Registration No. 02-35570
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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POST-EFFECTIVE AMENDMENT NO. 41 TO
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
and
REGISTRATION STATEMENT
under
THE INVESTMENT COMPANY ACT OF 1940
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PRINCIPAL VARIABLE CONTRACTS FUND, INC.
(Exact name of Registrant as specified in Charter)
The Principal Financial Group
Des Moines, Iowa 50392
(Address of principal executive offices)
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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
on (date) pursuant to paragraph (a)(1) of Rule 485
75 days after filing pursuant to paragraph (a)(2) of Rule 485
x on May 1, 1998 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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The Principal Variable Contracts Fund, Inc. described in this Prospectus is
a diversified, open-end management investment company offering a variety of
Accounts. Together, the Accounts provide the following range of investment
objectives:
Growth-Oriented Accounts
------------------------
Aggressive Growth Account International Account Real Estate Account
Asset Allocation Account International SmallCap Account SmallCap Account
Balanced Account MicroCap Account SmallCap Growth Account
Capital Value Account MidCap Account SmallCap Value Account
Growth Account MidCap Growth Account Utilities Account
Income-Oriented Accounts
------------------------
Bond Account Government Securities Account
Money Market Accounts
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Money Market Account
An investment in the Money Market fund is neither insured nor guaranteed by
the U.S. Government. There can be no assurance the Money Market Funds 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 May 1, 1998. 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 May 1, 1998.
TABLE OF CONTENTS
Summary ................................................. 2
Financial Highlights...................................... 4
Investment Objectives, Policies and Restrictions.......... 4
Certain Investment Policies and Restrictions.............. 13
Manager and Sub-Advisors ................................ 16
Duties Performed by the Manager and Sub-Advisors.......... 18
Managers' Comments........................................ 18
Determination of Net Asset Value of Account Shares........ 25
Performance Calculation................................... 25
Income Dividends, Distributions and Tax Status............ 26
Eligible Purchasers and Purchase of Shares................ 26
Shareholder Rights ....................................... 27
Redemption of Shares...................................... 27
Additional Information.................................... 28
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
Aggressive Growth Account -- 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 -- 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.
Balanced Account -- to generate a total return consisting of current income and
capital appreciation while assuming reasonable risks in furtherance of this
objective.
Capital Value Account --to provide long-term capital appreciation and
secondarily 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.
Growth Account -- to seek 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.
International Account -- to seek long-term growth of capital by investing in a
portfolio of equity securities domiciled in any of the nations of the world.
International SmallCap Account -- seeks long-term growth of capital. The Account
will attempt to achieve its objective by investing primarily in equity
securities of non-United States companies with comparatively smaller market
capitalizations.
MicroCap Account -- seeks long-term growth of capital. The Account will attempt
to achieve its objective by investing primarily in value and growth oriented
companies with small market capitalizations, generally less than $700 million.
MidCap Account -- to achieve capital appreciation by investing primarily in
securities of emerging and other growth-oriented companies.
MidCap Growth Account -- seeks long-term growth of capital. The Account will
attempt to achieve its objective by investing primarily in growth stocks of
companies with market capitalizations in the $1 billion to $10 billion range.
Real Estate Account -- seeks to generate a high total return. The Account will
attempt to achieve its objective by investing primarily in equity securities of
companies principally engaged in the real estate industry.
SmallCap Account -- seeks long-term growth of capital. The Account will attempt
to achieve its objective by investing primarily in equity securities of both
growth and value oriented companies with comparatively smaller market
capitalizations.
SmallCap Growth Account -- seeks long-term growth of capital. The Account will
attempt to achieve its objective by investing primarily in equity securities of
small growth companies with market capitalization of less than $1 billion.
SmallCap Value Account -- seeks long-term growth of capital. The Account will
attempt to achieve its objective by investing primarily in equity securities of
small companies with value characteristics and market capitalizations of less
than $1 billion.
Utilities Account -- seeks to provide current income and long-term growth of
income and capital. The Account will attempt to achieve its objective by
investing primarily in equity and fixed-income securities of companies in the
public utilities industry.
Income-Oriented Accounts
Bond Account -- to provide as high a level of income as is consistent with
preservation of capital and prudent investment risk.
Government Securities Account -- 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
Money Market Account -- 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 ("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 certain Accounts the Manager
has executed sub-advisory agreements with Invista Capital Management, Inc.
("Invista") (Balanced, Capital Value, Government Securities, Growth,
International, International SmallCap, MidCap, SmallCap and Utilities Accounts),
Morgan Stanley Asset Management Inc. ("MSAM") (Aggressive Growth and Asset
Allocation Accounts), Berger Associates, Inc. ("Berger") (SmallCap Growth
Account), Dreyfus Corporation ("Dreyfus") (MidCap Growth Account), Goldman Sachs
Asset Management ("GSAM") (MicroCap Account) and J.P. Morgan Investment
Management, Inc. ("J.P. Morgan Investment") (SmallCap Value Account").
