions
received with respect to participating contracts or policies, it then may vote
those Account shares in its own right.
REDEMPTION OF SHARES
Except for the third paragraph below, most of the following discussion of
redemption procedures is relevant only to Eligible Purchasers other than
variable annuity and variable life separate accounts of Principal Mutual Life
Insurance Company, and its wholly-owned subsidiaries.
Each Account will redeem shares upon request. There is no charge for
redemption. If no certificates have been issued, a shareholder simply writes a
letter to the appropriate Account requesting redemption of any part or all of
the shares. The letter must be signed exactly as the account is registered. If
certificates have been issued, they must be properly endorsed and forwarded with
the request. If payment is to be made to the registered shareholder or joint
shareholders, the Account will not require a signature guarantee as a part of a
proper endorsement; otherwise the shareholder's signature must be guaranteed by
either a commercial bank, trust company, credit union, savings and loan
association, national securities exchange member, or by a brokerage firm. The
price at which the shares are redeemed will be the net asset value per share as
next computed after the request (with appropriate certificate, if any) is
received by the Account in proper and complete form. The amount received for
shares upon redemption may be more or less than the cost of such shares
depending upon the net asset value at the time of redemption.
Redemption proceeds will be sent within three business days after receipt
of request for redemption in proper form. However, each Account may suspend the
right of redemption during any period when (a) trading on the New York Stock
Exchange is restricted as determined by the Securities and Exchange Commission
or such Exchange is closed for other than weekends and holidays; (b) an
emergency exists, as determined by the Securities and Exchange Commission, as a
result of which (i) disposal by the Account of securities owned by it is not
reasonably practicable, or (ii) it is not reasonably practicable for the Account
fairly to determine the value of its net assets; or (c) the Commission by order
so permits for the protection of security holders of the Account. An Account
will redeem only those shares for which it has good payment. To avoid the
inconvenience of such a delay, shares may be purchased with a certified check,
bank cashier's check or money order. During the period prior to the time a
redemption from the Money Market Account is effective, dividends on such shares
will accrue and be payable and the shareholder will be entitled to exercise all
other rights of beneficial ownership.
Restricted Transfer: Shares of each of the Accounts may be transferred to
an Eligible Purchaser. However, whenever any of the Accounts is requested to
transfer shares to other than an Eligible Purchaser, the Account has the right
at its election to purchase such shares at their net asset value next effective
following the time at which the request for transfer is presented; provided,
however, that the Account must notify the transferee or transferees of such
shares in writing of its election to purchase such shares within seven (7) days
following the date of such request and settlement for such shares shall be made
within such seven-day period.
ADDITIONAL INFORMATION
Organization: Effective January 1, 1998, an Agreement and Plan of
Reorganization and Liquidation was implemented under which a Series of the
Principal Variable Contracts Fund, Inc. adopted the assets and liabilities of
the corresponding Fund. The Funds were incorporated in the state of Maryland on
the following dates: Capital Accumulation Fund - May 26, 1989 (effective
November 1, 1989 succeeded to the business of a predecessor Fund that had been
incorporated in Delaware on February 6, 1969); Government Securities Fund - June
7, 1985; and Money Market Fund - June 10, 1986.
Custodian: Bank of New York, 48 Wall Street, New York, New York 10286, is
custodian of the portfolio securities and cash assets of each of the Accounts.
The custodian performs no managerial or policymaking functions for the Accounts.
Capitalization: The authorized capital stock of each Account consists of
100,000,000 shares of common stock (500,000,000 for Money Market Account), $.01
par value.
Financial Statements: Copies of the financial statements of each Account
will be mailed to each shareholder of that Account semi-annually. At the close
of each fiscal year, each Account's financial statements will be audited by a
firm of independent auditors. The firm of Ernst & Young LLP has been appointed
to audit the financial statements of each Account for their respective present
fiscal years.
Registration Statement: This Prospectus omits some information contained in
the Statement of Additional Information (also known as Part B of the
Registration Statement) and Part C of the Registration Statements which the Fund
has filed with the Securities and Exchange Commission. The Fund's Statement of
Additional Information is hereby incorporated by reference into this Prospectus.
A copy of this Statement of Additional Information can be obtained upon request,
free of charge, by writing or telephoning the Fund. You may obtain a copy of
Part C of the Registration Statements filed with the Securities and Exchange
Commission, Washington, D.C. from the Commission upon payment of the prescribed
fees.
Principal Underwriter: Princor Financial Services Corporation, The
Principal Financial Group, Des Moines, Iowa 50392-0200, is the principal
underwriter for the Fund.
PART B
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
Statement of Additional Information
dated _______________
This Statement of Additional Information provides information about the
Fund in addition to the information that is contained in the Fund's Prospectus,
dated _______________.
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Fund's Prospectus, a copy of which can be
obtained free of charge by writing or telephoning:
Principal Variable Contracts Fund, Inc.
The Principal Financial Group
Des Moines, Iowa 50392-0200
Telephone: 1-800-247-4123
TABLE OF CONTENTS
Investment Policies and Restrictions of the Fund............................ 3
Growth-Oriented Accounts............................................. 3
Income-Oriented Accounts............................................. 8
Money Market Account................................................. 11
Account Investments......................................................... 13
Directors and Officers of the Fund.......................................... 24
Manager and Sub-Advisors ................................................... 26
Cost of Manager's Services ................................................. 27
Brokerage on Purchases and Sales of Securities.............................. 29
Determination of Net Asset Value of Account Shares.......................... 31
Performance Calculation..................................................... 33
Tax Status.................................................................. 35
General Information and History............................................. 35
Financial Statements........................................................ 36
Appendix A.................................................................. 37
INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND
The following information about the Principal Variable Contracts Fund,
Inc. an incorporated, diversified, open-end management investment company,
commonly called a mutual fund, supplements the information provided in the
Prospectus under the caption "Investment Objectives, Policies and Restrictions."
The Fund offers multiple Accounts.
There are three categories of Accounts: Growth-Oriented Accounts, which
include five Accounts which seek primarily capital appreciation through
investments in equity securities (Aggressive Growth, Capital Value, Growth,
International and MidCap) and two Accounts which seek a total investment return
including both capital appreciation and income through investments in equity and
debt securities (Asset Allocation and Balanced); Income-Oriented Accounts, which
include three Accounts which seek primarily a high level of income through
investments in debt securities (Bond, Government Securities and High Yield) and
a Money Market Account, which seeks primarily a high level of income through
investments in short-term debt securities.
In seeking to achieve its investment objective, each Account has adopted
as matters of fundamental policy certain investment restrictions which cannot be
changed without approval by the holders of the lesser of: (i) 67% of the
Account's shares present or represented at a shareholders' meeting at which the
holders of more than 50% of such shares are present or represented by proxy; or
(ii) more than 50% of the outstanding shares of the Account. Similar shareholder
approval is required to change the investment objective of each of the Accounts.
The following discussion provides for each Account a statement of its investment
objective, a description of its investment restrictions that are matters of
fundamental policy and a description of any investment restrictions it may have
adopted that are not matters of fundamental policy and may be changed without
shareholder approval. For purposes of the investment restrictions, all
percentage and rating limitations apply at the time of acquisition of a
security, and any subsequent change in any applicable percentage resulting from
market fluctuations or in a rating by a rating service will not require
elimination of any security from the portfolio. Unless specifically identified
as a matter of fundamental policy, each investment policy discussed in the
Prospectus or the Statement of Additional Information is not fundamental and may
be changed by the Fund's Board of Directors.
GROWTH-ORIENTED ACCOUNTS
Investment Objectives
Aggressive Growth Account (formerly known as Principal Aggressive
Growth Fund, Inc.) seeks to provide long-term capital appreciation
by investing primarily in growth-oriented common stocks of medium
and large capitalization U.S. corporations and, to a limited
extent, foreign corporations.
Asset Allocation Account (formerly known as Principal Asset
Allocation Fund, Inc.) seeks to generate a total investment return
consistent with the preservation of capital.
Balanced Account (formerly known as Principal Balanced Fund, Inc.)
seeks to generate a total investment return consisting of current
income and capital appreciation while assuming reasonable risks in
furtherance of the investment objective.
Capital Value Account (formerly known as Principal Capital
Accumulation Fund, Inc.) seeks to achieve primarily long-term
capital appreciation and secondarily growth of investment income
through the purchase primarily of common stocks, but the Account
may invest in other securities.
Growth Account (formerly known as Principal Growth Fund, Inc.)
seeks growth of capital through the purchase primarily of common
stocks, but the Account may invest in other securities.
International Account (formerly known as Principal World Fund,
Inc.) seeks long- term growth of capital by investing in a
portfolio of equity securities of companies domiciled in any of the
nations of the world.
MidCap Account (formerly known as Principal Emerging Growth Fund,
Inc.) seeks to achieve capital appreciation by investing primarily
in securities of emerging and other growth-oriented companies.
Investment Restrictions
Aggressive Growth Account, Asset Allocation Account, Balanced Account,
Growth Account, International Account and MidCap Account
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Aggressive
Growth Account, Asset Allocation Account, Balanced Account, Growth Account,
International Account and MidCap Account each may not:
(1) Issue any senior securities as defined in the Investment Company
Act of 1940. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in accordance
with restrictions described below do not involve the issuance of a
senior security.
(2) Purchase or retain in its portfolio securities of any issuer if
those officers or directors of the Account or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(3) Invest in commodities or commodity contracts, but it may purchase
and sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which
are secured by real estate and securities of issuers which invest
or deal in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Account's total assets
at the time of the borrowing. The Balanced Account may borrow only
from banks.
(6) 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.
(7) 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)
except that this limitation shall apply only with respect to 75% of
the total assets of the Aggressive Growth Account, Asset Allocation
Account, Growth Account and International Account; or purchase more
than 10% of the outstanding voting securities of any one issuer.
(8) Act as an underwriter of securities, except to the extent the
Account may be deemed to be an underwriter in connection with the
sale of securities held in its portfolio.
(9) Concentrate its investments in any particular industry or
industries, except that the Account may invest not more than 25% of
the value of its total assets in a single industry.
(10) 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) or purchase
any securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
deposit or payment of margin in connection with transactions in
options and financial futures contracts is not considered the
purchase of securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Account may invest in securities
of issuers which invest in or sponsor such programs.
Each of these Accounts has also adopted the following restrictions which
are not fundamental policies and may be changed without shareholder approval. It
is contrary to each Account's present policy to:
(1) Invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market, including all covered spread options and the assets used as
cover for any options written in the Over-the-Counter market are
included as part of this 10% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2%
may be invested in warrants that are not listed on the New York or
American Stock Exchange. The 2% limitation for the International
Account does not apply to warrants listed on the Toronto Stock
Exchange or the Chicago Board Options Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Account's investments in
all such issuers to exceed 5% of the value of its total assets.
(4) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. 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.
(5) Invest in companies for the purpose of exercising control or
management.
(6) Invest more than 10% (25% for the Aggressive Growth Account) of its
total assets in securities of foreign issuers. This restriction
does not pertain to the International Account or the Asset
Allocation Account.
(7) 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.
(8) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(9) Invest in arbitrage transactions.
(10) Invest in real estate limited partnership interests.
The Balanced Account and MidCap Account have also adopted the following
restrictions which are not fundamental policies and may be changed without
shareholder approval. It is contrary to each such Account's present policy to:
(1) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization
or by purchase in the open market of securities of closed-end
companies where no underwriter or dealer's commission or profit,
other than a customary broker's commission, is involved, and if
immediately thereafter not more than 10% of the value of the
Account's total assets would be invested in such securities.
The Aggressive Growth, Asset Allocation, Growth and International
Accounts have also adopted the following restriction which is not a fundamental
policy and may be changed without shareholder approval. It is contrary to each
such Account's present policy to:
(1) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its assets
in securities of other investment companies, invest not more than
5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation or plan of reorganization, and the Account
may purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
Capital Value Account
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Capital Value
Account may not:
(1) Concentrate its investments in any one industry. No more than 25%
of the value of its total assets will be invested in any one
industry.
(2) Purchase the securities of any issuer if the purchase will cause
more than 5% of the value of its total assets to be invested in the
securities of any one issuer (except U. S. Government securities).
(3) Purchase the securities of any issuer if the purchase will cause
more than 10% of the voting securities, or any other class of
securities of the issuer, to be held by the Account.
(4) Underwrite securities of other issuers, except that the Account may
acquire portfolio securities under circumstances where if sold the
Account might be deemed an underwriter for purposes of the
Securities Act of 1933.
(5) Purchase securities of any company with a record of less than three
years' continuous operation (including that of predecessors) if the
purchase would cause the value of the Account's aggregate
investments in all such companies to exceed 5% of the Account's
total assets.
(6) Engage in the purchase and sale of illiquid interests in real
estate. For this purpose, readily marketable interests in real
estate investment trusts are not interests in real estate.
(7) Engage in the purchase and sale of commodities or commodity
contracts.
(8) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or the Manager owning
beneficially more than one-half of one percent (0.5%) of the
securities of the issuer together own beneficially more than 5% of
such securities.
(9) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
Account will not issue or acquire put and call options.
(10) Invest in companies for the purpose of exercising control or
management.
(11) Invest more than 5% of its assets at the time of purchase in rights
and warrants (other than those that have been acquired in units or
attached to other securities).
(12) Invest more than 20% of its total assets in securities of foreign
issuers.
In addition:
(13) 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.
(14) The Account does not propose to borrow money except for temporary
or emergency purposes from banks in an amount not to exceed the
lesser of (I) 5% of the value of the Account's assets, less
liabilities other than such borrowings, or (ii) 10% of the
Account's assets taken at cost at the time such borrowing is made.
The Account may not pledge, mortgage, or hypothecate its assets (at
value) to an extent greater than 15% of the gross assets taken at
cost.
(15) It is contrary to the Account's present policy to purchase warrants
in excess of 5% of its total assets of which 2% may be invested in
warrants that are not listed on the New York or American Stock
Exchange.
The Account has also adopted the following restrictions which are not
fundamental policies and may be changed without shareholder approval. It is
contrary to the Account's present policy to:
(1) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its assets
in securities of other investment companies, invest not more than
5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation, or plan of reorganization, and the Account
may purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
(2) Invest more than 15% of its total assets in securities not readily
marketable and in repurchase agreement maturing in more than seven
days.
INCOME-ORIENTED ACCOUNTS
Investment Objectives
Bond Account seeks to provide as high a level of income as is
consistent with preservation of capital and prudent investment
risk.
Government Securities Account seeks a high level of current income,
liquidity and safety of principal by purchasing obligations issued
or guaranteed by the United States Government or its agencies, with
emphasis on Government National Mortgage Association Certificates
("GNMA Certificates"). The guarantee by the United States
Government extends only to principal and interest; Account shares
are not guaranteed by the United States Government. There are
certain risks unique to GNMA Certificates.
High Yield Account seeks high current income primarily by
purchasing high yielding, lower or non-rated fixed income
securities which are believed to not involve undue risk to income
or principal. Capital growth is a secondary objective when
consistent with the objective of high current income.
Investment Restrictions
Bond Account and High Yield Account
Each of the following numbered restrictions is a matter of
fundamental policy and may not be changed without shareholder approval.
The Bond Account and High Yield Account each may not:
(1) Issue any senior securities as defined in the Investment Company
Act of 1940. Purchasing and selling securities and futures
contracts and options thereon and borrowing money in accordance
with restrictions described below do not involve the issuance of a
senior security.
(2) Purchase or retain in its portfolio securities of any issuer if
those officers or directors of the Account or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(3) Invest in commodities or commodity contracts, but it may purchase
and sell financial futures contracts and options on such contracts.
(4) Invest in real estate, although it may invest in securities which
are secured by real estate and securities of issuers which invest
or deal in real estate.
(5) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Account's total assets
at the time of the borrowing. The Bond Account and High Yield
Account may borrow only from banks.
(6) 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.
(7) 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.
(8) Act as an underwriter of securities, except to the extent the
Account may be deemed to be an underwriter in connection with the
sale of securities held in its portfolio.
(9) Concentrate its investments in any particular industry or
industries, except that the Bond Account and High Yield Account
each may invest not more than 25% of the value of its total assets
in a single industry.
(10) 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) or purchase
any securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
deposit or payment of margin in connection with transactions in
options and financial futures contracts is not considered the
purchase of securities on margin.
(11) Invest in interests in oil, gas or other mineral exploration or
development programs, although the Account may invest in securities
of issuers which invest in or sponsor such programs.
Each of these Accounts has also adopted the following restrictions which
are not fundamental policies and may be changed without shareholder approval. It
is contrary to each Account's present policy to:
(1) Invest more than 10% of its total assets in securities not readily
marketable and in repurchase agreements maturing in more than seven
days. The value of any options purchased in the Over-the-Counter
market, including all covered spread options and the assets used as
cover for any options written in the Over-the-Counter market are
included as part of this 10% limitation.
(2) Purchase warrants in excess of 5% of its total assets, of which 2%
may be invested in warrants that are not listed on the New York or
American Stock Exchange.
(3) Purchase securities of any issuer having less than three years'
continuous operation (including operations of any predecessors) if
such purchase would cause the value of the Account's investments in
all such issuers to exceed 5% of the value of its total assets.
(4) Purchase securities of other investment companies except in
connection with a merger, consolidation, or plan of reorganization
or by purchase in the open market of securities of closed-end
companies where no underwriter or dealer's commission or profit,
other than a customary broker's commission, is involved, and if
immediately thereafter not more than 10% of the value of the
Account's total assets would be invested in such securities.
(5) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. 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.
(6) Invest in companies for the purpose of exercising control or
management.
(7) Invest more than 20% of its total assets in securities of foreign
issuers.
(8) 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.
(9) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(10) Invest in arbitrage transactions.
(11) Invest in real estate limited partnership interests.
Government Securities Account
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The Government
Securities Account may not:
(1) Issue any senior securities as defined in the Act except insofar as
the Account may be deemed to have issued a senior security by
reason of (a) purchasing any securities on a standby, when-issued
or delayed delivery basis; or (b) borrowing money in accordance
with restrictions described below.
(2) Purchase any securities other than obligations issued or guaranteed
by the U.S. Government or its agencies or instrumentalities, except
that the Account may maintain reasonable amounts in cash or
commercial paper or purchase short-term debt securities not issued
or guaranteed by the U.S. Government or its agencies or
instrumentalities for daily cash management purposes or pending
selection of particular long-term investments.
(3) Act as an underwriter of securities, except to the extent the
Account may be deemed to be an underwriter in connection with the
sale of GNMA certificates held in its portfolio.
(4) Engage in the purchase and sale of interests in real estate,
including interests in real estate investment trusts (although it
will invest in securities secured by real estate or interests
therein, such as mortgage-backed securities) or invest in
commodities or commodity contracts, oil and gas interests, or
mineral exploration or development programs.
(5) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Fund or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(6) Sell securities short or purchase any securities on margin, except
it may obtain such short-term credits as are necessary for the
clearance of transactions. The deposit or payment of margin in
connection with transactions in options and financial futures
contracts is not considered the purchase of securities on margin.
(7) Invest in companies for the purpose of exercising control or
management.
(8) Make loans, except that the Account may purchase or hold debt
obligations in accordance with the investment restrictions set
forth in paragraph (2) and may enter into repurchase agreements for
such securities, and may 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, which is equal at all times to 100%
of the value of the securities loaned.
(9) Borrow money, except for temporary or emergency purposes, in an
amount not to exceed 5% of the value of the Account's total assets
at the time of the borrowing.
(10) Enter into repurchase agreements maturing in more than seven days
if, as a result thereof, more than 10% of the value of the
Account's total assets would be invested in such repurchase
agreements and other assets without readily available market
quotations.
(11) 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.
(12) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
The Government Securities Account has also adopted the following
restrictions which are not a fundamental policy and may be changed without
shareholder approval. It is contrary to the Government Securities Account's
present policy to:
(1) Pledge, mortgage or hypothecate its assets, except to secure
permitted borrowings. 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 future contracts are not deemed to be
pledges or other encumbrances.
(2) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its assets
in securities of other investment companies, invest not more than
5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation, or plan of reorganization, and the Account
may purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
MONEY MARKET ACCOUNT
Investment Objective
Money Market Account seeks as high a level of income available from
short-term securities as is considered consistent with preservation
of principal and maintenance of liquidity by investing in a
portfolio of money market instruments.
Investment Restrictions
Money Market Account
Each of the following numbered restrictions is a matter of
fundamental policy and may not be changed without shareholder approval.
The Money Market Account may not:
(1) Concentrate its investments in any one industry. No more than 25%
of the value of its total assets will be invested in securities of
issuers having their principal activities in any one industry,
other than securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities, or obligations of domestic
branches of U.S. banks and savings institutions. (See "Bank
Obligations").
(2) Purchase the securities of any issuer if the purchase will cause
more than 25% of the value of its total assets to be invested in
the securities of any one issuer (except securities issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities).
(3) Purchase the securities of any issuer if the purchase will cause
more than 10% of the outstanding voting securities of the issuer to
be held by the Account (other than securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities).
(4) Invest a greater percentage of its total assets in securities not
readily marketable than is allowed by federal securities rules or
interpretations.
(5) Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an
underwriter under the federal securities laws.
(6) Purchase securities of any company with a record of less than 3
years continuous operation (including that of predecessors) if the
purchase would cause the value of the Account's aggregate
investments in all such companies to exceed 5% of the value of the
Account's total assets.
(7) Engage in the purchase and sale of illiquid interests in real
estate, including interests in real estate investment trusts
(although it may invest in securities secured by real estate or
interests therein) or invest in commodities or commodity contracts,
oil and gas interests, or mineral exploration or development
programs.
(8) Purchase or retain in its portfolio securities of any issuer if
those officers and directors of the Account or the Manager owning
beneficially more than one-half of 1% (0.5%) of the securities of
the issuer together own beneficially more than 5% of such
securities.
(9) Purchase securities on margin, except it may obtain such short-term
credits as are necessary for the clearance of transactions. The
Account will not issue or acquire put and call options, straddles
or spreads or any combination thereof.
(10) Invest in companies for the purpose of exercising control or
management.
(11) 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 (see "Account Investments").
(12) Borrow money, except from banks for temporary or emergency
purposes, including the meeting of redemption requests which might
otherwise require the untimely disposition of securities, in an
amount not to exceed the lesser of (1) 5% of the value of the
Account's assets, or (ii) 10% of the value of the Account's net
assets taken at cost at the time such borrowing is made. The
Account will not issue senior securities except in connection with
such borrowings. The Account may not pledge, mortgage, or
hypothecate its assets (at value) to an extent greater than 10% of
the net assets.
(13) Invest in uncertificated time deposits maturing in more than seven
days; uncertificated time deposits maturing from two business days
through seven calendar days may not exceed 10% of the value of the
Account's total assets.
(14) Enter into repurchase agreements maturing in more than seven days
if, as a result thereof, more than 10% of the value of the
Account's total assets would be invested in such repurchase
agreements and other assets (excluding time deposits) without
readily available market quotations.
The Money Market Account has also adopted the following restriction which
is not a fundamental policy and maybe changed without shareholder approval. It
is contrary to the Money Market Account's present policy to:
(1) Invest its assets in the securities of any investment company
except that the Account may invest not more than 10% of its assets
in securities of other investment companies, invest not more than
5% of its total assets in the securities of any one investment
company, or acquire not more than 3% of the outstanding voting
securities of any one investment company except in connection with
a merger, consolidation, or plan of reorganization, and the Account
may purchase securities of closed-end companies in the open market
where no underwriter or dealer's commission or profit, other than a
customary broker's commission, is involved.
ACCOUNT INVESTMENTS
The following information further supplements the discussion of the
Account's investment objectives and policies in the Prospectus under the caption
"INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS."
Selections of equity securities for the Accounts, except the Aggressive
Growth and Asset Allocation Accounts, are made based upon an approach described
broadly as that of fundamental analysis. Three basic steps are involved in this
analysis. First is the continuing study of basic economic factors in an effort
to conclude what the future general economic climate is likely to be over the
next one to two years. Second, given some conviction as to the likely economic
climate, the Account attempts to identify the prospects for the major
industrial, commercial and financial segments of the economy, by looking at such
factors as demand for products, capacity to produce, operating costs, pricing
structure, marketing techniques, adequacy of raw materials and components,
domestic and foreign competition, and research productivity, to ascertain
prospects for each industry for the near and intermediate term. Finally,
determinations are made regarding earnings prospects for individual companies
within each industry by considering the same types of factors described above.
These earnings prospects are then evaluated in relation to the current price of
the securities of each company.
Although the Accounts may pursue the investment practices described under
the captions Restricted Securities, Foreign Securities, Spread Transactions,
Options on Securities and Securities Indices, and Futures Contracts and Options
on Futures Contracts, Currency Contracts, Repurchase Agreements, Lending of
Portfolio Securities and When Issued and Delay of Delivery Securities, none of
the Accounts either committed during the last fiscal year or currently intends
to commit during the present fiscal year more than 5% of its net assets to any
of the practices, with the following exceptions. Investments in foreign
securities by the Aggressive Growth, Asset Allocation and International Accounts
are expected to exceed 5% of each Account's net assets.
Restricted Securities
Each of the following Accounts has adopted investment restrictions as
non-fundamental policies that limit its investments in restricted securities and
other illiquid securities to 10% of its assets: Aggressive Growth, Asset
Allocation, Balanced, Bond, Capital Value, Growth, High Yield, International and
MidCap Accounts.
Generally, restricted securities are not readily marketable because they
are subject to legal or contractual restrictions upon resale. They may be sold
only in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 or in a transaction which is exempt from
the registration requirements of that act. When registration is required, an
Account may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Account may by permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Account might obtain a less favorable price than prevailed when
it decided to sell. Restricted securities and other securities not readily
marketable will be priced at fair value as determined in good faith by or under
the direction of the Board of Directors.
Foreign Securities
Each of the following Accounts has adopted investment restrictions as
non-fundamental policies that limit its investments in foreign securities to the
indicated percentage of its assets: Asset Allocation and International Accounts
- - 100% ; Aggressive Growth - 25%; Bond, Capital Value, High Yield 20%; Balanced,
Growth and MidCap - 10%. Debt securities issued in the United States pursuant to
a registration statement filed with the Securities and Exchange Commission are
not considered "foreign securities" for purposes of this investment limitation.
Investment in foreign securities presents certain risks, including those
resulting from fluctuations in currency exchange rates, revaluation of
currencies, the imposition of foreign taxes, future political and economic
developments including war, expropriations, nationalization, the possible
imposition of currency exchange controls and other foreign governmental laws or
restrictions, reduced availability of public information concerning issuers, and
the fact that foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements comparable to those applicable to domestic issuers. Moreover,
securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. In addition, transactions in
foreign securities may be subject to higher costs, and the time for settlement
of transactions in foreign securities may be longer than the settlement period
for domestic issuers. Each Account's investment in foreign securities may also
result in higher custodial costs and the costs associated with currency
conversions.
Spread Transactions, Options on Securities and Securities Indices, and Futures
Contracts and Options on Futures Contracts
The Aggressive Growth, Asset Allocation, Balanced, Bond, Government
Securities, Growth, High Yield, International and MidCap Accounts may each
engage in the practices described under this heading. None of the Accounts will
invest more than 5% of its assets in the purchase of call and put options on
individual securities, securities indices and futures contracts. In the
following discussion, the terms "the Account," "each Account" or "the Accounts"
refer to each of these Accounts.
Spread Transactions
Each Account may purchase from securities dealers covered spread options.
Such covered spread options are not presently exchange listed or traded. The
purchase of a spread option gives the Account the right to put, or sell, a
security that it owns at a fixed dollar spread or fixed yield spread in
relationship to another security that the Account does not own, but which is
used as a benchmark. The risk to the Account in purchasing covered spread
options is the cost of the premium paid for the spread option and any
transaction costs. In addition, there is no assurance that closing transactions
will be available. The purchase of spread options can be used to protect each
Account against adverse changes in prevailing credit quality spreads, i.e., the
yield spread between high quality and lower quality securities. The security
covering the spread option will be maintained in a segregated account by each
Account's custodian. The Accounts do not consider a security covered by a spread
option to be "pledged" as that term is used in the Accounts' policy limiting the
pledging or mortgaging of assets.
Options on Securities and Securities Indices
Each Account may write (sell) and purchase call and put options on
securities in which it may invest and on securities indices based on securities
in which the Account may invest. The Accounts may write call and put options to
generate additional revenue, and may write and purchase call and put options in
seeking to hedge against a decline in the value of securities owned or an
increase in the price of securities which the Account plans to purchase.
Writing Covered Call and Put Options. When an Account writes a call
option, it gives the purchaser of the option, in return for the premium it
receives, the right to buy from the Account the underlying security at a
specified price at any time before the option expires. When an Account writes a
put option, it gives the purchaser of the option, in return for the premium it
receives, the right to sell to the Account the underlying security at a
specified price at any time before the option expires.
The premium received by an Account, when it writes a put or call option,
reflects, among other factors, the current market price of the underlying
security, the relationship of the exercise price to the market price, the time
period until the expiration of the option and interest rates. The premium will
generate additional income for the Account if the option expires unexercised or
is closed out at a profit. By writing a call, an Account limits its opportunity
to profit from any increase in the market value of the underlying security above
the exercise price of the option, but it retains the risk of loss if the price
of the security should decline. By writing a put, an Account assumes the risk
that it may have to purchase the underlying security at a price that may be
higher than its market value at time of exercise.
The Accounts write only covered options and will comply with applicable
regulatory and exchange cover requirements. The Accounts usually will own the
underlying security covered by any outstanding call option that it has written.
With respect to an outstanding put option that it has written, each Account will
deposit and maintain with its custodian cash, U.S. Government securities or
other liquid securities with a value at least equal to the exercise price of the
option.
Once an Account has written an option, it may terminate its obligation,
before the option is exercised, by effecting a closing transaction, which is
accomplished by the Account's purchasing an option of the same series as the
option previously written. The Accounts will have a gain or loss depending on
whether the premium received when the option was written exceeds the closing
purchase price plus related transaction costs.
Purchasing Call and Put Options. When an Account purchases a call
option, it receives, in return for the premium it pays, the right to buy from
the writer of the option the underlying security at a specified price at any
time before the option expires. The Account may purchase call options in
anticipation of an increase in the market value of securities that it intends
ultimately to buy. During the life of the call option, the Account would be able
to buy the underlying security at the exercise price regardless of any increase
in the market price of the underlying security. In order for a call option to
result in a gain, the market price of the underlying security must rise to a
level that exceeds the sum of the exercise price, the premium paid and
transaction costs.
When an Account purchases a put option, it receives, in return for the
premium it pays, the right to sell to the writer of the option the underlying
security at a specified price at any time before the option expires. The Account
may purchase put options in anticipation of a decline in the market value of the
underlying security. During the life of the put option, the Account would be
able to sell the underlying security at the exercise price regardless of any
decline in the market price of the underlying security. In order for a put
option to result in a gain, the market price of the underlying security must
decline, during the option period, below the exercise price sufficiently to
cover the premium and transaction costs.
Once an Account has purchased an option, it may close out its position by
selling an option of the same series as the option previously purchased. The
Account will have a gain or loss depending on whether the closing sale price
exceeds the initial purchase price plus related transaction costs.
Options on Securities Indices. Each Account may purchase and sell
put and call options on any securities index based on securities in which the
Account may invest. Securities index options are designed to reflect price
fluctuations in a group of securities or segment of the securities market rather
than price fluctuations in a single security. Options on securities indices are
similar to options on securities, except that the exercise of securities index
options requires cash payments and does not involve the actual purchase or sale
of securities. The Accounts would engage in transactions in put and call options
on securities indices for the same purposes as they would engage in transactions
in options on securities. When an Account writes call options on securities
indices, it will hold in its portfolio underlying securities which, in the
judgment of the Manager or the Sub-Advisor, correlate closely with the
securities index and which have a value at least equal to the aggregate amount
of the securities index options.
Risks Associated with Options Transactions. An options position may
be closed out only on an exchange which provides a secondary market for an
option of the same series. Although the Accounts will generally purchase or
write only those options for which there appears to be an active secondary
market, there is no assurance that a liquid secondary market on an exchange will
exist for any particular option, or at any particular time. For some options, no
secondary market on an exchange or elsewhere may exist. If an Account is unable
to effect closing sale transactions in options it has purchased, the Account
would have to exercise its options in order to realize any profit and may incur
transaction costs upon the purchase or sale of underlying securities pursuant
thereto. If an Account is unable to effect a closing purchase transaction for a
covered option that it has written, it will not be able to sell the underlying
securities, or dispose of the assets held in a segregated account, until the
option expires or is exercised. An Account's ability to terminate option
positions established in the over-the-counter market may be more limited than
for exchange-traded options and may also involve the risk 35 that broker-dealers
participating in such transactions might fail to meet their obligations.
Futures Contracts and Options on Futures
Each Account may purchase and sell financial futures contracts and
options on those contracts. Financial futures contracts are commodities
contracts based on financial instruments such as U.S. Treasury bonds or bills or
on securities indices such as the S&P 500 Index. Futures contracts, options on
futures contracts and the commodity exchanges on which they are traded are
regulated by the Commodity Futures Trading Commission ("CFTC"). Through the
purchase and sale of futures contracts and related options, an Account may seek
to hedge against a decline in securities owned by the Account or an increase in
the price of securities which the Account plans to purchase.
Futures Contracts. When an Account sells a futures contract based
on a financial instrument, the Account becomes obligated to deliver that kind of
instrument at a specified future time for a specified price. When an Account
purchases that kind of contract, it becomes obligated to take delivery of the
instrument at a specified time and to pay the specified price. In most
instances, these contracts are closed out by entering into an offsetting
transaction before the settlement date, thereby canceling the obligation to make
or take delivery of specific securities. The Account realizes a gain or loss
depending on whether the price of an offsetting purchase plus transaction costs
are less or more than the price of the initial sale or on whether the price of
an offsetting sale is more or less than the price of the initial purchase plus
transaction costs. Although the Account will usually liquidate futures contracts
on financial instruments in this manner, they may instead make or take delivery
of the underlying securities whenever it appears economically advantageous to do
so.
A futures contract based on a securities index provides for the purchase
or sale of a group of securities at a specified future time for a specified
price. These contracts do not require actual delivery of securities, but result
in a cash settlement based upon the difference in value of the index between the
time the contract was entered into and the time it is liquidated, which may be
at its expiration or earlier if it is closed out by entering into an offsetting
transaction.
When a futures contract is purchased or sold a brokerage commission is
paid, but unlike the purchase or sale of a security or option, no price or
premium is paid or received. Instead, an amount of cash or U.S. Government
securities, which varies, but is generally about 5% of the contract amount, is
deposited by the Account with its custodian for the benefit of the futures
commission merchant through which the Account engages in the transaction. This
amount is known as "initial margin." It does not involve the borrowing of funds
by the Account to finance the transaction, but instead represents a "good faith"
deposit assuring the performance of both the purchaser and the seller under the
futures contract. It is returned to the Account upon termination of the futures
contract, if all the Account's contractual obligations have been satisfied.
Subsequent payments to and from the broker, known as "variation margin,"
are required to be made on a daily basis as the price of the futures contract
fluctuates, making the long or short positions in the futures contract more or
less valuable, a process known as "marking to market." If the position is closed
out by taking an opposite position prior to the settlement date of the futures
contract, a final determination of variation margin is made, additional cash is
required to be paid to or released by the broker, and the Account realizes a
loss or gain.
In using futures contracts, the Accounts will seek to establish more
certainly than would otherwise be possible the effective price of or rate of
return on portfolio securities or securities that the Account proposes to
acquire. An Account, for example, may sell futures contracts in anticipation of
a rise in interest rates which would cause a decline in the value of its debt
investments. When this kind of hedging is successful, the futures contracts
should increase in value when the Account's debt securities decline in value and
thereby keep the Account's net asset value from declining as much as it
otherwise would. An Account may also sell futures contracts on securities
indices in anticipation of or during a stock market decline in an endeavor to
offset a decrease in the market value of its equity investments. When an Account
is not fully invested and anticipates an increase in the cost of securities it
intends to purchase, it may purchase financial futures contracts. When increases
in the prices of equities are expected, an Account may purchase futures
contracts on securities indices in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of the equity securities it
intends to purchase.
Options on Futures. The Accounts may also purchase and write call
and put options on futures contracts. A call option on a futures contract gives
the purchaser the right, in return for the premium paid, to purchase a futures
contract (assume a long position) at a specified exercise price at any time
before the option expires. A put option gives the purchaser the right, in return
for the premium paid, to sell a futures contract (assume a short position), for
a specified exercise price, at any time before the option expires.
Upon the exercise of a call, the writer of the option is obligated to
sell the futures contract (to deliver a long position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a put, the
writer of the option is obligated to purchase the futures contract (deliver a
short position to the option holder) at the option exercise price, which will
presumably be higher than the current market price of the contract in the
futures market. However, as with the trading of futures, most options are closed
out prior to their expiration by the purchase or sale of an offsetting option at
a market price that will reflect an increase or a decrease from the premium
originally paid.
Options on futures can be used to hedge substantially the same risks as
might be addressed by the direct purchase or sale of the underlying futures
contracts. For example, if an Account anticipated a rise in interest rates and a
decline in the market value of the debt securities in its portfolio, it might
purchase put options or write call options on futures contracts instead of
selling futures contracts.
If an Account purchases an option on a futures contract, it may obtain
benefits similar to those that would result if it held the futures position
itself. But in contrast to a futures transaction, the purchase of an option
involves the payment of a premium in addition to transaction costs. In the event
of an adverse market movement, however, the Account will not be subject to a
risk of loss on the option transaction beyond the price of the premium it paid
plus its transaction costs.
When an Account writes an option on a futures contract, the premium paid
by the purchaser is deposited with the Account's custodian, and the Account must
maintain with its custodian all or a portion of the initial margin requirement
on the underlying futures contract. The Account assumes a risk of adverse
movement in the price of the underlying futures contract comparable to that
involved in holding a futures position. Subsequent payments to and from the
broker, similar to variation margin payments, are made as the premium and the
initial margin requirement are marked to market daily. The premium may partially
offset an unfavorable change in the value of portfolio securities, if the option
is not exercised, or it may reduce the amount of any loss incurred by the
Account if the option is exercised.
Risks Associated with Futures Transactions. There are a number of
risks associated with transactions in futures contracts and related options. An
Account's successful use of futures contracts is subject to the Manager's and
the Sub-Advisor's ability to predict correctly the factors affecting the market
values of the Account's portfolio securities. For example, if an Account was
hedged against the possibility of an increase in interest rates which would
adversely affect debt securities held by the Account and the prices of those
debt securities instead increased, the Account would lose part or all of the
benefit of the increased value of its securities which it hedged because it
would have offsetting losses in its futures positions. Other risks include
imperfect correlation between price movements in the financial instrument or
securities index underlying the futures contract, on the one hand, and the price
movements of either the futures contract itself or the securities held by the
Account, on the other hand. If the prices do not move in the same direction or
to the same extent, the transaction may result in trading losses.
Prior to exercise or expiration, a position in futures may be terminated
only by entering into a closing purchase or sale transaction. This requires a
secondary market on the relevant contract market. The Account will enter into a
futures contract or related option only if there appears to be a liquid
secondary market therefor. There can be no assurance, however, that such a
liquid secondary market will exist for any particular futures contract or
related option at any specific time. Thus, it may not be possible to close out a
futures position once it has been established. Under such circumstances, the
Account would continue to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such situations, if the
Account has insufficient cash, it may be required to sell portfolio securities
to meet daily variation margin requirements at a time when it may be
disadvantageous to do so. In addition, the Account may be required to perform
under the terms of the futures contracts it holds. The inability to close out
futures positions also could have an adverse impact on the Account's ability
effectively to hedge its portfolio.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. This daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
Limitations on the Use of Futures and Options on Futures. Each
Account intends to come within an exclusion from the definition of "commodity
pool operator" provided by CFTC regulations by complying with certain
limitations on the use of futures and related options prescribed by those
regulations.
None of the Accounts will purchase or sell futures contracts or options
thereon if immediately thereafter the aggregate initial margin and premiums
exceed 5% of the fair market value of the Account's assets, after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into (except that in the case of an option that is in-the-money at the
time of purchase, the in-the-money amount generally may be excluded in computing
the 5%).
The Accounts will enter into futures contracts and related options
transactions only for bona fide hedging purposes as permitted by the CFTC and
for other appropriate risk management purposes, if any, which the CFTC may deem
appropriate for mutual funds excluded from the regulations governing commodity
pool operators. The Accounts are not permitted to engage in speculative futures
trading. Each Account will determine that the price fluctuations in the futures
contracts and options on futures used for hedging or risk management purposes
are substantially related to price fluctuations in securities held by the
Account or which it expects to purchase. In pursuing traditional hedging
activities, each Account will sell futures contracts or acquire puts to protect
against a decline in the price of securities that the Account owns, and each
Account will purchase futures contracts or calls on futures contracts to protect
the Account against an increase in the price of securities the Account intends
to purchase before it is in a position to do so.
When an Account purchases a futures contract, or purchases a call option
on a futures contract, it will maintain an amount of cash, cash equivalents or
short-term high grade fixed income securities in a segregated account with the
Account's custodian, so that the amount so segregated plus the amount of initial
margin held for the account of its broker equals the market value of the futures
contract.
The Accounts will not maintain open short positions in futures contracts,
call options written on futures contracts, and call options written on
securities indices if, in the aggregate, the value of the open positions (marked
to market) exceeds the current market value of that portion of its securities
portfolio being hedged by those futures and options plus or minus the unrealized
gain or loss on those open positions, adjusted for the historical volatility
relationship between that portion of the portfolio and the contracts (i.e., the
Beta volatility factor). To the extent an Account has written call options on
specific securities in that portion of its portfolio, the value of those
securities will be deducted from the current market value of that portion of the
securities portfolio. If this limitation should be exceeded at any time, the
Account will take prompt action to close out the appropriate number of open
short positions to bring its open futures and options positions within this
limitation.
Currency Contracts
The Aggressive Growth, Asset Allocation and International Accounts each
may engage in currency transactions with securities dealers, financial
institutions or other parties that are deemed creditworthy by the Account's
Sub-Advisor to hedge the value of portfolio securities denominated in particular
currencies against fluctuations in relative value. Currency transactions include
forward currency contracts, exchange-listed currency futures contracts and
options thereon and exchange-listed and over-the-counter options on currencies.
A forward currency contract involves a privately negotiated obligation to
purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract.
The Accounts will engage in currency transactions only for hedging and
other non-speculative purposes, including transaction hedging and position
hedging. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Account, which will generally
arise in connection with the purchase or sale of the Account's portfolio
securities or the receipt of income from them. Position hedging is entering into
a currency transaction with respect to portfolio securities positions
denominated or generally quoted in that currency. The Accounts will not enter
into a transaction to hedge currency exposure to an extent greater, after
netting all transactions intended wholly or partially to offset other
transactions, than the aggregate market value (at the time of entering into the
transaction) of the securities held by the Account that are denominated or
generally quoted in or currently convertible into the currency, other than with
respect to proxy hedging as described below.
The Accounts may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or decline
in value relative to other currencies to which the Account has or in which the
Account expects to have exposure. To reduce the effect of currency fluctuations
on the value of existing or anticipated holdings of its securities, the Account
may also engage in proxy hedging. Proxy hedging is often used when the currency
to which an Account's holding is exposed is difficult to hedge generally or
difficult to hedge against the dollar. Proxy hedging entails entering into a
forward contract to sell a currency, the changes in the value of which are
generally considered to be linked to a currency or currencies in which some or
all of an Account's securities are or are expected to be denominated, and to buy
dollars. The amount of the contract would not exceed the market value of the
Account's securities denominated in linked currencies.
Except when an Account enters into a forward contract in connection with
the purchase or sale of a security denominated in a foreign currency or for
other non-speculative purposes, which requires no segregation, a currency
contract that obligates the Account to buy or sell a foreign currency will
generally require the Account to hold an amount of that currency or liquid
securities denominated in that currency equal to the Account's obligations or to
segregate liquid high grade debt obligations equal to the amount of the
Account's obligations.
Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Currency transactions can result in
losses to an Account if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, the risk exists that
the perceived linkage between various currencies may not be present or may not
be present during the particular time that an Account is engaging in proxy
hedging. Currency transactions are also subject to risks different from those of
other portfolio transactions. Because currency control is of great importance to
the issuing governments and influences economic planning and policy, purchases
and sale of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to an Account if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs. Currency exchange
rates may also fluctuate based on factors extrinsic to a country's economy.
Buyers and sellers of currency futures contracts are subject to the same risks
that apply to the use of futures contracts generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures contracts
is relative new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available.
Repurchase Agreements
All the Accounts may invest in repurchase agreements. None of the
Accounts will enter into repurchase agreements that do not mature within seven
days if any such investment, together with other illiquid securities held by the
Account, would amount to more than 10% of its assets. Repurchase agreements will
typically involve the acquisition by the Account of debt securities from a
selling financial institution such as a bank, savings and loan association or
broker-dealer. A repurchase agreement provides that the Account will sell back
to the seller and that the seller will repurchase the underlying securities at a
specified price and at a fixed time in the future. Repurchase agreements may be
viewed as loans by an Account collateralized by the underlying securities
("collateral"). This arrangement results in a fixed rate of return that is not
subject to market fluctuation during the Account's holding period. Although
repurchase agreements involve certain risks not associated with direct
investments in debt securities, each of the Accounts follows procedures
established by the Board of Directors which are designed to minimize such risks.
These procedures include entering into repurchase agreements only with large,
well-capitalized and well-established financial institutions, which have been
approved by the Board of Directors and which the Manager believes present
minimum credit risks. In addition, the value of the collateral underlying the
repurchase agreement will always be at least equal to the repurchase price,
including accrued interest. In the event of a default or bankruptcy by a selling
financial institution, the affected Account bears a risk of loss. In seeking to
liquidate the collateral, an Account may be delayed in or prevented from
exercising its rights and may incur certain costs. Further to the extent that
proceeds from any sale upon a default of the obligation to repurchase were less
than the repurchase price, the Account could suffer a loss.
Lending of Portfolio Securities
All the Accounts may lend their portfolio securities. None of the
Accounts intends to lend its portfolio securities if as a result the aggregate
of such loans made by the Account would exceed 30% of its total assets.
Portfolio securities may be loaned 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 will pay the Account any income accruing
thereon, and the Account may invest any cash collateral, thereby earning
additional income, or 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
inures to the Account and its shareholders. An Account may pay 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 government
securities pledged as collateral to the borrower or placing broker. An Account
does not vote securities that have been loaned, but it will call a loan of
securities in anticipation of an important vote.
When-Issued and Delayed Delivery Securities
Each of the Accounts may from time to time purchase securities on a
when-issued basis and may purchase or sell securities on a delayed delivery
basis. The price of such a transaction is fixed at the time of the commitment,
but delivery and payment take place on a later settlement date, which may be a
month or more after the date of the commitment. No interest accrues to the
purchaser during this period, and the securities are subject to market
fluctuation, which involves the risk for the purchaser that yields available in
the market at the time of delivery may be higher than those obtained in the
transaction. Each Account will only purchase securities on a when-issued or
delayed delivery basis with the intention of acquiring the securities, but an
Account may sell the securities before the settlement date, if such action is
deemed advisable. At the time an Account makes the commitment to purchase
securities on a when-issued or delayed delivery basis, it will record the
transaction and thereafter reflect the value, each day, of the securities in
determining its net asset value. Each Account will also establish a segregated
account with its custodian bank in which it will maintain cash or cash
equivalents, United States Government securities and other high grade debt
obligations equal in value to the Account's commitments for such when-issued or
delayed delivery securities. The availability of liquid assets for this purpose
and the effect of asset segregation on an Account's ability to meet its current
obligations, to honor requests for redemption and to have its investment
portfolio managed properly will limit the extent to which the Account may engage
in forward commitment agreements. Except as may be imposed by these factors,
there is no limit on the percent of an Account's total assets that may be
committed to transactions in such agreements.
Money Market Instruments
The Money Market Account will invest all of its available assets in money
market instruments maturing in 397 days or less. The types of instruments which
this Account may purchase are described below.
(1) U.S. Government Securities -- Securities issued or guaranteed by
the U.S. Government, including treasury bills, notes and bonds.
(2) U.S. Government Agency Securities -- Obligations issued or
guaranteed by agencies or instrumentalities of the U.S. Government.
U.S. agency obligations include, but are not limited to, the
Student Loan Marketing Association, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association. U.S.
instrumentality obligations include, but are not limited to, the
Export-Import Bank and Farmers Home Administration. Some
obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, such as those issued by Federal Intermediate
Credit Banks, are supported by the right of the issuer to borrower
from the Treasury, others such as those issued by the Federal
National Mortgage Association, by discretionary authority of the
U.S. Government to purchase certain obligations of the agency or
instrumentality, and others, such as those issued by the Student
Loan Marketing Association, only by the credit of the agency or
instrumentality.
(3) Bank Obligations -- Certificates of deposit, time deposits and
bankers' acceptances of U.S. commercial banks having total assets
of at least one billion dollars, and of the overseas branches of
U.S. commercial banks and foreign banks, which in the Manager's
opinion, are of comparable quality, provided each such bank with
its branches has total assets of at least five billion dollars, and
certificates, including time deposits of domestic savings and loan
associations having at least one billion dollars in assets which
are insured by the Federal Savings and Loan Insurance Corporation.
The Account may acquire obligations of U.S. banks which are not
members of the Federal Reserve System or of the Federal Deposit
Insurance Corporation. Any obligations of foreign banks shall be
denominated in U.S. dollars. Obligations of foreign banks and
obligations of overseas branches of U.S. banks are subject to
somewhat different regulations and risks than those of U.S.
domestic banks. For example, an issuing bank may be able to
maintain that the liability for an investment is solely that of the
overseas branch which could expose the Account to a greater risk of
loss. In addition, obligations of foreign banks or of overseas
branches of U.S. banks may be affected by governmental action in
the country of domicile of the branch or parent bank. Examples of
adverse foreign governmental actions include the imposition of
currency controls, the imposition of withholding taxes on interest
income payable on such obligations, interest limitations, seizure
or nationalization of assets, or the declaration of a moratorium.
Deposits in foreign banks or foreign branches of U.S. banks are not
covered by the Federal Deposit Insurance Corporation. The Account
will only buy short-term instruments where the risks of adverse
governmental action are believed by the Manager to be minimal. The
Account will consider these factors along with other appropriate
factors in making an investment decision to acquire such
obligations and will only acquire those which, in the opinion of
management, are of an investment quality comparable to other debt
securities bought by the Account. The Account may invest in
certificates of deposit of selected banks having less than one
billion dollars of assets providing the certificates do not exceed
the level of insurance (currently $100,000) provided by the
applicable government agency.
A certificate of deposit is issued against funds deposited in a
bank or savings and loan association for a definite period of time,
at a specified rate of return. Normally they are negotiable.
However, the Account may occasionally invest in certificates of
deposit which are not negotiable. Such certificates may provide for
interest penalties in the event of withdrawal prior to their
maturity. A bankers' acceptance is a short-term credit instrument
issued by corporations to finance the import, export, transfer or
storage of goods. They are termed "accepted" when a bank guarantees
their payment at maturity and reflect the obligation of both the
bank and drawer to pay the face amount of the instrument at
maturity.
(4) Commercial Paper -- Short-term promissory notes issued by
corporations which at time of purchase are rated A-1 or better by
Standard and Poor's ("S&P") or Prime-1 or better by Moody's
Investors Service, Inc. ("Moody's") or, if not rated, issued or
guaranteed by a corporation with outstanding debt rated AA or
better by S&P or Aa or better by Moody's. The Account will not
invest in master demand notes. (See Appendix A.)
(5) Short-term Corporate Debt -- Corporate notes, bonds and debentures
which at the time of purchase are rated AA or better by S&P or Aa
or better by Moody's provided such securities have one year or less
remaining to maturity. (See Appendix A.)
(6) Repurchase Agreements -- Instruments under which securities are
purchased from a bank or securities dealer with an agreement by the
seller to repurchase the securities at the same price plus interest
at a specified rate. (See "ACCOUNT INVESTMENTS - Repurchase
Agreements.")
The ratings of Moody's and S&P, which are described in Appendix A,
represent their opinions as to the quality of the money market instruments which
they undertake to rate. It should be emphasized, however, that ratings are
general and are not absolute standards of quality. These ratings are the initial
criteria for selection of portfolio investments, but the Manager will further
evaluate these securities.
Portfolio Turnover
Portfolio turnover will normally differ for each Account, may vary from
year to year, as well as within a year, and may be affected by portfolio sales
necessary to meet cash requirements for redemptions of Account shares. The
portfolio turnover rate for an Account is calculated by dividing the lesser of
purchases or sales of its portfolio securities during the fiscal year by the
monthly average of the value of its portfolio securities (excluding from the
computation all securities, including options, with maturities at the time of
acquisition of one year or less). A high rate of portfolio turnover generally
involves correspondingly greater brokerage commission expenses, which must be
borne directly by the Account. No portfolio turnover rate can be calculated for
the Money Market Account because of the short maturities of the securities in
which it invests. The portfolio turnover rates for each of the other Accounts
for its most recent and immediately preceding fiscal periods, respectively, were
as follows: Aggressive Growth - 166.9% and 172.9%; Asset Allocation - 108.2% and
47.1%; Balanced - 22.6% and 25.7%; Bond - 1.7% and 5.9%; Capital Value 48.5% and
49.2%; Government Securities - 8.4% and 9.8%; Growth - 2.0% and 6.9%; High Yield
- - 32.0% and 35.1%; International - 12.5% and 15.6%; MidCap - 8.8% and 13.1%.
DIRECTORS AND OFFICERS OF THE FUNDS
The following listing discloses the principal occupations and other
principal business affiliations of the Fund's Officers and Directors during the
past five years. All mailing addresses are The Principal Financial Group, Des
Moines, Iowa 50392, unless otherwise indicated.
@James D. Davis, 63, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.
Roy W. Ehrle, 69, Director. 2424 Jordan Trail, West Des Moines, Iowa.
Vice Chairman, Principal Mutual Life Insurance Company, Retired.
Pamela A. Ferguson, 54, Director. P.O. Box 805, Grinnell, Iowa.
President, Grinnell College since 1991.
@Richard W. Gilbert, 57, Director. 1357 Asbury Avenue, Winnetka, IL.
President, Gilbert Communications, Inc. since 1993. Prior thereto, President and
Publisher, Pioneer Press.
*&J. Barry Griswell, 48, Director and Chairman of the Board. Senior Vice
President, Principal Mutual Life Insurance Company, since 1991. Director and
Chairman of the Board, Principal Management Corporation, Princor Financial
Services Corporation.
*&Stephan L. Jones, 62, Director and President. Vice President, Principal
Mutual Life Insurance Company since 1986. Director and President, Princor
Financial Services Corporation and Principal Management Corporation.
*Ronald E. Keller, 61, Director. Executive Vice President, Principal
Mutual Life Insurance Company since 1992. Prior thereto, Senior Vice President,
Principal Mutual Life Insurance Company. Director, Princor Financial Services
Corporation and Principal Management Corporation. Director and Chairman, Invista
Capital Management, Inc.
@Barbara A. Lukavsky, 57, Director. 3920 Grand Avenue, Des Moines, Iowa.
President and CEO, Lu San ELITE USA, L.C.
&Richard G. Peebler, 68, Director. 1916 79th Street, Des Moines, Iowa.
Professor, Drake University, College of Business and Public Administration,
since 1990.
*Craig L. Bassett, 45, Treasurer. Director - Treasury, since 1996. Prior
thereto, Associate Treasurer, Principal Mutual Life Insurance Company since
1988.
*Michael J. Beer, 36, Financial Officer. Vice President and Chief
Operating Officer, Princor Financial Services Corporation and Principal
Management Corporation, since 1995. Prior thereto, Financial Officer.
*David J. Brown, 37, Assistant Counsel. Counsel, Principal Mutual Life
Insurance Company since 1995. Attorney 1994-1995. Prior thereto, Attorney,
Dickinson, Mackaman, Tyler & Hogan, P.C. 1986-1994.
*Michael W. Cumings, 46, Assistant Counsel. Counsel, Principal Mutual
Life Insurance Company since 1989.
* Arthur S. Filean, 59, Vice President and Secretary. Vice President,
Princor Financial Services Corporation since
1990. Vice President, Principal Management Corporation since 1996.
* Ernest H. Gillum, 42, Assistant Secretary. Assistant Vice President,
Registered Products, Princor Financial Services Corporation and Principal
Management Corporation, since 1995. Prior thereto, Product Development and
Compliance Officer.
Jane E. Karli, 40, Assistant Treasurer. Senior Accounting and Custody
Administrator, Principal Mutual Life Insurance Company since 1994; Senior
Investment Cost Accountant 1993-1994; Senior Investment Accountant 1992-1993;
Prior thereto, Manager-Investment Accounting and Treasury.
*Michael D. Roughton, 46, Counsel. Counsel, Principal Mutual Life
Insurance Company since 1994. Prior thereto, Assistant Counsel. Counsel, Invista
Capital Management, Inc., Princor Financial Services Corporation, Principal
Investors Corporation and Principal Management Corporation.
@ Member of Audit and Nominating Committee.
* Affiliated with the Manager of the Fund or its parent and considered an
"Interested Person," as defined in the Investment Company Act of 1940, as
amended.
& Member of the Executive Committee. The Executive Committee is elected
by the Board of Directors and may exercise all the powers of the Board of
Directors, with certain exceptions, when the Board is not in session and shall
report its actions to the Board.
All Directors and Officers listed above hold similar positions with
nineteen mutual funds sponsored by Principal Mutual Life Insurance Company. In
addition, James D. Davis, Pamela A. Ferguson, Stephan L. Jones, J. Barry
Griswell, Barbara A. Lukavsky, and all of the officers hold similar positions
with one other Fund sponsored by Principal Mutual Life Insurance Company.
The following information relates to compensation paid by each Account
during the fiscal year ended December 31, 1996.
Director Each Account
-------- ------------
James D. Davis $1,200
Roy W. Ehrle $1,200
Pamela A. Ferguson $1,350
Richard W. Gilbert $1,200
Barbara A. Lukavsky $1,350
Richard G. Peebler $1,350*
* Richard G. Peebler received $1,350 from each of the Account. He received an
additional $75 from Aggressive Growth, Asset Allocation, Balanced, Capital
Value, International and MidCap Accounts due to his participation in the
executive committee of each of those Accounts.
The Fund does not provide retirement benefits for any of the directors.
Total compensation from the investment companies included in the fund complex
for the fiscal year ended December 31, 1996 was as follows:
James D. Davis $32,100 Richard W. Gilbert $33,000
Roy W. Ehrle $30,900 Barbara A. Lukavsky $35,850
Pamela A. Ferguson $35,850 Richard G. Peebler $33,525
All of the outstanding shares of the Fund are owned by Principal Mutual
Life Insurance Company and its Separate Accounts B and C and Variable Life
Separate Account. As of December 31, 1996, the Officers and Directors as a group
owned none of the outstanding shares of the Fund.
MANAGER AND SUB-ADVISORS
The Manager of each of the Accounts is Principal Management Corporation
(formerly known as Princor Management Corporation (the "Manager"), a
wholly-owned subsidiary of Princor Financial Services Corporation which is a
wholly-owned subsidiary of Principal Holding Company. Principal Holding Company
is a holding company which is a wholly-owned subsidiary of Principal Mutual Life
Insurance Company, a mutual life insurance company organized in 1879 under the
laws of the state of Iowa. The address of the Manager is The Principal Financial
Group, Des Moines, Iowa 50392. The Manager was organized on January 10, 1969 and
since that time has managed various mutual funds sponsored by Principal Mutual
Life Insurance Company.
The Manager has executed an agreement with Invista Capital Management,
Inc. ("Invista") under which Invista has agreed to assume the obligations of the
Manager to provide investment advisory services for the Balanced, Capital Value,
Government Securities, Growth, International and MidCap Accounts. The Manager
will reimburse Invista for the cost of providing these services. Invista, an
indirectly wholly-owned subsidiary of Principal Mutual Life Insurance Company
and an affiliate of the Manager, was founded in 1985 and manages investments for
institutional investors, including Principal Mutual Life. Assets under
management at December 31, 1996 were approximately $19.6 billion. Invista's
address is 1500 Hub Tower, 699 Walnut, Des Moines, Iowa 50309.
The Manager has also executed an agreement with Morgan Stanley Asset
Management Inc. ("MSAM") under which MSAM has agreed to assume the obligations
of the Manager to provide investment advisory services for the Aggressive Growth
Account and Asset Allocation Account. The Manager pays MSAM a fee for such
investment advisory services. MSAM, with principal offices at 1221 Avenue of the
Americas, New York, NY 10020, provides a broad range of portfolio management
services to customers in the United States and abroad. At December 31, 1996,
MSAM managed investments totaling approximately $72.6 billion, including
approximately $54.9 billion under active management and $17.7 billion as Named
Fiduciary or Fiduciary Adviser.
Each of the persons affiliated with the Fund who is also an affiliated
person of the Manager or a Sub-Advisor is named below, together with the
capacities in which such person is affiliated:
Office Held With Office Held With
Name The Fund The Manager/Invista
Craig Bassett Treasurer Treasurer (Manager)
Michael J. Beer Financial Officer Vice President &
Financial Officer (Manager)
Ernest H. Gillum Assistant Secretary Product Development and
Compliance Officer
(Manager)
J. Barry Griswell Director and Chairman Director and Chairman of
of the Board the Board (Manager)
Director (Manager)
Stephan L. Jones Director and Director and President
President (Manager)
Ronald E. Keller Director Director (Manager)
Director and Chairman of
the Board (Invista)
Michael D. Roughton Counsel Counsel (Manager; Invista)
COST OF MANAGER'S SERVICES
For providing the investment advisory services, and specified other
services, the Manager, under the terms of the Management Agreement for the Fund,
is entitled to receive a fee computed and accrued daily and payable monthly, at
the following annual rates:
<TABLE>
<CAPTION>
Aggressive High Yield
Growth and and All
Net Asset Value Asset Allocation International MidCap Balanced Other
of Fund Accounts Account Account Accounts Accounts
- ------------------------ ----------------- -------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
First $100,000,000 .80% .75% .65% .60% .50%
Next 100,000,000 .75% .70% .60% .55% .45%
Next 100,000,000 .70% .65% .55% .50% .40%
Next 100,000,000 .65% .60% .50% .45% .35%
Over 400,000,000 .60% .55% .45% .40% .30%
</TABLE>
There is no assurance that any of the Accounts' net assets will reach
sufficient amounts to be able to take advantage of the rate decreases. The net
asset value of each Account on December 31, 1996 and the rate of the fee for
each Account for investment management services as provided in the Management
Agreement for the fiscal year then ended were as follows:
Management Fee
Net Assets as of For Year Ended
Account December 31, 1996 December 31, 1996
----------------------- ----------------- -----------------
Aggressive Growth $ 90,105,549 .80%
Asset Allocation 61,631,138 .80
Balanced 93,157,669 .60
Bond 63,386,561 .50
Capital Value 205,018,528 .48
Government Securities 85,099,858 .50
Growth 99,611,910 .50
High Yield 13,740,343 .60
International 71,682,015 .75
MidCap 137,160,881 .64
Money Market 46,244,249 .50
Under a Sub-Advisory Agreement between Invista and the Manager, Invista
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the Balanced, Capital Value, Government Securities,
Growth, International and MidCap Accounts and is reimbursed by the Manager for
the cost of providing such services.
Under a Sub-Advisory Agreement between MSAM and the Manager, MSAM
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the Aggressive Growth and Asset Allocation Accounts.
The Manager pays MSAM a fee that is accrued daily and payable monthly.
The fee is based on the net asset value of each Account as follows: first $40
million of net assets - the fee is 0.45%; next $160 million - 0.30%; next $100
million - 0.25%; and net assets over $300 million - 0.20%.
Except for certain Fund expenses set out below, 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 Mutual Life Insurance Company and some or all of the
administrative duties and services may be delegated by the Manager to Principal
Mutual 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, 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.
Fees paid for investment management services during the periods indicated
were as follows:
Management Fees For Year Ended December 31,
1996 1995 1994
---- ---- ----
Aggressive Growth $491,699 $180,022 $ 53,716 *
Asset Allocation 425,427 272,724 127,034 *
Balanced 420,010 206,614 131,488
Bond 260,242 122,783 72,199
Capital Value 816,437 591,891 637,781
Government Securities 360,968 202,554 195,469
Growth 357,833 137,029 24,971 **
High Yield 75,111 64,422 57,369
International 376,123 172,258 38,147 **
MidCap 606,697 264,411 94,644
Money Market 208,822 140,895 125,791
* Period beginning June 1, 1994 and ended December 31, 1994.
** Period beginning May 1, 1994 and ended December 31, 1994.
The Management Agreements, Sub-Advisory Agreements and Investment Service
Agreements, pursuant to which Principal Mutual Life Insurance Company has agreed
to furnish certain personnel, services and facilities required by the Manager to
enable it to fulfill its investment advisory responsibilities for each of the
Accounts except the Aggressive Growth and Asset Allocation Accounts, were last
approved by the Fund's Board of Directors on September 8, 1997. Each of these
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 of the Fund or by vote of a majority of the outstanding voting
securities of an Account of the Fund, provided that in either event such
continuation shall be approved by vote of a majority of the Directors who are
not "interested persons" (as defined in the Investment Company Act of 1940) of
the Manager, Principal Mutual Life Insurance Company or its subsidiaries, the
Fund and, in the case of the Sub-Advisory Agreement for each of the Accounts
other than the Aggressive Growth and Asset Allocation Accounts, Invista, and in
the case of the Sub-Advisory Agreement for each of the Aggressive Growth and
Asset Allocation Accounts, MSAM, cast in person at a meeting called for the
purpose of voting on such approval. The Agreements may be terminated at any time
on 60 days written notice to the Manager by the Board of Directors of the Fund
or by a vote of a majority of the outstanding securities of the Fund and by the
Manager, Invista, MSAM or Principal Mutual Life Insurance Company, as the case
may be, on 60 days written notice to the Fund. The Agreements will automatically
terminate in the event of their assignment.
BROKERAGE ON PURCHASES AND SALES OF SECURITIES
In distributing brokerage business arising out of the placement of orders
for the purchase and sale of securities for any Account, the objective of the
Accounts' Manager or Sub-Advisor is to obtain the best overall terms. In
pursuing this objective, the Manager, or Sub-Advisor, considers all matters it
deems relevant, including the breadth of the market in the security, the price
of the security, the financial condition and executing capability of the broker
or dealer and the reasonableness of the commission, if any (for the specific
transaction and on a continuing basis). This may mean in some instances that the
Manager, or Sub-Advisor, will pay a broker commissions that are in excess of the
amount of commission another broker might have charged for executing the same
transaction when the Manager, or Sub-Advisor, believes that such commissions are
reasonable in light of (a) the size and difficulty of transactions (b) the
quality of the execution provided and (C) the level of commissions paid relative
to commissions paid by other institutional investors. (Such factors are viewed
both in terms of that particular transaction and in terms of all transactions
that broker executes for accounts over which the Manager, or Sub-Advisor,
exercises investment discretion. The Manager, or Sub-Advisor, may purchase
securities in the over-the-counter market, utilizing the services of principal
market matters, unless better terms can be obtained by purchases through brokers
or dealers, and may purchase securities listed on the New York Stock Exchange
from non-Exchange members in transactions off the Exchange.) The Manager, or
Sub-Advisor, gives consideration in the allocation of business to services
performed by a broker (e.g. the furnishing of statistical data and research
generally consisting of information of the following types: analyses and reports
concerning issuers, s). If any such allocation is made, the primary criteria
used will be to obtain the best overall terms for such transactions. The
Manager, or Sub-Advisor, may pay additional commission amounts for research
services but generally does not do so. Such statistical data and research
information received from brokers or dealers may be useful in varying degrees
and the Manager, or Sub-Advisor, may use it in servicing some or all of the
accounts it manages. Some statistical data and research information may not be
useful to the Manager, or Sub-Advisor, in managing the client account, brokerage
for which resulted in the Manager's, or Sub-Advisor's, receipt of the
statistical data and research information. However, in the Manager's, or
Sub-Advisor's, opinion, the value thereof is not determinable and it is not
expected that the Manager's, or Sub-Advisor's, expenses will be significantly
reduced since the receipt of such statistical data and research information is
only supplementary to the Manager's, or Sub-Advisor's, own research efforts. The
Manager, or Sub-Advisor, allocated portfolio transactions for the Aggressive
Growth Account, Asset Allocation Account, Balanced Account, Capital Value
Account, Growth Account, International Account and MidCap Account to certain
brokers during the fiscal year ended December 31, 1996 due to research services
provided by such brokers. These portfolio transactions resulted in commissions
paid to such brokers by the Funds in the amounts of $15,242, $15,438, $13,692,
$29,405, $500, $3,955 and $2,591, respectively.
Purchases and sales of debt securities and money market instruments
usually will be principal transactions; portfolio securities will normally be
purchased directly from the issuer or from an underwriter or marketmaker for the
securities. Such transactions are usually conducted on a net basis with the
Account paying no brokerage commissions. Purchases from underwriters will
include a commission or concession paid by the issuer to the underwriter, and
the purchases from dealers serving as marketmakers will include the spread
between the bid and asked prices.
The following table shows the brokerage commissions paid during the
periods indicated. In each year, 100% of the commissions paid by each Account
went to broker-dealers which provided research, statistical or other factual
information.
Total Brokerage Commissions Paid
Fiscal Year Ended
December 31,
Account 1996 1995 1994
------- -------------------------------------------------------
Aggressive Growth $250,591 $102,404 $37,910 *
Asset Allocation 109,360 35,476 40,055 *
Balanced 46,458 18,780 14,596
Capital Value 183,156 142,577 149,871
Growth 45,131 28,870 7,280 **
International 156,842 78,939 43,151 **
MidCap 63,355 31,588 7,527
* Period beginning June 1, 1994 and ended December 31, 1994.
** Period beginning May 1, 1994 and ended December 31, 1994.
Brokerage commissions paid to affiliates during the year ended December
31, 1996 were as follows:
Commissions Paid to Principal Financial Securities, Inc.
Total Dollar As Percent of As Percent of Dollar Amount
Account Amount Total Commissions of Commissionable Transactions
------- ------ ----------------- ------------------------------
Capital Value $ 6,612 3.61% 7.92%
Growth 438 .97% .86%
Commissions Paid to Morgan Stanley and Co.
Total Dollar As Percent of As Percent of Dollar Amount
Account Amount Total Commissions of Commissionable Transactions
- -------------- ------ ----------------- ------------------------------
Balanced $ 1,300 2.80% 1.82%
Capital Value 3,650 1.99% 1.48%
International 3,176 2.02% 1.78%
Morgan Stanley and Co. is affiliated with Morgan Stanley Asset
Management, Inc., which acts as a sub-advisor to two Accounts included in the
Fund.
The Manager acts as investment advisor for each of the funds sponsored by
Principal Mutual Life Insurance Company and places orders to trade portfolio
securities for the funds and these Accounts, except the Aggressive Growth
Account and Asset Allocation Account. If, in carrying out the investment
objectives of the Accounts, occasions arise when purchases or sales of the same
equity securities are to be made for two or more of the Accounts or Funds at the
same time, (or, in the case of Accounts managed by Invista, for two or more
Funds and any other accounts managed by Invista), the Manager or Invista may
submit the orders to purchase or, whenever possible, to sell, to a broker/dealer
for execution on an aggregate or "bunched" basis. The Manager (or, in the case
of Accounts managed by Invista, Invista) may create several aggregate or
"bunched" orders relating to a single security at different times during the
same day. On such occasion, the Manager (or, in the case of Accounts managed by
Invista, Invista) will employ a computer program to randomly order the Accounts
whose individual orders for purchase or sale make up each aggregate or "bunched"
order. Securities purchased or proceeds of sales received on each trading day
with respect to each such aggregate or "bunched" orders shall be allocated to
the various Accounts (or, in the case of Invista, the various Accounts or Funds
and other client accounts) whose individual orders for purchase or sale make up
the aggregate or "bunched" order by filling each Account's or Fund's (or, in the
case of Invista, each Account's or Fund's or other client account's) order, in
the sequence arrived at by the random ordering. Securities purchased for funds
(or, in the case of Invista, Accounts, Funds and other clients accounts)
participating in an aggregate or "bunched" order will be placed into those
Accounts and, where applicable, other client accounts at a price equal to the
average of the prices achieved in the course of filling that aggregate or
"bunched" order.
If purchases or sales of the same debt securities are to be made for two
or more of the Accounts or Funds at the same time, the securities will be
purchased or sold proportionately in accordance with the amount of such security
sought to be purchased or sold at that time for each Account or Fund. If the
purchase or sale of securities consistent with the investment objectives of the
Accounts or one or more of the other clients for which MSAM acts as investment
sub-advisor or advisor is to be made at the same time, the securities will be
purchased or sold proportionately in accordance with the amount of such security
sought to be purchased or sold at that time for each Account or client.
DETERMINATION OF NET ASSET VALUE OF ACCOUNT SHARES
Growth-Oriented and Income-Oriented Accounts
The net asset values of the shares of each of the Growth-Oriented and
Income-Oriented Accounts are determined daily, Monday through Friday, as of the
close of trading on the New York Stock Exchange, except on days on which changes
in the value of an Account's portfolio securities will not materially affect the
current net asset value of that Account's redeemable securities, on days during
which an Account receives no order for the purchase or sale of its redeemable
securities and no tender of such a security for redemption, and on customary
national business holidays. The Accounts treat as customary national business
holidays those days on which the New York Stock Exchange is closed for New
Year's Day (January 1), Washington's Birthday (third Monday in February), Good
Friday (variable date between March 20 and April 23, inclusive), Memorial Day
(last Monday in May), Independence Day (July 4), Labor Day (first Monday in
September), Thanksgiving Day (fourth Thursday in November) and Christmas Day
(December 25). The net asset value per share for each Account is determined by
dividing the value of securities in the Account's investment portfolio plus all
other assets, less all liabilities, by the number of Account shares outstanding.
Securities for which market quotations are readily available, including options
and futures traded on an exchange, are valued at market value, which is
currently determined using the last reported sale price or, if no sales are
reported, as is regularly the case for some securities traded over-the-counter,
the last reported bid price. When reliable market quotations are not considered
to be readily available, which may be the case, for example, with respect to
certain debt securities, preferred stocks, foreign securities and
over-the-counter options, the investments are valued by using market quotations,
prices provided by market makers, which may include dealers with which the
Account has executed transactions, or estimates of market values obtained from
yield data and other factors relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by the
Board of Directors. Securities with remaining maturities of 60 days or less are
valued at amortized cost. Other assets are valued at fair value as determined in
good faith by the Board of Directors.
Generally, trading in foreign securities is substantially completed each
day at various times prior to the close of the New York Stock Exchange. The
values of such securities used in computing net asset value per share are
usually determined as of such times. Occasionally, events which affect the
values of such securities and foreign currency exchange rates may occur between
the times at which they are generally determined and the close of the New York
Stock Exchange and would therefore not be reflected in the computation of the
Account's net asset value. If events materially affecting the value of such
securities occur during such period, then these securities will be valued at
their fair value as determined in good faith by the Manager under procedures
established and regularly reviewed by the Board of Directors. To the extent the
Account invests in foreign securities listed on foreign exchanges which trade on
days on which the Account does not determine its net asset value, for example
Saturdays and other customary national U.S. holidays, the Account's net asset
value could be significantly affected on days when shareholders have no access
to the Account.
Certain securities issued by companies in emerging market countries may
have more than one quoted valuation at any given point in time, sometimes
referred to as a "local" price and a "premium" price. The premium price is often
a negotiated price which may not consistently represent a price at which a
specific transaction can be effected. It is the policy of International Account
to value such securities at prices at which it is expected those shares may be
sold, and the Manager or any sub-adviser, is authorized to make such
determinations subject to such oversight by the Fund's Board of Directors as may
from time to time be necessary.
Money Market Account
The net asset value of shares of the Money Market Account is determined
at the same time and on the same days as each of the Growth-Oriented Accounts
and Income-Oriented Accounts as described above. The net asset value per share
for the Account is computed by dividing the total value of the Account's
securities and other assets, less liabilities, by the number of Account shares
outstanding.
All securities held by the Money Market Account will be valued on an
amortized cost basis. Under this method of valuation, a security is initially
valued at cost; thereafter, the Account assumes a constant proportionate
amortization in value until maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the security.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price that would be received upon sale of the security.