Subsequent references to these corporations may be as "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 .80% .02% .82%
Asset Allocation .80 .09 .89
Balanced .59 .02 .61
Bond .50 .02 .52
Capital Value .46 .01 .47
Government Securities .50 .02 .52
Growth .49 .01 .50
International .74 .13 .87
International SmallCap 1.20 .06 1.26*
MicroCap 1.00 .06 1.06*
MidCap .62 .02 .64
MidCap Growth .90 .06 .96*
Money Market .50 .05 .55
Real Estate .90 .06 .96*
SmallCap .85 .06 .91*
SmallCap Growth 1.00 .06 1.06*
SmallCap Value 1.10 .06 1.16*
Utilities .60 .06 .66*
*Estimated Expenses
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 $8 $26 $46 $101
Asset Allocation $9 $28 $49 $110
Balanced $6 $20 $34 $76
Bond $5 $17 $29 $65
Capital Value $5 $15 $26 $59
Government Securities $5 $17 $29 $65
Growth $5 $16 $28 $63
International $9 $28 $48 $107
International SmallCap $13 $40 N/A N/A
MicroCap $11 $34 N/A N/A
MidCap $7 $20 $36 $80
MidCap Growth $10 $31 N/A N/A
Money Market $6 $18 $31 $69
Real Estate $10 $31 N/A N/A
SmallCap $9 $29 N/A N/A
SmallCap Growth $11 $34 N/A N/A
SmallCap Value $12 $37 N/A N/A
Utilities $7 $21 N/A N/A
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 are derived from financial statements which,
for the five years in the period ended December 31, 1997, 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 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 Growth-Oriented Accounts have different approaches to achieving their
investment objectives. They seek:
-- long-term growth of capital through investments primarily in equity
securities of corporations established in the United States ("U.S.")
(Aggressive Growth, Capital Value, Growth, MicroCap, MidCap, MidCap
Growth, SmallCap, SmallCap Growth and SmallCap Value Accounts)
-- total investment return including both capital appreciation and income
through investments in equity and debt securities (Asset Allocation and
Balanced Accounts)
-- long-term growth of capital primarily through investments in equity
securities of corporations located outside of the U.S. (International
and International SmallCap Accounts)
-- long-term growth of income and capital through investment in equity
securities of companies principally engaged in the real estate industry
(Real Estate Account)
-- current income and long-term growth of income and capital through
investment in equity and fixed-income securities of public utilities
companies (Utilities Account)
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 depository receipts based on any
of the foregoing securities. The Aggressive Growth, Capital Value, Growth,
International, MidCap and SmallCap Value 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. When investing for temporary defensive
purposes, a Growth-Oriented Account is not investing so as to achieve its
investment objective. 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 Certain Investment Policies and Restrictions - 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) growth and
value stocks; medium capitalization (companies whose market value is greater
than $1 billion but less than $7 billion) growth and value stocks; large
capitalization (companies whose market value is greater than $7 billion) growth
and value stocks; domestic real estate investment trusts; common stocks of
foreign corporations, domestic fixed-income securities; domestic high yield
fixed-income securities; foreign fixed-income securities; and money market (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
Certain Investment Policies and Restrictions - 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
Sub-Advisor, Invista, 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 Invista
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 Certain Investment Policies and Restrictions - 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 Account 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.
International SmallCap Account
The investment objective of International SmallCap Account is long-term growth
of capital. The strategy of this Account is to invest primarily in equity
securities of non-United States companies with comparatively smaller market
capitalizations. Under normal market conditions, the Account invests at least
65% of its assets in securities of companies having a total market
capitalization of $1 billion or less.
The Account diversifies its investments geographically. 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 three countries. For a description of certain
investment risks associated with foreign securities, see Certain Investment
Policies and Restrictions - Foreign Securities.
For temporary defensive purposes, the International SmallCap 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.
MicroCap Account
The investment objective of MicroCap Account is long-term growth of capital.
Under normal market conditions, the Account invests at least 65% of its total
assets in equity securities of companies with market capitalizations of $700
million or less at the time of investment. Under normal circumstances, the
Account's investment horizon for ownership of equity securities will be two to
three years. Dividend income, if any, is an incidental consideration.
The Account invests in companies which the Sub-Advisor, GSAM, believes are well
managed niche businesses that have the potential to achieve high or improving
returns on capital and/or above average sustainable growth. The Sub-Advisor will
invest in companies that have what has become known in the investment industry
as "value" characteristics as well as companies that have "growth"
characteristics with no consistent preference between the two categories.
Companies with value characteristics generally have above average dividend
yields and below average price to book (P/B) and or price to earnings (P/E)
ratios. Growth companies are generally those whose sales and earnings growth is
expected to exceed the growth rate of corporation profits of the S&P 500 or
which offer new products or new services. The Account may invest in securities
of small market capitalization companies which may have experienced financial
difficulties. Investments may also be made in companies that are in the early
stages of their life and that the Sub-Advisor believes have significant growth
potential. The Sub-Advisor believes that the companies in which the Account may
invest offer greater opportunities for growth of capital than larger, more
mature, better known companies. However, investments in such small market
capitalization companies involve special risks. See Certain Investment Policies
and Restrictions - Securities of Smaller Companies and Unseasoned Issuers.
The Account may invest in the aggregate up to 35% of its total assets in the
equity securities of companies with market capitalizations in excess of $700
million and in fixed income securities. In addition, although the Account will
invest primarily in publicly traded U.S. securities, it may invest up to 25% of
its total assets in foreign securities, including securities of issuers in
emerging countries and securities quoted in foreign currencies. See Certain
Investment Policies and Restrictions - Foreign Securities.
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 Sub-Advisor, Invista, 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. Under normal market conditions, the Account will
invest at least 65% of its assets in securities of companies with market
capitalizations in the $1 billion to $10 billion range. The Account may invest
up to 10% of its assets in securities of foreign issuers. For a description of
certain investment risks associated with foreign securities, see Certain
Investment Policies and Restrictions Foreign Securities.
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.
MidCap Growth Account
The investment objective of MidCap Growth Account is long-term growth of
capital. The Account attempts to maintain a diversified holding in common stocks
of medium capitalization companies, generally firms with a market value between
$1 billion and $5 billion. In the view of the Sub-Advisor, Dreyfus, many
medium-sized companies are in fast-growing industries, offer superior earnings
growth potential, and are characterized by strong balance sheets and high
returns on equity. However, because the companies in this market are smaller,
prices of their stocks tend to be more volatile than stocks of companies with
larger capitalizations. The Account may also hold investments in large and small
capitalization companies, including emerging and cyclical growth companies.
Emerging and cyclical growth companies are firms, which while they may not have
a history of stable long-term growth, are nonetheless expected to represent
attractive investments. See Certain Investment Policies and Restrictions -
Securities of Smaller Companies and Unseasoned Issuers.
The Account may also invest in preferred stock and other securities having
equity features such as convertible bonds, warrants and rights (subject to
certain restrictions). In addition, the Account may hold foreign securities,
corporate fixed-income securities, government securities, and short-term
investments. Because income is not an objective of the Account, any income
produced will be a by-product of the effort to achieve the Account's objective
of long-term growth of capital. See Certain Investment Policies and Restrictions
- - Foreign Securities.
Common stocks are selected for the Account so that, in the aggregate, the
investment characteristics and risk profile of the Account are similar to the
S&P MidCap 400 Index ("S&P MidCap"). While it may maintain aggregate investment
characteristics similar to the S&P MidCap, the Account seeks to invest in common
stocks of companies which in the aggregate will provide a higher total return
than the S&P MidCap. The Account is not an index fund and its investments are
not limited to securities of issuers included in the S&P MidCap.
The Sub-Advisor uses valuation models designed to identify common stocks of
companies that have demonstrated consistent earnings momentum and delivered
superior results relative to market analyst expectation. Other evaluative
considerations include profit margins, growth in cash flow and other standard
balance sheet measures. The securities held are generally characterized by
strong earnings momentum measures and higher expected earnings per share growth
with an eye on the underlying asset value not fully reflected in the current
market price. Once such common stocks are identified, the Sub-Advisor constructs
a portfolio, that in the aggregate breakdown and risk profile resembles the S&P
MidCap, but is weighted toward the most attractive stocks. The valuation model
incorporates information about the relevant criteria as of the most recent
period for which data are available. Once ranked, the securities are categorized
under the headings "buy", "sell" or "hold." The Sub-Advisor decides whether to
buy, sell, or hold the security based principally on the model's categorization,
subject to modification based on subsequently available or other specific
relevant information about the security.
Real Estate Account
The investment objective of Real Estate Account is to generate total return by
investing primarily in equity securities of companies principally engaged in the
real estate industry. The Account will seek to achieve its objective by seeking,
with approximately equal emphasis, long-term capital growth and current income
through the purchase of equity securities.
Under normal circumstances the Account will invest at least 65 percent of its
assets in the equity securities of real estate companies. Equity securities
include common stock (including shares in real estate investment trusts),
preferred stock, rights and warrants. A real estate investment trust ("REIT") is
a corporation, or a business trust which, in satisfying certain Internal Revenue
Code requirements, is permitted to effectively eliminate corporate level federal
income taxes. Qualifying REITs must, among other things, derive substantially
all of their income from real estate assets and annually distribute to
shareholders 95 percent or more of their otherwise taxable income.
REITs are characterized as equity REITs, mortgage REITs and hybrid REITs. An
equity REIT invests primarily in the fee ownership of real estate and revenue is
primarily derived from rental income. A mortgage REIT primarily invests in real
estate mortgages and hybrid REITs combine the characteristics of both an equity
REIT and a mortgage REIT.
For purposes of the Account's investment policies, a real estate company is one
that has at least 50% of its assets, income or profits attributable to products
or services related to the real estate industry. Real estate companies include
REITs or other securitized real estate investments and companies with
substantial real estate holdings such as paper, lumber, hotel and entertainment
companies. Companies whose products and services relate to the real estate
industry include building supply manufacturers, mortgage lenders and mortgage
servicing companies. The Account may invest up to 25% of its total assets in
securities of foreign real estate companies, see Certain Investment Policies and
Restrictions - Foreign Securities.
Securities issued by real estate companies may be subject to risks similar to
those associated with the direct ownership of real estate (in addition to
securities market risks) because of its policy of concentration in the
securities of companies in the real estate industry. These include declines in
the value of real estate, risks related to general and local economic
conditions, dependency on management skills, heavy cash flow dependency,
possible lack of availability of mortgage funds, overbuilding, extended
vacancies in properties, increases in property taxes and operating expenses,
changes in zoning laws, losses due to costs resulting from the cleanup of
environmental problems, casualty or condemnation losses, changes in neighborhood
values and changes in interest rates.
In addition to these risks, equity REITS may be affected by changes in the value
of the underlying property owned by the trusts, while mortgage REITS may be
affected by the quality of any credit extended. Further, equity and mortgage
REITS are dependent upon management skills and generally may not be diversified.
Equity and mortgage REITS are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation. In addition, equity or mortgage
REITS could possibly fail to qualify for tax free pass-through of income under
the Internal Revenue Code of 1986, as amended, or to maintain their exemptions
from registration under the Investment Company Act of 1940. The above factors
may also adversely affect a borrower's or lessee's ability to meet its
obligations to the REIT. In the event of a default by a borrower or lessee, the
REIT may experience delays in enforcing its rights as a mortgagee or lessor and
may incur substantial costs associated with protecting its investments.
SmallCap Account
The investment objective of SmallCap Account is long-term growth of capital. The
strategy of this Account is to invest primarily in equity securities of
companies domiciled in the United States with comparatively smaller market
capitalizations. Under normal market conditions, the Account invests at least
65% of its assets in securities of companies having a total market
capitalization of $1 billion or less.