Use of the amortized cost valuation method by the Money Market Account
requires the Account to maintain a dollar weighted average maturity of 90 days
or less and to purchase only obligations that have remaining maturities of 397
days or less or have a variable or floating rate of interest. In addition, the
Account can invest only in "Eligible Securities" as that term is defined in
Regulations issued under the Investment Company Act of 1940 (see the Fund's
Prospectus for a more complete description) determined by the Board of Directors
to present minimal credit risks.
The Board of Directors has established procedures designed to stabilize,
to the extent reasonably possible, the Account's price per share as computed for
the purpose of sales and redemptions at $1.00. Such procedures include a
directive to the Manager to test price the portfolio or specific securities
thereof upon certain changes in the Treasury Bill auction interest rate for the
purpose of identifying possible deviations in the net asset value per share
calculated by using available market quotations or equivalents from $1.00 per
share. If such deviation exceeds 1/2 of 1%, the Board of Directors will promptly
consider what action, if any, will be initiated. In the event the Board of
Directors determines that a deviation exists which may result in material
dilution or other unfair results to shareholders, the Board will take such
corrective action as it regards as appropriate, including: the sale of portfolio
instruments prior to maturity; the withholding of dividends; redemptions of
shares in kind; the establishment of a net asset value per share based upon
available market quotations; or splitting, combining or otherwise recapitalizing
outstanding shares. The Account may also reduce the number of shares outstanding
by redeeming proportionately from shareholders, without the payment of any
monetary compensation, such value at $1.00 per share.
PERFORMANCE CALCULATION
Each of the Accounts may from time to time advertise its performance in
terms of total return. The figures used for total return and yield are based on
the historical performance of an Account, or its corresponding, predecessor
mutual fund, show the performance of a hypothetical investment and are not
intended to indicate future performance. Total return and yield will vary from
time to time depending upon market conditions, the composition of an Account's
portfolio and operating expenses. These factors and possible differences in the
methods used in calculating performance figures should be considered when
comparing an Account's performance to the performance of some other kind of
investment. The calculations of total return and yield for the Accounts do not
include the fees and charges of the separate accounts that invest in the
Accounts and, therefore, do not reflect the investment performance of those
separate accounts.
Each Account may also include in its advertisements performance rankings
and other performance-related information published by independent statistical
services or publishers, such as Lipper Analytical Services, Weisenberger
Investment Companies Services, Money Magazine, Forbes, The Wall Street Journal,
Barron's and Changing Times, and comparisons of the performance of an Account to
that of various market indices, such as the S&P 500 Index, Lehman Brothers GNMA
Index, Dow Jones Industrials Index, and the Salomon Brothers Investment Grade
Bond Index.
Total Return
When advertising total return figures, each of the Growth-Oriented
Accounts and Income-Oriented Accounts will include its average annual total
return for each of the one, five and ten year periods (or if shorter, the period
during which its corresponding predecessor fund's registration statement has
been in effect) that end on the last day of the most recent calendar quarter.
Average annual total return is computed by calculating the average annual
compounded rate of return over the stated period that would equate an initial
$1,000 investment to the ending redeemable value assuming the reinvestment of
all dividends and capital gains distributions at net asset value. In its
advertising, an Account may also include average annual total return for some
other period or cumulative total return for a specified period. Cumulative total
return is computed by dividing the ending redeemable value (assuming the
reinvestment of all dividends and capital gains distributions at net asset
value) by the initial investment.
The following table shows as of December 31, 1996 average annual total
return for each of the Accounts for the periods indicated:
Account 1-Year 5-Year 10-Year
- ---------------------- ------ ------ -------
Aggressive Growth 28.05% 28.05%(4) N/A
Asset Allocation 12.92% 12.95%(4) N/A
Balanced 13.13% 11.57% 12.16%(1)
Bond 2.36% 8.20% 9.55%(1)
Capital Value 23.50% 14.08% 13.08%
Government Securities 3.35% 6.68% 8.63%(2)
Growth 12.51% 16.12%(3) N/A
High Yield 13.13% 11.20% 9.89%(1)
International 25.09% 12.83%(3) N/A
MidCap 21.11% 16.64% 17.73%(1)
(1) Period beginning December 18, 1987 and ending December 31, 1996.
(2) Period beginning March 30, 1987 and ending December 31, 1996.
(3) Period beginning May 1, 1994 and ending December 31, 1996.
(4) Period beginning June 1, 1994 and ending December 31, 1996.
Yield
Money Market Account
The Money Market Account may advertise its yield and its effective yield.
Yield is computed by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then multiplying the base period return by (365/7) with the
resulting yield figure carried to at least the nearest hundredth of one percent.
As of December 31, 1996, the Money Market Account's yield was 5.00%. Because
realized capital gains or losses in an Account's portfolio are not included in
the calculation, the Account's net investment income per share for yield
purposes may be different from the net investment income per share for dividend
purposes, which includes net short-term realized gains or losses on the
Account's portfolio.
Effective yield is computed by determining the net change, exclusive of
capital changes, in the value of a hypothetical pre-existing account having a
balance of one share at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then compounding the base period return by
adding 1, raising the sum to a power equal to 365 divided by 7, and subtracting
1 from the result. The resulting effective yield figure is carried to at least
the nearest hundredth of one percent. As of December 31, 1996, the Money Market
Account's effective yield was 5.13%.
The yield quoted at any time for the Money Market Account represents the
amount that was earned during a specific, recent seven-day period and is a
function of the quality, types and length of maturity of instruments in the
Account's portfolio and the Account's operating expenses. The length of maturity
for the portfolio is the average dollar weighted maturity of the portfolio. This
means that the portfolio has an average maturity of a stated number of days for
its issues. The calculation is weighted by the relative value of each
investment.
The yield for the Money Market Account will fluctuate daily as the income
earned on the investments of the Account fluctuates. Accordingly, there is no
assurance that the yield quoted on any given occasion will remain in effect for
any period of time. There is no guarantee that the net asset value or any stated
rate of return will remain constant. A shareholder's investment in the Account
is not insured. Investors comparing results of the Money Market Account with
investment results and yields from other sources such as banks or savings and
loan associations should understand these distinctions. Historical and
comparative yield information may, from time to time, be presented by the
Account.
TAX STATUS
It is the policy of each Account to distribute substantially all net
investment income and net realized gains. Through such distributions, and by
satisfying certain other requirements, the Fund intends to qualify for the tax
treatment accorded to regulated investment companies under the applicable
provisions of the Internal Revenue Code. This means that in each year in which
the Fund so qualifies, it will be exempt from federal income tax upon the amount
so distributed to investors.
For federal income tax purposes, capital gains and losses on futures
contracts or options thereon, index options or options traded on qualified
exchanges are generally treated at 60% long-term and 40% short-term. In
addition, an Account must recognize any unrealized gains and losses on such
positions held at the end of the fiscal year. An Account may elect out of such
tax treatment, however, for a futures or options position that is part of an
"identified mixed straddle" such as a put option purchased by the Account with
respect to a portfolio security. Gains and losses on figures and options
included in an identified mixed straddle will be considered 100% short-term and
unrealized gain or loss on such positions will not be realized at year end. The
straddle provisions of the Code may require the deferral of realized losses to
the extent that the Account has unrealized gains in certain offsetting positions
at the end of the fiscal year, and may also require recharacterization of all or
a part of losses on certain offsetting positions from short-term to long-term,
as well as adjustment of the holding periods of straddle positions.
The 1986 Tax Reform Act imposes an excise tax on mutual funds which fail
to distribute net investment income and capital gains by the end of the calendar
year in accordance with the provisions of the Act. The Fund intends to comply
with the Act's requirements and to avoid this excise tax.
GENERAL INFORMATION AND HISTORY
Following is a description of a reorganization completed by each of the
Funds on December 31, 1997. The terms of each reorganization were identical,
therefore, the description is intended to apply to each of the funds.
"Liquidating Corporation" as used below means each of the following funds, all
of which were incorporated in the State of Maryland:
Fund Date of Incorporation
---- ---------------------
Principal Aggressive Growth Fund 08/20/93
Principal Asset Allocation Fund 08/20/93
Principal Balanced Fund 11/26/86
Principal Bond Fund 11/26/86
Principal Capital Accumulation Fund 05/26/89
Principal Emerging Growth Fund 02/20/87
Principal Government Securities Fund 06/07/85
Principal Growth Fund 08/20/93
Principal High Yield Fund 12/02/86
Principal Money Market Fund 06/10/82
Principal World Fund 08/20/93
"Surviving Corporation" refers to Principal Variable Contract Fund, Inc.,
a Maryland Corporation, Incorporated on May 27, 1997.
On September 16, 1997, a majority of the outstanding shares of the
Liquidating Corporation approved a proposal to permit the Liquidating
Corporation to transfer all of its assets and liabilities to the Surviving
Corporation in accordance with an Agreement and Plan of Reorganization and
Liquidation dated July 1, 1997 (the "Agreement") between the Liquidating
Corporation and Surviving Corporation (the "Reorganization"). The Agreement was
authorized and approved by the Boards of Directors of the Liquidating
Corporation and the Surviving Corporation in accordance with the laws of
Maryland. The net asset values of the shares were unaffected by the
Reorganization.
The primary purpose for the Reorganization was to develop a "series
company" structure rather than a "multiple fund" structure for the Principal
Funds. Management of the Liquidating Corporation concluded that a series company
form would simplify the operation of and provide greater flexibility in managing
the investment medium used to fund the variable contracts that invested in the
Liquidating Corporation.
By approving the Plan, the shareholders of the Liquidating Corporation
authorized the Liquidating Corporation, as the sole shareholder of the
corresponding series of shares prior to the Reorganization to:
1. Elect as directors of the Surviving Corporation of all the
Liquidating Corporation's Directors at the time of the
Reorganization;
2. Ratify the selection of Ernst & Young LLP as the independent
auditors of the Surviving Corporation;
3. Approve the Management Agreement, Investment Service Agreement, and
Sub-Advisory Agreements for the Surviving Corporation; and
4. Approve the transactions required of the Surviving Corporation to
implement the Reorganization.
The shareholders also authorized the liquidation and dissolution of the
Liquidating Corporation
FINANCIAL STATEMENTS
The financial statements for the Accounts for the fiscal period
ended December 31, 1996 appearing in the Annual Report to Shareholders and the
report thereon of Ernst and Young LLP, independent auditors, appearing therein
are incorporated by reference in this Statement of Additional Information. The
Annual Report will be furnished, without charge, to investors who request copies
of the Statement of Additional Information.
APPENDIX A
Description of Bond Ratings:
Moody's Investors Service, Inc. Bond Ratings
Aaa:
Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa:
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A:
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa:
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
Ba:
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B:
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa:
Bonds which are rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or
interest. Ca:
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C:
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
CONDITIONAL RATING: Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally.
These bonds secured by (a) earnings of projects under construction, (b)
earnings of projects unseasoned in operation experience, (c) rentals which
begin when facilities are completed, or (d) payments to which some other
limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of
condition.
RATING REFINEMENTS: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its bond rating
system. The modifier 1 indicates that the security ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range
ranking; and a modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
SHORT-TERM NOTES: The four ratings of Moody's for short-term notes are MIG
1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality...but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk for having protection...and not
distinctly or predominantly speculative."
Description of Moody's Commercial Paper Ratings
Moody's Commercial Paper ratings are opinions of the ability to repay
punctually promissory obligations not having an original maturity in excess
of nine months. Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment capacity of rated
issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poor's Corporation's Debt Ratings:
A Standard & Poor's debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability
for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by Standard & Poor's from other sources Standard & Poor's considers
reliable. Standard & Poor's does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
I. Likelihood of default -- capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditor's rights.
AAA:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA:
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A:
Debt rated "A" has a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB:
Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher-rated categories.
BB, B, CCC, CC:
Debt rated "BB", "B", "CCC" and "CC" is regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB" indicates the
lowest degree of speculation and "CC" the highest degree of speculation.
While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C:
The rating "C" is reserved for income bonds on which no interest is being
paid.
D:
Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment
of debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the project, makes no
comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgment with respect to
such likelihood and risk.
NR:
Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does not
rate a particular type of obligation as a matter of policy.
Standard & Poor's, Commercial Paper Ratings
A Standard & Poor's Commercial Paper Rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for
the highest quality obligations to "D" for the lowest. Ratings are
applicable to both taxable and tax-exempt commercial paper. The four
categories are as follows:
A:
Issues assigned the highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Issues that possess
overwhelming safety characteristics will be given a "+" designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-1".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the highest designations.
B:
Issues rated "B" are regarded as having only an adequate capacity for timely
payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C:
This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D:
This rating indicates that the issue is either in default or is expected to
be in default upon maturity.
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to Standard
& Poor's by the issuer and obtained by Standard & Poor's from other sources
it considers reliable. The ratings may be changed, suspended, or withdrawn
as a result of changes in or unavailability of, such information.
Standard & Poor's rates notes with a maturity of less than three years as
follows:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be
given a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in the Registration Statement
(1) Part A:
Financial Highlights for each of the 4 years in
the period ended December 31, 1996, for the period
from July 1, 1992 through December 31, 1992 and for
each of 6 years in the period ended June 30, 1992.
(2) Part B:
None
(b) Exhibits
(1) Articles of Incorporation
(2) Bylaws
(5a) Management Agreement
(5b) Investment Service Agreement
(5c) Sub-Advisory Agreement
(5d) Sub-Advisory Agreement
(8a) Domestic Custody Agreement
(8b) Global Custody Agreement
(9) Agreement and Plan of Reorganization and
Liquidation
(11) Consent of Independent Auditors
(12) Audited Financial Statements as of
December 31, 1996, including the Report of
Ernst & Young LLP, independent auditors for
the Registrant.
(16) Total Return Performance Quotation
(Filed 4/12/96)
(27) Financial Data Schedule
Item 25. Persons Controlled by or Under Common Control with Depositor
Principal Mutual Life Insurance Company (incorporated as a
mutual life insurance company under the laws of Iowa);
Sponsored the organization of the following mutual funds,
some of which it controls by virtue of owning voting
securities:
Principal Asset Allocation Fund, Inc. (a Maryland
Corporation)100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company and its separate accounts on
October 8, 1997.
Principal Aggressive Growth Fund, Inc. (a Maryland Corporation)
100.0% of shares outstanding owned by Principal Mutual Life
Insurance Company and its separate accounts on October 8, 1997.
Princor Balanced Fund, Inc. (a Maryland Corporation) 0.88% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Principal Balanced Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on October 8, 1997.
Princor Blue Chip Fund, Inc. (a Maryland Corporation) 1.30% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Princor Bond Fund, Inc. (a Maryland Corporation) 1.43% of shares
outstanding owned by Principal Mutual Life Insurance Company on
October 8, 1997.
Principal Bond Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company and its separate accounts on October 8, 1997.
Princor Capital Accumulation Fund, Inc. (a Maryland
Corporation) 29.63% of outstanding shares owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Principal Capital Accumulation Fund, Inc. (a Maryland
Corporation)100.0% of outstanding shares owned by Principal
Mutual Life Insurance Company and its Separate Accounts on
October 8, 1997.
Princor Cash Management Fund, Inc. (a Maryland Corporation) 2.25%
of outstanding shares owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on October 8,
1997.
Princor Emerging Growth Fund, Inc. (a Maryland Corporation) 0.61%
of shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997
Principal Emerging Growth Fund, Inc. (a Maryland Corporation)
100.0% of shares outstanding owned by Principal Mutual Life
Insurance Company and its Separate Accounts on October 8, 1997.
Princor Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.40% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Principal Government Securities Fund, Inc. (a Maryland
Corporation) 100.0% of shares outstanding owned by Principal
Mutual Life Insurance Company and its Separate Accounts on
October 8, 1997.
Princor Growth Fund, Inc. (a Maryland Corporation) 0.51% of
outstanding shares owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Principal Growth Fund, Inc. (a Maryland Corporation) 100.0% of
outstanding shares are owned by Principal Mutual Life Insurance
Company and its Separate Accounts on October 8, 1997.
Princor High Yield Fund, Inc. (a Maryland Corporation) 21.18% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Principal High Yield Fund, Inc. (a Maryland Corporation) 100.0%
of shares outstanding owned by Principal Mutual Life Insurance
Company and its Separate Accounts on October 8, 1997.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 86.90% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 82.32% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Princor Limited Term Bond Fund, Inc. (a Maryland Corporation)
50.89% of shares outstanding owned by Principal Mutual Life
Insurance Company on October 8, 1997.
Principal Money Market Fund, Inc. (a Maryland Corporation) 100.0%
of shares outstanding owned by Principal Mutual Life Insurance
Company and its Separate Accounts on October 8, 1997.
Principal Special Markets Fund, Inc. (a Maryland Corporation)
50.83% of the shares outstanding of the International Securities
Portfolio and 84.27% of the shares outstanding of the
Mortgage-Backed Securities Portfolio were owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Princor Tax-Exempt Bond Fund, Inc. (a Maryland Corporation) 0.57%
of shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Princor Tax-Exempt Cash Management Fund, Inc. (a Maryland
Corporation) 1.03% of shares outstanding owned by Principal
Mutual Life Insurance Company on October 8, 1997.
Princor Utilities Fund, Inc. (a Maryland Corporation) 1.56% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Princor World Fund, Inc. (a Maryland Corporation) 23.36% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Principal World Fund, Inc. (a Maryland Corporation) 100.0% of
shares outstanding owned by Principal Mutual Life Insurance
Company on October 8, 1997.
Subsidiaries organized and wholly-owned by Principal Mutual Life
Insurance Company:
a. Principal Holding Company (an Iowa Corporation) A holding
company wholly-owned by Principal Mutual Life Insurance
Company.
b. PT Asuransi Jiwa Principal Egalita Indonesia (an Indonesia
Corporation)
Subsidiaries wholly-owned by Principal Holding Company:
a. Petula Associates, Ltd. (an Iowa Corporation) a real estate
development company.
b. Patrician Associates, Inc. (a California Corporation) a real
estate development company.
c. Principal Development Associates, Inc. (a California
Corporation) a real estate development company.
d. Princor Financial Services Corporation (an Iowa Corporation)
a registered broker-dealer.
e. Invista Capital Management, Inc. (an Iowa Corporation) a
registered investment adviser.
f. Principal Marketing Services, Inc. (a Delaware Corporation)
a corporation formed to serve as an interface between
marketers and manufacturers of financial services products.
g. The Principal Financial Group, Inc. (a Delaware corporation)
a general business corporation established in connection
with the new corporate identity. It is not currently active.
h. Delaware Charter Guarantee & Trust Company (a Delaware
Corporation) a nondepository trust company.
i. Principal Securities Holding Corporation (a Delaware
Corporation) a holding company.
j. Principal Health Care, Inc. (an Iowa Corporation) a
developer and administrator of managed care systems.
k. Principal Financial Advisors, Inc. (an Iowa Corporation) a
registered investment advisor.
l. Principal Asset Markets, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
m. Principal Portfolio Services, Inc. (an Iowa Corporation) a
mortgage due diligence company.
n. Principal International, Inc. (an Iowa Corporation) a
company formed for the purpose of international business
development.
o. Principal Spectrum Associates, Inc. (a California
Corporation) a real estate development company.
p. Principal Commercial Advisors, Inc. (an Iowa Corporation) a
company that purchases, manages and sells commercial real
estate assets.
q. Principal FC, Ltd. (an Iowa Corporation) a limited purpose
investment corporation.
r. Principal Residential Mortgage, Inc. (an Iowa Corporation) a
residential mortgage loan broker.
s. Equity FC, Ltd. (an Iowa Corporation) engaged in investment
transactions including limited partnership and limited
liability companies.
t. Principal L.L.C. (an Illinois Corporation) a limited
liability company.
Subsidiaries organized and wholly-owned by Princor Financial Services
Corporation:
a. Princor Management Corporation (an Iowa Corporation) a
registered investment advisor.
b. Principal Investors Corporation (a New Jersey Corporation) a
registered broker-dealer with the Securities Exchange
Commission. It is not currently active.
Subsidiary wholly owned by Principal Securities Holding Corporation:
a. Principal Financial Securities, Inc. (a Delaware
Corporation) an investment banking and securities brokerage
firm.
Subsidiary wholly owned by Delaware Charter Guarantee & Trust Company:
a. Trust Consultants, Inc. (a California Corporation) a
Consulting and Administration of Employee Benefit Plans.
Subsidiaries organized and wholly-owned by Principal Health Care,
Inc.:
a. The Admar Group, Inc. (a Florida Corporation) a national
managed care service organization that developes and manages
preferred provider organizations.
b. Principal Health Care Management Corporation (an Iowa
Corporation) provide management services to health
maintenance organizations.
c. Principal Health Care of the Carolinas, Inc. (a North
Carolina Corporation) a health maintenance organization.
d. Principal Health Care of Delaware, Inc. (a Delaware
Corporation) a health maintenance organization.
e. Principal Health Care of Florida, Inc. (a Florida
Corporation) a health maintenance organization.
f. Principal Health Care of Georgia, Inc. (a Georgia
Corporation) a health maintenance organization.
g. Principal Health Care of Illinois, Inc. (an Illinois
Corporation) a health maintenance organization.
h. Principal Health Care of Indiana, Inc. (a Delaware
Corporation) a health maintenance organization.
i. Principal Health Care of Iowa, Inc. (an Iowa Corporation) a
health maintenance organization.
j. Principal Health Care of Kansas City, Inc. (a Missouri
Corporation) a health maintenance organization.
k. Principal Health Care of Louisiana, Inc. (a Louisiana
Corporation) a health maintenance organization.
l. Principal Health Care of the Mid-Atlantic, Inc. (a Virginia
Corporation) a health maintenance organization.
m. Principal Health Care of Nebraska, Inc. (a Nebraska
Corporation) a health maintenance organization.
n. Principal Health Care of Pennsylvania, Inc. (a Pennsylvania
Corporation) a health maintenance organization.
o. Principal Health Care of St. Louis, Inc. (a Delaware
Corporation) a health maintenance organization.
p. Principal Health Care of South Carolina, Inc. (A South
Carolina Corporation) a health maintenance organization.
q. Principal Health Care of Tennessee, Inc. (a Tennessee
Corporation) a health maintenance organization.
r. Principal Health Care of Texas, Inc. ( a Texas Corporation)
a health maintenance organization.
s. United Health Care Services of Iowa, Inc. (an Iowa
Corporation) a health maintenance organization.
Subsidiary owned by The Admar Group, Inc.:
a. Admar Corporation (a California Corporation) a managed care
services organization.
b. Admar Insurance Marketing, Inc. (a California Corporation) a
managed care services organization.
c. Benefit Plan Administrators, Inc. (a Colorado Corporation) a
managed care services organization.
d. SelectCare Management Co., Inc. (a California Corporation) a
managed care services organization.
e. Image Financial & Insurance Services, Inc. (a California
Corporation) a managed care services organization.
f. WM. G. Hofgard & Co., Inc. (a California Corporation) a
managed care services organization.
Subsidiaries owned by Principal International, Inc.:
a. Principal Insurance Company Limited (a Hong Kong
Corporation) sells insurance and pension products.
b. Principal International Argentina, S.A. (an Argentina
services corporation).
c. Principal International Asia Limited (a Hong Kong
Corporation) a corporation operating as a regional
headquarters for Asia.
d. Principal International de Chile, S.A. (a Chile
Corporation) a holding company.
e. Principal International Espana, S.A. de Seguros de Vida (a
Spain Corporation) a life insurance company.
f. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company.
g. Qualitas Medica, S.A. (an Argentina HMO) a health
maintenance organization.
h. Afore Confia-Principal, S.a. de C.V. (a Mexico Corporation).
i. Zao Principal International (a Russia Corporation) inactive.
Subsidiaries owned by Principal International Argentina, S.A.:
a. Ethika-Jacaranda S.A. Administradora de Fondos de
Jubilaciones y Pensions (an Argentina company) a pension
company.
b. Princor Compania de Seguros de Retiro, S.A. (an Argentina
Corporation) an individual annuity/employee benefit company.
c. Prinlife Compania de Seguros de Vida, S.A. (an Argentina
Corporation) a life insurance company.
Subsidiary owned by Principal International de Chile, S.A.:
a. BanRenta Compania de Seguros de Vida, S.A. (a Chile
Corporation).
Subsidiary owned by Principal International Espana, S.A. de Seguros de
Vida:
a. Princor International Espana Sociedad Anonima de Agencia de
Seguros (a Spain Corporation) an insurance agency.
Subsidiary owned by Afore Confia-Principal, S.A. de C.V.:
a. Siefore Confia-Principal, S.A. de C.V. (a Mexico
Corporation) an investment fund company.
Item 26. Number of Holders of Securities - As of: September 30, 1997
(1) (2)
Title of Class Number of Holders
Common-Principal Capital Accumulation Fund, Inc. 15
Item 27. Indemnification
Under Section 2-418 of the Maryland General Corporation Law, with respect
to any proceedings against a present or former director, officer, agent or
employee (a "corporate representative") of the Registrant, the Registrant may
indemnify the corporate representative against judgments, fines, penalties, and
amounts paid in settlement, and against expenses, including attorneys' fees, if
such expenses were actually incurred by the corporate representative in
connection with the proceeding, unless it is established that:
(i) The act or omission of the corporate representative was
material to the matter giving rise to the proceeding; and
1. Was committed in bad faith; or
2. Was the result of active and deliberate dishonesty; or
(ii) The corporate representative actually received an improper
personal benefit in money, property, or services; or
(iii) In the case of any criminal proceeding, the corporate
representative had reasonable cause to believe that the act or
omission was unlawful.
If a proceeding is brought by or on behalf of the Registrant, however, the
Registrant may not indemnify a corporate representative who has been adjudged to
be liable to the Registrant. Under the Registrant's Articles of Incorporation
and Bylaws, directors and officers of Registrant are entitled to indemnification
by the Registrant to the fullest extent permitted under Maryland law and the
Investment Company Act of 1940. Reference is made to Article VI, Section 7 of
the Registrant's Articles of Incorporation, Article 12 of Registrant's Bylaws
and Section 2-418 of the Maryland General Corporation Law.
The Registrant has agreed to indemnify, defend and hold the Distributor,
its officers and directors, and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act of 1933, free and harmless from
and against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act of 1933, or under common law or otherwise, arising out of or
based upon any untrue statement of a material fact contained in the Registrant's
registration statement or prospectus or arising out of or based upon any alleged
omission to state a material fact required to be stated in either thereof or
necessary to make the statements in either thereof not misleading, except
insofar as such claims, demands, liabilities or expenses arise out of or are
based upon any such untrue statement or omission made in conformity with
information furnished in writing by the Distributor to the Registrant for use in
the Registrant's registration statement or prospectus: provided, however, that
this indemnity agreement, to the extent that it might require indemnity of any
person who is also an officer or director of the Registrant or who controls the
Registrant within the meaning of Section 15 of the Securities Act of 1933, shall
not inure to the benefit of such officer, director or controlling person unless
a court of competent jurisdiction shall determine, or it shall have been
determined by controlling precedent that such result would not be against public
policy as expressed in the Securities Act of 1933, and further provided, that in
no event shall anything contained herein be so construed as to protect the
Distributor against any liability to the Registrant or to its security holders
to which the Distributor would otherwise be subject by reason of willful
misfeasance, bad faith, or gross negligence, in the performance of its duties,
or by reason of its reckless disregard of its obligations under this Agreement.
The Registrant's agreement to indemnify the Distributor, its officers and
directors and any such controlling person as aforesaid is expressly conditioned
upon the Registrant being promptly notified of any action brought against the
Distributor, its officers or directors, or any such controlling person, such
notification to be given by letter or telegram addressed to the Registrant.
Item 28. Business or Other Connection of Investment Adviser
A complete list of the officers and directors of the investment adviser,
Princor Management Corporation, are set out below. This list includes some of
the same people (designated by an *), who are serving as officers and directors
of the Registrant. For these people the information as set out in the Statement
of Additional Information (See Part B) under the caption "Directors and Officers
of the Fund" is incorporated by reference.
Craig R. Barnes The Principal President and Director
Vice President Financial Group Invista Capital
Des Moines, Iowa Management, Inc.
50392
*Craig L. Bassett See Part B
Treasurer
*Michael J. Beer Same See Part B
Vice President and
Chief Operating Officer
Mary L. Bricker Same Counsel & Assistant
Assistant Corporate Corporate Secretary
Secretary Principal Mutual Life
Insurance Company
Ray S. Crabtree Same Executive Vice President
Director Principal Mutual Life
Insurance Company
David J. Drury Same Chief Executive Officer
Director and Chairman of the Board
Principal Mutual Life
Insurance Company
*Arthur S. Filean Same See Part B
Vice President
Paul N. Germain Same Assistant Vice President-
Assistant Vice President Operations
- Operations Princor Financial Services
Corporation
Michael H. Gersie Same Senior Vice President
Director Principal Mutual Life
Insurance Company
*Ernest H. Gillum Same See Part B
Assistant Vice President
- Registered Products
Thomas J. Graf Same Senior Vice President
Director Principal Mutual Life
Insurance Company
*J. Barry Griswell Same See Part B
Chairman of the Board
and Director
Joyce N. Hoffman Same Vice President and
Vice President and Corporate Secretary
Corporate Secretary Principal Mutual Life
Insurance Company
*Stephan L. Jones Same See Part B
Director and President
Ronald E. Keller Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Gregg R. Narber Same Senior Vice President &
Director General Counsel
Principal Mutual Life
Insurance Company
Layne A. Rasmussen Same Controller
Controller - Mutual Funds Princor Financial Services
Corporation
Elizabeth R. Ring Same Controller
Controller Princor Financial Services
Corporation
*Michael D. Roughton Same See Part B
Counsel
Charles E. Rohm Same Executive Vice President
Director Principal Mutual Life
Insurance Company
Jean B. Schustek Same Product Compliance Officer
Product Compliance Officer Princor Financial Services
- Registered Products Corporation
Dewain A. Sparrgrove Same Vice President- Investment
Vice President Securities
Principal Mutual Life
Insurance Company
Princor Management Corporation serves as investment adviser and dividend
disbursing and transfer agent for, Principal Aggressive Growth Fund, Inc.,
Principal Asset Allocation Fund, Inc., Principal Balanced Fund, Inc., Principal
Bond Fund, Inc., Principal Capital Accumulation Fund, Inc., Principal Emerging
Growth Fund, Inc., Principal Government Securities Fund, Inc., Principal Growth
Fund, Inc., Principal High Yield Fund, Inc., Principal Money Market Fund, Inc.,
Principal Special Markets Fund, Inc., Principal World Fund, Inc., Princor
Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Bond Fund, Inc.,
Princor Capital Accumulation Fund, Inc., Princor Cash Management Fund, Inc.,
Princor Emerging Growth Fund, Inc., Princor Government Securities Income Fund,
Inc., Princor Growth Fund, Inc., Princor High Yield Fund, Inc., Principal
International Emerging Markets Fund, Inc., Principal International SmallCap
Fund, Inc., Princor Limited Term Bond Fund, Inc., Princor Tax-Exempt Bond Fund,
Inc., Princor Tax-Exempt Cash Management Fund, Inc., Princor Utilities Fund,
Inc. and Princor World Fund, Inc. - funds sponsored by Principal Mutual Life
Insurance Company.
Item 29. Principal Underwriters
(a) Princor Financial Services Corporation, principal underwriter for
Registrant, acts as principal underwriter for, Principal Aggressive Growth Fund,
Inc., Principal Asset Allocation Fund, Inc., Principal Balanced Fund, Inc.,
Principal Bond Fund, Inc., Principal Capital Accumulation Fund, Inc., Principal
Emerging Growth Fund, Inc., Principal Government Securities Fund, Inc.,
Principal Growth Fund, Inc., Principal High Yield Fund, Inc., Principal Money
Market Fund, Inc., Principal Special Markets Fund, Inc., Principal World Fund,
Inc., Princor Balanced Fund, Inc., Princor Blue Chip Fund, Inc., Princor Bond
Fund, Inc., Princor Capital Accumulation Fund, Inc., Princor Cash Management
Fund, Inc., Princor Emerging Growth Fund, Inc., Princor Government Securities
Income Fund, Inc., Princor Growth Fund, Inc., Princor High Yield Fund, Inc.,
Principal International Emerging Markets Fund, Inc., Principal International
SmallCap Fund, Inc., Princor Limited Term Bond Fund, Inc., Princor Tax-Exempt
Bond Fund, Inc., Princor Tax-Exempt Cash Management Fund, Inc., Princor
Utilities Fund, Inc., Princor World Fund, Inc. and for variable annuity
contracts participating in Principal Mutual Life Insurance Company Separate
Account B, a registered unit investment trust for retirement plans adopted by
public school systems or certain tax-exempt organizations pursuant to Section
403(b) of the Internal Revenue Code, Section 457 retirement plans, Section
401(a) retirement plans, certain non- qualified deferred compensation plans and
Individual Retirement Annuity Plans adopted pursuant to Section408 of the
Internal Revenue Code, and for variable life insurance contracts issued by
Principal Mutual Life Insurance Company Variable Life Separate Account, a
registered unit investment trust.
(b) (1) (2) (3)
Positions
and offices Positions and
Name and principal with principal offices with
business address underwriter registrant
Robert W. Baehr Marketing Services None
The Principal Officer
Financial Group
Des Moines, IA 50392
Craig L. Bassett Treasurer Treasurer
The Principal
Financial Group
Des Moines, IA 50392
Michael J. Beer Senior Vice President and Vice President
The Principal Chief Operating Officer
Financial Group
Des Moines, IA 50392
Mary L. Bricker Assistant Corporate None
The Principal Secretary
Financial Group
Des Moines, IA 50392
Ray S. Crabtree Director None
The Principal
Financial Group
Des Moines, IA 50392
David J. Drury Director None
The Principal
Financial Group
Des Moines, IA 50392
Arthur S. Filean Vice President Vice President
The Principal and Secretary
Financial Group
Des Moines, IA 50392
Paul N. Germain Assistant Vice President - None
The Principal Operations
Financial Group
Des Moines, IA 50392
Michael H. Gersie Director None
The Principal
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Assistant Vice President - Assistant
The Principal Registered Products Secretary
Financial Group
Des Moines, IA 50392
Thomas J. Graf Director None
The Principal
Financial Group
Des Moines, IA 50392
William C. Gordon Insurance License Officer None
The Principal
Financial Group
Des Moines, IA 50392
J. Barry Griswell Director and Director and
The Principal Chairman of the Chairman of the
Financial Group Board Board
Des Moines, IA 50392
Joyce N. Hoffman Vice President and None
The Principal Corporate Secretary
Financial Group
Des Moines, IA 50392
Stephan L. Jones Director and Director and
The Principal President President
Financial Group
Des Moines, IA 50392
Ronald E. Keller Director Director
The Principal
Financial Group
Des Moines, IA 50392
John R. Lepley Senior Vice None
The Principal President - Marketing
Financial Group and Distribution
Des Moines, IA 50392
Gregg R. Narber Director None
The Principal
Financial Group
Des Moines, IA 50392
Mark M. Oswald Compliance Officer None
The Principal
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller - None
The Principal Mutual Funds
Financial Group
Des Moines, IA 50392
Elizabeth R. Ring Controller None
The Principal
Financial Group
Des Moines, IA 50392
Charles E. Rohm Director None
The Principal
Financial Group
Des Moines, IA 50392
Michael D. Roughton Counsel Counsel
The Principal
Financial Group
Des Moines, IA 50392
Jean B. Schustek Product Compliance Officer - None
The Principal Registered Products
Financial Group
Des Moines, IA 50392
Kyle R. Selberg Vice President-Marketing None
The Principal
Financial Group
Des Moines, IA 50392
Susan R. Sorensen Marketing Officer None
The Principal
Financial Group
Des Moines, IA 50392
Roger C. Stroud Assistant Director - None
The Principal Marketing
Financial Group
Des Moines, IA 50392
(c) Inapplicable.
Item 30. Location of Accounts and Records
All accounts, books or other documents of the Registrant are located at the
offices of the Registrant and its Investment Adviser in the Principal Mutual
Life Insurance Company home office building, The Principal Financial Group, Des
Moines, Iowa 50392.
Item 31. Management Services
Inapplicable.
Item 32. Undertakings
Indemnification
Reference is made to Item 27 above, which discusses circumstances under
which directors and officers of the Registrant shall be indemnified by the
Registrant against certain liabilities and expenses incurred by them by reason
of being a director or officer of the Registrant.
Notwithstanding the provisions of Registrant's Articles of Incorporation
and Bylaws, the Registrant hereby makes the following undertaking:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant, pursuant to the foregoing provisions or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant, in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the Registrant, in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue
Shareholder Communications
Registrant hereby undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a director or directors when
requested in writing to do so by the holders of at least 10% of the Registrant's
outstanding shares of common stock and in connection with such meeting to comply
with the provisions of Section 16(c) of the Investment Company Act of 1940
relating to shareholder communications
Delivery of Annual Report to Shareholders
The registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the registrant's latest annual report to
shareholders, upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940 the Registrant certifies that it meets all of the
requirments for effectiveness of this Registration Statement and has duly caused
this Amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Des Moines and State of
Iowa, on the 23rd day of October, 1997.
Principal Capital Accumulation Fund, Inc.
(Registrant)
By /s/ S. L. Jones
______________________________________
S. L. Jones
President and Director
Attest:
/s/ A. S. Filean
______________________________________
A. S. Filean
Vice President and Secretary
<PAGE>
Pursuant to the requirement of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
Signature Title Date
/s/ S. L. Jones
_____________________________ President and Director 10/23/97
S. L. Jones (Principal Executive Officer) __________
(J. B. Griswell)*
_____________________________ Director and 10/23/97
J. B. Griswell Chairman of the Board __________
/s/ M. J. Beer
_____________________________ Financial Officer (Principal 10/23/97
M. J. Beer Financial and Accounting Officer) __________
(J. D. Davis)*
_____________________________ Director 10/23/97
J. D. Davis __________
(R. W. Erhle)*
_____________________________ Director 10/23/97
R. W. Ehrle __________
(P. A. Ferguson)*
_____________________________ Director 10/23/97
P. A. Ferguson __________
(R. W. Gilbert)*
_____________________________ Director 10/23/97
R. W. Gilbert __________
(R. E. Keller)*
_____________________________ Director 10/23/97
R. E. Keller __________
(B. A. Lukavsky)*
_____________________________ Director 10/23/97
B. A. Lukavsky __________
(R. G. Peebler)*
_____________________________ Director 10/23/97
R. G. Peebler __________
*By /s/ S. L. Jones
_____________________________________
S. L. Jones
President and Director
Pursuant to Powers of Attorney
Previously Filed or Included
ARTICLES OF INCORPORATION
OF
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
ARTICLE I
Incorporator
The undersigned Arthur S. Filean and Ernest H. Gillum, whose post office
address is The Principal Financial Group, Des Moines, Iowa 50392, being at least
18 years of age, incorporators, hereby form a corporation under and by virtue of
the laws of Maryland.
ARTICLE II
Name
The name of the corporation is Principal Variable Contracts Fund, Inc.
hereinafter called the "Corporation."
ARTICLE III
Corporate Purposes and Powers
The Corporation is formed for the following purposes:
(1) To conduct and carry on the business of an investment company.
(2) To hold, invest and reinvest its assets in securities and other
investments or to hold part or all of its assets in cash.
(3) To issue and sell shares of its capital stock in such amounts and on
such terms and conditions and for such purposes and for such amount or kind of
consideration as may now or hereafter be permitted by law.
(4) To redeem, purchase or acquire in any other manner, hold, dispose of,
resell, transfer, reissue or cancel (all without the vote or consent of the
stockholders of the Corporation) shares of its capital stock, in any manner and
to the extent now or hereafter permitted by law and by these Articles of
Incorporation.
(5) To do any and all additional acts and to exercise any and all
additional powers or rights as may be necessary, incidental, appropriate or
desirable for the accomplishment of all or any of the foregoing purposes.
To carry out all or any part of the foregoing objects as principal, factor,
agent, contractor, or otherwise, either alone or through or in conjunction with
any person, firm, association or corporation, and, in carrying on its business
and for the purpose of attaining or furnishing any of its objects and purposes,
to make and perform any contracts and to do any acts and things, and to exercise
any powers suitable, convenient or proper for the accomplishment of any of the
objects and purposes herein enumerated or incidental to the powers herein
specified, or which at any time may appear conducive to or expedient for the
accomplishment of any such objects and purposes.
To carry out all or any part of the aforesaid objects and purposes, and to
conduct its business in all or any of its branches, in any or all states,
territories, districts and possessions of the United States of America and in
foreign countries; and to maintain offices and agencies in any or all states,
territories, districts and possessions of the United States of America and in
foreign countries.
The foregoing objects and purposes shall, except when otherwise expressed,
be in no way limited or restricted by reference to or inference from the terms
of any other clause of this or any other article of these Articles of
Incorporation or of any amendment thereto, and shall each be regarded as
independent, and construed as powers as well as objects and purposes.
The Corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations of a
similar character by the Maryland General Corporation Law now or hereafter in
force, and the enumeration of the foregoing powers shall not be deemed to
exclude any powers, rights or privileges so granted or conferred.
ARTICLE IV
Principal Office and Resident Agent
The post office address of the principal office of the Corporation in this
State is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202. The name of the resident agent of the Corporation in this State
is The Corporation Trust Incorporated, a corporation of this State, and the post
office address of the resident agent is 32 South Street, Baltimore, Maryland
21202.
ARTICLE V
Capital Stock
Section 1. Authorized Shares: The total number of shares of stock which the
Corporation shall have authority to issue is one billion five hundred million
(1,500,000,000) shares, of the par value of one cent ($.01) each and of the
aggregate par value of fifteen million dollars ($15,000,000). The shares may be
issued by the Board of Directors in such separate and distinct series and
classes of series as the Board of Directors shall from time to time create and
establish. The Board of Directors shall have full power and authority, in its
sole discretion, to establish and designate series and classes of series, and to
classify or reclassify any unissued shares in separate series or classes having
such preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption as shall be fixed and determined from time to time by the Board of
Directors. In the event of establishment of classes, each class of a series
shall represent interests in the assets belonging to that series and have
identical voting, dividend, liquidation and other rights and the same terms and
conditions as any other class of the series, except that expenses allocated to
the class of a series may be borne solely by such class as shall be determined
by the Board of Directors and may cause differences in rights as described in
the following sentence. The shares of a class may be converted into shares of
another class upon such terms and conditions as shall be determined by the Board
of Directors, and a class of a series may have exclusive voting rights with
respect to matters affecting only that class. Expenses related to the
distribution of, and other identified expenses that should properly be allocated
to, the shares of a particular series or class may be charged to and borne
solely by such series or nner determined by the Board of Directors) and cause
differences in the net asset value attributable to, and the dividend, redemption
and liquidation rights of, the shares of each series or class. Subject to the
authority of the Board of Directors to increase and decrease the number of, and
to reclassify the shares of any series or class, there are hereby established
eleven series of common stock all of the same class, each comprising the number
of shares and having the designation indicated:
Series Number of Shares
Aggressive Growth 100,000,000
Asset Allocation 100,000,000
Balanced 100,000,000
Bond 100,000,000
Capital Value 100,000,000
Government Securities 100,000,000
Growth 100,000,000
High Yield 100,000,000
International 100,000,000
Midcap 100,000,000
Money Market 500,000,000
In addition, the Board of Directors is hereby expressly granted authority to
change the designation of any series or class, to increase or decrease the
number of shares of any series or class, provided that the number of shares of
any series or class shall not be decreased by the Board of Directors below the
number of shares thereof then outstanding, and to reclassify any unissued shares
into one or more series or classes that may be established and designated from
time to time. Notwithstanding the designations herein of series and classes, the
Corporation may refer, in prospectuses and other documents furnished to
shareholders, filed with the Securities and Exchange Commission or used for
other purposes, to a series of shares as a "class" and to a class of shares of a
particular series as a "series."
(a) The Corporation may issue shares of stock in fractional
denominations to the same extent as its whole shares, and shares in
fractional denominations shall be shares of stock having proportionately,
to the respective fractions represented thereby, all the rights of whole
shares, including without limitation, the right to vote, the right to
receive dividends and distributions and the right to participate upon
liquidation of the Corporation, but excluding the right to receive a stock
certificate representing fractional shares.
(b) The holder of each share of stock of the Corporation shall be
entitled to one vote for each full share, and a fractional vote for each
fractional share, of stock, irrespective of the series or class, then
standing in the holder's name on the books of the Corporation. On any
matter submitted to a vote of stockholders, all shares of the Corporation
then issued and outstanding and entitled to vote shall be voted in the
aggregate and not by series or class except that (1) when otherwise
expressly required by the Maryland General Corporation Law or the
Investment Company Act of 1940, as amended, shares shall be voted by
individual series or class, and (2) if the Board of Directors, in its sole
discretion, determines that a matter affects the interests of only one or
more particular series or class or classes then only the holders of shares
of such affected series or class or classes shall be entitled to vote
thereon.
(c) Unless otherwise provided in the resolution of the Board of
Directors providing for the establishment and designation of any new series
or class or classes, each series of stock of the Corporation shall have the
following powers, preferences and rights, and qualifications, restrictions,
and limitations thereof:
(1) Assets Belonging to a Class. All consideration received by the
Corporation for the issue or sale of shares of a particular class,
together with all assets in which such consideration is invested or
reinvested, all income, earnings, profits and proceeds thereof,
including any proceeds derived from the sale, exchange or liquidation
of such assets, and any funds or payments derived from any reinvestment
of such proceeds in whatever form the same may be, shall irrevocably
belong to that class for all purposes, subject only to the rights of
creditors, and shall be so recorded upon the books and accounts of the
Corporation. Such consideration, assets, income, earnings, profits and
proceeds thereof, including any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds, in whatever form the
same may be, together with any General Items allocated to that class as
provided in the following sentence, are herein referred to as "assets
belonging to" that class. In the event that there are any assets,
income, earnings, profits, proceeds thereof, funds or payments which
are not readily identifiable as belonging to any particular class
(collectively "General Items"), such General Items shall be allocated
by or under the supervision of the Board of Directors to and among any
one or more of the classes established and designated from time to time
in such manner and on such basis as the Board of Directors, in its sole
discretion, deems fair and equitable, and any General Items so
allocated to a particular class shall belong to that class. Each such
allocation by the Board of Directors shall be conclusive and binding
for all purposes.
(2) Liabilities Belonging to a Class. The assets belonging to each
particular class shall be charged with the liabilities of the
Corporation in respect of that class and all expenses, costs, charges
and reserves attributable to that class, and any general liabilities,
expenses, costs, charges or reserves of the Corporation which are not
readily identifiable as belonging to any particular class shall be
allocated and charged by or under the supervision of the Board of
Directors to and among any one or more of the classes established and
designated from time to time in such manner and on such basis as the
Board of Directors, in its sole discretion, deems fair and equitable.
The liabilities, expenses, costs, charges and reserves allocated and so
charged to a class are herein referred to as "liabilities belonging to"
that class. Expenses related to the shares of a series may be borne
solely by that series (as determined by the Board of Directors). Each
allocation of liabilities, expenses, costs, charges and reserves by the
Board of Directors shall be conclusive and binding for all purposes.
(3) Dividends. The Board of Directors may from time to time
declare and pay dividends or distributions, in stock, property or cash,
on any or all series of stock or classes of series, the amount of such
dividends and property distributions and the payment of them being
wholly in the discretion of the Board of Directors. Dividends may be
declared daily or otherwise pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Board of
Directors may determine, after providing for actual and accrued
liabilities belonging to that class. All dividends or distributions on
shares of a particular class shall be paid only out of surplus or other
lawfully available assets determined by the Board of Directors as
belonging to such class. Dividends and distributions may vary between
the classes of a series to reflect differing allocations of the expense
of each class of that series to such extent and for such purposes as
the Boards of Directors may deem appropriate. The Board of Directors
shall have the power, in its sole discretion, to distribute in any
fiscal year as dividends, including dividends designated in whole or in
part as capital gains distributions, amounts sufficient, in the opinion
of the Board of Directors, to enable the Corporation, or where
applicable each series of shares or class of a series, to qualify as a
regulated investment company under the Internal Revenue Code of 1986,
as amended, or any successor or comparable statute thereto, and
regulations promulgated thereunder, and to avoid liability for the
Corporation, or each series of shares or class of a series, for Federal
income and excise taxes in respect of that or any other year.
(4) Liquidation. In the event of the liquidation of the
Corporation or of the assets attributable to a particular series or
class, the shareholders of each series or class that has been
established and designated and is being liquidated shall be entitled to
receive, as a series or class, when and as declared by the Board of
Directors, the excess of the assets belonging to that series or class
over the liabilities belonging to that series or class. The holders of
shares of any series or class shall not be entitled thereby to any
distribution upon liquidation of any other series or class. The assets
so distributable to the shareholder of any particular series or class
shall be distributed among such shareholders according to their
respective rights taking into account the proper allocation of expenses
being borne by that series or class. The liquidation of assets
attributable to any particular series or class in which there are
shares then outstanding may be authorized by vote of a majority of the
Board of Directors then in office, subject to the approval of a
majority of the outstanding voting securities of that series or class,
as defined in the Investment Company Act of 1940, as amended. In the
event that there are any general assets not belonging to any particular
series or class of stock and available for distribution, such
distribution shall be made to holders of stock of various series or
classes in such proportion as the Board of Directors determines to be
fair and equitable, and such determination by the Board of Directors
shall be conclusive and binding for all purposes.
(5) Redemption. All shares of stock of the Corporation shall have
the redemption rights provided for in Article V, Section 5.
(d) The Corporation's shares of stock are issued and sold, and all
persons who shall acquire stock of the Corporation shall do so, subject to
the condition and understanding that the provisions of the Corporation's
Articles of Incorporation, as from time to time amended, shall be binding
upon them.
Section 2. Quorum Requirements and Voting Rights: Except as otherwise
expressly provided by the Maryland General Corporation Law, the presence in
person or by proxy of the holders of one-third of the shares of capital stock of
the Corporation outstanding and entitled to vote thereat shall constitute a
quorum at any meeting of the stockholders, except that where the holders of any
series or class are required or permitted to vote as a series or class,
one-third of the aggregate number of shares of that series or class outstanding
and entitled to vote shall constitute a quorum.
Notwithstanding any provision of Maryland General Corporation Law requiring
a greater proportion than a majority of the votes of all series or classes or of
any series or class of the Corporation's stock entitled to be cast in order to
take or authorize any action, any such action may be taken or authorized upon
the concurrence of a majority of the aggregate number of votes entitled to be
cast thereon subject to the applicable laws and regulations as from time to time
in effect or rules or orders of the Securities and Exchange Commission or any
successor thereto. All shares of stock of this Corporation shall have the voting
rights provided for in Article V, Section 1, paragraph (b).
Section 3. No Preemptive Rights: No holder of shares of capital stock of
the Corporation shall, as such holder, have any right to purchase or subscribe
for any shares of the capital stock of the Corporation which the Corporation may
issue or sell (whether consisting of shares of capital stock authorized by these
Articles of Incorporation, or shares of capital stock of the Corporation
acquired by it after the issue thereof, or other shares) other than any right
which the Board of Directors of the Corporation, in its discretion, may
determine.
Section 4. Determination of Net Asset Value: The net asset value of each
share of each series or class of each series of the Corporation shall be the
quotient obtained by dividing the value of the net assets of the Corporation, or
if applicable of the series or class (being the value of the assets of the
Corporation or of the particular series or class or attributable to the
particular series or class less its actual and accrued liabilities exclusive of
capital stock and surplus), by the total number of outstanding shares of the
Corporation or the series or class, as applicable. Such determination may be
made on a series-by-series basis or made or adjusted on a class-by-class basis,
as appropriate, and shall include any expenses allocated to a specific series or
class thereof. The Board of Directors may adopt procedures for determination of
net asset value consistent with the requirements of applicable statutes and
regulations and, so far as accounting matters are concerned, with generally
accepted accounting principles. The procedures may include, without limitation,
procedures for valuation of the Corporation's portfolio securities and other
assets, for accrual of expenses or creation of reserves and for the
determination of the number of shares issued and outstanding at any given time.
Section 5. Redemption and Repurchase of Shares of Capital Stock: Any
shareholder may redeem shares of the Corporation for the net asset value of each
series or class thereof by presentation of an appropriate request, together with
the certificates, if any, for such shares, duly endorsed, at the office or
agency designated by the Corporation. Redemptions as aforesaid, or purchases by
the Corporation of its own stock, shall be made in the manner and subject to the
conditions contained in the bylaws or approved by the Board of Directors.
Section 6. Purchase of Shares: The Corporation shall be entitled to
purchase shares of any series or class of its capital stock, to the extent that
the Corporation may lawfully effect such purchase under Maryland General
Corporation Law, upon such terms and conditions and for such consideration as
the Board of Directors shall deem advisable, by agreement with the stockholder
at a price not exceeding the net asset value per share computed in accordance
with Section 4 of this Article.
Section 7. Redemption of Minimum Amounts:
(a) If after giving effect to a request for redemption by a
stockholder, the aggregate net asset value of his remaining shares of any
series or class will be less than the Minimum Amount then in effect, the
Corporation shall be entitled to require the redemption of the remaining
shares of such series or class owned by such stockholder, upon notice given
in accordance with paragraph (c) of this Section, to the extent that the
Corporation may lawfully effect such redemption under Maryland General
Corporation Law.
(b) The term "Minimum Amount" when used herein shall mean Three Hundred
Dollars ($300) unless otherwise fixed by the Board of Directors from time
to time, provided that the Minimum Amount may not in any event exceed Five
Thousand Dollars ($5,000).
(c) If any redemption under paragraph (a) of this Section is upon
notice, the notice shall be in writing personally delivered or deposited in
the mail, at least thirty days prior to such redemption. If mailed, the
notice shall be addressed to the stockholder at his post office address as
shown on the books of the Corporation, and sent by certified or registered
mail, postage prepaid. The price for shares redeemed by the Corporation
pursuant to paragraph (a) of this Section shall be paid in cash in an
amount equal to the net asset value of such shares, computed in accordance
with Section 4 of this Article.
Section 8. Mode of Payment: Payment by the Corporation for shares of any
series or class of the capital stock of the Corporation surrendered to it for
redemption shall be made by the Corporation within three business days of such
surrender out of the funds legally available therefor, provided that the
Corporation may suspend the right of the holders of capital stock of the
Corporation to redeem shares of capital stock and may postpone the right of such
holders to receive payment for any shares when permitted or required to do so by
law. Payment of the redemption or purchase price may be made in cash or, at the
option of the Corporation, wholly or partly in such portfolio securities of the
Corporation as the Corporation may select.
Section 9. Rights of Holders of Shares Purchased or Redeemed: The right of
any holder of any series or class of capital stock of the Corporation purchased
or redeemed by the Corporation as provided in this Article to receive dividends
thereon and all other rights of such holder with respect to such shares shall
terminate at the time as of which the purchase or redemption price of such
shares is determined, except the right of such holder to receive (i) the
purchase or redemption price of such shares from the Corporation or its
designated agent and (ii) any dividend or distribution or voting rights to which
such holder has previously become entitled as the record holder of such shares
on the record date for the determination of the stockholders entitled to receive
such dividend or distribution or to vote at the meeting of stockholders.
Section 10. Status of Shares Purchased or Redeemed: In the absence of any
specification as to the purpose for which such shares of any series or class of
capital stock of the Corporation are redeemed or purchased by it, all shares so
redeemed or purchased shall be deemed to be retired in the sense contemplated by
the laws of the State of Maryland and may be reissued. The number of authorized
shares of capital stock of the Corporation shall not be reduced by the number of
any shares redeemed or purchased by it.
Section 11. Additional Limitations and Powers: The following provisions are
inserted for the purpose of defining, limiting and regulating the powers of the
Corporation and of the Board of Directors and stockholders:
(a) Any determination made in good faith and, so far as accounting
matters are involved, in accordance with generally accepted accounting
principles by or pursuant to the direction of the Board of Directors, as to
the amount of the assets, debts, obligations or liabilities of the
Corporation, as to the amount of any reserves or charges set up and the
propriety thereof, as to the time of or purpose for creating such reserves
or charges, as to the use, alteration or cancellation of any reserves or
charges (whether or not any debt, obligation or liability for which such
reserves or charges shall have been created shall have been paid or
discharged or shall be then or thereafter required to be paid or
discharged), as to the establishment or designation of procedures or
methods to be employed for valuing any investment or other assets of the
Corporation and as to the value of any investment or other asset, as to the
allocation of any asset of the Corporation to a particular series or class
or classes of the Corporation's stock, as to the funds available for the
declaration of dividends and as to the declaration of dividends, as to the
charging of any liability of the Corporation to a particular series or
class or classes of the Corporation's stock, as to the number of shares of
any series or class or classes of the Corporation's outstanding stock, as
to the estimated expense to the Corporation in connection with purchases or
redemptions of its shares, as to the ability to liquidate investments in
orderly fashion, or as to any other matters relating to the issue, sale,
purchase or redemption or other acquisition or disposition of investments
or shares of the Corporation, or in the determination of the net asset
value per share of shares of any series or class of the Corporation's stock
shall be conclusive and binding for all purposes.
(b) Except to the extent prohibited by the Investment Company Act of
1940, as amended, or rules, regulations or orders thereunder promulgated by
the Securities and Exchange Commission or any successor thereto or by the
bylaws of the Corporation, a director, officer or employee of the
Corporation shall not be disqualified by his position from dealing or
contracting with the Corporation, nor shall any transaction or contract of
the Corporation be void or voidable by reason of the fact that any
director, officer or employee or any firm of which any director, officer or
employee is a member, or any corporation of which any director, officer or
employee is a stockholder, officer or director, is in any way interested in
such transaction or contract; provided that in case a director, or a firm
or corporation of which a director is a member, stockholder, officer or
director is so interested, such fact shall be disclosed to or shall have
been known by the Board of Directors or a majority thereof. Nor shall any
director or officer of the Corporation be liable to the Corporation or to
any stockholder or creditor thereof or to any person for any loss incurred
by it or him or for any profit realized by such director or officer under
or by reason of such contract or transaction; provided that nothing herein
shall protect any director or officer of the Corporation against any
liability to the Corporation or to its security holders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of
his office; and provided always that such contract or transaction shall
have been on terms that were not unfair to the Corporation at the time at
which it was entered into. Any director of the Corporation who is so
interested, or who is a member, stockholder, officer or director of such
firm or corporation, may be counted in determining the existence of a
quorum at any meeting of the Board of Directors of the Corporation which
shall authorize any such transaction or contract, with like force and
effect as if he were not such director, or member, stockholder, officer or
director of such firm or corporation.
(c) Specifically and without limitation of the foregoing paragraph (b)
but subject to the exception therein prescribed, the Corporation may enter
into management or advisory, underwriting, distribution and administration
contracts, custodian contracts and such other contracts as may be
appropriate.
ARTICLE VI
Directors
Section 1. Initial Board of Directors: The number of directors of the
Corporation shall initially be nine. The names of the directors who shall hold
office until the first annual meeting of stockholders or until their successors
are duly chosen and qualified are:
James D. Davis Roy W. Ehrle Pamela A. Ferguson
Richard W. Gilbert J. Barry Griswell Stephan L. Jones
Ronald E. Keller Barbara A. Lukavsky Richard G. Peebler
Section 2. Number of Directors: The number of directors in office may be
changed from time to time in the manner specified in the bylaws of the
Corporation, but this number shall never be less than three.
Section 3. Certain Powers of Board of Directors: The business and affairs
of the Corporation shall be managed under the direction of the Board of
Directors, which shall have and may exercise all powers of the Corporation
except those powers which are by law, by these Articles of Incorporation or by
the bylaws of the Corporation conferred upon or reserved to the stockholders. In
addition to its other powers explicitly or implicitly granted under these
Articles of Incorporation, by law or otherwise, the Board of Directors of the
Corporation (a) is expressly authorized to make, alter, amend or repeal bylaws
for the Corporation, (b) is empowered to authorize, without stockholder
approval, the issuance and sale from time to time of shares of capital stock of
the Corporation, whether now or hereafter authorized, in such amounts, for such
amount and kind of consideration and on such terms and conditions as the Board
of Directors shall determine, (c) is empowered to classify or reclassify any
unissued stock, whether now or hereafter authorized, by setting or changing the
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption of such stock, and (d) shall have the power from time to time to set
apart, out of any assets of the Corporation otherwise available for dividends, a
reserve or reserves for taxes or for any other proper purposes, and to reduce,
abolish or add to any such reserve or reserves from time to time as said Board
of Directors may deem to be in the best interests of the Corporation; and to
determine in its discretion what part of the assets of the Corporation available
for dividends in excess of such reserve or reserves shall be declared in
dividends and paid to the stockholders of the Corporation.
ARTICLE VII
Indemnification
The Corporation shall indemnify its directors, including any director who
serves another corporation, partnership, joint venture, trust or other
enterprise in any capacity at the request of the Corporation, to the maximum
extent permitted by the Maryland General Corporation Law and the Investment
Company Act of 1940. The Corporation shall indemnify its officers to the same
extent as its directors and to such further extent as is consistent with law.
The Corporation shall indemnify its employees and agents to the extent provided
by its Board of Directors.
ARTICLE VIII
Amendments
The Corporation reserves the right from time to time to make any amendment
of these Articles of Incorporation now or hereafter authorized by law, including
any amendment which alters the contract rights, as expressly set forth in these
Articles of Incorporation, of any outstanding capital stock. "Articles of
Incorporation" or "these Articles of Incorporation" as used herein and in the
bylaws of the Corporation shall be deemed to mean these Articles of
Incorporation as from time to time amended or restated.
ARTICLE IX
Duration
The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, the undersigned incorporators of Principal Variable
Contracts Fund, Inc. have executed the foregoing Articles of Incorporation and
hereby acknowledge the same to be their voluntary act and deed.
Dated the 23rd day of May, 1997
/s/ Arthur S. Filean
-----------------------------------
Arthur S. Filean
/s/ Ernest H. Gillum
-----------------------------------
Ernest H. Gillum
BYLAWS
OF
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
ARTICLE 1
Name, Fiscal Year
1.01 The name of this Corporation shall be Principal Variable Contracts
Fund, Inc. Except as otherwise from time to time provided by the board of
directors, the fiscal year of the Corporation shall begin January 1 and end
December 31.
ARTICLE 2
Stockholders' Meetings
2.01 Place of Meetings. All meetings of the stockholders shall be held
at such place within or without the State of Maryland, as is stated in the
notice of meeting.
2.02 Annual Meetings. The Board of Directors of the Corporation shall
determine whether or not an annual meeting of stockholders shall be held. In the
event that an annual meeting of stockholders is held, such meeting shall be held
on the first Tuesday after the first Monday of April in each year or on such
other day during the 31-day period following the first Tuesday after the first
Monday of April as the directors may determine.
2.03 Special Meetings. Special meetings of the stockholders shall be
held whenever called by the chairman of the board, the president or the board of
directors, or when requested in writing by 10% of the Corporation's outstanding
shares.
2.04 Notice of Stockholders' Meetings. Notice of each stockholders'
meeting stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called shall be given by mailing such notice
to each stockholder of record at his address as it appears on the records of the
Corporation not less than 10 nor more than 90 days prior to the date of the
meeting. Any meeting at which all stockholders entitled to vote are present
either in person or by proxy or of which those not present have waived notice in
writing shall be a legal meeting for the transaction of business notwithstanding
that notice has not been given as herein provided.
2.05 Quorum. Except as otherwise expressly required by law, these
bylaws or the Articles of Incorporation, as from time to time amended, at any
meeting of the stockholders the presence in person or by proxy of the holders of
one-third of the shares of capital stock of the Corporation issued and
outstanding and entitled to vote, shall constitute a quorum, but a lesser
interest may adjourn any meeting from time to time and the meeting may be held
as adjourned without further notice. When a quorum is present at any meeting a
majority of the stock represented thereat shall decide any question brought
before such meeting unless the question is one upon which by express provision
of law or of these bylaws or the Articles of Incorporation a larger or different
vote is required, in which case such express provision shall govern.
2.06 Proxies and Voting Stockholders of record may vote at any meeting
either in person or by written proxy signed by the stockholder or by the
stockholder's duly authorized attorney-in-fact dated not more than eleven months
before the date of exercise, which shall be filed with the Secretary of the
meeting before being voted. Each stockholder shall be entitled to one vote for
each share of stock held, and to a fraction of a vote equal to any fractional
share held.
Attachment B
2.07 Stock Ledger. The Corporation shall maintain at the office of the
stock transfer agent of the Corporation, or at the office of any successor
thereto as stock transfer agent of the Corporation, an original stock ledger
containing the names and addresses of all stockholders and the number of shares
of each class held by each stockholder. Such stock ledger may be in written form
or any other form capable of being converted into written form within a
reasonable time for visual inspection.
ARTICLE 3
Board of Directors
3.01 Number, Service. The Corporation shall have a Board of Directors
consisting of not less than three and no more than fifteen members. The number
of Directors to constitute the whole board within the limits above-stated shall
be fixed by the Board of Directors. The Directors may be chosen (i) by
stockholders at any annual meeting of stockholders held for the purpose of
electing directors or at any meeting held in lieu thereof, or at any special
meeting called for such purpose, or (ii) by the Directors at any regular or
special meeting of the Board to fill a vacancy on the Board as provided in these
bylaws and Maryland General Corporation Law. Each director should serve until
the next annual meeting of shareholders and until a successor is duly qualified
and elected, unless sooner displaced.
3.02 Powers. The board of directors shall be responsible for the entire
management of the business of the Corporation. In the management and control of
the property, business and affairs of the Corporation the board of directors is
hereby vested with all the powers possessed by the Corporation itself so far as
this designation of authority is not inconsistent with the laws of the State of
Maryland, but subject to the limitations and qualifications contained in the
Articles of Incorporation and in these bylaws.
3.03 Executive Committee and Other Committees. The board of directors
may elect from its members an executive committee of not less than three which
may exercise certain powers of the board of directors when the board is not in
session pursuant to Maryland law. The executive committee may make rules for the
holding and conduct of its meetings and keeping the records thereof, and shall
report its action to the board of directors.
The board of directors may elect from its members such other
committees from time to time as it may desire. The number composing such
committees and the powers conferred upon them shall be determined by the board
of directors at its own discretion.
3.04 Meetings. Regular meetings of the board of directors may be held
in such places within or without the State of Maryland, and at such times as the
board may from time to time determine, and if so determined, notices thereof
need not be given. Special meetings of the board of directors may be held at any
time or place whenever called by the president or a majority of the directors,
notice thereof being given by the secretary or the president, or the directors
calling the meeting, to each director. Special meetings of the board of
directors may also be held without formal notice provided all directors are
present or those not present have waived notice thereof.
3.05 Quorum. A majority of the members of the board of directors from
time to time in office but in no event not less than one-third of the number
constituting the whole board shall constitute a quorum for the transaction of
business provided, however, that where the Investment Company Act of 1940
requires a different quorum to transact business of a specific nature, the
number of directors so required shall constitute a quorum for the transaction of
such business.
A lesser number may adjourn a meeting from time to time and the
meeting may be held without further notice. When a quorum is present at any
meeting a majority of the members present thereat shall decide any question
brought before such meeting except as otherwise expressly required by law, the
Articles of Incorporation or these bylaws.
3.06 Action by Directors Other than at a Meeting. Any action required
or permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting, if a written consent to such
action is signed by all members of the Board of Directors or such committee, as
the case may be, and such written consent is filed with the minutes of
proceedings of the Board of Directors or committee.
3.07 Holding of Meetings by Conference Telephone Call. At any regular
or special meeting, members of the Board of Directors or any committee thereof
may participate by conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this Section shall constitute presence in
person at such meeting.
ARTICLE 4
Officers
4.01 Selection. The officers of the Corporation shall be a president,
one or more vice presidents, a secretary and a treasurer. The board of directors
may, if it so determines, also elect a chairman of the board. All officers shall
be elected by the board of directors and shall serve at the pleasure of the
board. The same person may hold more than one office except the offices of
president and vice president.
4.02 Eligibility. The chairman of the board, if any, and the president
shall be directors of the Corporation. Other officers need not be directors.
4.03 Additional Officers and Agents. The board of directors may appoint
one or more assistant treasurers, one or more assistant secretaries and such
other officers or agents as it may deem advisable, and may prescribe the duties
thereof.
4.04 Chairman of the Board of Directors. The chairman of the board, if
any, shall preside at all meetings of the board of directors at which he is
present. He shall have such other authority and duties as the board of directors
shall from time to time determine.
4.05 The President. The president shall be the chief executive officer
of the Corporation; he shall have general and active management of the business,
affairs and property of the Corporation, and shall see that all orders and
resolutions of the board of directors are carried into effect. He shall preside
at meetings of stockholders, and of the board of directors unless a chairman of
the board has been elected and is present.
4.06 The Vice Presidents. The vice presidents shall respectively have
such powers and perform such duties as may be assigned to them by the board of
directors or the president. In the absence or disability of the president, the
vice presidents, in the order determined by the board of directors, shall
perform the duties and exercise the powers of the president.
4.07 The Secretary. The secretary shall keep accurate minutes of all
meetings of the stockholders and directors, and shall perform all duties
commonly incident to his office and as provided by law and shall perform such
other duties and have such other powers as the board of directors shall from
time to time designate. In his absence an assistant secretary or secretary pro
tempore shall perform his duties.
4.08 The Treasurer. The treasurer shall, subject to the order of the
board of directors and in accordance with any arrangements for performance of
services as custodian, transfer agent or disbursing agent approved by the board,
have the care and custody of the money, funds, securities, valuable papers and
documents of the Corporation, and shall have and exercise under the supervision
of the board of directors all powers and duties commonly incident to his office
and as provided by law. He shall keep or cause to be kept accurate books of
account of the Corporation's transactions which shall be subject at all times to
the inspection and control of the board of directors. He shall deposit all funds
of the Corporation in such bank or banks, trust company or trust companies or
such firm or firms doing a banking business as the board of directors shall
designate. In his absence, an assistant treasurer shall perform his duties.
ARTICLE 5
Vacancies
5.01 Removals. The stockholders may at any meeting called for the
purpose, by vote of the holders of a majority of the capital stock issued and
outstanding and entitled to vote, remove from office any director and, unless
the number of directors constituting the whole board is accordingly decreased,
elect a successor. To the extent consistent with the Investment Company Act of
1940, the board of directors may by vote of not less than a majority of the
directors then in office remove from office any director, officer or agent
elected or appointed by them and may for misconduct remove any thereof elected
by the stockholders.
5.02 Vacancies. If the office of any director becomes or is vacant by
reason of death, resignation, removal, disqualification, an increase in the
authorized number of directors or otherwise, the remaining directors may by vote
of a majority of said directors choose a successor or successors who shall hold
office for the unexpired term; provided that vacancies on the board of directors
may be so filled only if, after the filling of the same, at least two-thirds of
the directors then holding office would be directors elected to such office by
the stockholders at a meeting or meetings called for the purpose. In the event
that at any time less than a majority of the directors were so elected by the
stockholders, a special meeting of the stockholders shall be called forthwith
and held as promptly as possible and in any event within sixty days for the
purpose of electing an entire new board of directors.
ARTICLE 6
Certificates of Stock
6.01 Certificates. The board of directors may adopt a policy of not
issuing certificates except in extraordinary situations as may be authorized
from time to time by an officer of the Corporation. If such a policy is adopted,
a stockholder may obtain a certificate or certificates of the capital stock of
the Corporation owned by such stockholder only if the stockholder demonstrates a
specific reason for needing a certificate. If issued, the certificate shall be
in such form as shall, in conformity to law, be prescribed from time to time by
the board of directors. Such certificates shall be signed by the chairman of the
board of directors or the president or a vice president and by the treasurer or
an assistant treasurer or the secretary or an assistant secretary. If such
certificates are countersigned by a transfer agent or registrar other than the
Corporation or an employee of the Corporation, the signatures of the
aforementioned officers upon such certificates may be facsimile. In case any
officer or officers who have signed, or whose facsimile signature or signatures
have been used on, any such certificate or certificates shall cease to be such
officer or officers of the Corporation, whether because of death, resignation or
otherwise, before such certificate or certificates have been delivered by the
Corporation, such certificate or certificates may nevertheless be adopted by the
Corporation and be issued and delivered as though the person or persons who
signed such certificate or certificates or whose facsimile signature or
signatures have been used thereon had not ceased to be such officer or officers
of the Corporation.
6.02 Replacement of Certificates. The board of directors may direct a
new certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed. When authorizing such issue of a new certificate or certificates, the
board of directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost or destroyed certificate or
certificates, or its legal representative, to advertise the same in such manner
as it shall require and/or to give the Corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the Corporation
with respect to the certificate alleged to have been lost or destroyed.
6.03 Stockholder Open Accounts. The Corporation may maintain or cause
to be maintained for each stockholder a stockholder open account in which shall
be recorded such stockholder's ownership of stock and all changes therein, and
certificates need not be issued for shares so recorded in a stockholder open
account unless requested by the stockholder and such request is approved by an
officer.
6.04 Transfers. Transfers of stock for which certificates have been
issued will be made only upon surrender to the Corporation or the transfer agent
of the Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, whereupon
the Corporation will issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction on its books. Transfers of
stock evidenced by open account authorized by Section 6.03 will be made upon
delivery to the Corporation or the transfer agent of the Corporation of
instructions for transfer or evidence of assignment or succession, in each case
executed in such manner and with such supporting evidence as the Corporation or
transfer agent may reasonably require.
6.05 Closing Transfer Books. The transfer books of the stock of the
Corporation may be closed for such period (not to exceed 20 days) from time to
time in anticipation of stockholders' meetings or the declaration of dividends
as the directors may from time to time determine.
6.06 Record Dates. The board of directors may fix in advance a date,
not exceeding ninety days preceding the date of any meeting of stockholders, or
the date for the payment of any dividend, or the date for the allotment of
rights, or the date when any change or conversion or exchange of capital stock
shall go into effect, or a date in connection with obtaining any consent or for
any other lawful purpose, as a record date for the determination of the
stockholders entitled to notice of, and to vote at, any such meeting, and any
adjournment thereof, or entitled to receive payment of any such dividend, or to
any such allotment of rights, or to exercise the rights in respect of any such
change, conversion or exchange of capital stock, or to give such consent, and in
such case such stockholders and only such stockholders as shall be stockholders
of record on the date as fixed shall be entitled to such notice of, and to vote
at, such meeting, and any adjournment thereof, or to receive payment of such
dividend, or to receive such allotment of rights, or to exercise such rights, or
to give such consent, as the case may be, notwithstanding any transfer of any
stock on the books of the Corporation after any such record date fixed as
aforesaid.
6.07 Registered Ownership. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner and shall not be bound
to recognize any equitable or other claim to or interest in such share or shares
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.
ARTICLE 7
Notices
7.01 Manner of Giving. Whenever under the provisions of the statutes or
of the Articles of Incorporation or of these bylaws notice is required to be
given to any director, committee member, officer or stockholder, it shall not be
construed to mean personal notice, but such notice may be given, in the case of
stockholders, in writing, by mail, by depositing the same in a United States
post office or letter box, in a postpaid sealed wrapper, addressed to each
stockholder at such address as it appears on the books of the Corporation, or,
in default to other address, to such stockholder at the General Post Office in
the City of Baltimore, Maryland, and, in the case of directors, committee
members and officers, by telephone, or by mail or by telegram to the last
business address known to the secretary of the Corporation, and such notice
shall be deemed to be given at the time when the same shall be thus mailed or
telegraphed or telephoned.
7.02 Waiver. Whenever any notice is required to be given under the
provisions of the statutes or of the Articles of Incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE 8
General Provisions
8.01 Disbursement of Funds. All checks, drafts, orders or instructions
for the payment of money and all notes of the Corporation shall be signed by
such officer or officers or such other person or persons as the board of
directors may from time to time designate.
8.02 Voting Stock in Other Corporations. Unless otherwise ordered by
the board of directors, any officer shall have full power and authority to
attend and act and vote at any meeting of stockholders of any Corporation in
which this Corporation may hold stock, and at any such meeting may exercise any
and all the rights and powers incident to the ownership of such stock. Any
officer of this Corporation may execute proxies to vote shares of stock of other
corporations standing in the name of this Corporation.
8.03 Execution of Instruments. Except as otherwise provided in these
bylaws, all deeds, mortgages, bonds, contracts, stock powers and other
instruments of transfer, reports and other instruments may be executed on behalf
of the Corporation by the president or any vice president or by any other
officer or agent authorized to act in such matters, whether by law, the Articles
of Incorporation, these bylaws, or any general or special authorization of the
board of directors. If the corporate seal is required, it shall be affixed by
the secretary or an assistant secretary.