In selecting securities for investment, the Sub-Advisor, Invista, will look at
stocks with both "growth" and "value" characteristics, with no consistent
preference between the two categories. The growth orientation emphasizes buying
stocks of companies whose potential for growth of capital and earnings is
expected to be above average. The value orientation emphasizes buying stocks at
less than their intrinsic value and avoiding those whose price has been
speculatively bid up.
SmallCap Growth Account
The investment objective of SmallCap Growth Account is long-term growth of
capital. In seeking to achieve its objective, the Account invests primarily in a
diversified group of equity securities of small growth companies with a market
capitalization of less than $1 billion at the time of initial purchase. Growth
companies are generally those whose sales and earnings growth is expected to
exceed the growth rate of corporate profits of the S&P 500 or which offer new
products or new services. Under normal market conditions, the Account will
invest at least 65% of its assets in equity securities of such companies,
consisting of common and preferred stock and other securities having equity
features such as convertible bonds, warrants and rights (subject to certain
restrictions). The balance of the Account may include equity securities of
companies with market capitalization in excess of $1 billion, foreign
securities, securities of unseasoned issuers, corporate fixed-income securities,
government securities, and short-term investments. Because income is not an
objective of the Account, any income produced will be a by-product of the effort
to achieve the Account's objective of long-term growth of capital. See Certain
Investment Policies and Restrictions - Foreign Securities and Unseasoned
Issuers.
In selecting securities for investment, the Account places primary emphasis on
companies which it believes have favorable growth prospects. The Sub-Advisor,
Berger, seeks to identify small growth companies that either occupy a dominant
position in an emerging industry or a growing market share in larger fragmented
industries. While these companies may present above average risk, the
Sub-Advisor believes that they may have the potential to achieve long-term
earnings growth substantially in excess of the growth of earning of other
companies. See Certain Investment Policies and Restrictions - Securities of
Smaller Companies.
SmallCap Value Account
The investment objective of SmallCap Value Account is long-term growth of
capital. In seeking to achieve its objective, the Account invests primarily in a
diversified group of equity securities of small U.S. companies with market
capitalizations of less than $1 billion at the time of initial purchase.
Emphasis will be given to those companies that exhibit "value" characteristics.
These characteristics are above average dividend yield and below average price
to earnings (P/E) ratios. Under normal market conditions, the Sub-Advisor, J.P.
Morgan Investment, intends to keep the Account fully invested with at least 65%
of its assets in equity securities. See Certain Investment Policies and
Restrictions - Securities of Smaller Companies.
The Sub-Advisor uses fundamental research, systematic stock valuation and a
disciplined portfolio construction process to seek to enhance returns and reduce
volatility in the market value of the Account relative to that of the U.S. small
company value universe, represented by the Russell 2000(R) Value Index. The
Sub-Advisor continuously screens the small company universe to identify for
further analysis those companies which exhibit favorable characteristics such as
significant and predictable cash flow and high quality management. Based on
fundamental research and using a dividend discount model, the Sub-Advisor ranks
these companies within economic sectors according to their relative value. The
Sub-Advisor then selects for purchase the companies it feels to be most
attractive within each economic sector.
The Sub-Advisor believes that under normal market conditions, the Account will
have sector weightings comparable to that of the U.S. small company value
universe, although it may under or over-weight selected economic sectors. In
addition, as a company moves out of the market capitalization range of the small
company universe, it generally becomes a candidate for sale by the Account.
The Account intends to manage its investments actively to accomplish its
investment objective. Since the Account has a long-term investment perspective,
it does not intend to respond to short-term market fluctuations or to acquire
securities for the purpose of short-term trading; however, it may take advantage
of short-term trading opportunities that are consistent with its objective. To
the extent that the Account engages in short-term trading, it may incur an
increase in transaction costs.
Utilities Account
The investment objective of Utilities Account is to provide current income and
long-term growth of income and capital. The Account seeks to achieve its
investment objective by investing primarily in equity and fixed-income
securities of companies engaged in the public utilities industry. The term
"public utilities industry" consists of companies engaged in the manufacture,
production, generation, transmission, sale and distribution of gas and electric
energy, as well as companies engaged in the communications field, including
telephone, telegraph, satellite, microwave and other companies providing
communication facilities for the public, but excluding public broadcasting
companies. For purposes of the Account, a company will be considered to be in
the public utilities industry if, during the most recent twelve-month period, at
least 50% of the company's gross revenues, on a consolidated basis, is derived
from the public utilities industry. Under normal market conditions, the Account,
as an investment policy, will invest at least 65%, and may invest up to 100%, of
its total assets in securities of companies in the public utilities industry,
and as a matter of fundamental policy will invest no less than 25% of its total
assets in those securities. As a non-fundamental policy, the Account may not own
more than 5% of the outstanding voting securities of more than one public
utility company as defined by the Public Utility Holding Company Act of 1935.
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
Certain Investment Policies and Restrictions - 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.
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 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). Therefore, the market value 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 Sub-Advisor, Invista, 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 markup 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 Accounts
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 that 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, International and International SmallCap Accounts - 100%;
Aggressive Growth, MicroCap, Real Estate and SmallCap Growth Accounts - 25%;
Bond, Capital Value, SmallCap and Utilities Accounts - 20%; Balanced, Growth,
MidCap, MidCap Growth and SmallCap Value 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 Accounts (except Government Securities and Money Market) 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 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 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 and International SmallCap Accounts, 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.
As a matter of fundamental policy, the International SmallCap, MicroCap, MidCap
Growth, Real Estate, SmallCap, SmallCap Growth, SmallCap Value and Utilities
Accounts each are prohibited from borrowing money except each Account (a) may
borrow from banks (as defined in the Investment Company Act of 1940, as amended)
or through reverse repurchase agreements in amounts up to 33 1/3% of its total
assets (including the amount borrowed) and (b) may, to the extent permitted by
applicable law, borrow up to an additional 5% of its total assets for temporary
purposes. In addition, the MicroCap Account may (i) obtain such short-term
credits as may be necessary for the clearance of purchases and sales of
portfolio securities, (ii) purchase securities on margin to the extent permitted
by applicable law and (iii) engage in transactions in mortgage dollar rolls
which are accounted for as financings.
Options
Each of the Accounts (except Bond, Capital Value and Money Market) 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.
Securities of Smaller Companies.
The International SmallCap, MicroCap, MidCap, MidCap Growth, SmallCap, SmallCap
Growth and SmallCap Value Accounts may invest in and be weighted toward,
securities of companies with small- or mid-sized market capitalizations. Market
capitalization is defined as total current market value of a company's
outstanding common stock. Investments in companies with smaller market
capitalizations may involve greater risks and price volatility (wide, rapid
fluctuations) than investments in larger, more mature companies. Smaller
companies may be less mature than older companies. At this earlier stage of
development, the companies may have limited product lines, reduced market
liquidity for their shares, limited financial resources or less depth in
management than larger or more established companies. Small companies also may
be less significant factors within their industries and may be at a competitive
disadvantage relative to their larger competitors. While smaller companies may
be subject to these additional risks, they may also realize more substantial
growth than larger or more established companies.
Unseasoned Issuers.
Each of the Accounts, except the Government Securities, MicroCap and SmallCap
Growth Accounts, may invest to a limited degree in securities of unseasoned
issuers. The MicroCap and SmallCap Growth Accounts each may invest no more than
10% of its total assets in securities of unseasoned issuers. The Government
Securities Account may not purchase securities of unseasoned issuers. Unseasoned
issuers are companies with a record of less than three years' continuous
operation, including the operations of any predecessors and parents. Unseasoned
issuers by their nature have only a limited operating history which can be used
for evaluating the companies growth prospects. As a result, investment decisions
for these securities may place a greater emphasis on current or planned product
lines and the reputation and experience of the companies management and less
emphasis on fundamental valuation factors than would be the case for more mature
growth companies. In addition, many unseasoned issuers also may be small
companies and involve the risks and price volatility associated with smaller
companies.
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 (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, 1997, the Manager served as investment advisor for
30 such funds with assets totaling approximately $5.3 billion.
The Manager has executed agreements with various Sub-Advisors. Under those
Sub-Advisory agreements, the Sub-Advisor agrees to assume the obligations of the
Manager to provide investment advisory services for a specific Account. For
these services, each Sub-Advisor is paid a fee by the Manager.
Accounts:
Balanced, Capital Value, Government Securities, Growth, International,
International SmallCap, MidCap, SmallCap and Utilities
Sub-Advisor:
Invista Capital Management, Inc. Invista, an indirectly wholly-owned
subsidiary of Principal Mutual Life Insurance Company and an affiliate of
the Manager, was founded in 1985. It manages investments for
institutional investors, including Principal Mutual Life Insurance
Company. Assets under management as of December 31, 1997 were
approximately $26 billion. Invista's address is 1800 Hub Tower, 699
Walnut, Des Moines, Iowa 50309.
Accounts:
Aggressive Growth and Asset Allocation
Sub-Advisor:
Morgan Stanley Asset Management Inc. 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 U.S. and abroad. At
December 31, 1997, MSAM managed investments totaling approximately $____
billion, including approximately $___ billion under active management and
$____ billion as Named Fiduciary or Fiduciary Adviser.
Account:
MicroCap
Sub-Advisor:
Goldman Sachs Asset Management ("GSAM"), One New York Plaza, New York,
New York 10004, is a separate operating division of Goldman, Sachs & Co.
("Goldman Sachs"). Goldman Sachs provides a wide range of fully
discretionary investment advisory services quantitatively driven and
actively managed U.S. and international equity portfolios, U.S. and
global fixed income portfolios, commodity and currency products, and
money markets.
Account:
MidCap Growth
Sub-Advisor:
The Dreyfus Corporation, located at 200 Park Avenue, New York, New York
10166, was formed in 1947. The Dreyfus Corporation is a wholly-owned
subsidiary of Mellon Bank, N.A., which is a wholly-owned subsidiary of
Mellon Bank Corporation ("Mellon"). As of September 30, 1997, The Dreyfus
Corporation managed or administered approximately $93 billion in assets
for approximately 1.7 million investor accounts nationwide.
Account:
SmallCap Growth
Sub-Advisor:
Berger Associates, Inc. Berger's address is 210 University Boulevard,
Suite 900, Denver, CO 80206. It serves as investment advisor,
sub-advisor, administrator or sub-administrator to mutual funds and
institutional investors. Berger is a wholly-owned subsidiary of Kansas
City Southern Industries, Inc. ("KCSI"). KCSI is a publicly traded
holding company with principal operations in rail transportation, through
its subsidiary The Kansas City Southern Railway Company, and financial
asset management businesses.
Account:
SmallCap Value
Sub-Advisor:
J.P. Morgan Investment Management, Inc. J.P. Morgan Investment, with
principal offices at 522 Fifth Avenue, New York, NY 10036 is a
wholly-owned subsidiary of J.P.Morgan & Co. Incorporated ("J.P.Morgan") a
bank holding company. J.P.Morgan, through J.P. Morgan Investment and
other subsidiaries, offers a wide range of services to governmental,
institutional, corporate and individual customers and acts as investment
adviser to individual and institutional clients. As of December 31, 1997,
J.P.Morgan and its subsidiaries had total combined assets under
management of approximately $250 billion.