8.04 Seal. The corporate seal shall have inscribed thereon the name of
the Corporation, the year of its incorporation and the words "Corporate Seal,
Maryland." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE 9
Regulations
9.01 Investment and Related Matters. The Corporation shall not purchase
or hold securities in violation of the investment restrictions enumerated in its
then current prospectus and the registration statement or statements filed with
the Securities and Exchange Commission pursuant to the Securities Act of 1933
and the Investment Company Act of 1940, as amended, nor shall the Corporation
invest in securities the purchase of which would cause the Corporation to
forfeit its rights to continue to publicly offer its shares under the laws,
rules or regulations of any state in which it may become authorized to so offer
its shares unless, by specific resolution of the board of directors, the
Corporation shall elect to discontinue the sale of its shares in such state.
9.02 Other Matters. When used in this section the following words shall
have the following meanings: "Sponsor" shall mean any one or more corporations,
firms or associations which have distributor's contracts in effect with this
Corporation. "Manager" shall mean any corporation, firm or association which may
at the time have an investment advisory contract with this Corporation.
(a)Limitation of Holdings by this Corporation of Certain
Securities and of Dealings with Officers or Directors. This
Corporation shall not purchase or retain securities of any
issuer if those officers and directors of the Fund or its
Manager owning beneficially more than one-half of one per cent
(0.5%) of the shares or securities of such issuer together own
beneficially more than five per cent (5%) of such shares or
securities; and each officer and director of this Corporation
shall keep the treasurer of this Corporation informed of the
names of all issuers (securities of which are held in the
portfolio of this Corporation) in which such officer or
director owns as much as one-half of one percent (1/2 of 1%) of
the outstanding shares or securities and (except in the case of
a holding by the treasurer) this Corporation shall not be
charged with knowledge of any such security holding in the
absence of notice given if as aforesaid if this Corporation has
requested such information not less often than quarterly. The
Corporation will not lend any of its assets to the Sponsor or
Manager or to any officer or director of the Sponsor or Manager
or of this Corporation and shall not permit any officer or
director, and any officer or director of the Sponsor or
Manager, to deal for or on behalf of the Corporation with
himself as principal agent, or with any partnership,
association or corporation in which he has a financial
interest. Nothing contained herein shall prevent (1) officers
and directors of the Corporation from buying, holding or
selling shares in the Corporation, or from being partners,
officers or directors of or otherwise financially interested in
the Sponsor or the Manager or any company controlling the
Sponsor or the Manager; (2) employment of legal counsel,
registrar, transfer agent, dividend disbursing agent or
custodian who is, or has a partner shareholder, officer or
director who is, an officer or director of the Corporation, if
only customary fees are charged for services to the
Corporation; (3) sharing statistical and research expenses and
office hire and expenses with any other investment company in
which an officer or director of the Corporation is an officer
or director or otherwise financially interested.
(b)Limitation Concerning Participating by Interested Persons in
Investment Decisions. In any case where an officer or director
of the Corporation or of the Manager, or a member of an
advisory committee or portfolio committee of the Corporation,
is also an officer or a director of another corporation, and
the purchase or sale of shares issued by that other corporation
is under consideration, the officer or director or committee
member concerned will abstain from participating in any
decision made on behalf of the Corporation to purchase or sell
any securities issued by such other corporation.
(c)Limitation on Dealing in Securities of this Corporation by
certain Officers, Directors, Sponsor or Manager. Neither the
Sponsor nor Manager, nor any officer or director of this
Corporation or of the Sponsor or Manager shall take long or
short positions in securities issued by this Corporation,
provided, however, that:
(1)The Sponsor may purchase from this Corporation shares
issued by this Corporation if the orders to purchase from
this Corporation are entered with this Corporation by the
Sponsor upon receipt by the Sponsor of purchase orders for
shares of this Corporation and such purchases are not in
excess of purchase orders received by the Sponsor.
(2)The Sponsor may in the capacity of agent for this
Corporation buy securities issued by this Corporation
offered for sale by other persons.
(3)Any officer or director of this Corporation or of the
Sponsor or Manager or any Company controlling the Sponsor or
Manager may at any time, or from time to time, purchase from
this Corporation or from the Sponsor shares issued by this
Corporation at a price not lower than the net asset value of
the shares, no such purchase to be in contravention of any
applicable state or federal requirement.
(d)Securities and Cash of this Corporation to be held by
Custodian subject to certain Terms and Conditions.
(1)All securities and cash owned by this Corporation shall as
hereinafter provided, be held by or deposited with a bank or
trust company having (according to its last published
report) not less than two million dollars ($2,000,000)
aggregate capital, surplus and undivided profits (which bank
or trust company is hereby designated as "Custodian"),
provided such a Custodian can be found ready and willing to
act.
(2)This Corporation shall enter into a written contract with
the Custodian regarding the powers, duties and compensation
of the Custodian with respect to the cash and securities of
this Corporation held by the Custodian. Said contract and
all amendments thereto shall be approved by the board of
directors of this Corporation.
(3)This Corporation shall upon the resignation or inability to
serve of its Custodian or upon change of the Custodian: (aa)
in case of such resignation or inability to serve, use its
best efforts to obtain a successor Custodian;
(bb)require that the cash and securities owned by this
Corporation be delivered directly to the successor
Custodian; and
(cc)In the event that no successor Custodian can be found,
submit to the stockholders, before permitting delivery
of the cash and securities owned by this Corporation
otherwise than to a successor Custodian, the question
whether or not this Corporation shall be liquidated or
shall function without a Custodian.
(e)Amendment of Investment Advisory Contract. Any investment
advisory contract entered into by this Corporation shall not be
subject to amendment except by (1) affirmative vote at a
shareholders meeting, of the holders of a majority of the
outstanding stock of this Corporation, or (2) a majority of
such Directors who are not interested persons (as the term is
defined in the Investment Company Act of 1940) of the Parties
to such agreements, cast in person at a board meeting called
for the purpose of voting on such amendment.
(f)Reports relating to Certain Dividends. Dividends paid from net
profits from the sale of securities shall be clearly revealed
by this Corporation to its shareholders and the basis of
calculation shall be set forth.
(g)Maximum Sales Commission. The Corporation shall, in any
distribution contract with respect to its shares of common
stock entered into by it, provide that the maximum sales
commission to be charged upon any sales of such shares shall
not be more than nine per cent (9%) of the offering price to
the public of such shares. As used herein, "offering price to
the public" shall mean net asset value per share plus the
commission charged adjusted to the nearest cent.
ARTICLE 10
Purchases and Redemption of Shares:
Suspension of Sales
10.01 Purchase by Agreement. The Corporation may purchase its shares by
agreement with the owner at a price not exceeding the net asset value next
computed following the time when the purchase or contract to purchase is made.
10.02 Redemption. The Corporation shall redeem such shares as are
offered by any stockholder for redemption upon the presentation of a written
request therefor, duly executed by the record owner, to the office or agency
designated by the Corporation. If the shareholder has received stock
certificates, the request must be accompanied by the certificates, duly endorsed
for transfer, in acceptable form; and the Corporation will pay therefor the net
asset value of the shares next effective following the time at which the
request, in acceptable form, is so presented. Payment for said shares shall
ordinarily be made by the Corporation to the stockholder within seven days after
the date on which the shares are presented.
10.03 Suspension of Redemption. The obligations set out in Section
10.02 may be suspended (i) for any period during which the New York Stock
Exchange, Inc. is closed other than customary week-end and holiday closings, or
during which trading on the New York Stock Exchange, Inc. is restricted, as
determined by the rules and regulations of the Securities and Exchange
Commission or any successor thereto; (ii) for any period during which an
emergency, as determined by the rules and regulations of the Securities and
Exchange Commission or any successor thereto, exists as a result of which
disposal by the Corporation of securities owned by it is not reasonably
practicable or as a result of which it is not reasonably practicable for the
Corporation to fairly determine the value of its net assets; or (iii) for such
other periods as the Securities and Exchange Commission or any successor thereto
may by order permit for the protection of security holders of the Corporation.
Payment of the redemption or purchase price may be made in cash or, at the
option of the Corporation, wholly or partly in such portfolio securities of the
Corporation as the Corporation may select.
10.04 Suspension of Sales. The Corporation reserves the right to
suspend sales of its shares if, in the judgment of the majority of the board of
directors or a majority of the executive committee of its Board, if such
committee exists, it is in the best interest of the Corporation to do so, such
suspension to continue for such period as may be determined by such majority.
10.05 Sales only to Eligible Purchasers. Only Eligible Purchasers may
purchase shares directly from the Corporation. Eligible purchasers are limited
to (a) separate accounts of Principal Mutual Life Insurance Company or of other
insurance companies; (b) Principal Mutual Life Insurance Company or any
subsidiary or affiliate thereof; (c) trustees or other managers of any qualified
profit sharing, incentive or bonus plan established by Principal Mutual Life
Insurance Company or any subsidiary or affiliate thereof for the employees of
such company, subsidiary or affiliate.
ARTICLE 11
Fractional Shares
11.01 The board of directors may authorize the issue from time to time
of shares of the capital stock of the Corporation in fractional denominations,
provided that the transactions in which and the terms upon which shares in
fractional denominations may be issued may from time to time be determined and
limited by or under authority of the board of directors.
ARTICLE 12
Indemnification
12.01(a) Every person who is or was a director, officer or employee of
this Corporation or of any other corporation which he served at
the request of this Corporation and in which this Corporation owns
or owned shares of capital stock or of which it is or was a
creditor shall have a right to be indemnified by this Corporation
against all liability and reasonable expenses incurred by him in
connection with or resulting from a claim, action, suit or
proceeding in which he may become involved as a party or otherwise
by reason of his being or having been a director, officer or
employee of this Corporation or such other corporation, provided
(1) said claim, action, suit or proceeding shall be prosecuted to
a final determination and he shall be vindicated on the merits, or
(2) in the absence of such a final determination vindicating him
on the merits, the board of directors shall determine that he
acted in good faith and in a manner he reasonably believed to be
in the best interest of the Corporation in the case of conduct in
the director's official capacity with the Corporation and in all
other cases, that the conduct was at least not opposed to the best
interest of the Corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his
conduct was unlawful; said determination to be made by the board
of directors acting through a quorum of disinterested directors,
or in its absence on the opinion of counsel.
(b)For purposes of the preceding subsection: (1) "liability and
reasonable expenses" shall include but not be limited to
reasonable counsel fees and disbursements, amounts of any
judgment, fine or penalty, and reasonable amounts paid in
settlement; (2) "claim, action, suit or proceeding" shall
include every such claim, action, suit or proceeding, whether
civil or criminal, derivative or otherwise, administrative,
judicial or legislative, any appeal relating thereto, and shall
include any reasonable apprehension or threat of such a claim,
action, suit or proceeding; (3) the termination of any
proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent creates a rebuttable
presumption that the director did not meet the standard of
conduct set forth in subsection (a)(2), supra.
(c)Notwithstanding the foregoing, the following limitations shall
apply with respect to any action by or in the right of the
Corporation: (1) no indemnification shall be made in respect of
claim, issue or matter as to which the person seeking
indemnification shall have been adjudged to be liable for
negligence or misconduct in the performance of his duty to the
Corporation unless and only to the extent that the Court of
Chancery of the State of Maryland or the court in which such
action or suit was brought shall determine upon application
that despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper; and
(2) indemnification shall extend only to reasonable expenses,
including reasonable counsel's fees and disbursements.
(d)The right of indemnification shall extend to any person
otherwise entitled to it under this bylaw whether or not that
person continues to be a director, officer or employee of this
Corporation or such other corporation at the time such
liability or expense shall be incurred. The right of
indemnification shall extend to the legal representative and
heirs of any person otherwise entitled to indemnification. If a
person meets the requirements of this bylaw with respect to
some matters in a claim, action suit, or proceeding, but not
with respect to others, he shall be entitled to indemnification
as to the former. Advances against liability and expenses may
be made by the Corporation on terms fixed by the board of
directors subject to an obligation to repay if indemnification
proves unwarranted.
(e)This bylaw shall not exclude any other rights of
indemnification or other rights to which any director, officer
or employee may be entitled to by contract, vote of the
stockholders or as a matter of law.
If any clause, provision or application of this section shall
be determined to be invalid, the other clauses, provisions or
applications of this section shall not be affected but shall
remain in full force and effect. The provisions of this bylaw
shall be applicable to claims, actions, suits or proceedings
made or commenced after the adoption hereof, whether arising
from acts or omissions to act occurring before or after the
adoption hereof.
(f)Nothing contained in this bylaw shall be construed to protect
any director or officer of the Corporation against any
liability to the Corporation or its security holders to which
he would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
ARTICLE 13
Amendments
13.01 These bylaws may be amended or added to, altered or repealed at
any annual or special meeting of the stockholders by the affirmative vote of the
holders of a majority of the shares of capital stock issued and outstanding and
entitled to vote, provided notice of the general purport of the proposed
amendment, addition, alteration or repeal is given in the notice of said
meeting, or, at any meeting of the board of directors by vote of a majority of
the directors then in office, except that the board of directors may not amend
Article 5 to permit removal by said board without cause of any director elected
by the stockholders.
MANAGEMENT AGREEMENT
AGREEMENT to be effective the day of , 1997, by and between PRINCIPAL
VARIABLE CONTRACTS FUND, INC., a Maryland corporation (hereinafter called the
"Fund") and PRINCOR 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 therefor 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 Fund's
portfolio consistent with the Fund'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, 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 Mutual Life
Insurance Company, or an affiliate thereof.
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 Fund as of the time of determination of the net
asset value on each trading day throughout the month in accordance with the
Schedules of Management Fees 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 MUTUAL 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 Mutual
Life Insurance Company and the Manager may be reimbursed therefor, or such
expenses may be paid directly by Principal Mutual 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 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 Mutual 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 amendment of this Agreement shall be effective until approved 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 Mutual 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 ____________________________________________
Arthur S. Filean, Vice President
PRINCOR MANAGEMENT CORPORATION
By ____________________________________________
Stephan L. Jones, President
SCHEDULE 1
MANAGEMENT FEES
Aggressive Growth and
Asset Allocation Accounts
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
---------------------------------------------------------------------
First $100,000,000 .80%
Next 100,000,000 .75%
Next 100,000,000 .70%
Next 100,000,000 .65%
Amount Over 400,000,000 .60%
SCHEDULE 2
MANAGEMENT FEES
International Account
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
---------------------------------------------------------------------
First $100,000,000 .75%
Next 100,000,000 .70%
Next 100,000,000 .65%
Next 100,000,000 .60%
Amount Over 400,000,000 .55%
SCHEDULE 3
MANAGEMENT FEES
MidCap Account
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
---------------------------------------------------------------------
First $100,000,000 .65%
Next 100,000,000 .60%
Next 100,000,000 .55%
Next 100,000,000 .50%
Amount Over 400,000,000 .45%
SCHEDULE 4
MANAGEMENT FEES
High Yield and
Balanced Accounts
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
------------------------------------------------------------------
First $100,000,000 .60%
Next 100,000,000 .55%
Next 100,000,000 .50%
Next 100,000,000 .45%
Amount Over 400,000,000 .40%
SCHEDULE 5
MANAGEMENT FEES
Bond, Capital Value, Government Securities,
Growth and Money Market Accounts
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
------------------------------------------------------------------
First $100,000,000 .50%
Next 100,000,000 .45%
Next 100,000,000 .40%
Next 100,000,000 .35%
Amount Over 400,000,000 .30%
INVESTMENT SERVICE AGREEMENT
THIS INVESTMENT SERVICE AGREEMENT, to be effective the _______day of
___________, ____, by and between PRINCIPAL VARIABLE CONTRACTS FUND, INC. (the
"Fund"), an open-end investment company formed under the laws of Maryland,
PRINCOR MANAGEMENT CORPORATION ("Manager"), an Iowa corporation, and PRINCIPAL
MUTUAL LIFE INSURANCE COMPANY, a specially chartered Iowa life insurance
company.
W I T N E S S E T H:
WHEREAS, Principal Mutual Life Insurance Company has organized the Manager
to serve as investment adviser and is the owner (through its subsidiaries) of
all of the outstanding stock of the Manager; and
WHEREAS, the Manager and the Fund have entered into a Management Agreement
effective as of ____________________ whereby the Manager undertakes to furnish
the Fund with investment advisory services and certain other services; and
WHEREAS, the Manager has the right under the Management Agreement to
appoint one or more sub-advisors to furnish such services to the Fund; and
WHEREAS, Principal Mutual Life Insurance Company is willing to make
available to the Manager on a part-time basis certain employees and services of
Principal Mutual Life Insurance Company and its subsidiaries for the purpose of
better enabling the Manager to fulfill its investment advisory obligations under
the Management Agreement, provided that the Manager bears all costs allocable to
the time spent by them on the affairs of the Manager, and the Manager and the
Fund believe that such an arrangement will be for their mutual benefit:
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. The Manager shall have the right to use, on a part-time basis, and
Principal Mutual Life Insurance Company shall make available on such basis, such
employees of Principal Mutual Life Insurance Company and its subsidiaries and
for such periods as may be agreed upon by the Manager and Principal Mutual Life
Insurance Company and its subsidiaries, as reasonably needed by the Manager in
the performance of its investment advisory services (but not its administrative,
transfer and paying services) under the Management Agreement. It is anticipated
that such employees will be persons employed in the Investment Department of
Principal Mutual Life Insurance Company or its subsidiaries. Principal Mutual
Life Insurance Company will also make available to the Manager or the Fund such
clerical, stenographic and administrative services as the Manager may reasonably
request to facilitate its performance of such investment advisory services.
2. The employees of Principal Mutual Life Insurance Company and its
subsidiaries in performing services for the Manager hereunder may, to the full
extent that they deem appropriate, have access to and utilize statistical and
economic data, investment research reports and other material prepared for or
contained in the files of the Investment Department of Principal Mutual Life
Insurance Company or its subsidiaries which is relevant to making investments
for the Fund, and may make such materials available to the Manager, provided,
that any such materials prepared or obtained in connection with a private
placement or other non-public transaction need not be made available to the
Manager if Principal Mutual Life Insurance Company or its subsidiaries deem such
materials confidential.
3. Employees of Principal Mutual Life Insurance Company or its subsidiaries
performing services for the Manager pursuant hereto shall report and be
responsible solely to the officers and directors of the Manager or persons
designated by them. Principal Mutual Life Insurance Company or its subsidiaries
shall have no responsibility for investment recommendations and decisions of the
Manager based upon information or advice given or obtained by or through such
Principal Mutual Life Insurance Company employees or employees of Principal
Mutual Life Insurance Company subsidiaries.
4. Principal Mutual Life Insurance Company will, to the extent requested by
the Manager, supply to employees of the Manager (including part-time employees
of Principal Mutual Life Insurance Company or its subsidiaries serving the
Manager) such clerical, stenographic and administrative services and such office
supplies and equipment as may be reasonably required in order that they may
properly perform their respective functions on behalf of the Manager in
connection with its performance of its investment advisory services under the
Management Agreement.
5. The obligation of performance under the Management Agreement is solely
that of the Manager, and Principal Mutual Life Insurance Company and its
subsidiaries undertake no obligation in respect thereto, except as otherwise
expressly provided herein.
6. In consideration of the services to be rendered by Principal Mutual Life
Insurance Company or its subsidiaries and their employees pursuant to this
Investment Service Agreement, the Manager agrees to reimburse Principal Mutual
Life Insurance Company or its subsidiaries for such costs, direct and indirect,
as may be fairly attributable to the services performed for the Manager. Such
costs shall include, but not be limited to, an appropriate portion of:
(a) salaries;
(b) employee benefits;
(c) general overhead expense;
(d) supplies and equipment; and
(e) a charge in the nature of rent for the cost of space in Principal
Mutual Life Insurance Company offices fairly allocable to
activities of the Manager under the Management Agreement.
In the event of disagreement between the Manager and Principal Mutual Life
Insurance Company and its subsidiaries as to a fair basis for allocating or
apportioning costs, such basis shall be fixed by the public accountants for the
Fund.
7. This Investment Service 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 from year to year provided that the continuance is
specifically approved at least annually either by the Board of Directors of the
Fund or by vote of a majority of the outstanding voting securities of the Fund
and in either event such continuance shall be approved by the vote of a majority
of the directors who are not interested persons of the Manager, Principal Mutual
Life Insurance Company or its subsidiaries or the Fund cast in person at a
meeting called for the purpose of voting on such approval. This Investment
Service 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, by the
Manager or Principal Mutual Life Insurance Company. This Investment Service
Agreement shall automatically terminate in the event of its assignment. In
interpreting the provisions of this Section 7, the definitions contained in
Section 2(a) of the Investment Company Act of 1940 (particularly the definitions
of "interested persons", "assignment" and "voting securities") shall be applied.
8. Any notice under this Investment Service Agreement shall be in writing,
addressed and delivered or mailed postage prepaid to the other parties at such
addresses as such other parties may designate for the receipt of such notices.
Until further notice it is agreed that the address of the fund, that of the
Manager and that of Principal Mutual Life Insurance Company and its subsidiaries
for this purpose shall be The Principal Financial Group, Des Moines, Iowa 50392.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed in three counterparts by their duly authorized officers the day and
year first above written.
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
By ______________________________________________
PRINCOR MANAGEMENT CORPORATION
By ______________________________________________
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
By ______________________________________________
SUB-ADVISORY AGREEMENT
AGREEMENT executed as of the _____________________, 1997, by and between
PRINCOR MANAGEMENT CORPORATION, an Iowa Corporation (hereinafter called "the
Manager") and INVISTA CAPITAL MANAGEMENT, INC. (hereinafter called "Invista").
W I T N E S S E T H:
WHEREAS, the Manager is the manager and investment adviser to Principal
Variable Contracts Fund, Inc., (the "Fund"), an open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Manager desires to retain Invista to furnish certain portfolio
selection and related research and statistical services in connection with the
investment advisory services which the Manager has agreed to provide to the
Fund, and Invista desires to furnish such services; and
WHEREAS, The Manager has furnished Invista with copies properly certified
or authenticated of each of the following:
(a) Management Agreement (the "Management Agreement") with the Fund;
(b) Copies of the registration statement of the Fund as filed pursuant to
the federal securities laws of the United States, including all
exhibits and amendments;
NOW, THEREFORE, in consideration of the premises and the terms and
conditions hereinafter set forth, it is agreed as follows:
1. Appointment of Invista
In accordance with and subject to the Management Agreement, the Manager
hereby appoints Invista to perform portfolio selection services described in
Section 2 below for investment and reinvestment of the securities and other
assets of certain series of the Fund (see Schedule A), subject to the control
and direction of the Fund's Board of Directors, as well as to assume other
obligations as specified in Section 2 below, for the period and on the terms
hereinafter set forth. Invista accepts such appointment and agrees to furnish
the services hereinafter set forth for the compensation herein provided. Invista
shall for all purposes herein be deemed to be an independent contractor and
shall, except as expressly provided or authorized, have no authority to act for
or represent the Fund or the Manager in any way or otherwise be deemed an agent
of the Fund or the Manager.
2. Obligations of and Services to be Provided by Invista
(a) Invista shall provide with respect to those Accounts of the Fund
described in Schedule 1 hereto (the "Accounts") all services and
obligations of the Manager described in Section 1, Investment
Advisory Services, of the Management Agreement.
(b) Invista shall use the same skill and care in providing services to
the Accounts as it uses in providing services to fiduciary
accounts for which it has investment responsibility. Invista will
conform with all applicable rules and regulations of the
Securities and Exchange Commission.
3. Compensation
As full compensation for all services rendered and obligations assumed by
Invista hereunder with respect to the Accounts, the Manager shall pay Invista
within 10 days after the end of each calendar month, or as otherwise agreed, an
amount representing Invista's actual cost of providing such services and
assuming such obligations.
4. Duration and Termination of This Agreement
This Agreement shall become effective as to an Account on the latest of (i)
the date of its execution, (ii) the date of its approval by a majority of the
directors of the Fund, including approval by the vote of a majority of the
directors of the Fund who are not interested persons of the Manager, Principal
Mutual Life Insurance Company, Invista or the Fund cast in person at a meeting
called for the purpose of voting on such approval and (iii) the date of its
approval by a majority of the outstanding voting securities of the Account. It
shall continue in effect thereafter from year to year provided that the
continuance is specifically approved at least annually either by the Board of
Directors of the Fund or by a vote of a majority of the outstanding voting
securities of the Account and in either event by vote of a majority of the
directors of the Fund who are not interested persons of the Manager, Principal
Mutual Life Insurance Company, Invista 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 as to an Account 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 Account, Invista or by the
Manager. This Agreement shall automatically terminate in the event of its
assignment. In interpreting the provisions of this Section 4, 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.
5. Amendment of this Agreement
No amendment of this Agreement as to an Account shall be effective until
approved by vote of the holders of a majority of the outstanding voting
securities of the Account and by vote of a majority of the directors of the Fund
who are not interested persons of the Manager, Invista, Principal Mutual Life
Insurance Company or the Fund cast in person at a meeting called for the purpose
of voting on such approval.
6. General Provisions
(a) Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Iowa. The
captions in this Agreement are included for convenience only and
in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(b) Any notice under this Agreement shall be in writing, addressed and
delivered or mailed postage pre-paid to the other party at such
address as such other party may designate for the receipt of such
notices. Until further notice to the other party, it is agreed
that the address of Invista and of the Manager for this purpose
shall be The Principal Financial Group, Des Moines, Iowa
50392-0200.
(c) Invista agrees to notify the Manager of any change in Invista's
officers and directors within a reasonable time after such change.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date first above written.
PRINCOR MANAGEMENT CORPORATION
By __________________________________________
Stephan L. Jones, President
INVISTA CAPITAL MANAGEMENT, INC.
By __________________________________________
Craig R. Barnes, President
SCHEDULE A
Invista serves as Sub-Advisor for:
Balanced Account
Capital Value Account
Government Securities Account
Growth Account
International Account
MidCap Account
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
SUB-ADVISORY AGREEMENT
AGREEMENT executed as of the _____ day of _____________, 1997, by and between
PRINCOR MANAGEMENT CORPORATION, an Iowa Corporation (hereinafter called "the
Manager") and MORGAN STANLEY ASSET MANAGEMENT INC. (hereinafter called "the
Sub-Advisor").
W I T N E S S E T H:
WHEREAS, the Manager is the manager and investment adviser to Principal
Variable Contracts Fund, Inc., (the "Fund"), an open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Manager desires to retain the Sub-Advisor to furnish it with
certain portfolio selection and related research and statistical services in
connection with the investment advisory services which the Manager has agreed to
provide to the Fund, and the Sub-Advisor desires to furnish such services; and
WHEREAS, The Manager has furnished the Sub-Advisor with copies properly
certified or authenticated of each of the following and will promptly provide
the Sub-Advisor with copies properly certified or authenticated of any amendment
or supplement thereto:
(a) Management Agreement (the "Management Agreement") with the Fund;
(b) The Fund's registration statement as filed with the Securities and
Exchange Commission;
(c) The Fund's Articles of Incorporation and By-laws;
NOW, THEREFORE, in consideration of the premises and the terms and
conditions hereinafter set forth, the parties agree as follows:
1. Appointment of Sub-Advisor
In accordance with and subject to the Management Agreement, the Manager
hereby appoints the Sub-Advisor to perform the services described in Section 2
below for investment and reinvestment of the securities and other assets of
certain series of the Fund (Appendix A), subject to the control and direction of
the Fund's Board of Directors, for the period and on the terms hereinafter set
forth. The Sub-Advisor accepts such appointment and agrees to furnish the
services hereinafter set forth for the compensation herein provided. The
Sub-Advisor shall for all purposes herein be deemed to be an independent
contractor and shall, except as expressly provided or authorized, have no
authority to act for or represent the Fund or the Manager in any way or
otherwise be deemed an agent of the Fund or the Manager.
2. Obligations of and Services to be Provided by the Sub-Advisor
(a) Provide investment advisory services, including but not limited to
research, advice and supervision, for the Accounts of the Fund
identified on Appendix A hereto (the "Accounts")
(b) 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 consistent with the Account's investment objective and
policies.
(c) Implement such of its recommended investment program as the Board of
Directors (or any appropriate committee of the Board) 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, as each of the same
shall be from time to time in effect.
(d) 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.
(e) 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 Accounts are being
observed.
(f) Provide determinations of the fair value of certain securities when
market quotations are not readily available for purposes of calculating
net asset value in accordance with procedures and methods established
by the Fund's Board of Directors.
(g) Furnish, at its own expense, (i) all necessary investment and
management facilities, including salaries of clerical and other
personnel required for it to execute its duties faithfully, and (ii)
administrative facilities, including bookkeeping, clerical personnel
and equipment necessary for the efficient conduct of the investment
advisory affairs of the Accounts.
(h) Select brokers and dealers to effect all transactions for the Accounts,
place all necessary orders with brokers, dealers, or issuers, and
negotiate brokerage commissions if applicable.
(i) Maintain all accounts, books and records with respect to the Accounts
as are required of an investment advisor of a registered investment
company pursuant to the Investment Company Act of 1940 (the "Investment
Company Act") and Investment Advisers Act of 1940 (the "Investment
Advisors Act") and the rules thereunder.
3. Compensation
As full compensation for all services rendered and obligations assumed by
the Sub-Advisor hereunder with respect to the Accounts, the Manager shall pay
the compensation specified in Appendix B to this Agreement.
4. Liability of Sub-Advisor
Neither the Sub-Advisor nor any of its directors, officers or employees
shall be liable to the Manager or the Fund for any loss suffered by the Manager
or the Fund resulting from any error of judgment made in the good faith exercise
of the Sub-Advisor's investment discretion in connection with selecting Fund
investments except for losses resulting from willful misfeasance, bad faith or
gross negligence of, or from reckless disregard of, the duties of the
Sub-Advisor or any of its directors, officers or employees.
5. Supplemental Arrangements
The Sub-Advisor may enter into arrangements with other persons affiliated
with the Sub-Advisor to better enable it to fulfill its obligations under this
Agreement for the provision of certain personnel and facilities to the
Sub-Advisor.
6. Regulation
The Sub-Advisor shall submit to all regulatory and administrative bodies
having jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body may request or
require pursuant to applicable laws and regulations.
7. 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 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 Mutual Life Insurance Company,
the Sub-Advisor or the Fund cast in person at a meeting called for the purpose
of voting on such approval.
If the shareholders of the Fund fail to approve the Agreement or any
continuance of the Agreement, the Sub-Advisor will continue to act as
Sub-Advisor with respect to the Fund pending the required approval of the
Agreement or its continuance or of any contract with the Sub-Advisor or a
different manager or sub-advisor or other definitive action; provided, that the
compensation received by the Sub-Advisor in respect to the Fund during such
period is in compliance with Rule 15a-4 under the Investment Company Act.
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, the
Sub-Advisor or the Manager, or by vote of a majority of the outstanding voting
securities of the Fund This Agreement shall automatically terminate in the event
of its assignment. In interpreting the provisions of this Section 7, 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.
8. Amendment of this Agreement
No amendment of this Agreement as to an Account shall be effective until
approved by vote of the holders of a majority of the outstanding voting
securities of the Account and by vote of a majority of the directors of the Fund
who are not interested persons of the Manager, the Sub-Advisor, Principal Mutual
Life Insurance Company or the Fund cast in person at a meeting called for the
purpose of voting on such approval.
9. General Provisions
(a) Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof. This
Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Iowa. The captions in this
Agreement are included for convenience only and in no way define or
delimit any of the provisions hereof or otherwise affect their
construction or effect.
(b) Any notice under this Agreement shall be in writing, addressed and
delivered or mailed postage pre-paid to the other party at such address
as such other party may designate for the receipt of such notices.
Until further notice to the other party, it is agreed that the address
of the Manager for this purpose shall be The Principal Financial Group,
Des Moines, Iowa 50392-0200, and the address of the Sub-Advisor shall
be 1221 Avenue of the Americas, New York, New York 10020.
(c) The Sub-Advisor will promptly notify the Advisor in writing of the
occurrence of any of the following events:
(1) the Sub-Advisor fails to be registered as an investment adviser
under the Investment Advisers Act or under the laws of any
jurisdiction in which the Sub-Advisor is required to be registered
as an investment advisor in order to perform its obligations under
this Agreement.
(2) the Sub-Advisor is served or otherwise receives notice of any
action, suit, proceeding, inquiry or investigation, at law or in
equity, before or by any court, public board or body, involving
the affairs of the Fund.
(d) This Agreement contains the entire understanding and agreement of the
parties.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date first above written.
PRINCOR MANAGEMENT CORPORATION
By ____________________________________________
Stephan L. Jones, President
MORGAN STANLEY ASSET MANAGEMENT INC.
By ____________________________________________
APPENDIX A
The Sub-Advisor shall serve as investment sub-advisor for Aggressive Growth
and Asset Allocation Accounts of the Fund. With respect to such Account, the
Manager will pay the Sub-Advisor, as full compensation for all services provided
under this Agreement, a fee computed at an annual rate as follows (the
"Sub-Advisor Percentage Fee"):
First $ 40,000,000 of Assets..................0.45%
Next $160,000,000 of Assets..................0.30%
Next $100,000,000 of Assets..................0.25%
Assets above $300,000,000.....................0.20%
The Sub-Advisor Percentage Fee shall be accrued for each calendar day and
the sum of the daily fee accruals shall be paid monthly to the Sub-Advisor. The
daily fee accruals will be computed by multiplying the fraction of one over the
number of calendar days in the year by the applicable annual rate described
above and multiplying this product by the net assets of the Fund as determined
in accordance with the Fund's prospectus and statement of additional information
as of the close of business on the previous business day on which the Fund was
open for business.
CUSTODY AGREEMENT
Agreement made as of this _____ day of _______________, 1997, between
PRINCIPAL VARIABLE CONTRACTS FUND, INC., a corporation organized and existing
under the laws of the State of Maryland having its principal office and place of
business at 711 High Street, Des Moines, Iowa 50392-0200 (hereinafter called the
"Fund"), and THE BANK OF NEW YORK, a New York corporation authorized to do a
banking business, having its principal office and place of business at 48 Wall
Street, New York, New York 10286 (hereinafter called the "Custodian").
W I T N E S S E T H :
that for and in consideration of the mutual promises hereinafter set forth, the
Fund and the Custodian agree as follows:
ARTICLE I.
DEFINITIONS
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
1. "Book-Entry System" shall mean the Federal Reserve/Treasury
book-entry system for United States and federal agency securities, its successor
or successors and its nominee or nominees.
2. "Call Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer thereof the
specified underlying Securities.
3. "Certificate" shall mean any notice, instruction, or other
instrument in writing, authorized or required by this Agreement to be given to
the Custodian which is actually received by the Custodian and signed on behalf
of the Fund by any two Officers.
4. "Clearing Member" shall mean a registered broker-dealer which is a
clearing member under the rules of O.C.C. and a member of a national securities
exchange qualified to act as a custodian for an investment company, or any
broker-dealer reasonably believed by the Custodian to be such a clearing member.
5. "Collateral Account" shall mean a segregated account so denominated
which is specifically allocated to a Series and pledged to the Custodian as
security for, and in consideration of, the Custodian's issuance of (a) any Put
Option guarantee letter or similar document described in paragraph 8 of Article
V herein, or (b) any receipt described in Article V or VIII herein.
6. "Covered Call Option" shall mean an exchange traded option entitling
the holder, upon timely exercise and payment of the exercise price, as specified
therein, to purchase from the writer thereof the specified underlying Securities
(excluding Futures Contracts) which are owned by the writer thereof and subject
to appropriate restrictions.
Attachment H-2
7. "Depository" shall mean The Depository Trust Company ("DTC"), a
clearing agency registered with the Securities and Exchange Commission, its
successor or successors and its nominee or nominees. The term "Depository" shall
further mean and include any other person authorized to act as a depository
under the Investment Company Act of 1940, its successor or successors and its
nominee or nominees, specifically identified in a certified copy of a resolution
of the Fund's Board of Directors specifically approving deposits therein by the
Custodian.
8. "Financial Futures Contract" shall mean the firm commitment to buy
or sell fixed income securities including, without limitation, U.S. Treasury
Bills, U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of
deposit, and Eurodollar certificates of deposit, during a specified month at an
agreed upon price.
9. "Futures Contract" shall mean a Financial Futures Contract and/or
Stock Index Futures Contracts.
10. "Futures Contract Option" shall mean an option with respect to a
Futures Contract.
11. "Margin Account" shall mean a segregated account in the name of a
broker, dealer, futures commission merchant, or a Clearing Member, or in the
name of the Fund for the benefit of a broker, dealer, futures commission
merchant, or Clearing Member, or otherwise, in accordance with an agreement
between the Fund, the Custodian and a broker, dealer, futures commission
merchant or a Clearing Member (a "Margin Account Agreement"), separate and
distinct from the custody account, in which certain Securities and/or money of
the Fund shall be deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time determine. Securities held
in the Book-Entry System or the Depository shall be deemed to have been
deposited in, or withdrawn from, a Margin Account upon the Custodian's effecting
an appropriate entry in its books and records.
12. "Money Market Security" shall be deemed to include, without
limitation, certain Reverse Repurchase Agreements, debt obligations issued or
guaranteed as to interest and principal by the government of the United States
or agencies or instrumentalities thereof, any tax, bond or revenue anticipation
note issued by any state or municipal government or public authority, commercial
paper, certificates of deposit and bankers' acceptances, repurchase agreements
with respect to the same and bank time deposits, where the purchase and sale of
such securities normally requires settlement in federal funds on the same day as
such purchase or sale.
13. "O.C.C." shall mean the Options Clearing Corporation, a clearing
agency registered under Section 17A of the Securities Exchange Act of 1934, its
successor or successors, and its nominee or nominees.
14. "Officers" shall be deemed to include the President, any Vice
President, the Secretary, the Treasurer, the Controller, any Assistant
Secretary, any Assistant Treasurer, and any other person or persons, whether or
not any such other person is an officer of the Fund, duly authorized by the
Board of Directors of the Fund to execute any Certificate, instruction, notice
or other instrument on behalf of the Fund and listed in the Certificate annexed
hereto as Appendix A or such other Certificate as may be received by the
Custodian from time to time.
15. "Option" shall mean a Call Option, Covered Call Option, Stock Index
Option and/or a Put Option.
16. "Oral Instructions" shall mean verbal instructions actually
received by the Custodian from an Officer or from a person reasonably believed
by the Custodian to be an Officer.
17. "Put Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and tender of the
specified underlying Securities, to sell such Securities to the writer thereof
for the exercise price.
18. "Reverse Repurchase Agreement" shall mean an agreement pursuant to
which the Fund sells Securities and agrees to repurchase such Securities at a
described or specified date and price.