The Manager or Sub-Advisor has assigned certain individuals the primary
responsibility for the day-to-day management of each Account's portfolio. The
persons primarily responsible for each Account and the year they assumed the
responsibility are identified below:
Account: Year
- -------- ----
Aggressive Growth
Kurt Feuerman - Managing Director, May, 1994
Morgan Stanley Asset Management Inc. (Account's inception)
and Morgan Stanley & Co. Incorporated
since 1993.
Asset Allocation
Francine J. Bovich - Principal, May, 1994
Morgan Stanley Asset Management Inc. (Account's inception)
and Morgan Stanley & Co. Incorporated
since 1993.
Kurt Feuerman - Managing Director, May, 1994
Morgan Stanley Asset Management Inc. (Account's inception)
and Morgan Stanley & Co. Incorporated
since 1993.
Stephen C. Sexauer - Principal, Morgan April, 1996
Stanley Asset Management Inc. and
Morgan Stanley & Co. Incorporated
since 1989.
Balanced
Co-Manager: Judith A. Vogel - April, 1993
Vice President, Invista Capital
Management, Inc. since 1987.
Co-Manager: Martin J. Schafer - December, 1997
Vice President, Invista Capital
Management, Inc. since 1992.
Bond
Scott A. Bennett - Assistant Director November, 1996
Investment Securities, Principal Mutual
Life Insurance Company since 1996.
Prior thereto, Investment Manager.
Capital Value
Catherine A. Green - Vice President, November, 1996
Invista Capital Management, Inc.
since 1987.
Government Securities
Martin J. Schafer - Vice President, April, 1987
Invista Capital Management, Inc. (Account's inception)
since 1992.
Growth and MidCap
Michael R. Hamilton - Vice President, May, 1994
Invista Capital Management, Inc. (Account's inception)
since 1987. and December, 1987
(Account's inception),
respectively
International
Scott D. Opsal - Executive Vice President, April, 1994
Invista Capital Management, Inc.
since 1997; Vice President, 1986 - 1997.
International SmallCap
Darren K. Sleister - Investment Officer, April, 1998
Invista Capital Management, Inc. (Account's inception)
since 1995. Prior thereto, Security Analyst.
MicroCap
Paul David Farrell - Vice President, April, 1998
GSAM, Matthew B. McLennan, Associate (Account's inception)
at GSAM and Eileen A. Aptman,
Vice President, GSAM. Mr. Farrell joined
GSAM in 1991. Mr. McLennan joined
GSAM in 1995. Prior to joining GSAM,
he worked at Queensland Investment
Corporation in Australia. Ms. Aptman joined
GSAM in 1993. Prior to 1993, she was an
equity analyst at Delphi Management.
MidCap Growth
John O'Toole CFA - Senior Vice President, April, 1998
and Portfolio Manager, Mellon Equity (Account's inception)
Associates LLP since 1990.
Real Estate
Kelly D. Rush - Assistant Director, April, 1998
Investment - Commercial Real Estate, (Account's Inception)
Principal Mutual Life Insurance
Company since 1996. Prior thereto,
Senior Administrator,
Investment - Commercial Real Estate.
SmallCap
Co-Manager: Mark T. Williams - April, 1998
Vice President, Invista Capital (Account's inception)
Management, Inc., since 1995.
Investment Officer, 1992-1995.
Co-Manager: John F. McClain, April, 1998
Vice President, Invista Capital (Account's inception)
Management, Inc. since 1995;
Investment Officer, 1992-1995.
SmallCap Growth
William R. Keithler - Senior Vice April, 1998
President, Investment Management (Account's inception)
Berger Associates since December 1993.
Prior thereto, Senior Vice President
INVESCO Trust Company
January 1993 - December 1993.
SmallCap Value
James B Otness - Managing Director, April, 1998
J. P. Morgan Investment (Account's inception)
Management, Inc. since January 1995.
Employed by J.P. Morgan Investment
since February 1992.
Utilities
Catherine A. Green - Vice President, April, 1998
Invista Capital Management, Inc. (Account's inception)
since 1987.
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. The Manager, or Sub-Advisor, 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, 1997 was, on an annual basis, equal to the following percentage of
average net assets:
Total
Manager's Annualized
Account Fee Expenses
------- --------- ----------
Aggressive Growth .80% .82%
Asset Allocation .80 .89
Balanced .59 .61
Bond .50 .52
Capital Value .46 .47
Government Securities .50 .52
Growth .49 .50
International Account .74 .87
MidCap Account .62 .64
Money Market Account .50 .55
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, Asset
Allocation MicroCap, MidCap Growth, SmallCap Growth and SmallCap Value 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, 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 and Sub-Advisors 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 1997. The accompanying graphs 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.
Manager Comments and performance graphs will be included in the next
Post-Effective Amendment.
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. 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.
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. 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 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 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 and International SmallCap Accounts. The custodian for
the International and International SmallCap Accounts 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, certain Funds
sponsored by Principal Mutual Life Insurance Company were reorganized into a
series of the Principal Variable Contracts Fund, Inc., a corporation
incorporated in the State of Maryland. The new series adopted the assets and
liabilities of the corresponding Fund. Those 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. The Articles of Incorporation for the Principal Variable Contracts Fund,
Inc. were amended on February ___, 1998 to reflect the addition of the following
new Accounts: International SmallCap; MicroCap; MidCap Growth; Real Estate;
SmallCap; SmallCap Growth; SmallCap Value; and Utilities.Principal Mutual Life
Insurance Company owns 100% of each Account'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.