19. "Security" shall be deemed to include, without limitation, Money
Market Securities, Call Options, Put Options, Stock Index Options, Stock Index
Futures Contracts, Stock Index Futures Contract Options, Financial Futures
Contracts, Financial Futures Contract Options, Reverse Repurchase Agreements,
common stocks and other securities having characteristics similar to common
stocks, preferred stocks, debt obligations issued by state or municipal
governments and by public authorities, (including, without limitation, general
obligation bonds, revenue bonds, industrial bonds and industrial development
bonds), bonds, debentures, notes, mortgages or other obligations, and any
certificates, receipts, warrants or other instruments representing rights to
receive, purchase, sell or subscribe for the same, or evidencing or representing
any other rights or interest therein, or any property or assets.
20. "Senior Security Account" shall mean an account maintained and
specifically allocated to a Series under the terms of this Agreement as a
segregated account, by recordation or otherwise, within the custody account in
which certain Securities and/or other assets of the Fund specifically al located
to such Series shall be deposited and withdrawn from time to time in accordance
with Certificates received by the Custodian in connection with such transactions
as the Fund may from time to time determine.
21. "Series" shall mean the various portfolios, if any, of the Fund as
described from time to time in the current and effective prospectus for the Fund
and listed on Appendix B hereto as amended from time to time.
22. "Shares" shall mean the shares of capital stock of the Fund, each
of which is, in the case of a Fund having Series, allocated to a particular
Series.
23. "Stock Index Futures Contract" shall mean a bilateral agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the value
of a particular stock index at the close of the last business day of the
contract and the price at which the futures contract is originally struck.
24. "Stock Index Option" shall mean an exchange traded option entitling
the holder, upon timely exercise, to receive an amount of cash determined by
reference to the difference between the exercise price and the value of the
index on the date of exercise.
ARTICLE II.
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as custodian
of the Securities and moneys at any time owned by the Fund during the period of
this Agreement.
2. The Custodian hereby accepts appointment as such custodian and
agrees to perform the duties thereof as hereinafter set forth.
ARTICLE III.
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, the Fund will deliver or cause to be delivered to the Custodian
all Securities and all moneys owned by it, at any time during the period of this
Agreement, and shall specify with respect to such Securities and money the
Series to which the same are specifically allocated. The Custodian shall
segregate, keep and maintain the assets of the Series separate and apart. The
Custodian will not be responsible for any Securities and moneys not actually
received by it. The Custodian will be entitled to reverse any credits made on
the Fund's behalf where such credits have been previously made and moneys are
not finally collected. The Fund shall deliver to the Custodian a certified
resolution of the Board of Directors of the Fund approving the Custodian's use
of the Book-Entry System with respect to all Securities eligible for deposit
therein, regardless of the Series to which the same are specifically allocated
and utilization of the Book-Entry System to the extent possible in connection
with its performance hereunder, including, without limitation, in connection
with settlements of purchases and sales of Securities, loans of Securities and
deliveries and returns of Securities collateral. Prior to a deposit of
Securities specifically allocated to a Series in the Depository, the Fund shall
deliver to the Custodian a certified resolution of the Board of Directors of the
Fund approving the Custodian's use of the Depository with respect to all
Securities specifically allocated to such Series eligible for deposit therein
and utilization of the Depository to the extent possible with respect to such
Securities in connection with its performance hereunder, including, without
limitation, in connection with settlements of purchases and sales of Securities,
loans of Securities, and deliveries and returns of Securities collateral.
Securities and moneys deposited in either the Book-Entry System or the
Depository will be represented in accounts which include only assets held by the
Custodian for customers, including, but not limited to, accounts in which the
Custodian acts in a fiduciary or representative capacity and will be
specifically allocated on the Custodian's books to the separate account for the
applicable Series. Prior to the Custodian's accepting, utilizing and acting with
respect to Clearing Member confirmations for Options and transactions in Options
for a Series as provided in this Agreement, the Custodian shall have received a
certified resolution of the Fund's Board of Directors, substantially in the form
of Exhibit A hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis, until instructed to the contrary by a Certificate
actually received by the Custodian, to accept, utilize and act in accordance
with such confirmations as provided in this Agreement with respect to such
Series.
2. The Custodian shall establish and maintain separate accounts, in the
name of each Series, and shall credit to the separate account for each Series
all moneys received by it for the account of the Fund with respect to such
Series. Money credited to a separate account for a Series shall be disbursed by
the Custodian only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the name and address of the
person to whom the payment is to be made, the Series account from which payment
is to be made and the purpose for which payment is to be made; or
(c) In payment of the fees and in reimbursement of the expenses and
liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian
shall furnish the Fund with confirmations and a summary, on a per Series basis,
of all transfers to or from the account of the Fund for a Series, either
hereunder or with any co-custodian or sub-custodian appointed in accordance with
this Agreement during said day. Where Securities are transferred to the account
of the Fund for a Series, the Custodian shall also by book-entry or otherwise
identify as belonging to such Series a quantity of Securities in a fungible bulk
of Securities registered in the name of the Custodian (or its nominee) or shown
on the Custodian's account on the books of the Book-Entry System or the
Depository. At least monthly and from time to time, the Custodian shall furnish
the Fund with a detailed statement, on a per Series basis, of the Securities and
moneys held by the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, all Securities held by the Custodian hereunder, which are issued
or issuable only in bearer form, except such Securities as are held in the
Book-Entry System, shall be held by the Custodian in that form; all other
Securities held hereunder may be registered in the name of the Fund, in the name
of any duly appointed registered nominee of the Custodian as the Custodian may
from time to time determine, or in the name of the Book-Entry System or the
Depository or their successor or successors, or their nominee or nominees. The
Fund agrees to furnish to the Custodian appropriate instruments to enable the
Custodian to hold or deliver in proper form for transfer, or to register in the
name of its registered nominee or in the name of the Book-Entry System or the
Depository any Securities which it may hold hereunder and which may from time to
time be registered in the name of the Fund. The Custodian shall hold all such
Securities specifically allocated to a Series which are not held in the
Book-Entry System or in the Depository in a separate account in the name of such
Series physically segregated at all times from those of any other person or
persons.
5. Except as otherwise provided in this Agreement and unless otherwise
instructed to the contrary by a Certificate, the Custodian by itself, or through
the use of the Book-Entry System or the Depository with respect to Securities
held hereunder and therein deposited, shall with respect to all Securities held
for the Fund hereunder in accordance with preceding paragraph 4:
(a) Collect all income due or payable;
(b) Present for payment and collect the amount payable upon such
Securities which are called, but only if either (i) the Custodian receives a
written notice of such call, or (ii) notice of such call appears in one or more
of the publications listed in Appendix C annexed hereto, which may be amended at
any time by the Custodian without the prior notification or consent of the Fund;
(c) Present for payment and collect the amount payable upon all
Securities which mature;
(d) Surrender Securities in temporary form for definitive Securities;
(e) Execute, as custodian, any necessary declarations or certificates
of ownership under the Federal Income Tax Laws or the laws or regulations of any
other taxing authority now or hereafter in effect; and
(f) Hold directly, or through the Book-Entry System or the Depository
with respect to Securities therein deposited, for the account of a Series, all
rights and similar securities issued with respect to any Securities held by the
Custodian for such Series hereunder.
6. Upon receipt of a Certificate and not otherwise, the Custodian,
directly or through the use of the Book-Entry System or the Depository, shall:
(a) Execute and deliver to such persons as may be designated in such
Certificate proxies, consents, authorizations, and any other instruments whereby
the authority of the Fund as owner of any Securities held by the Custodian
hereunder for the Series specified in such Certificate may be exercised;
(b) Deliver any Securities held by the Custodian hereunder for the
Series specified in such Certificate in exchange for other Securities or cash
issued or paid in connection with the liquidation, reorganization, refinancing,
merger, consolidation or recapitalization of any corporation, or the exercise of
any conversion privilege and receive and hold hereunder specifically allocated
to such Series any cash or other Securities received in exchange;
(c) Deliver any Securities held by the Custodian hereunder for the
Series specified in such Certificate to any protective committee, reorganization
committee or other person in connection with the reorganization, refinancing,
merger, consolidation, recapitalization or sale of assets of any corporation,
and receive and hold hereunder specifically allocated to such Series such
certificates of deposit, interim receipts or other instruments or documents as
may be issued to it to evidence such delivery;
(d) Make such transfers or exchanges of the assets of the Series
specified in such Certificate, and take such other steps as shall be stated in
such Certificate to be for the purpose of effectuating any duly authorized plan
of liquidation, reorganization, merger, consolidation or recapitalization of the
Fund; and
(e) Present for payment and collect the amount payable upon Securities
not described in preceding paragraph 5(b) of this Article which may be called as
specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the
Custodian shall not be required to obtain possession of any instrument or
certificate representing any Futures Contract, any Option, or any Futures
Contract Option until after it shall have determined, or shall have received a
Certificate from the Fund stating, that any such instruments or certificates are
available. The Fund shall deliver to the Custodian such a Certificate no later
than the business day preceding the availability of any such instrument or
certificate. Prior to such availability, the Custodian shall comply with Section
17(f) of the Investment Company Act of 1940, as amended, in connection with the
purchase, sale, settlement, closing out or writing of Futures Contracts,
Options, or Futures Contract Options by making payments or deliveries specified
in Certificates received by the Custodian in connection with any such purchase,
sale, writing, settlement or closing out upon its receipt from a broker, dealer,
or futures commission merchant of a statement or confirmation reasonably
believed by the Custodian to be in the form customarily used by brokers,
dealers, or future commission merchants with respect to such Futures Contracts,
Options, or Futures Contract Options, as the case may be, confirming that such
Security is held by such broker, dealer or futures commission merchant, in
book-entry form or otherwise, in the name of the Custodian (or any nominee of
the Custodian) as custodian for the Fund, provided, however, that
notwithstanding the foregoing, payments to or deliveries from the Margin
Account, and payments with respect to Securities to which a Margin Account
relates, shall be made in accordance with the terms and conditions of the Margin
Account Agreement. Whenever any such instruments or certificates are available,
the Custodian shall, notwithstanding any provision in this Agreement to the
contrary, make payment for any Futures Contract, Option, or Futures Contract
Option for which such instruments or such certificates are available only
against the delivery to the Custodian of such instrument or such certificate,
and deliver any Futures Contract, Option or Futures Contract Option for which
such instruments or such certificates are available only against receipt by the
Custodian of payment therefor. Any such instrument or certificate delivered to
the Custodian shall be held by the Custodian hereunder in accordance with, and
subject to, the provisions of this Agreement.
ARTICLE IV.
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other than a
purchase of an Option, a Futures Contract, or a Futures Contract Option, the
Fund shall deliver to the Custodian (I) with respect to each purchase of
Securities which are not Money Market Securities, a Certificate, and (ii) with
respect to each purchase of Money Market Securities, a Certificate or Oral
Instructions, specifying with respect to each such purchase: (a) the Series to
which such Securities are to be specifically allocated; (b) the name of the
issuer and the title of the Securities; (c) the number of shares or the
principal amount purchased and accrued interest, if any; (d) the date of
purchase and settlement; (e) the purchase price per unit; (f) the total amount
payable upon such purchase; (g) the name of the person from whom or the broker
through whom the purchase was made, and the name of the clearing broker, if any;
and (h) the name of the broker to whom payment is to be made. The Custodian
shall, upon receipt of Securities purchased by or for the Fund, pay to the
broker specified in the Certificate out of the moneys held for the account of
such Series the total amount payable upon such purchase, provided that the same
conforms to the total amount payable as set forth in such Certificate or Oral
Instructions.
2. Promptly after each sale of Securities by the Fund, other than a
sale of any Option, Futures Contract, Futures Contract Option, or any Reverse
Repurchase Agreement, the Fund shall deliver to the Custodian (I) with respect
to each sale of Securities which are not Money Market Securities, a Certificate,
and (ii) with respect to each sale of Money Market Securities, a Certificate or
Oral Instructions, specifying with respect to each such sale: (a) the Series to
which such Securities were specifically allocated; (b) the name of the issuer
and the title of the Security; (c) the number of shares or principal amount
sold, and accrued interest, if any; (d) the date of sale; (e) the sale price per
unit; (f) the total amount payable to the Fund upon such sale; (g) the name of
the broker through whom or the person to whom the sale was made, and the name of
the clearing broker, if any; and (h) the name of the broker to whom the
Securities are to be delivered. The Custodian shall deliver the Securities
specifically allocated to such Series to the broker specified in the Certificate
against payment of the total amount payable to the Fund upon such sale, provided
that the same conforms to the total amount payable as set forth in such
Certificate or Oral Instructions.
ARTICLE V.
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the Fund
shall deliver to the Custodian a Certificate specifying with respect to each
Option purchased: (a) the Series to which such Option is specifically allocated;
(b) the type of Option (put or call); (c) the name of the issuer and the title
and number of shares subject to such Option or, in the case of a Stock Index
Option, the stock index to which such Option relates and the number of Stock
Index Options purchased; (d) the expiration date; (e) the exercise price; (f)
the dates of purchase and settlement; (g) the total amount payable by the Fund
in connection with such purchase; (h) the name of the Clearing Member through
whom such Option was purchased; and (I) the name of the broker to whom payment
is to be made. The Custodian shall pay, upon receipt of a Clearing Member's
statement confirming the purchase of such Option held by such Clearing Member
for the account of the Custodian (or any duly appointed and registered nominee
of the Custodian) as custodian for the Fund, out of moneys held for the account
of the Series to which such Option is to be specifically allocated, the total
amount payable upon such purchase to the Clearing Member through whom the
purchase was made, provided that the same conforms to the total amount payable
as set forth in such Certificate.
2. Promptly after the sale of any Option purchased by the Fund pursuant
to paragraph 1 hereof, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each such sale: (a) the Series to which such Option
was specifically allocated; (b) the type of Option (put or call); (c) the name
of the issuer and the title and number of shares subject to such Option or, in
the case of a Stock Index Option, the stock index to which such Option relates
and the number of Stock Index Options sold; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the Clearing Member through whom the sale was
made. The Custodian shall consent to the delivery of the Option sold by the
Clearing Member which previously supplied the confirmation described in
preceding paragraph 1 of this Article with respect to such Option against
payment to the Custodian of the total amount payable to the Fund, provided that
the same conforms to the total amount payable as set forth in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Call Option: (a) the
Series to which such Call Option was specifically allocated; (b) the name of the
issuer and the title and number of shares subject to the Call Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise price
per share; (f) the total amount to be paid by the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Call Option was exercised.
The Custodian shall, upon receipt of the Securities underlying the Call Option
which was exercised, pay out of the moneys held for the account of the Series to
which such Call Option was specifically allocated the total amount payable to
the Clearing Member through whom the Call Option was exercised, provided that
the same conforms to the total amount payable as set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option purchased
by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to the
Custodian a Certificate specifying with respect to such Put Option: (a) the
Series to which such Put Option was specifically allocated; (b) the name of the
issuer and the title and number of shares subject to the Put Option; (c) the
expiration date; (d) the date of exercise and settlement; (e) the exercise price
per share; (f) the total amount to be paid to the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Put Option was exercised.
The Custodian shall, upon receipt of the amount payable upon the exercise of the
Put Option, deliver or direct the Depository to deliver the Securities
specifically allocated to such Series, provided the same conforms to the amount
payable to the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver to
the Custodian a Certificate specifying with respect to such Stock Index Option:
(a) the Series to which such Stock Index Option was specifically allocated; (b)
the type of Stock Index Option (put or call); (c) the number of Options being
exercised; (d) the stock index to which such Option relates; (e) the expiration
date; (f) the exercise price; (g) the total amount to be received by the Fund in
connection with such exercise; and (h) the Clearing Member from whom such
payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Covered Call Option: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares for which
the Covered Call Option was written and which underlie the same; (c) the
expiration date; (d) the exercise price; (e) the premium to be received by the
Fund; (f) the date such Covered Call Option was written; and (g) the name of the
Clearing Member through whom the premium is to be received. The Custodian shall
deliver or cause to be delivered, in exchange for receipt of the premium
specified in the Certificate with respect to such Covered Call Option, such
receipts as are required in accordance with the customs prevailing among
Clearing Members dealing in Covered Call Options and shall impose, or direct the
Depository to impose, upon the underlying Securities specified in the
Certificate specifically allocated to such Series such restrictions as may be
required by such receipts. Notwithstanding the foregoing, the Custodian has the
right, upon prior written notification to the Fund, at any time to refuse to
issue any receipts for Securities in the possession of the Custodian and not
deposited with the Depository underlying a Covered Call Option.
7. Whenever a Covered Call Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate instructing the Custodian to deliver, or
to direct the Depository to deliver, the Securities subject to such Covered Call
Option and specifying: (a) the Series for which such Covered Call Option was
written; (b) the name of the issuer and the title and number of shares subject
to the Covered Call Option; (c) the Clearing Member to whom the underlying
Securities are to be delivered; and (d) the total amount payable to the Fund
upon such delivery. Upon the return and/or cancellation of any receipts
delivered pursuant to paragraph 6 of this Article, the Custodian shall deliver,
or direct the Depository to deliver, the underlying Securities as specified in
the Certificate against payment of the amount to be received as set forth in
such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Put
Option: (a) the Series for which such Put Option was written; (b) the name of
the issuer and the title and number of shares for which the Put Option is
written and which underlie the same; (c) the expiration date; (d) the exercise
price; (e) the premium to be received by the Fund; (f) the date such Put Option
is written; (g) the name of the Clearing Member through whom the premium is to
be received and to whom a Put Option guarantee letter is to be delivered; (h)
the amount of cash, and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Senior Security
Account for such Series; and (i) the amount of cash and/or the amount and kind
of Securities specifically allocated to such Series to be deposited into the
Collateral Account for such Series. The Custodian shall, after making the
deposits into the Collateral Account specified in the Certificate, issue a Put
Option guarantee letter substantially in the form utilized by the Custodian on
the date hereof, and deliver the same to the Clearing Member specified in the
Certificate against receipt of the premium specified in said Certificate.
Notwithstanding the foregoing, the Custodian shall be under no obligation to
issue any Put Option guarantee letter or similar document if it is unable to
make any of the representations contained therein.
9. Whenever a Put Option written by the Fund and described in the
preceding paragraph is exercised, the Fund shall promptly deliver to the
Custodian a Certificate specifying: (a) the Series to which such Put Option was
written; (b) the name of the issuer and title and number of shares subject to
the Put Option; (c) the Clearing Member from whom the underlying Securities are
to be received; (d) the total amount payable by the Fund upon such delivery; (e)
the amount of cash and/or the amount and kind of Securities specifically
allocated to such Series to be withdrawn from the Collateral Account for such
Series and (f) the amount of cash and/or the amount and kind of Securities,
specifically allocated to such Series, if any, to be withdrawn from the Senior
Security Account. Upon the return and/or cancellation of any Put Option
guarantee letter or similar document issued by the Custodian in connection with
such Put Option, the Custodian shall pay out of the moneys held for the account
of the Series to which such Put Option was specifically allocated the total
amount payable to the Clearing Member specified in the Certificate as set forth
in such Certificate against delivery of such Securities, and shall make the
withdrawals specified in such Certificate.
10. Whenever the Fund writes a Stock Index Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Stock Index Option: (a) the Series for which such Stock Index Option was
written; (b) whether such Stock Index Option is a put or a call; (c) the number
of options written; (d) the stock index to which such Option relates; (e) the
expiration date; (f) the exercise price; (g) the Clearing Member through whom
such Option was written; (h) the premium to be received by the Fund; (i) the
amount of cash and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in the Senior Security Account for such
Series; (j) the amount of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the Collateral Account
for such Series; and (k) the amount of cash and/or the amount and kind of
Securities, if any, specifically allocated to such Series to be deposited in a
Margin Account, and the name in which such account is to be or has been
established. The Custodian shall, upon receipt of the premium specified in the
Certificate, make the deposits, if any, into the Senior Security Account
specified in the Certificate, and either (1) deliver such receipts, if any,
which the Custodian has specifically agreed to issue, which are in accordance
with the customs prevailing among Clearing Members in Stock Index Options and
make the deposits into the Collateral Account specified in the Certificate, or
(2) make the deposits into the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described in
the preceding paragraph of this Article is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying with respect to such Stock
Index Option: (a) the Series for which such Stock Index Option was written; (b)
such information as may be necessary to identify the Stock Index Option being
exercised; (c) the Clearing Member through whom such Stock Index Option is being
exercised; (d) the total amount payable upon such exercise, and whether such
amount is to be paid by or to the Fund; (e) the amount of cash and/or amount and
kind of Securities, if any, to be withdrawn from the Margin Account; and (f) the
amount of cash and/or amount and kind of Securities, if any, to be withdrawn
from the Senior Security Account for such Series; and the amount of cash and/or
the amount and kind of Securities, if any, to be withdrawn from the Collateral
Account for such Series. Upon the return and/or cancellation of the receipt, if
any, delivered pursuant to the preceding paragraph of this Article, the
Custodian shall pay out of the moneys held for the account of the Series to
which such Stock Index Option was specifically allocated to the Clearing Member
specified in the Certificate the total amount payable, if any, as specified
therein.
12. Whenever the Fund purchases any Option identical to a previously
written Option described in paragraphs, 6, 8 or 10 of this Article in a
transaction expressly designated as a "Closing Purchase Transaction" in order to
liquidate its position as a writer of an Option, the Fund shall promptly deliver
to the Custodian a Certificate specifying with respect to the Option being
purchased: (a) that the transaction is a Closing Purchase Transaction; (b) the
Series for which the Option was written; (c) the name of the issuer and the
title and number of shares subject to the Option, or, in the case of a Stock
Index Option, the stock index to which such Option relates and the number of
Options held; (d) the exercise price; (e) the premium to be paid by the Fund;
(f) the expiration date; (g) the type of Option (put or call); (h) the date of
such purchase; (i) the name of the Clearing Member to whom the premium is to be
paid; and (j) the amount of cash and/or the amount and kind of Securities, if
any, to be withdrawn from the Collateral Account, a specified Margin Account, or
the Senior Security Account for such Series. Upon the Custodian's payment of the
premium and the return and/or cancellation of any receipt issued pursuant to
paragraphs 6, 8 or 10 of this Article with respect to the Option being
liquidated through the Closing Purchase Transaction, the Custodian shall remove,
or direct the Depository to remove, the previously imposed restrictions on the
Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a Closing Purchase
Transaction with respect to any Option purchased or written by the Fund and
described in this Article, the Custodian shall delete such Option from the
statements delivered to the Fund pursuant to paragraph 3 Article III herein, and
upon the return and/or cancellation of any receipts issued by the Custodian,
shall make such withdrawals from the Collateral Account, and the Margin Account
and/or the Senior Security Account as may be specified in a Certificate received
in connection with such expiration, exercise, or consummation.
ARTICLE VI.
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund
shall deliver to the Custodian a Certificate specifying with respect to such
Futures Contract, (or with respect to any number of identical Futures
Contract(s)): (a) the Series for which the Futures Contract is being entered;
(b) the category of Futures Contract (the name of the underlying stock index or
financial instrument); (c) the number of identi cal Futures Contracts entered
into; (d) the delivery or settle ment date of the Futures Contract(s); (e) the
date the Futures Contract(s) was (were) entered into and the maturity date; (f)
whether the Fund is buying (going long) or selling (going short) on such Futures
Contract(s); (g) the amount of cash and/or the amount and kind of Securities, if
any, to be deposited in the Senior Security Account for such Series; (h) the
name of the broker, dealer, or futures commission merchant through whom the
Futures Contract was entered into; and (i) the amount of fee or commission, if
any, to be paid and the name of the broker, dealer, or futures commission
merchant to whom such amount is to be paid. The Custodian shall make the
deposits, if any, to the Margin Account in accordance with the terms and
conditions of the Margin Account Agreement. The Custodian shall make payment out
of the moneys specifically allocated to such Series of the fee or commission, if
any, specified in the Certificate and deposit in the Senior Security Account for
such Series the amount of cash and/or the amount and kind of Securities
specified in said Certificate.
2. (a) Any variation margin payment or similar payment required to be
made by the Fund to a broker, dealer, or futures commission merchant with
respect to an outstanding Futures Contract, shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account Agreement.
(b) Any variation margin payment or similar payment from a broker,
dealer, or futures commission merchant to the Fund with respect to an
outstanding Futures Contract, shall be received and dealt with by the Custodian
in accordance with the terms and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian hereunder is
retained by the Fund until delivery or settlement is made on such Futures
Contract, the Fund shall deliver to the Custodian a Certificate specifying: (a)
the Futures Contract and the Series to which the same relates; (b) with respect
to a Stock Index Futures Contract, the total cash settlement amount to be paid
or received, and with respect to a Financial Futures Contract, the Securities
and/or amount of cash to be delivered or received; (c) the broker, dealer, or
futures commission merchant to or from whom payment or delivery is to be made or
received; and (d) the amount of cash and/or Securities to be withdrawn from the
Senior Security Account for such Series. The Custodian shall make the payment or
delivery specified in the Certificate, and delete such Futures Contract from the
statements delivered to the Fund pursuant to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a
Futures Contract held by the Custodian hereunder, the Fund shall deliver to the
Custodian a Certificate specifying: (a) the items of information required in a
Certificate described in paragraph 1 of this Article, and (b) the Futures
Contract being offset. The Custodian shall make payment out of the money
specifically allocated to such Series of the fee or commission, if any,
specified in the Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3 of Article III
herein, and make such withdrawals from the Senior Security Account for such
Series as may be specified in such Certificate. The withdrawals, if any, to be
made from the Margin Account shall be made by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
ARTICLE VII.
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by the
Fund, the Fund shall promptly deliver to the Custodian a Certificate specifying
with respect to such Futures Contract Option: (a) the Series to which such
Option is specifically allocated; (b) the type of Futures Contract Option (put
or call); (c) the type of Futures Contract and such other information as may be
necessary to identify the Futures Contract underlying the Futures Contract
Option purchased; (d) the expiration date; (e) the exercise price; (f) the dates
of purchase and settlement; (g) the amount of premium to be paid by the Fund
upon such purchase; (h) the name of the broker or futures commission merchant
through whom such option was purchased; and (i) the name of the broker, or
futures commission merchant, to whom payment is to be made. The Custodian shall
pay out of the moneys specifically allocated to such Series, the total amount to
be paid upon such purchase to the broker or futures commissions merchant through
whom the purchase was made, provided that the same conforms to the amount set
forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to each such sale: (a) Series to
which such Futures Contract Option was specifically allocated; (b) the type of
Future Contract Option (put or call); (c) the type of Futures Contract and such
other information as may be necessary to identify the Futures Contract
underlying the Futures Contract Option; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount payable to the Fund upon
such sale; and (h) the name of the broker of futures commission merchant through
whom the sale was made. The Custodian shall consent to the cancellation of the
Futures Contract Option being closed against payment to the Custodian of the
total amount payable to the Fund, provided the same conforms to the total amount
payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant to
paragraph 1 is exercised by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specify ing: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the particular Futures Contract
Option (put or call) being exercised; (c) the type of Futures Contract
underlying the Futures Contract Option; (d) the date of exercise; (e) the name
of the broker or futures commission merchant through whom the Futures Contract
Option is exercised; (f) the net total amount, if any, payable by the Fund; (g)
the amount, if any, to be received by the Fund; and (h) the amount of cash
and/or the amount and kind of Securities to be deposited in the Senior Security
Account for such Series. The Custodian shall make, out of the moneys and
Securities specifically allocated to such Series, the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
4. Whenever the Fund writes a Futures Contract Option, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to such
Futures Contract Option: (a) the Series for which such Futures Contract Option
was written; (b) the type of Futures Contract Option (put or call); (c) the type
of Futures Contract and such other information as may be necessary to identify
the Futures Contract underlying the Futures Contract Option; (d) the expiration
date; (e) the exercise price; (f) the premium to be received by the Fund; (g)
the name of the broker or futures commission merchant through whom the premium
is to be received; and (h) the amount of cash and/or the amount and kind of
Securities, if any, to be deposited in the Senior Security Account for such
Series. The Custodian shall, upon receipt of the premium specified in the
Certificate, make out of the moneys and Securities specifically allocated to
such Series the deposits into the Senior Security Account, if any, as specified
in the Certificate. The deposits, if any, to be made to the Margin Account shall
be made by the Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
5. Whenever a Futures Contract Option written by the Fund which is a
call is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Futures Contract Option was
specifically allocated; (b) the particular Futures Contract Option exercised;
(c) the type of Futures Contract underlying the Futures Contract Option; (d) the
name of the broker or futures commission merchant through whom such Futures
Contract Option was exercised; (e) the net total amount, if any, payable to the
Fund upon such exercise; (f) the net total amount, if any, payable by the Fund
upon such exercise; and (g) the amount of cash and/or the amount and kind of
Securities to be deposited in the Senior Security Account for such Series. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in such Certificate make the payments, if any, and the
deposits, if any, into the Senior Security Account as specified in the
Certificate. The deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and conditions of the Margin
Account Agreement.
6. Whenever a Futures Contract Option which is written by the Fund and
which is a put is exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series to which such Option was specifically
allocated; (b) the particular Futures Contract Option exercised; (c) the type of
Futures Contract underlying such Futures Contract Option; (d) the name of the
broker or futures commission merchant through whom such Futures Contract Option
is exercised; (e) the net total amount, if any, payable to the Fund upon such
exercise; (f) the net total amount, if any, payable by the Fund upon such
exercise; and (g) the amount and kind of Securities and/or cash to be withdrawn
from or deposited in, the Senior Security Account for such Series, if any. The
Custodian shall, upon its receipt of the net total amount payable to the Fund,
if any, specified in the Certificate, make out of the moneys and Securities
specifically allocated to such Series, the payments, if any, and the deposits,
if any, into the Senior Security Account as specified in the Certificate. The
deposits to and/or withdrawals from the Margin Account, if any, shall be made by
the Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
7. Whenever the Fund purchases any Futures Contract Option identical to
a previously written Futures Contract Option described in this Article in order
to liquidate its position as a writer of such Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specifying with respect to
the Futures Contract Option being purchased: (a) the Series to which such Option
is specifically allocated; (b) that the transaction is a closing transaction;
(c) the type of Future Contract and such other information as may be necessary
to identify the Futures Contract underlying the Futures Option Contract; (d) the
exercise price; (e) the premium to be paid by the Fund; (f) the expiration date;
(g) the name of the broker or futures commission merchant to whom the premium is
to be paid; and (h) the amount of cash and/or the amount and kind of Securities,
if any, to be withdrawn from the Senior Security Account for such Series. The
Custodian shall effect the withdrawals from the Senior Security Account
specified in the Certificate. The withdrawals, if any, to be made from the
Margin Account shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a closing
transaction with respect to, any Futures Contract Option written or purchased by
the Fund and described in this Article, the Custodian shall (a) delete such
Futures Contract Option from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein and, (b) make such withdrawals from and/or in
the case of an exercise such deposits into the Senior Security Account as may be
specified in a Certificate. The deposits to and/or withdrawals from the Margin
Account, if any, shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
9. Futures Contracts acquired by the Fund through the exercise of a
Futures Contract Option described in this Article shall be subject to Article VI
hereof.
ARTICLE VIII.
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the Fund
shall promptly deliver to the Custodian a Certificate specifying: (a) the Series
for which such short sale was made; (b) the name of the issuer and the title of
the Security; (c) the number of shares or principal amount sold, and accrued
interest or dividends, if any; (d) the dates of the sale and settlement; (e) the
sale price per unit; (f) the total amount credited to the Fund upon such sale,
if any, (g) the amount of cash and/or the amount and kind of Securities, if any,
which are to be deposited in a Margin Account and the name in which such Margin
Account has been or is to be established; (h) the amount of cash and/or the
amount and kind of Securities, if any, to be deposited in a Senior Security
Account, and (i) the name of the broker through whom such short sale was made.
The Custodian shall upon its receipt of a statement from such broker confirming
such sale and that the total amount credited to the Fund upon such sale, if any,
as specified in the Certificate is held by such broker for the account of the
Custodian (or any nominee of the Custodian) as custodian of the Fund, issue a
receipt or make the deposits into the Margin Account and the Senior Security
Account specified in the Certificate.
2. In connection with the closing-out of any short sale, the Fund shall
promptly deliver to the Custodian a Certificate specifying with respect to each
such closing out: (a) the Series for which such transaction is being made; (b)
the name of the issuer and the title of the Security; (c) the number of shares
or the principal amount, and accrued interest or dividends, if any, required to
effect such closing-out to be delivered to the broker; (d) the dates of
closing-out and settlement; (e) the purchase price per unit; (f) the net total
amount payable to the Fund upon such closing-out; (g) the net total amount
payable to the broker upon such closing-out; (h) the amount of cash and the
amount and kind of Securities to be withdrawn, if any, from the Margin Account;
(i) the amount of cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account; and (j) the name of the broker
through whom the Fund is effecting such closing-out. The Custodian shall, upon
receipt of the net total amount payable to the Fund upon such closing-out, and
the return and/or cancellation of the receipts, if any, issued by the Custodian
with respect to the short sale being closed-out, pay out of the moneys held for
the account of the Fund to the broker the net total amount payable to the
broker, and make the withdrawals from the Margin Account and the Senior Security
Account, as the same are specified in the Certificate.
ARTICLE IX.
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repurchase Agreement with
respect to Securities and money held by the Custodian hereunder, the Fund shall
deliver to the Custodian a Certificate, or in the event such Reverse Repurchase
Agreement is a Money Market Security, a Certificate or Oral Instructions
specifying: (a) the Series for which the Reverse Repurchase Agreement is
entered; (b) the total amount payable to the Fund in connection with such
Reverse Repurchase Agreement and specifically allocated to such Series; (c) the
broker or dealer through or with whom the Reverse Repurchase Agreement is
entered; (d) the amount and kind of Securities to be delivered by the Fund to
such broker or dealer; (e) the date of such Reverse Repurchase Agreement; and
(f) the amount of cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in a Senior Security
Account for such Series in connection with such Reverse Repurchase Agreement.
The Custodian shall, upon receipt of the total amount payable to the Fund
specified in the Certificate, Oral Instructions, or Written Instructions make
the delivery to the broker or dealer, and the deposits, if any, to the Senior
Security Account, specified in such Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described in
preceding paragraph 1 of this Article, the Fund shall promptly deliver a
Certificate or, in the event such Reverse Repurchase Agreement is a Money Market
Security, a Certificate or Oral Instructions to the Custodian specifying: (a)
the Reverse Repurchase Agreement being terminated and the Series for which same
was entered; (b) the total amount payable by the Fund in connection with such
termination; (c) the amount and kind of Securities to be received by the Fund
and specifically allocated to such Series in connection with such termination;
(d) the date of termination; (e) the name of the broker or dealer with or
through whom the Reverse Repurchase Agreement is to be terminated; and (f) the
amount of cash and/or the amount and kind of Securities to be withdrawn from the
Senior Securities Account for such Series. The Custodian shall, upon receipt of
the amount and kind of Securities to be received by the Fund specified in the
Certificate or Oral Instructions, make the payment to the broker or dealer, and
the withdrawals, if any, from the Senior Security Account, specified in such
Certificate or Oral Instructions.
ARTICLE X.
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically
allocated to a Series held by the Custodian hereunder, the Fund shall deliver or
cause to be delivered to the Custodian a Certificate specifying with respect to
each such loan: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities, (c) the
number of shares or the principal amount loaned, (d) the date of loan and
delivery, (e) the total amount to be delivered to the Custodian against the loan
of the Securities, including the amount of cash collateral and the premium, if
any, separately identified, and (f) the name of the broker, dealer, or financial
institution to which the loan was made. The Custodian shall deliver the
Securities thus designated to the broker, dealer or financial institution to
which the loan was made upon receipt of the total amount designated as to be
delivered against the loan of Securities. The Custodian may accept payment in
connection with a delivery otherwise than through the Book-Entry System or
Depository only in the form of a certified or bank cashier's check payable to
the order of the Fund or the Custodian drawn on New York Clearing House funds
and may deliver Securities in accordance with the customs prevailing among
dealers in securities.
2. Promptly after each termination of the loan of Securities by the
Fund, the Fund shall deliver or cause to be delivered to the Custodian a
Certificate specifying with respect to each such loan termination and return of
Securities: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities to be
returned, (c) the number of shares or the principal amount to be returned, (d)
the date of termination, (e) the total amount to be delivered by the Custodian
(including the cash collateral for such Securities minus any offsetting credits
as described in said Certificate), and (f) the name of the broker, dealer, or
financial institution from which the Securities will be returned. The Custodian
shall receive all Securities returned from the broker, dealer, or financial
institution to which such Securities were loaned and upon receipt thereof shall
pay, out of the moneys held for the account of the Fund, the total amount
payable upon such return of Securities as set forth in the Certificate.
ARTICLE XI.
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to, or
withdrawals from, a Senior Security Account as specified in a Certificate
received by the Custodian. Such Certificate shall specify the Series for which
such deposit or withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such Series to be
deposited in, or withdrawn from, such Senior Security Account for such Series.
In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and the number of shares or the principal amount
of any particular Securities to be deposited by the Custodian into, or withdrawn
from, a Senior Securities Account, the Custodian shall be under no obligation to
make any such deposit or withdrawal and shall so notify the Fund.
2. The Custodian shall make deliveries or payments from a Margin
Account to the broker, dealer, futures commission merchant or Clearing Member in
whose name, or for whose benefit, the account was established as specified in
the Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions with
respect to Securities deposited in any Margin Account shall be dealt with in
accordance with the terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and security interest in
and to any property at any time held by the Custodian in any Collateral Account
described herein. In accordance with applicable law the Custodian may enforce
its lien and realize on any such property whenever the Custodian has made
payment or delivery pursuant to any Put Option guarantee letter or similar
document or any receipt issued hereunder by the Custodian. In the event the
Custodian should realize on any such property net proceeds which are less than
the Custodian's obligations under any Put Option guarantee letter or similar
document or any receipt, such deficiency shall be a debt owed the Custodian by
the Fund within the scope of Article XII herein.
5. On each business day the Custodian shall furnish the Fund with a
statement with respect to each Margin Account in which money or Securities are
held specifying as of the close of business on the previous business day: (a)
the name of the Margin Account; (b) the amount and kind of Securities held
therein; and (c) the amount of money held therein. The Custodian shall make
available upon request to any broker, dealer, or futures commission merchant
specified in the name of a Margin Account a copy of the statement furnished the
Fund with respect to such Margin Account.
6. Promptly after the close of business on each business day in which
cash and/or Securities are maintained in a Collateral Account for any Series,
the Custodian shall furnish the Fund with a statement with respect to such
Collateral Account specifying the amount of cash and/or the amount and kind of
Securities held therein. No later than the close of business next succeeding the
delivery to the Fund of such state ment, the Fund shall furnish to the Custodian
a Certificate or Written Instructions specifying the then market value of the
Securities described in such statement. In the event such then market value is
indicated to be less than the Custodian's obligation with respect to any
outstanding Put Option guarantee letter or similar document, the Fund shall
promptly specify in a Certificate the additional cash and/or Securities to be
deposited in such Collateral Account to eliminate such deficiency.
ARTICLE XII.
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion advance funds on
behalf of any Series which results in an overdraft because the moneys held by
the Custodian in the separate account for such Series shall be insufficient to
pay the total amount payable upon a purchase of Securities specifically
allocated to such Series, as set forth in a Certificate or Oral Instructions, or
which results in an overdraft in the separate account of such Series for some
other reason, or if the Fund is for any other reason indebted to the Custodian
with respect to a Series, including any indebtedness to The Bank of New York
under the Fund's Cash Management and Related Services Agreement, (except a
borrowing for investment or for temporary or emergency purposes using Securities
as collateral pursuant to a separate agreement and subject to the provisions of
paragraph 2 of this Article), such overdraft or indebtedness shall be deemed to
be a loan made by the Custodian to the Fund for such Series payable on demand
and shall bear interest from the date incurred at a rate per annum (based on a
360-day year for the actual number of days involved) equal to 1/2% over
Custodian's prime commercial lending rate in effect from time to time, such rate
to be adjusted on the effective date of any change in such prime commercial
lending rate but in no event to be less than 6% per annum. In addition, the Fund
hereby agrees that the Custodian shall have a continuing lien and security
interest in and to any property specifically allocated to such Series at any
time held by it for the benefit of such Series or in which the Fund may have an
interest which is then in the Custodian's possession or control or in possession
or control of any third party acting in the Custodian's behalf. The Fund
authorizes the Custodian, in its sole discretion, at any time to charge any such
overdraft or indebtedness together with interest due thereon against any balance
of account standing to such Series' credit on the Custodian's books. In
addition, the Fund hereby covenants that on each Business Day on which either it
intends to enter a Reverse Repurchase Agreement and/or otherwise borrow from a
third party, or which next succeeds a Business Day on which at the close of
business the Fund had outstanding a Reverse Repurchase Agreement or such a
borrowing, it shall prior to 9 a.m., New York City time, advise the Custodian,
in writing, of each such borrowing, shall specify the Series to which the same
relates, and shall not incur any indebtedness not so specified other than from
the Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank
(including, if the borrowing is pursuant to a separate agreement, the Custodian)
from which it borrows money for investment or for temporary or emergency
purposes using Securities held by the Custodian hereunder as collateral for such
borrowings, a notice or undertaking in the form currently employed by any such
bank setting forth the amount which such bank will loan to the Fund against
delivery of a stated amount of collateral. The Fund shall promptly deliver to
the Custodian a Certificate specifying with respect to each such borrowing: (a)
the Series to which such borrowing relates; (b) the name of the bank, (c) the
amount and terms of the borrowing, which may be set forth by incorporating by
reference an attached promissory note, duly endorsed by the Fund, or other loan
agreement, (d) the time and date, if known, on which the loan is to be entered
into, (e) the date on which the loan becomes due and payable, (f) the total
amount payable to the Fund on the borrowing date, (g) the market value of
Securities to be delivered as collateral for such loan, including the name of
the issuer, the title and the number of shares or the principal amount of any
particular Securities, and (h) a statement specifying whether such loan is for
investment purposes or for temporary or emergency purposes and that such loan is
in conformance with the Investment Company Act of 1940 and the Fund's
prospectus. The Custodian shall deliver on the borrowing date specified in a
Certificate the specified collateral and the executed promissory note, if any,
against delivery by the lending bank of the total amount of the loan payable,
provided that the same conforms to the total amount payable as set forth in the
Certificate. The Custodian may, at the option of the lending bank, keep such
collateral in its possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory note or loan
agreement. The Custodian shall deliver such Securities as additional collateral
as may be specified in a Certificate to collateralize further any transaction
described in this paragraph. The Fund shall cause all Securities released from
collateral status to be returned directly to the Custodian, and the Custodian
shall receive from time to time such return of collateral as may be tendered to
it. In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and number of shares or the principal amount of
any particular Securities to be delivered as collateral by the Custodian, the
Custodian shall not be under any obligation to deliver any Securities.
ARTICLE XIII.
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as
sub-custodian for each Series' Foreign Securities (as such term is defined in
paragraph (c)(1) of Rule 17f-5 under the Investment Company Act of 1940, as
amended) and other assets, the foreign banking institutions and foreign
securities depositories and clearing agencies designated on Schedule I hereto
("Foreign Sub-Custodians") to carry out their respective responsibilities in
accordance with the terms of the sub-custodian agreement between each such
Foreign Sub-Custodian and the Custodian, copies of which have been previously
delivered to the Fund and receipt of which is hereby acknowledged (each such
agreement, a "Foreign Sub-Custodian Agreement"). Upon receipt of a Certificate,
together with a certified resolution substantially in the form attached as
Exhibit B of the Fund's Board of Directors, the Fund may designate any
additional foreign sub-custodian with which the Custodian has an agreement for
such entity to act as the Custodian's agent, as its sub-custodian and any such
additional foreign sub-custodian shall be deemed added to Schedule I. Upon
receipt of a Certificate from the Fund, the Custodian shall cease the employment
of any one or more Foreign Sub-Custodians for maintaining custody of the Fund's
assets and such Foreign Sub-Custodian shall be deemed deleted from Schedule I.
2. Each Foreign Sub-Custodian Agreement shall be substantially in the
form previously delivered to the Fund and will not be amended in a way that
materially adversely affects the Fund without the Fund's prior written consent.
3. The Custodian shall identify on its books as belonging to each
Series of the Fund the Foreign Securities of such Series held by each Foreign
Sub-Custodian. At the election of the Fund, it shall be entitled to be
subrogated to the rights of the Custodian with respect to any claims by the Fund
or any Series against a Foreign Sub-Custodian as a consequence of any loss,
damage, cost, expense, liability or claim sustained or incurred by the Fund or
any Series if and to the extent that the Fund or such Series has not been made
whole for any such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with the
terms of the applicable Foreign Sub-Custodian Agreement, use reasonable efforts
to arrange for the independent accountants of the Fund to be afforded access to
the books and records of any Foreign Sub-Custodian insofar as such books and
records relate to the performance of such Foreign Sub-Custodian under its
agreement with the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as mutually
agreed upon, statements in respect of the securities and other assets of each
Series held by Foreign Sub-Custodians, including but not limited to, an
identification of entities having possession of each Series' Foreign Securities
and other assets, and advices or notifications of any transfers of Foreign
Securities to or from each custodial account maintained by a Foreign
Sub-Custodian for the Custodian on behalf of the Series.
6. The Custodian shall furnish annually to the Fund, as mutually agreed
upon, information concerning the Foreign Sub-Custodians employed by the
Custodian. Such information shall be similar in kind and scope to that furnished
to the Fund in connection with the Fund's initial approval of such Foreign
Sub-Custodians and, in any event, shall include information pertaining to (i)
the Foreign Custodians' financial strength, general reputation and standing in
the countries in which they are located and their ability to provide the
custodial services required, and (ii) whether the Foreign Sub-Custodians would
provide a level of safeguards for safekeeping and custody of securities not
materially different from those prevailing in the United States. The Custodian
shall monitor the general operating performance of each Foreign Sub-Custodian.
The Custodian agrees that it will use reasonable care in monitoring compliance
by each Foreign Sub-Custodian with the terms of the relevant Foreign
Sub-Custodian Agreement and that if it learns of any breach of such Foreign
Sub-Custodian Agreement believed by the Custodian to have a material adverse
effect on the Fund or any Series it will promptly notify the Fund of such
breach. The Custodian also agrees to use reasonable and diligent efforts to
enforce its rights under the relevant Foreign Sub-Custodian Agreement.
7. The Custodian shall transmit promptly to the Fund all notices,
reports or other written information received pertaining to the Fund's Foreign
Securities, including without limitation, notices of corporate action, proxies
and proxy solicitation materials.
8. Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for securities received for the account of any Series and
delivery of securities maintained for the account of such Series may be effected
in accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer.
9. Notwithstanding any other provision in this Agreement to the
contrary, with respect to any losses or damages arising out of or relating to
any actions or omissions of any Foreign Sub-Custodian the sole responsibility
and liability of the Custodian shall be to take appropriate action at the Fund's
expense to recover such loss or damage from the Foreign Sub-Custodian. It is
expressly understood and agreed that the Custodian's sole responsibility and
liability shall be limited to amounts so recovered from the Foreign
Sub-Custodian.
ARTICLE XIV.
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XIII
neither the Custodian nor its nominee shall be liable for any loss or damage,
including counsel fees, resulting from its action or omission to act or
otherwise, either hereunder or under any Margin Account Agreement, except for
any such loss or damage arising out of its own negligence or willful misconduct.
In no event shall the Custodian be liable to the Fund or any third party for
special, indirect or consequential damages or lost profits or loss of business,
arising under or in connection with this Agreement, even if previously informed
of the possibility of such damages and regardless of the form of action. The
Custodian may, with respect to questions of law arising hereunder or under any
Margin Account Agreement, apply for and obtain the advice and opinion of counsel
to the Fund or of its own counsel, at the expense of the Fund, and shall be
fully protected with respect to anything done or omitted by it in good faith in
conformity with such advice or opinion. The Custodian shall be liable to the
Fund for any loss or damage resulting from the use of the Book-Entry System or
any Depository arising by reason of any negligence or willful misconduct on the
part of the Custodian or any of its employees or agents.
2. Without limiting the generality of the foregoing, the Custodian
shall be under no obligation to inquire into, and shall not be liable for:
(a) The validity of the issue of any Securities purchased, sold, or
written by or for the Fund, the legality of the purchase, sale or writing
thereof, or the propriety of the amount paid or received therefor;
(b) The legality of the sale or redemption of any Shares, or the
propriety of the amount to be received or paid therefor;
(c) The legality of the declaration or payment of any dividend by the
Fund;
(d) The legality of any borrowing by the Fund using Securities as
collateral;
(e) The legality of any loan of portfolio Securi ties, nor shall the
Custodian be under any duty or obligation to see to it that any cash collateral
delivered to it by a broker, dealer, or financial institution or held by it at
any time as a result of such loan of portfolio Securities of the Fund is
adequate collateral for the Fund against any loss it might sustain as a result
of such loan. The Custodian specifically, but not by way of limitation, shall
not be under any duty or obligation periodically to check or notify the Fund
that the amount of such cash collateral held by it for the Fund is sufficient
collateral for the Fund, but such duty or obligation shall be the sole
responsibility of the Fund. In addition, the Custodian shall be under no duty or
obligation to see that any broker, dealer or financial institution to which
portfolio Securities of the Fund are lent pursuant to Article X of this
Agreement makes payment to it of any dividends or interest which are payable to
or for the account of the Fund during the period of such loan or at the
termination of such loan, provided, however, that the Custodian shall promptly
notify the Fund in the event that such dividends or interest are not paid and
received when due; or
(f) The sufficiency or value of any amounts of money and/or Securities
held in any Margin Account, Senior Security Account or Collateral Account in
connection with transactions by the Fund. In addition, the Custodian shall be
under no duty or obligation to see that any broker, dealer, futures commission
merchant or Clearing Member makes payment to the Fund of any variation margin
payment or similar payment which the Fund may be entitled to receive from such
broker, dealer, futures commission merchant or Clearing Member, to see that any
payment received by the Custodian from any broker, dealer, futures commission
merchant or Clearing Member is the amount the Fund is entitled to receive, or to
notify the Fund of the Custodian's receipt or non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be the
Custodian of, any money, whether or not represented by any check, draft, or
other instrument for the payment of money, received by it on behalf of the Fund
until the Custodian actually receives and collects such money directly or by the
final crediting of the account representing the Fund's interest at the
Book-Entry System or the Depository.
4. The Custodian shall have no responsibility and shall not be liable
for ascertaining or acting upon any calls, conversions, exchange offers,
tenders, interest rate changes or similar matters relating to Securities held in
the Depository, unless the Custodian shall have actually received timely notice
from the Depository. In no event shall the Custodian have any responsibility or
liability for the failure of the Depository to collect, or for the late
collection or late crediting by the Depository of any amount payable upon
Securities deposited in the Depository which may mature or be redeemed, retired,
called or otherwise become payable. However, upon receipt of a Certificate from
the Fund of an overdue amount on Securities held in the Depository the Custodian
shall make a claim against the Depository on behalf of the Fund, except that the
Custodian shall not be under any obligation to appear in, prosecute or defend
any action suit or proceeding in respect to any Securities held by the
Depository which in its opinion may involve it in expense or liability, unless
indemnity satisfactory to it against all expense and liability be furnished as
often as may be required.
5. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount due to the Fund from the Transfer
Agent of the Fund nor to take any action to effect payment or distribution by
the Transfer Agent of the Fund of any amount paid by the Custodian to the
Transfer Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to take
action to effect collection of any amount, if the Securities upon which such
amount is payable are in default, or if payment is refused after due demand or
presentation, unless and until (i) it shall be directed to take such action by a
Certificate and (ii) it shall be assured to its satisfaction of reimbursement of
its costs and expenses in connection with any such action.
7. The Custodian may in addition to the employment of Foreign
Sub-Custodians pursuant to Article XIII appoint one or more banking institutions
as Depository or Depositories, as Sub-Custodian or Sub-Custodians, or as
Co-Custodian or Co-Custodians including, but not limited to, banking
institutions located in foreign countries, of Securities and moneys at any time
owned by the Fund, upon such terms and conditions as may be approved in a
Certificate or contained in an agreement executed by the Custodian, the Fund and
the appointed institution.
8. The Custodian shall not be under any duty or obligation (a) to
ascertain whether any Securities at any time delivered to, or held by it or by
any Foreign Sub-Custodian, for the account of the Fund and specifically
allocated to a Series are such as properly may be held by the Fund or such
Series under the provisions of its then current prospectus, or (b) to ascertain
whether any transactions by the Fund, whether or not involving the Custodian,
are such transactions as may properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Fund agrees to
pay to the Custodian all out-of-pocket expenses and such compensation as may be
agreed upon from time to time between the Custodian and the Fund. The Custodian
may charge such compensation and any expenses with respect to a Series incurred
by the Custodian in the performance of its duties pursuant to such agreement
against any money specifically allocated to such Series. Unless and until the
Fund instructs the Custodian by a Certificate to apportion any loss, damage,
liability or expense among the Series in a specified manner, the Custodian shall
also be entitled to charge against any money held by it for the account of a
Series such Series' pro rata share (based on such Series net asset value at the
time of the charge to the aggregate net asset value of all Series at that time)
of the amount of any loss, damage, liability or expense, including counsel fees,
for which it shall be entitled to reimbursement under the provisions of this
Agreement. The expenses for which the Custodian shall be entitled to
reimbursement hereunder shall include, but are not limited to, the expenses of
sub-custodians and foreign branches of the Custodian incurred in settling
outside of New York City transactions involving the purchase and sale of
Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate,
notice or other instrument in writing received by the Custodian and reasonably
believed by the Custodian to be a Certificate. The Custodian shall be entitled
to rely upon any Oral Instructions actually received by the Custodian
hereinabove provided for. The Fund agrees to forward to the Custodian a
Certificate or facsimile thereof confirming such Oral Instructions in such
manner so that such Certificate or facsimile thereof is received by the
Custodian, whether by hand delivery, telecopier or other similar device, or
otherwise, by the close of business of the same day that such Oral Instructions
are given to the Custodian. The Fund agrees that the fact that such confirming
instructions are not received, or that contrary instructions are received, by
the Custodian shall in no way affect the validity of the transactions or
enforceability of the transactions hereby authorized by the Fund. The Fund
agrees that the Custodian shall incur no liability to the Fund in acting upon
Oral Instructions given to the Custodian hereunder concerning such transactions
provided such instructions reasonably appear to have been received from an
Officer.
11. The Custodian shall be entitled to rely upon any instrument,
instruction or notice received by the Custodian and reasonably believed by the
Custodian to be given in accordance with the terms and conditions of any Margin
Account Agreement. Without limiting the generality of the foregoing, the
Custodian shall be under no duty to inquire into, and shall not be liable for,
the accuracy of any statements or representations contained in any such
instrument or other notice including, without limitation, any specification of
any amount to be paid to a broker, dealer, futures commission merchant or
Clearing Member.
12. The books and records pertaining to the Fund which are in the
possession of the Custodian shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the Investment Company
Act of 1940, as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representatives, shall have
access to such books and records during the Custodian's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's authorized
representative, and the Fund shall reimburse the Custodian its expenses of
providing such copies. Upon reasonable request of the Fund, the Custodian shall
provide in hard copy or on micro- film, whichever the Custodian elects, any
records included in any such delivery which are maintained by the Custodian on a
computer disc, or are similarly maintained, and the Fund shall reimburse the
Custodian for its expenses of providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report obtained by
the Custodian on the system of internal accounting control of the Book-Entry
System, the Depository or O.C.C., and with such reports on its own systems of
internal accounting control as the Fund may reasonably request from time to
time.
14. The Fund agrees to indemnify the Custodian against and save the
Custodian harmless from all liability, claims, losses and demands whatsoever,
including attorney's fees, howsoever arising or incurred because of or in
connection with this Agreement, including the Custodian's payment or non-payment
of checks pursuant to paragraph 6 of Article XIII as part of any check
redemption privilege program of the Fund, except for any such liability, claim,
loss and demand arising out of the Custodian's own negligence or willful
misconduct.
15. Subject to the foregoing provisions of this Agreement, including,
without limitation, those contained in Article XIII the Custodian may deliver
and receive Securities, and receipts with respect to such Securities, and
arrange for payments to be made and received by the Custodian in accordance with
the customs prevailing from time to time among brokers or dealers in such
Securities. When the Custodian is instructed to deliver Securities against
payment, delivery of such Securities and receipt of payment therefor may not be
completed simultaneously. The Fund assumes all responsibility and li ability for
all credit risks involved in connection with the Custodian's delivery of
Securities pursuant to instructions of the Fund, which responsibility and
liability shall continue until final payment in full has been received by the
Custodian.
16. The Custodian shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied in this Agreement
against the Custodian.
ARTICLE XV.
TERMINATION
1. Either of the parties hereto may terminate this Agreement by giving
to the other party a notice in writing specifying the date of such termination,
which shall be not less than ninety (90) days after the date of giving of such
notice. In the event such notice is given by the Fund, it shall be accompanied
by a copy of a resolution of the Board of Directors of the Fund, certified by
the Secretary or any Assistant Secretary, electing to terminate this Agreement
and designating a successor custodian or custodians, each of which shall be a
bank or trust company having not less than $2,000,000 aggregate capital, surplus
and undivided profits. In the event such notice is given by the Custodian, the
Fund shall, on or before the termination date, deliver to the Custodian a copy
of a resolution of the Board of Directors of the Fund, certified by the
Secretary or any Assistant Secretary, designating a successor custodian or
custodians. In the absence of such designation by the Fund, the Custodian may
designate a successor custodian which shall be a bank or trust company having
not less than $2,000,000 aggregate capital, surplus and undivided profits. Upon
the date set forth in such notice this Agreement shall terminate, and the
Custodian shall upon receipt of a notice of acceptance by the successor
custodian on that date deliver directly to the successor custodian all
Securities and moneys then owned by the Fund and held by it as Custodian, after
deducting all fees, expenses and other amounts for the payment or reimbursement
of which it shall then be entitled.
2. If a successor custodian is not designated by the Fund or the
Custodian in accordance with the preceding paragraph, the Fund shall upon the
date specified in the notice of termination of this Agreement and upon the
delivery by the Custodian of all Securities (other than Securities held in the
Book-Entry System which cannot be delivered to the Fund) and moneys then owned
by the Fund be deemed to be its own custodian and the Custodian shall thereby be
relieved of all duties and responsibilities pursuant to this Agreement, other
than the duty with respect to Securities held in the Book Entry System which
cannot be delivered to the Fund to hold such Securities hereunder in accordance
with this Agreement.
ARTICLE XVI.
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of the
present Officers of the Fund under its corporate seal, setting forth the names
and the signatures of the present Officers of the Fund. The Fund agrees to
furnish to the Custodian a new Certificate in similar form in the event any such
present Officer ceases to be an Officer of the Fund, or in the event that other
or additional Officers are elected or appointed. Until such new Certificate
shall be received, the Custodian shall be fully protected in acting under the
provisions of this Agreement upon the signatures of the Officers as set forth in
the last delivered Certificate.
2. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at 90
Washington Street, New York, New York 10286, or at such other place as the
Custodian may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund shall be sufficiently given if addressed
to the Fund and mailed or delivered to it at its office at the address for the
Fund first above written, or at such other place as the Fund may from time to
time designate in writing.
<PAGE>
4. This Agreement may not be amended or modified in any manner except
by a written agreement executed by both parties with the same formality as this
Agreement and approved by a resolution of the Board of Directors of the Fund.
5. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund without the written consent
of the Custodian, or by the Custodian without the written consent of the Fund,
authorized or approved by a resolution of the Fund's Board of Directors.
6. This Agreement shall be construed in accordance with the laws of the
State of New York without giving effect to conflict of laws principles thereof.
Each party hereby consents to the jurisdiction of a state or federal court
situated in New York City, New York in connection with any dispute arising
hereunder and hereby waives its right to trial by jury.
7. This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, but such counterparts shall,
together, constitute only one instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective corporate Officers, thereunto duly authorized and
their respective corporate seals to be hereunto affixed, as of the day and year
first above written.
PRINCIPAL _______________________ FUND, INC.
[SEAL] By: _______________________________
Attest:
_________________________________
THE BANK OF NEW YORK
[SEAL] By: _______________________________
Name:
Title:
Attest:
_________________________________
APPENDIX A
I, Stephan L. Jones, President and I, Arthur S. Filean, Vice President
and Secretary of _____________________________________, a Maryland corporation
(the "Fund"), do hereby certify that:
The following individuals serve in the following positions with the
Fund and each has been duly elected or appointed by the Board of Directors of
the Fund to each such position and qualified therefor in conformity with the
Fund's Articles of Incorporation and By-Laws, and the signatures set forth
opposite their respective names are their true and correct signatures:
Name Position Signature
- ------------------------- --------------------- -------------------------
- ------------------------- --------------------- -------------------------
- ------------------------- --------------------- -------------------------
- ------------------------- --------------------- -------------------------
- ------------------------- --------------------- -------------------------
- ------------------------- --------------------- -------------------------
- ------------------------- --------------------- -------------------------
- ------------------------- --------------------- -------------------------
APPENDIX B
SERIES
NONE
APPENDIX C
I, ________________________________________ , a Vice President with THE
BANK OF NEW YORK do hereby designate the following publications:
The Bond Buyer Depository Trust Company Notices Financial Daily Card Service JJ
Kenney Municipal Bond Service London Financial Times New York Times Standard &
Poor's Called Bond Record Wall Street Journal
EXHIBIT A
CERTIFICATION
The undersigned, ________________________________, hereby certifies
that he or she is the duly elected and acting _______________________ of
____________________________________, a Maryland corporation (the "Fund"), and
further certifies that the following resolution was adopted by the Board of
Directors of the Fund at a meeting duly held on ________________________,
19_____, at which a quorum was at all times present and that such resolution has
not been modified or rescinded and is in full force and effect as of the date
hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of
__________________, 19_____, (the "Custody Agreement") is authorized and
instructed on a continuous and ongoing basis until such time as it receives a
Certificate, as defined in the Custody Agreement, to the contrary, to accept,
utilize and act with respect to Clearing Member confirmations for Options and
transaction in Options, regardless of the Series to which the same are
specifically allocated, as such terms are defined in the Custody Agreement, as
provided in the Custody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of
____________________________________, as of the day of
_________________________, 19____.
__________________________________
[SEAL]
EXHIBIT B
The undersigned, ________________, hereby certifies that he or she is
the duly elected and acting ____________________ of
_________________________________, a Maryland corporation (the "Fund"), and
further certifies that the following resolutions were adopted by the Board of
Directors of the Fund at a meeting duly held on ______________________________,
19___________, at which a quorum was at all times present and that such
resolutions have not been modified or rescinded and are in full force and effect
as of the date hereof.
RESOLVED, that the maintenance of the Fund's assets in each country
listed in Schedule I hereto be, and hereby is, approved by the Board of
Directors as consistent with the best interests of the Fund and its
shareholders; and further
RESOLVED, that the maintenance of the Fund's assets with the foreign
branches of The Bank of New York (the "Bank") listed in Schedule I located in
the countries specified therein, and with the foreign sub-custodians and
depositories listed in Schedule I located in the countries specified therein be,
and hereby is, approved by the Board of Directors as consistent with the best
interest of the Fund and its shareholders; and further
RESOLVED, that the Sub-Custodian Agreements presented to this meeting
between the Bank and each of the foreign sub-custodians and depositories listed
in Schedule I providing for the maintenance of the Fund's assets with the
applicable entity, be and hereby are, approved by the Board of Directors as
consistent with the best interests of the Fund and its shareholders; and further
RESOLVED, that the appropriate officers of the Fund are hereby
authorized to place assets of the Fund with the aforementioned foreign branches
and foreign sub-custodians and depositories as hereinabove provided; and further
RESOLVED, that the appropriate officers of the Fund, or any of them,
are authorized to do any and all other acts, in the name of the Fund and on its
behalf, as they, or any of them, may determine to be necessary or desirable and
proper in connection with or in furtherance of the foregoing resolutions.
IN WITNESS WHEREOF, I hereunto set my hand and the seal of
____________________________, as of the _________ day of ____________________,
19______.
_________________________________
[SEAL]
CHASE
GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective _____________________, 199__, and is between
THE CHASE MANHATTAN BANK ("Bank") and __________________________________________
_______________________________________________________("Customer").
1. Customer Accounts.
Bank shall establish and maintain the following accounts ("Accounts"):
(a) A custody account in the name of Customer ("Custody Account") for any
and all stocks, shares, bonds, debentures, notes, mortgages or other obligations
for the payment of money, bullion, coin and any certificates, receipts, warrants
or other instruments representing rights to receive, purchase or subscribe for
the same or evidencing or representing any other rights or interests therein and
other similar property whether certificated or uncertificated as may be received
by Bank or its Subcustodian (as defined in Section 3) for the account of
Customer ("Securities"); and
(b) A deposit account in the name of Customer ("Deposit Account") for any
and all cash in any currency received by Bank or its Subcustodian for the
account of Customer, which cash shall not be subject to withdrawal by draft or
check.
Customer warrants its authority to: 1) deposit the cash and Securities
("Assets") received in the Accounts and 2) give Instructions (as defined in
Section 11) concerning the Accounts. Bank may deliver securities of the same
class in place of those deposited in the Custody Account.
Upon written agreement between Bank and Customer, additional Accounts may
be established and separately accounted for as additional Accounts hereunder.
2. Maintenance of Securities and Cash at Bank and Subcustodian Locations.
Unless Instructions specifically require another location acceptable to
Bank:
(a) Securities shall be held in the country or other jurisdiction in which
the principal trading market for such Securities is located, where such
Securities are to be presented for payment or where such Securities are
acquired; and
(b) Cash shall be credited to an account in a country or other jurisdiction
in which such cash may be legally deposited or is the legal currency for the
payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and Bank can comply with such
Instructions, Bank is authorized to maintain cash balances on deposit for
Customer with itself or one of its "Affiliates" at such reasonable rates of
interest as may from time to time be paid on such accounts, or in non-interest
bearing accounts as Customer may direct, if acceptable to Bank. For purposes
hereof, the term "Affiliate" shall mean an entity controlling, controlled by, or
under common control with, Bank.
If Customer wishes to have any of its Assets held in the custody of an
institution other than the established Subcustodians as defined in Section 3 (or
their securities depositories), such arrangement must be authorized by a written
agreement, signed by Bank and Customer.
3. Subcustodians and Securities Depositories.
Bank may act hereunder through the subcustodians listed in Schedule A
hereof with which Bank has entered into subcustodial agreements
("Subcustodians"). Customer authorizes Bank to hold Assets in the Accounts in
accounts which Bank has established with one or more of its branches or
Subcustodians. Bank and Subcustodians are authorized to hold any of the
Securities in their account with any securities depository in which they
participate.
Bank reserves the right to add new, replace or remove Subcustodians.
Customer shall be given reasonable notice by Bank of any amendment to Schedule
A. Upon request by Customer, Bank shall identify the name, address and principal
place of business of any Subcustodian of Customer's Assets and the name and
address of the governmental agency or other regulatory authority that supervises
or regulates such Subcustodian.
4. Use of Subcustodian.
(a) Bank shall identify the Assets on its books as belonging to Customer.
(b) A Subcustodian shall hold such Assets together with assets belonging to
other customers of Bank in accounts identified on such Subcustodian's books as
custody accounts for the exclusive benefit of customers of Bank.
(c) Any Assets in the Accounts held by a Subcustodian shall be subject only
to the instructions of Bank or its agent. Any Securities held in a securities
depository for the account of a Subcustodian shall be subject only to the
instructions of such Subcustodian.
(d) Any agreement Bank enters into with a Subcustodian for holding its
customer's assets shall provide that such assets shall not be subject to any
right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets shall be freely transferable without the payment of
money or value other than for safe custody or administration. The foregoing
shall not apply to the extent of any special agreement or arrangement made by
Customer with any particular Subcustodian.
5. Deposit Account Transactions.
(a) Bank or its Subcustodians shall make payments from the Deposit Account
upon receipt of Instructions which include all information required by
Bank.
(b) In the event that any payment to be made under this Section 5 exceeds
the funds available in the Deposit Account, Bank, in its discretion, may advance
Customer such excess amount which shall be deemed a loan payable on demand,
bearing interest at the rate customarily charged by Bank on similar loans.
(c) If Bank credits the Deposit Account on a payable date, or at any time
prior to actual collection and reconciliation to the Deposit Account, with
interest, dividends, redemptions or any other amount due, Customer shall
promptly return any such amount upon oral or written notification: (i) that such
amount has not been received in the ordinary course of business or (ii) that
such amount was incorrectly credited. If Customer does not promptly return any
amount upon such notification, Bank shall be entitled, upon oral or written
notification to Customer, to reverse such credit by debiting the Deposit Account
for the amount previously credited. Bank or its Subcustodian shall have no duty
or obligation to institute legal proceedings, file a claim or a proof of claim
in any insolvency proceeding or take any other action with respect to the
collection of such amount, but may act for Customer upon Instructions after
consultation with Customer.
6. Custody Account Transactions.
(a) Securities shall be transferred, exchanged or delivered by Bank or its
Subcustodian upon receipt by Bank of Instructions which include all information
required by Bank. Settlement and payment for Securities received for, and
delivery of Securities out of, the Custody Account may be made in accordance
with the customary or established securities trading or securities processing
practices and procedures in the jurisdiction or market in which the transaction
occurs, including, without limitation, delivery of Securities to a purchaser,
dealer or their agents against a receipt with the expectation of receiving later
payment and free delivery. Delivery of Securities out of the Custody Account may
also be made in any manner specifically required by Instructions acceptable to
Bank.
(b) Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Securities with respect to any sale,
exchange or purchase of Securities. Otherwise, such transactions shall be
credited or debited to the Accounts on the date cash or Securities are actually
received by Bank and reconciled to the Account.
(i) Bank may reverse credits or debits made to the Accounts in its
discretion if the related transaction fails to settle within a reasonable
period, determined by Bank in its discretion, after the contractual
settlement date for the related transaction.
(ii) If any Securities delivered pursuant to this Section 6 are
returned by the recipient thereof, Bank may reverse the credits and debits
of the particular transaction at any time.
7. Actions of Bank.
Bank shall follow Instructions received regarding assets held in the
Accounts. However, until it receives Instructions to the contrary, Bank shall:
(i) Present for payment any Securities which are called, redeemed or
retired or otherwise become payable and all coupons and other income items
which call for payment upon presentation, to the extent that Bank or
Subcustodian is actually aware of such opportunities.
(ii) Execute in the name of Customer such ownership and other
certificates as may be required to obtain payments in respect of
Securities.
(iii) Exchange interim receipts or temporary Securities for definitive
Securities.
(iv) Appoint brokers and agents for any transaction involving the
Securities, including, without limitation, Affiliates of Bank or any
Subcustodian.
(v) Issue statements to Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
Bank shall send Customer an advice or notification of any transfers of
Assets to or from the Accounts. Such statements, advices or notifications shall
indicate the identity of the entity having custody of the Assets. Unless
Customer sends Bank a written exception or objection to any Bank statement
within sixty (60) days of receipt, Customer shall be deemed to have approved
such statement. In such event, or where Customer has otherwise approved any such
statement, Bank shall, to the extent permitted by law, be released, relieved and
discharged with respect to all matters set forth in such statement or reasonably
implied therefrom as though it had been settled by the decree of a court of
competent jurisdiction in an action where Customer and all persons having or
claiming an interest in Customer or Customer's Accounts were parties.
All collections of funds or other property paid or distributed in respect
of Securities in the Custody Account shall be made at the risk of Customer. Bank
shall have no liability for any loss occasioned by delay in the actual receipt
of notice by Bank or by its Subcustodians of any payment, redemption or other
transaction regarding Securities in the Custody Account in respect of which Bank
has agreed to take any action hereunder.
8. Corporate Actions; Proxies; Tax Reclaims.
(a) Corporate Actions. Whenever Bank receives information concerning the
Securities which requires discretionary action by the beneficial owner of the
Securities (other than a proxy), such as subscription rights, bonus issues,
stock repurchase plans and rights offerings, or legal notices or other material
intended to be transmitted to securities holders ("Corporate Actions"), Bank
shall give Customer notice of such Corporate Actions to the extent that Bank's
central corporate actions department has actual knowledge of a Corporate Action
in time to notify its customers.
When a rights entitlement or a fractional interest resulting from a rights
issue, stock dividend, stock split or similar Corporate Action is received which
bears an expiration date, Bank shall endeavor to obtain Instructions from
Customer or its Authorized person, but if Instructions are not received in time
for Bank to take timely action, or actual notice of such Corporate Action was
received too late to seek Instructions, Bank is authorized to sell such rights
entitlement or fractional interest and to credit the Deposit Account with the
proceeds or take any other action it deems, in good faith, to be appropriate in
which case it shall be held harmless for any such action.
(b) Proxy Voting. Bank shall provide proxy voting services, if elected by
Customer, in accordance with the terms of the proxy voting services rider
hereto. Proxy voting services may be provided by Bank or, in whole or in part,
by one or more third parties appointed by Bank (which may be Affiliates of
Bank).
(c) Tax Reclaims.
(i) Subject to the provisions hereof, Bank shall apply for a reduction
of withholding tax and any refund of any tax paid or tax credits which
apply in each applicable market in respect of income payments on Securities
for the benefit of Customer which Bank believes may be available to such
Customer.
(ii) The provision of tax reclaim services by Bank is conditional upon
Bank receiving from the beneficial owner of Securities (A) a declaration of
its identity and place of residence and (B) certain other documentation
(pro forma copies of which are available from Bank). Customer acknowledges
that, if Bank does not receive such declarations, documentation and
information, additional United Kingdom taxation shall be deducted from all
income received in respect of Securities issued outside the United Kingdom
and that U.S. non-resident alien tax or U.S. backup withholding tax shall
be deducted from U.S. source income. Customer shall provide to Bank such
documentation and information as it may require in connection with
taxation, and warrants that, when given, this information shall be true and
correct in every respect, not misleading in any way, and contain all
material information. Customer undertakes to notify Bank immediately if any
such information requires updating or amendment.
(iii) Bank shall not be liable to Customer or any third party for any
tax, fines or penalties payable by Bank or Customer, and shall be
indemnified accordingly, whether these result from the inaccurate
completion of documents by Customer or any third party, or as a result of
the provision to Bank or any third party of inaccurate or misleading
information or the withholding of material information by Customer or any
other third party, or as a result of any delay of any revenue authority or
any other matter beyond the control of Bank.
(iv) Customer confirms that Bank is authorized to deduct from any cash
received or credited to the Deposit Account any taxes or levies required by
any revenue or governmental authority for whatever reason in respect of the
Securities or Cash Accounts.
(v) Bank shall perform tax reclaim services only with respect to
taxation levied by the revenue authorities of the countries notified to
Customer from time to time and Bank may, by notification in writing, at its
absolute discretion, supplement or amend the markets in which the tax
reclaim services are offered. Other than as expressly provided in this
sub-clause, Bank shall have no responsibility with regard to Customer's tax
position or status in any jurisdiction.
(vi) Customer confirms that Bank is authorized to disclose any
information requested by any revenue authority or any governmental body in
relation to Customer or the Securities and/or Cash held for Customer.
(vii) Tax reclaim services may be provided by Bank or, in whole or in
part, by one or more third parties appointed by Bank (which may be
Affiliates of Bank); provided that Bank shall be liable for the performance
of any such third party to the same extent as Bank would have been if it
performed such services itself.
9. Nominees.
Securities which are ordinarily held in registered form may be registered
in a nominee name of Bank, Subcustodian or securities depository, as the case
may be. Bank may without notice to Customer cause any such Securities to cease
to be registered in the name of any such nominee and to be registered in the
name of Customer. In the event that any Securities registered in a nominee name
are called for partial redemption by the issuer, Bank may allot the called
portion to the respective beneficial holders of such class of security in any
manner Bank deems to be fair and equitable. Customer shall hold Bank,
Subcustodians, and their respective nominees harmless from any liability arising
directly or indirectly from their status as a mere record holder of Securities
in the Custody Account.
10. Authorized Persons.
As used herein, the term "Authorized Person" means employees or agents
including investment managers as have been designated by written notice from
Customer or its designated agent to act on behalf of Customer hereunder. Such
persons shall continue to be Authorized Persons until such time as Bank receives
Instructions from Customer or its designated agent that any such employee or
agent is no longer an Authorized Person.
11. Instructions.
The term "Instructions" means instructions of any Authorized Person
received by Bank, via telephone, telex, facsimile transmission, bank wire or
other teleprocess or electronic instruction or trade information system
acceptable to Bank which Bank believes in good faith to have been given by
Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which Bank may specify. Unless
otherwise expressly provided, all Instructions shall continue in full force and
effect until canceled or superseded.