PART B
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
Statement of Additional Information
dated May 1, 1998
This Statement of Additional Information provides information about the
Fund in addition to the information that is contained in the Fund's Prospectus,
dated May 1, 1998.
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........................................ 9
Money Market Account............................................ 12
Account Investments.................................................... 13
Directors and Officers of the Fund..................................... 22
Manager and Sub-Advisors .............................................. 24
Cost of Manager's Services ............................................ 26
Brokerage on Purchases and Sales of Securities......................... 28
Determination of Net Asset Value of Account Shares..................... 30
Performance Calculation................................................ 31
Tax Status............................................................. 33
General Information and History........................................ 33
Financial Statements................................................... 33
Appendix A............................................................. 34
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: Accounts which seek primarily capital appreciation through investments
in equity securities (Aggressive Growth, Capital Value, Growth, MicroCap,
MidCap, MidCap Growth, SmallCap, SmallCap Growth and SmallCap Value); 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); two Accounts which seek long-term growth of capital
primarily through investments in equity securities of corporations located
outside of the U.S. (International and International SmallCap Accounts); one
account seeking long-term growth of income and capital through investment in
equity securities of real estate companies (Real Estate Account); and one
Account seeking to generate current income and long-term growth of income and
capital through investment in equity and fixed-income securities of public
utilities companies (Utilities Account); 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 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 seeks to generate a total investment return
consistent with the preservation of capital.
Balanced Account 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 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 seeks growth of capital through the purchase primarily
of common stocks, but the Account may invest in other securities.
International Account 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.
International SmallCap Account seeks long-term growth of capital. The
Account will attempt to achieve its objective by investing primarily in
equity securities of non-United States companies with comparatively
smaller market capitalizations.
MicroCap Account seeks long-term growth of capital. The Account will
attempt to achieve its objective by investing primarily in value and
growth oriented companies with small market capitalizations, generally
in the $300 million to $700 million range.
MidCap Account seeks to achieve capital appreciation by investing
primarily in securities of emerging and other growth-oriented
companies.
MidCap Growth Account seeks long-term growth of capital. The Account
will attempt to achieve its objective by investing primarily in growth
stocks of companies with market capitalizations in the $1 billion to
$10 billion range.
Real Estate Account seeks to generate a high total return. The Account
will attempt to achieve its objective by investing primarily in equity
securities of companies principally engaged in the real estate
industry.
SmallCap Account seeks long-term growth of capital. The Account will
attempt to achieve its objective by investing primarily in equity
securities of both growth and value oriented companies with
comparatively smaller market capitalizations.
SmallCap Growth Account seeks long-term growth of capital. The Account
will attempt to achieve its objective by investing primarily in equity
securities of small growth companies with market capitalization of less
than $1 billion.
SmallCap Value Account seeks long-term growth of capital. The Account
will attempt to achieve its objective by investing primarily in equity
securities of small companies with value characteristics and market
capitalizations of less than $1 billion.
Utilities Account seeks to provide current income and long-term growth
of income and capital. The Account will attempt to achieve its
objective by investing primarily in equity and fixed-income securities
of companies in the public utilities industry.
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, Asset Allocation, Balanced, Growth, International and MidCap Accounts
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 15% 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 15% 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 and MidCap Accounts each 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.
Investment Restrictions
International SmallCap Account, MicroCap Account, MidCap Growth Account,
Real Estate Account, SmallCap Account, SmallCap Growth Account, SmallCap
Value Account and Utilities Account.
Each of the following numbered restrictions is a matter of fundamental
policy and may not be changed without shareholder approval. The International
SmallCap Account, MicroCap Account, MidCap Growth Account, Real Estate Account,
SmallCap Account, SmallCap Growth Account, SmallCap Value Account and Utilities
Accounts each may not:
(1) Issue any senior securities as defined in the Investment Company Act of
1940, as amended. 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) Invest in commodities or commodity contracts, but it may purchase and
sell financial futures contracts and options on such contracts.
(3) 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.
(4) Borrow money, except (a) it may borrow from banks (as defined in the
Investment Company Act of 1940, as amended) or other financial
institutions or through reverse repurchase agreements in amounts up to
331/3% of its total assets (including the amount borrowed) and (b) it
may, to the extent permitted by applicable law, borrow up to an
additional 5% of its total assets for temporary purposes. In addition,
the MicroCap Account may (i) obtain such short-term credits as may be
necessary for the clearance of purchases and sales of portfolio
securities, (ii) purchase securities on margin to the extent permitted
by applicable law and (iii) engage in transactions in mortgage dollar
rolls which are accounted for as financings.
(5) 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.
(6) Invest more than 5% of its total assets in the securities of any one
issuer (other than obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities) or purchase
more than 10% of the outstanding voting securities of any one issuer,
except that this limitation shall apply only with respect to 75% of the
total assets of each Account.
(7) 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.
(8) Concentrate its investments in any particular industry*, except that
the Account may invest not more than 25% of the value of its total
assets in a single industry.
(a) the Real Estate Account may not invest less than 25% of its total
assets in securities of companies in the real estate industry,
and
(b) the Utilities Account may not invest less than 25% of its total
assets in securities of companies in the public utilities
industry.
*In applying the SmallCap Growth Account's industry concentration
restriction, the Account uses the industry groups used in the
Data Monitor Portfolio Monitoring System of William O'Neil & Co.
Incorporated.