Any Instructions delivered to Bank by telephone shall promptly thereafter
be confirmed in writing by an Authorized Person (which confirmation may bear the
facsimile signature of such Person), but Customer shall hold Bank harmless for
the failure of an Authorized Person to send such confirmation in writing, the
failure of such confirmation to conform to the telephone instructions received
or Bank's failure to produce such confirmation at any subsequent time. Bank may
electronically record any Instructions given by telephone, and any other
telephone discussions with respect to the Custody Account. Customer shall be
responsible for safeguarding any testkeys, identification codes or other
security devices which Bank shall make available to Customer or its Authorized
Persons.
12. Standard of Care; Liabilities.
(a) Bank shall be responsible for the performance of only such duties as
are set forth herein or expressly contained in Instructions which are consistent
with the provisions hereof as follows:
(i) Bank shall use reasonable care with respect to its obligations
hereunder and the safekeeping of Assets. Bank shall be liable to Customer
for any loss which shall occur as the result of the failure of a
Subcustodian to exercise reasonable care with respect to the safekeeping of
such Assets to the same extent that Bank would be liable to Customer if
Bank were holding such Assets in New York. In the event of any loss to
Customer by reason of the failure of Bank or its Subcustodian to utilize
reasonable care, Bank shall be liable to Customer only to the extent of
Customer's direct damages, to be determined based on the market value of
the property which is the subject of the loss at the date of discovery of
such loss and without reference to any special conditions or circumstances.
Bank shall have no liability whatsoever for any consequential, special,
indirect or speculative loss or damages (including, but not limited to,
lost profits) suffered by Customer in connection with the transactions
contemplated hereby and the relationship established hereby even if Bank
has been advised as to the possibility of the same and regardless of the
form of the action. Bank shall not be responsible for the insolvency of any
Subcustodian which is not a branch or Affiliate of Bank.
(ii) Bank shall not be responsible for any act, omission, default or
the solvency of any broker or agent which it or a Subcustodian appoints
unless such appointment was made negligently or in bad faith.
(iii) Bank shall be indemnified by, and without liability to Customer
for any action taken or omitted by Bank whether pursuant to Instructions or
otherwise within the scope hereof if such act or omission was in good
faith, without negligence. In performing its obligations hereunder, Bank
may rely on the genuineness of any document which it believes in good faith
to have been validly executed.
(iv) Customer shall pay for and hold Bank harmless from any liability
or loss resulting from the imposition or assessment of any taxes or other
governmental charges, and any related expenses with respect to income from
or Assets in the Accounts.
(v) Bank shall be entitled to rely, and may act, upon the advice of
counsel (who may be counsel for Customer) on all matters and shall be
without liability for any action reasonably taken or omitted pursuant to
such advice.
(vi) Bank need not maintain any insurance for the benefit of Customer.
(vii) Without limiting the foregoing, Bank shall not be liable for any
loss which results from: 1) the general risk of investing, or 2) investing
or holding Assets in a particular country including, but not limited to,
losses resulting from malfunction, interruption of or error in the
transmission of information caused by any machines or system or
interruption of communication facilities, abnormal operating conditions,
nationalization, expropriation or other governmental actions; regulation of
the banking or securities industry; currency restrictions, devaluations or
fluctuations; and market conditions which prevent the orderly execution of
securities transactions or affect the value of Assets.
(viii) Neither party shall be liable to the other for any loss due to
forces beyond their control including, but not limited to strikes or work
stoppages, acts of war (whether declared or undeclared) or terrorism,
insurrection, revolution, nuclear fusion, fission or radiation, or acts of
God.
(b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that Bank shall have no duty or
responsibility to:
(i) question Instructions or make any suggestions to Customer or an
Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to investments or
the retention of Securities;
(iii) advise Customer or an Authorized Person regarding any default in
the payment of principal or income of any security other than as provided
in Section 5(c) hereof;
(iv) evaluate or report to Customer or an Authorized Person regarding
the financial condition of any broker, agent or other party to which
Securities are delivered or payments are made pursuant hereto; and
(v) review or reconcile trade confirmations received from brokers.
Customer or its Authorized Persons (as defined in Section 10) issuing
Instructions shall bear any responsibility to review such confirmations
against Instructions issued to and statement issued by Bank.
(c) Customer authorizes Bank to act hereunder notwithstanding that Bank or
any of its divisions or Affiliates may have a material interest in a
transaction, or circumstances are such that Bank may have a potential conflict
of duty or interest including the fact that Bank or any of its Affiliates may
provide brokerage services to other customers, act as financial advisor to the
issuer of Securities, act as a lender to the issuer of Securities, act in the
same transaction as agent for more than one customer, have a material interest
in the issue of Securities, or earn profits from any of the activities listed
herein.
13. Fees and Expenses.
Customer shall pay Bank for its services hereunder the fees set forth in
Schedule B hereto or such other amounts as may be agreed upon in writing,
together with Bank's reasonable out-of-pocket or incidental expenses, including,
but not limited to, legal fees. Bank shall have a lien on and is authorized to
charge any Accounts of Customer for any amount owing to Bank under any provision
hereof.
14. Miscellaneous.
(a) Foreign Exchange Transaction. To facilitate the administration of
Customer's trading and investment activity, Bank is authorized to enter into
spot or forward foreign exchange contracts with Customer or an Authorized Person
for Customer and may also provide foreign exchange through its subsidiaries,
Affiliates or Subcustodians. Instructions, including standing instructions, may
be issued with respect to such contracts but Bank may establish rules or
limitations concerning any foreign exchange facility made available. In all
cases where Bank, its subsidiaries, Affiliates or Subcustodians enter into a
foreign exchange contract related to Accounts, the terms and conditions of the
then current foreign exchange contract of Bank, its subsidiary, Affiliate or
Subcustodian and, to the extent not inconsistent, this Agreement shall apply to
such transaction.
(b) Certification of Residency, etc. Customer certifies that it is a
resident of the United States and shall notify Bank of any changes in residency.
Bank may rely upon this certification or the certification of such other facts
as may be required to administer Bank's obligations hereunder. Customer shall
indemnify Bank against all losses, liability, claims or demands arising directly
or indirectly from any such certifications.
(c) Access to Records. Bank shall allow Customer's independent public
accountant reasonable access to the records of Bank relating to the Assets as is
required in connection with their examination of books and records pertaining to
Customer's affairs. Subject to restrictions under applicable law, Bank shall
also obtain an undertaking to permit Customer's independent public accountants
reasonable access to the records of any Subcustodian which has physical
possession of any Assets as may be required in connection with the examination
of Customer's books and records.
(d) Governing Law: Successors and Assigns Captions. THIS AGREEMENT SHALL BE
GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND
TO BE PERFORMED IN NEW YORK and shall not be assignable by either party, but
shall bind the successors in interest of Customer and Bank. The captions given
to the sections and subsections of this Agreement are for convenience of
reference only and are not to be used to interpret this Agreement.
(e) Entire Agreement: Applicable Riders. Customer represents that the
Assets deposited in the Accounts are (Check one):
___ Employee Benefit Plan or other assets subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA");
___ Mutual Fund assets subject to certain Securities and Exchange
Commission rules and regulations;
___ Neither of the above.
This Agreement consists exclusively of this document together with
Schedules A and B, Exhibits I - _____ and the following Rider(s) [Check
applicable rider(s)]:
___ ERISA
___ MUTUAL FUND
___ PROXY VOTING
___ SPECIAL TERMS AND CONDITIONS
There are no other provisions hereof and this Agreement supersedes any
other agreements, whether written or oral, between the parties. Any amendment
hereto must be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions hereof are held
invalid, illegal or unenforceable in any respect on the basis of any particular
circumstances or in any jurisdiction, the validity, legality and enforceability
of such provision or provisions under other circumstances or in other
jurisdictions and of the remaining provisions shall not in any way be affected
or impaired.
(g) Waiver. Except as otherwise provided herein, no failure or delay on the
part of either party in exercising any power or right hereunder operates as a
waiver, nor does any single or partial exercise of any power or right preclude
any other or further exercise, or the exercise of any other power or right. No
waiver by a party of any provision hereof, or waiver of any breach or default,
is effective unless in writing and signed by the party against whom the waiver
is to be enforced.
(h) Representations and Warranties. (i) Customer hereby represents and
warrants to Bank that: (A) it has full authority and power to deposit and
control the Securities and cash deposited in the Accounts; (B) it has all
necessary authority to use Bank as its custodian; (C) this Agreement is its
legal, valid and binding obligation, enforceable in accordance with its terms;
(D) it shall have full authority and power to borrow moneys and enter into
foreign exchange transactions; and (E) it has not relied on any oral or written
representation made by Bank or any person on its behalf, and acknowledges that
this Agreement sets out to the fullest extent the duties of Bank, (ii) Bank
hereby represents and warrants to Customer that (A) it has the power and
authority to perform its obligations hereunder, (B) this Agreement constitutes a
legal, valid and binding obligation on it; enforceable in accordance with its
terms; and (C) that it has taken all necessary action to authorize the execution
and delivery hereof.
(i) Notices. All notices hereunder shall be effective when actually
received. Any notices or other communications which may be required hereunder
are to be sent to the parties at the following addresses or such other addresses
as may subsequently be given to the other party in writing: (a) Bank: The Chase
Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, New York 11245, Attention:
Global Custody Division; and (b) Customer:______________________________________
________________________________________.
(j) Termination. This Agreement may be terminated by Customer or Bank by
giving sixty (60) days written notice to the other, provided that such notice to
Bank shall specify the names of the persons to whom Bank shall deliver the
Assets in the Accounts. If notice of termination is given by Bank, Customer
shall, within sixty (60) days following receipt of the notice, deliver to Bank
Instructions specifying the names of the persons to whom Bank shall deliver the
Assets. In either case Bank shall deliver the Assets to the persons so
specified, after deducting any amounts which Bank determines in good faith to be
owed to it under Section 13. If within sixty (60) days following receipt of a
notice of termination by Bank, Bank does not receive Instructions from Customer
specifying the names of the persons to whom Bank shall deliver the Assets, Bank,
at its election, may deliver the Assets to a bank or trust company doing
business in the State of New York to be held and disposed of pursuant to the
provisions hereof, or to Authorized Persons, or may continue to hold the Assets
until Instructions are provided to Bank.
(k) Money Laundering. Customer warrants and undertakes to Bank for itself
and its agents that all Customer's customers are properly identified in
accordance with U.S. Money Laundering Regulations as in effect from time to
time.
(l) Imputation of Certain Information. Bank shall not be held responsible
for and shall not be required to have regard to information held by any person
by imputation or information of which Bank is not aware by virtue of a "Chinese
Wall" arrangement. If Bank becomes aware of confidential information which in
good faith it feels inhibits it from effecting a transaction hereunder, Bank may
refrain from effecting it.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first-above written.
CUSTOMER
By: __________________________________
Title:
Date:
THE CHASE MANHATTAN BANK
By: ___________________________________
Title:
Date:
STATE OF )
: ss.
COUNTY OF )
On this day of , 199 , before me personally came
, to me known, who being by me duly sworn, did depose and say
that he/she resides in at , that
he/she is of , the
entity described in and which executed the foregoing instrument; that he/she
knows the seal of said entity, that the seal affixed to said instrument is such
seal, that it was so affixed by order of said entity, and that he/she signed
his/her name thereto by like order.
--------------------------------
Sworn to before me this _________
day of _________________, 199_.
- -----------------------------
Notary
STATE OF NEW YORK )
: ss.
COUNTY OF NEW YORK )
On this day of , 199 , before me personally came
, to me known, who being by me duly sworn, did depose and say that
he/she resides in at ; that
he/she is a Vice President of THE CHASE MANHATTAN BANK, the corporation
described in and which executed the foregoing instrument; that he/she knows the
seal of said corporation, that the seal affixed to said instrument is such
corporate seal, that it was so affixed by order of the Board of Directors of
said corporation, and that he/she signed his/her name thereto by like order.
--------------------------------
Sworn to before me this _________
day of _________________, 199_.
- -----------------------------
Notary
<PAGE>
Mutual Fund Rider to Global Custody Agreement
Between The Chase Manhattan Bank and
-----------------------------------------
effective _________________________
Customer represents that the Assets being placed in Bank's custody are
subject to the Investment Company Act of 1940 (the "1940 Act"), as the same may
be amended from time to time.
Except to the extent that Bank has specifically agreed to comply with a
condition of a rule, regulation, interpretation promulgated by or under the
authority of the Securities and Exchange Commission ("SEC") or the Exemptive
Order applicable to accounts of this nature issued to Bank (1940 Act, Release
No. 12053, November 20, 1981), as amended, or unless Bank has otherwise
specifically agreed, Customer shall be solely responsible to assure that the
maintenance of Assets hereunder complies with such rules, regulations,
interpretations or exemptive order promulgated by or under the authority of the
Securities Exchange Commission.
The following modifications are made to the Agreement:
Section 3. Subcustodians and Securities Depositories.
Add the following language to the end of Section 3:
The terms Subcustodian and securities depositories as used herein shall
mean a branch of a qualified U.S. bank, an eligible foreign custodian or an
eligible foreign securities depository, which are further defined as
follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as defined in
Rule 17f-5 under the Investment 1940 Act;
(b) "eligible foreign custodian" shall mean (i) a banking institution or
trust company incorporated or organized under the laws of a country other
than the United States that is regulated as such by that country's
government or an agency thereof and that has shareholders' equity in excess
of $200 million in U.S. currency (or a foreign currency equivalent
thereof), (ii) a majority owned direct or indirect subsidiary of a
qualified U.S. bank or bank holding company that is incorporated or
organized under the laws of a country other than the United States and that
has shareholders' equity in excess of $100 million in U.S. currency (or a
foreign currency equivalent thereof) (iii) a banking institution or trust
company incorporated or organized under the laws of a country other than
the United States or a majority owned direct or indirect subsidiary of a
qualified U.S. bank or bank holding company that is incorporated or
organized under the laws of a country other than the United States which
has such other qualifications as shall be specified in Instructions and
approved by Bank; or (iv) any other entity that shall have been so
qualified by exemptive order, rule or other appropriate action of the SEC;
and
(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the laws of
a country other than the United States, which operates (i) the central
system for handling securities or equivalent book-entries in that country,
or (ii) a transnational system for the central handling of securities or
equivalent book-entries.
Customer represents that its Board of Directors has approved each of the
Subcustodians listed in Schedule A hereto and the terms of the subcustody
agreements between Bank and each Subcustodian, which are attached as Exhibits I
through ___ of Schedule A, and further represents that its Board has determined
that the use of each Subcustodian and the terms of each subcustody agreement are
consistent with the best interests of the Fund(s) and its (their) shareholders.
Bank shall supply Customer with any amendment to Schedule A for approval.
Customer has supplied or shall supply Bank with certified copies of its Board of
Directors resolution(s) with respect to the foregoing prior to placing Assets
with any Subcustodian so approved.
Section 11. Instructions.
Add the following language to the end of Section 11:
Deposit Account Payments and Custody Account Transactions made pursuant to
Section 5 and 6 hereof may be made only for the purposes listed below.
Instructions must specify the purpose for which any transaction is to be
made and Customer shall be solely responsible to assure that Instructions
are in accord with any limitations or restrictions applicable to Customer
by law or as may be set forth in its prospectus.
(a) In connection with the purchase or sale of Securities at prices as
confirmed by Instructions;
(b) When Securities are called, redeemed or retired, or otherwise become
payable;
(c) In exchange for or upon conversion into other securities alone or other
securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment;
(d) Upon conversion of Securities pursuant to their terms into other
securities;
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities;
(f) For the payment of interest, taxes, management or supervisory fees,
distributions or operating expenses;
(g) In connection with any borrowings by Customer requiring a pledge of
Securities, but only against receipt of amounts borrowed;
(h) In connection with any loans, but only against receipt of adequate
collateral as specified in Instructions which shall reflect any
restrictions applicable to Customer;
(i) For the purpose of redeeming shares of the capital stock of Customer
and the delivery to, or the crediting to the account of, Bank, its
Subcustodian or Customer's transfer agent, such shares to be purchased or
redeemed;
(j) For the purpose of redeeming in kind shares of Customer against
delivery to Bank, its Subcustodian or Customer's transfer agent of such
shares to be so redeemed;
(k) For delivery in accordance with the provisions of any agreement among
Customer, Bank and a broker-dealer registered under the Securities Exchange
Act of 1934 and a member of The National Association of Securities Dealers,
Inc., relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange, or of any
similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by Customer;
(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released only
upon payment to Bank of monies for the premium due and a receipt for the
Securities which are to be held in escrow. Upon exercise of the option, or
at expiration, Bank shall receive from brokers the Securities previously
deposited. Bank shall act strictly in accordance with Instructions in the
delivery of Securities to be held in escrow and shall have no
responsibility or liability for any such Securities which are not returned
promptly when due other than to make proper request for such return;
(m) For spot or forward foreign exchange transactions to facilitate
security trading, receipt of income from Securities or related
transactions;
(n) For other proper purposes as may be specified in Instructions issued by
an officer of Customer which shall include a statement of the purpose for
which the delivery or payment is to be made, the amount of the payment or
specific Securities to be delivered, the name of the person or persons to
whom delivery or payment is to be made, and a certification that the
purpose is a proper purpose under the instruments governing Customer; and
(o) Upon the termination hereof as set forth in Section 14(j).
Section 12. Standard of Care: Liabilities.
Add the following at the end of Section as 12:
(d) Bank hereby warrants to Customer that in its opinion, after due
inquiry, the established procedures to be followed by each of its branches,
each branch of a qualified U.S. bank, each eligible foreign custodian and
each eligible foreign securities depository holding Customer's Securities
pursuant hereto afford protection for such Securities at least equal to
that afforded by Bank's established procedures with respect to similar
securities held by Bank and its securities depositories in New York.
Section 14. Access to Records.
Add the following language t the end of Section 14(c):
Upon reasonable request from Customer, Bank shall furnish Customer such
reports (or portions thereof) of Bank's system of internal accounting
controls applicable to Bank's duties hereunder. Bank shall endeavor to
obtain and furnish Customer with such similar reports as it may reasonably
request with respect to each Subcustodian and securities depository holding
Assets.
<PAGE>
GLOBAL PROXY SERVICE RIDER
To Global Custody Agreement
Between
THE CHASE MANHATTAN BANK
AND
--------------------------------
dated 199_.
1. Global Proxy Services ("Proxy Services") shall be provided for the
countries listed in the procedures and guidelines ("Procedures") furnished
to Customer, as the same may be amended by Bank from time to time on prior
notice to Customer. The Procedures are incorporated by reference herein and
form a part of this Rider.
2. Proxy Services shall consist of those elements as set forth in the
Procedures, and shall include (a) notifications ("Notifications") by Bank
to Customer of the dates of pending shareholder meetings, resolutions to be
voted upon and the return dates as may be received by Bank or provided to
Bank by its Subcustodians or third parties, and (b) voting by Bank of
proxies based on Customer Directions. Original proxy materials or copies
thereof shall not be provided. Notifications shall generally be in English
and, where necessary, shall be summarized and translated from such
non-English materials as have been made available to Bank or its
Subcustodian. In this respect Bank's only obligation is to provide
information from sources it believes to be reliable and/or to provide
materials summarized and/or translated in good faith. Bank reserves the
right to provide Notifications, or parts thereof, in the language received.
Upon reasonable advance request by Customer, backup information relative to
Notifications, such as annual reports, explanatory material concerning
resolutions, management recommendations or other material relevant to the
exercise of proxy voting rights shall be provided as available, but without
translation.
3. While Bank shall attempt to provide accurate and complete Notifications,
whether or not translated, Bank shall not be liable for any losses or other
consequences that may result from reliance by Customer upon Notifications
where Bank prepared the same in good faith.
4. Notwithstanding the fact that Bank may act in a fiduciary capacity with
respect to Customer under other agreements or otherwise under the
Agreement, in performing Proxy Services Bank shall be acting solely as the
agent of Customer, and shall not exercise any discretion with regard to
such Proxy Services.
5. Proxy voting may be precluded or restricted in a variety of circumstances,
including, without limitation, where the relevant Securities are: (i) on
loan; (ii) at registrar for registration or reregistration; (iii) the
subject of a conversion or other corporate action; (iv) not held in a name
subject to the control of Bank or its Subcustodian or are otherwise held in
a manner which precludes voting; (v) not capable of being voted on account
of local market regulations or practices or restrictions by the issuer; or
(vi) held in a margin or collateral account.
6. Customer acknowledges that in certain countries Bank may be unable to vote
individual proxies but shall only be able to vote proxies on a net basis
(e.g., a net yes or no vote given the voting instructions received from all
customers).
7. Customer shall not make any use of the information provided hereunder,
except in connection with the funds or plans covered hereby, and shall in
no event sell, license, give or otherwise make the information provided
hereunder available, to any third party, and shall not directly or
indirectly compete with Bank or diminish the market for Proxy Services by
provision of such information, in whole or in part, for compensation or
otherwise, to any third party.
8. The names of Authorized Persons for Proxy Services shall be furnished to
Bank in accordance with ss.10 of the Agreement. Proxy Services fees shall
be as set forth in ss.13 of the Agreement or as separately agreed.
<PAGE>
Country Sub-Custodian Central Depository
Argentina Chase Manhattan Bank, N.A. Caja de Valores,S.A.
Australia Chase Manhattan Bank Austraclear Limited
Australia Limited The Reserve Bank Information
and Transfer System
Austria Creditanstalt - Bankverein Oesterreichische Kontrollbank
Aktiengensellschaft
Belgium Generale Bank Caisse Interprofessionelle de
Depots et de Virements
de Titres
Brazil Banco Chase Manhattan, S.A. Sao Paulo Stock Exchange
(BOVESPA)
Canada Royal Bank of Canada, Canadian Depository for
Trust Company Securities
Chile Chase Manhattan Bank, N.A. None
(branch)
Colombia Cititrust Colombia, S.A. None
Sociedad Fiduciaria
Czech Republic Ceskoslovenska Obchodni Securities Center (SCP)
Banka, A.S.
Denmark Den Danske Bank Vaerdipapircentralen
Egypt National Bank of Egypt Misr Clearing and Securities
Depository
Finland Kansallis-Osake-Pankki Pankkitarkastu Virasto
France Banque Paribas SICOVAM
Germany Chase Bank, A.G. Deutscher Kassenverein AG
Greece Barclay's Bank plc. Apothetirio Titlon, A.E.
Hong Kong Chase Manhattan Bank, N.A. Central Clearing and
(branch) Settlement System
Hungary Citibank Budapest Rt. KELER Ltd.
India Deutsche Bank, A.G. None
Hong Kong and Shanghai
Banking Corp. Ltd.
Indonesia Hong Kong and Shanghai None
Banking Corporation, Ltd.
Israel Bank Leumi Le-Israel B.M. Tel Aviv Stock Exchange
Clearing House Ltd.
Italy Banque Paribas Monte Titoli S.p.A.
Japan The Fuji Bank, Ltd. Japan Securities Depository
Center
Jordan Arab Bank Limited None
Lebanon The British Bank of the Clearing Centre of Financial
Middle East Instruments for Lebanon and
the Middle East (Midclear)
S.A.L.
Malaysia Chase Manhattan Bank, N.A. Malaysian Central Depository
(branch) Sdn. Bhd.
Mexico Chase Manhattan Bank, N.A. Instituto para el Deposito de
(branch)Banco Nacional de Valores-INDEVAL
Mexico, S.A.
Morocco Banque Commerciale du Maroc None
Netherlands ABN-AMRO Bank N.V. Nederlands Centraal Instituut
voor Giraal Effectenverkeer
New Zealand National Nominees Limited Austraclear New Zealand
Norway Den norske Bank Verdipapirsentralen
Peru Citibank, N.A. None
Philippines Hong Kong and Shanghai Philippines Central
Banking Corporation, Ltd. Depository
Poland Bank Handlowy W. Warzawie, National Depository for
S.A. Securities
Portugal Banco Espirito Santo E. Central de Valores Mobiliaros
Comercial De Lisboa,S.A.
Singapore Chase Manhattan Bank, N.A. Central Depository Pte
(branch)
South Africa The Standard Bank of South The Central Depository, Ltd.
Africa
South Korea Hong Kong and Shanghai Korean Securities Settlement
Banking Corporation, Let. Corporation
Spain Chase Manhattan Bank, N.A. Servicio de Compensacion y
(branch) Liquidacion de Valores
Sweden Skankinaviska Enskilda Vardepapperscentralen
Banken
Switzerland Union Bank of Switzerland Schweizerische Effekten-Giro
Taiwan Chase Manhattan Bank, N.A. Taiwan Securities Central
(branch) Depository Co.
Thailand Chase Manhattan Bank, N.A. The Shares Depository Center
(branch)
United Kingdom Chase Manhattan Bank, N.A. CREST
(branch); First National Bank
of Chicago, London
Venezuela Citibank, N.A. None
AGREEMENT AND PLAN OF
REORGANIZATION AND LIQUIDATION
This AGREEMENT AND PLAN OF REORGANIZATION AND LIQUIDATION is entered into
this ___ day of ______________________, 1997 by and between Principal Variable
Contract Fund, Inc., a Maryland Corporation (the "Surviving Corporation") and
Principal Aggressive Growth Fund, Inc., Principal Asset Allocation Fund, Inc.,
Principal Balanced Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Accumulation Fund, Inc., Principal Emerging Growth Fund, Inc., Principal
Government Securities Fund, Inc., Principal Growth Fund, Inc., Principal High
Yield Fund, Inc., Principal Money Market Fund, Inc., and Principal World Fund,
Inc. (individually, a Liquidating Corporation; together the "Liquidating
Corporations").
WHEREAS, The Liquidating Corporations are open-end management investment
companies registered under the Investment Company Act of 1940, as amended (the
"1940 Act");
WHEREAS, The Liquidating Corporations have authorized capital stock
consisting of the following shares of common stock, par value $.01 per share:
Principal Aggressive Growth Fund, Inc.......................100 Million
Principal Asset Allocation Fund, Inc........................100 Million
Principal Balanced Fund, Inc................................100 Million
Principal Bond Fund, Inc....................................100 Million
Principal Capital Accumulation Fund, Inc....................100 Million
Principal Emerging Growth Fund, Inc.........................100 Million
Principal Government Securities Fund, Inc...................100 Million
Principal Growth Fund, Inc..................................100 Million
Principal High Yield Fund, Inc..............................100 Million
Principal Money Market Fund, Inc............................500 Million
Principal World Fund, Inc...................................100 Million
WHEREAS, the Surviving Corporation was organized as a Maryland Corporation
pursuant to Articles of Incorporation and is presently authorized to issue 1.5
billion shares, par value $0.01 per share, of a single class divisible into an
indefinite number of different series and will be operated as a "series company"
as provided by Rule 18f-2 under the 1940 Act;
WHEREAS, Liquidating Corporations desire to reorganize into separate series
of a single corporation through a reorganization within the meaning of Section
368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, each Liquidating Corporation desires generally to accomplish this
change by transferring all of its assets to the series of Surviving Corporation
corresponding to it in consideration for the assumption by the Surviving
Corporation of all of each Liquidating Corporation's liabilities and the
issuance to each Liquidating Corporation of shares of the series of Surviving
Corporation corresponding to it, which shares each Liquidating Corporation will
thereupon distribute pro rata to its shareholders in complete liquidation, all
in accordance with the procedures and subject to the terms and conditions of
this Agreement;
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties hereto agree as follows:
1. Plan of Reorganization and Liquidation.
(a) At the Closing each Liquidating Corporation will convey, transfer
and deliver to the Surviving Corporation all of its then existing
assets. In consideration thereof, the Surviving Corporation will
at the Closing (i) assume all of each Liquidating Corporation's
obligations and liabilities then existing, whether absolute,
accrued, contingent or otherwise, including without limitation,
all fees and expenses in connection with the transactions
contemplated hereby, and (ii) deliver to each Liquidating
Corporation a number of full and fractional shares of the
appropriate series of Surviving Corporation equal to the number of
each Liquidating Corporation's full and fractional shares then
outstanding.
(b) Upon consummation of the transactions described in paragraph (a)
of this Section 1, each Liquidating Corporation will liquidate and
the shares of the Surviving Corporation received by each
Liquidating Corporation will be distributed to its shareholders of
record as of the Closing Date, each shareholder to receive a
number of shares equal to the number of share then held by such
shareholder. Such liquidation and distribution will be accompanied
by the establishment of an open account on the share records of
the Surviving Corporation in the name of each shareholder of each
Liquidating Corporation and representing the respective pro rata
number of shares of the Surviving Corporation due such
shareholder.
(c) As soon as practicable after the Closing Date, each Liquidating
Corporation will take, in accordance with the Maryland General
Corporation Law, all steps as shall be necessary and proper to
effect a complete dissolution.
(d) Prior to the Closing and after each Liquidating Corporation has
taken the actions authorized pursuant to Section 3(e) hereof, the
shares of the Surviving Corporation heretofore held by each
Liquidating Corporation will be redeemed and canceled by the
Surviving Corporation.
2. Closing and Closing Date. The Closing will occur at 11:59 p.m. on
December 31, 1997, or at such other time and date as the parties may
mutually agree (the "Closing Date").
3. Conditions Precedent. The obligations of each Liquidating Corporation
and the Surviving Corporation to effectuate the Plan of Reorganization
and Liquidation shall be subject to the satisfaction of each of the
following conditions:
(a) Such authority and orders from the Securities and Exchange
Commission (the "Commission") and state securities commissions as
may be necessary to permit the parties to carry out the
transactions contemplated by this Agreement shall have been
received.
(b) One or more post-effective amendments to the Registration
Statement of Principal Capital Accumulation Fund, Inc. on Form
N-1A under the Securities Act of 1933 and the 1940 Act containing
(i) such amendments to such Registration Statement as are
determined by the Board of Directors of the Surviving Corporation
to be necessary and appropriate as a result of the Plan of
Reorganization and Liquidation and (ii) the adoption by the
Surviving Corporation as its own of such Registration Statement,
as so amended, shall have been filed with the Commission and such
post-effective amendment or amendments to the Registration
Statement shall have become effective, and no stop-order
suspending the effectiveness of the Registration Statement shall
have been issued, and no proceeding for that purpose shall have
been initiated or threatened by the Commission (and not withdrawn
or terminated).
(c) Each party shall have received an opinion of counsel in form and
substance satisfactory to it, relating to its authority to engage
in the transactions contemplated hereby and to the effect that
(i) this Agreement has been duly authorized, executed and
delivered by each Liquidating Corporation and the Surviving
Corporation and constitutes a legal, valid and binding agreement
of each such party in accordance with its terms; (ii) the shares
of the Surviving Corporation to be issued pursuant to the terms
of this Agreement, will be validly issued, fully paid and
non-assessable; and (iii) the Surviving Corporation is duly
organized and validly existing under the laws of the State of
Maryland.
(d) Each party shall have received an opinion of counsel to the
effect that the reorganization contemplated by this Agreement
qualifies as a "reorganization" under Section 368(a)(1)(F) of the
Code.
(e) A vote approving this Agreement and the reorganization
contemplated hereby shall have been adopted by at least a
majority of the outstanding shares of common stock of each
Liquidating Corporation entitled to vote at an annual or special
meeting and the shareholders of each Liquidating Corporation
shall have voted at such meeting to authorize each Liquidating
Corporation to vote, and each Liquidating Corporation shall have
voted, as the sole shareholder of its corresponding series of the
Surviving Corporation, to:
(1) elect the Directors of each Liquidating Corporation as
Directors of the Surviving Corporation;
(2) approve (i) a management agreement between the Surviving
Corporation and Princor Management, Inc. (the "Manager"),
(ii) an Investment Service Agreement between and among the
Manager, Principal Mutual Life Insurance Company ("Principal
Mutual") and the Surviving Corporation (the "Service
Agreement"), (iii) with respect to the Surviving
Corporation's Balanced, Capital Value, Government, Growth,
International and MidCap series, a Sub-Advisory Agreement
between and among the Manager, Invista Capital Management,
Inc. and the Surviving Corporation, and (iv) with respect to
the Surviving Corporation's Aggressive Growth and Asset
Allocation series, a Sub-Advisory Agreement between and
among the Manager, Morgan Stanley Asset Management, Inc. and
the Surviving Corporation (together, the "Advisory
Agreements"); and
(3) ratify the selection of Ernst & Young as the Surviving
Corporation's independent public accountants for the fiscal
year ending December 31, 1997.
(f) The Directors of the Surviving Corporation (and, to the extent
required by law, the Directors of the Surviving Corporation who
are not "interested persons" of the Surviving Corporation as
defined in the 1940 Act) shall have taken the following actions
at a meeting duly called for such purposes:
(1) approval of the Advisory Agreements;
(2) selection of Ernst & Young as the Surviving Corporation's
independent public accountants for the fiscal year ending
December 31, 1997;
(3) authorization of the issuance by the Surviving Corporation,
prior to the Closing, of a share of the Surviving
Corporation to each Liquidating Corporation in consideration
of the payment of $1.00 per share for the purpose of
enabling each Liquidating Corporation to vote on the matters
referred to in paragraph (e) of this Section 3;
(4) submission of the matters referred to in paragraph (e) of
this Section 3 to each Liquidating Corporation as the sole
shareholder of its corresponding series of the Surviving
Corporation; and
(5) authorization of the issuance by the Surviving Corporation
of shares at the Closing in exchange for the assets of each
Liquidating Corporation pursuant to the terms and provisions
of this Agreement.
At any time prior to the Closing, any of the foregoing conditions may
be waived by the Board of Directors of each Liquidating Corporation on
behalf of such Liquidating Corporation and the Directors of the
Surviving Corporation on behalf of the Surviving Corporation if, in
their judgment, such waiver will not have a material adverse effect on
the interests of the shareholders of such Liquidating Corporation.
4. Amendment. This Agreement may be amended at any time by action of the
Board of Directors of any Liquidating Corporation and the Directors of
the Surviving Corporation, notwithstanding approval thereof by the
shareholders of any Liquidating Corporation, provided that no
amendment shall have a material adverse effect on the interests of the
shareholders of any Liquidating Corporation unless approved by such
shareholders.
5. Termination. The Board of Directors of any Liquidating Corporation and
the Board of Directors of the Surviving Corporation may terminate this
Agreement and abandon the reorganization contemplated hereby,
notwithstanding approval thereof by the shareholders of any
Liquidating Corporation, at any time prior to the Closing, if
circumstances should develop that, in their judgment, make proceeding
with the plan inadvisable.
6. Governing Law. This Agreement shall be construed in accordance with
applicable federal law and the laws of the State of Maryland.
7. Further Assistance. The Liquidating Corporations and the Surviving
Corporation shall take further action as may be necessary or desirable
and proper to consummate the transactions contemplated hereby.
8. Entire Agreement. This Agreement embodies the entire agreement between
the parties and there are no agreements, understandings, restrictions
or warranties among the parties other than those set forth or provided
for herein.
9. Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first above written.
Principal Aggressive Growth Fund, Inc.
Principal Asset Allocation Fund, Inc.
Principal Balanced Fund, Inc.
Principal Bond Fund, Inc.
Principal Capital Accumulation Fund, Inc.
Principal Emerging Growth Fund, Inc.
Principal Government Securities Fund, Inc.
Principal Growth Fund, Inc.
Principal High Yield Fund, Inc.
Principal Money Market Fund, Inc.
Principal World Fund, Inc.
As to each of the foregoing:
By:_________________________________
Title:_______________________________
Principal Variable Contracts Fund, Inc.
By:_________________________________
Title:________________________________
ERNST & YOUNG LLP Suite 3400 Phone: 515 243 2727
801 Grand Avenue
Des Moines, Iowa 50309-2764
Consent of Independent Auditors
The Board of Directors and Shareholders
Principal Capital Accumulation Fund, Inc.
We consent to the reference to our firm under the captions "Financial
Highlights" and "Additional Information - Financial Statements" in the
Prospectus in Part A and "Financial Statements" in Part B and to the
incorporation by reference in Part B of our report dated January 17, 1997 on the
financial statements and the financial highlights of Principal Aggressive Growth
Fund, Inc., Principal Asset Allocation Fund, Inc., Principal Balanced Fund,
Inc., Principal Bond Fund, Inc., Principal Capital Accumulation Fund, Inc.,
Principal Emerging Growth Fund, Inc., Principal Government Securities Fund,
Inc., Principal Growth Fund, Inc., Principal High Yield Fund, Inc., Principal
Money Market Fund, Inc., and Principal World Fund, Inc., in this Post Effective
Amendment No. 39 to Form N-1A Registration Statement under the Securities Act of
1933 (No. 2-35570) and this Amendment No. 39 to the Registration Statement under
the Investment Company Act of 1940 (No. 811-1944) of Principal Capital
Accumulation Fund, Inc.
/s/ Ernst & Young LLP
Des Moines, Iowa
October 21, 1997
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 174,212,683
<INVESTMENTS-AT-VALUE> 206,483,512
<RECEIVABLES> 824,621
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 10,932
<TOTAL-ASSETS> 207,319,065
<PAYABLE-FOR-SECURITIES> 2,124,032
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 176,505
<TOTAL-LIABILITIES> 2,300,537
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 165,323,376
<SHARES-COMMON-STOCK> 6,869,636
<SHARES-COMMON-PRIOR> 4,878,949
<ACCUMULATED-NII-CURRENT> 35,319
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7,389,004
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 32,270,829
<NET-ASSETS> 205,018,528
<DIVIDEND-INCOME> 4,025,859
<INTEREST-INCOME> 324,177
<OTHER-INCOME> 0
<EXPENSES-NET> (832,081)
<NET-INVESTMENT-INCOME> 3,517,895
<REALIZED-GAINS-CURRENT> 26,628,772
<APPREC-INCREASE-CURRENT> 6,846,493
<NET-CHANGE-FROM-OPS> 36,993,160
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,541,996)
<DISTRIBUTIONS-OF-GAINS> (22,300,640)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,763,121
<NUMBER-OF-SHARES-REDEEMED> (1,641,040)
<SHARES-REINVESTED> 868,606
<NET-CHANGE-IN-ASSETS> 69,378,848
<ACCUMULATED-NII-PRIOR> 59,420
<ACCUMULATED-GAINS-PRIOR> 3,060,872
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 816,437
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 832,081
<AVERAGE-NET-ASSETS> 170,620,968
<PER-SHARE-NAV-BEGIN> 27.80
<PER-SHARE-NII> .57
<PER-SHARE-GAIN-APPREC> 5.82
<PER-SHARE-DIVIDEND> (.58)
<PER-SHARE-DISTRIBUTIONS> (3.77)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 29.84
<EXPENSE-RATIO> .49
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