(9) 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 to the extent permitted by applicable law and except
that the Account may obtain such short-term credits as are necessary
for the clearance of transactions. The deposit or payment of margin in
connection with transactions in options and financial futures contracts
is not considered the purchase of securities on margin.
(10) 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 15% 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 15% limitation.
(2) 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.
(3) Invest in companies for the purpose of exercising control or
management.
(4) 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.
(5) 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.
(6) Invest more than 5% of its assets in initial margin and premiums on
financial futures contracts and options on such contracts.
(7) Invest in arbitrage transactions.
(8) Invest in real estate limited partnership interests except that this
restriction shall not apply to either the MicroCap or Real Estate
Accounts.
(9) Acquire securities of other investment companies, except as permitted
by the Investment Company Act of 1940, as amended or any rule, order or
interpretation thereunder, or in connection with a merger,
consolidation, reorganization, acquisition of assets or an offer of
exchange. The Account may purchase securities of closed-end investment
companies in the open market where no underwriter or dealer's
commission or profit, other than a customary broker's commission, is
involved.
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 15% 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 15% 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 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.
(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 (i) 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: 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."
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, except as noted. Investments in foreign securities by the
Aggressive Growth, Asset Allocation, International, International SmallCap, and
MicroCap Accounts are expected to exceed 5% of each Account's net assets, and
investments in foreign securities by the SmallCap Growth Account may at times
exceed 5% of its net assets.
Fundamental Analysis
Selections of equity securities for the Accounts, except the Aggressive
Growth, Asset Allocation, MicroCap, MidCap Growth and SmallCap Value 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.
This analysis process is often referred to as "top-down" fundamental analysis.
In selecting equity securities for the SmallCap Growth Account, these same three
basic steps are followed, but in the reverse order.
This process is often referred to as "bottom-up" fundamental analysis.
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 15% of its assets: Aggressive Growth, Asset
Allocation, Balanced, Bond, Capital Value, Growth, High Yield, International,
International SmallCap, MicroCap, MidCap, MidCap Growth, Real Estate, SmallCap,
SmallCap Growth, SmallCap Value and Utilities 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, International and
International SmallCap Accounts - 100% ; Aggressive Growth, MicroCap, Real
Estate and SmallCap Growth Accounts - 25%; Bond, Capital Value, High Yield,
SmallCap and Utilities Accounts - 20%; Balanced, Growth, MidCap, MidCap Growth
and SmallCap Value Accounts - 10%. The Money Market Account does not invest in
foreign securities other than those that are United States dollar denominated.
United States dollar denominated means that all principal and interest payments
for the security are payable in U.S. dollars and that the interest rate of, the
principal amount to be repaid and the timing of payments related to the
securities do not vary or float with the value of a foreign currency, the rate
of interest on foreign currency borrowings or with any other interest rate or
index expressed in a currency other than U.S. dollars. 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, International SmallCap, MicroCap,
MidCap, MidCap Growth, Real Estate, SmallCap, SmallCap Growth, SmallCap Value
and Utilities 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 place any asset, including equity securities and
non-investment grade debt, in a segregated account, so long as the asset is
liquid and marked to the market daily. 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 Accounts (except Government Securities and Money Market) 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 15% 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 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.
Securities of Smaller Companies
The International SmallCap, MicroCap, MidCap, MidCap Growth, SmallCap,
SmallCap Growth and SmallCap Value Accounts may invest in and be weighted
toward, securities of companies with small- or mid-sized market capitalizations.
Market capitalization is defined as total current market value of a company's
outstanding common stock. Investments in companies with smaller market
capitalizations may involve greater risks and price volatility (wide, rapid
fluctuations) than investments in larger, more mature companies. Smaller
companies may be less mature than older companies. At this earlier stage of
development, the companies may have limited product lines, reduced market
liquidity for their shares, limited financial resources or less depth in
management than larger or more established companies. Small companies also may
be less significant factors within their industries and may be at a competitive
disadvantage relative to their larger competitors. While smaller companies may
be subject to these additional risks, they may also realize more substantial
growth than larger or more established companies.
Unseasoned Issuers
Each of the Accounts, except the Government Securities, MicroCap and the
SmallCap Growth Accounts, may invest up to 5% of the Account's total assets in
securities of unseasoned issuers. The MicroCap and SmallCap Growth Accounts each
may invest no more than 10% of its total assets in securities of unseasoned
issuers. The Government Securities Account may not purchase securities of
unseasoned issuers. Unseasoned issuers are companies with a record of less than
three years' continuous operation, including the operations of any predecessors
and parents. Unseasoned issuers by their nature have only a limited operating
history which can be used for evaluating the companies growth prospects. As a
result, investment decisions for these securities may place a greater emphasis
on current or planned product lines and the reputation and experience of the
companies management and less emphasis on fundamental valuation factors than
would be the case for more mature growth companies. In addition, many unseasoned
issuers also may be small companies and involve the risks and price volatility
associated with smaller companies.
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, 64, Director. 49 40 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.
Pamela A. Ferguson, 54, Director. 4112 River Oaks Drive, Des Moines, Iowa.
Professor of Mathematics, Grinnell College since 1998. Prior thereto, President,
Grinnell College.
@Richard W. Gilbert, 57, Director. 1357 Asbury Avenue, Winnetka, IL.
President, Gilbert Communications, Inc. since 1993.
*&J. Barry Griswell, 49, Director and Chairman of the Board. Executive Vice
President, Principal Mutual Life Insurance Company since 1996. Senior Vice
President 1991-1996. 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, 62, Director. Executive Vice President, Principal Mutual
Life Insurance Company since 1992. 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. Dean
and Professor Emeritus, Drake University, College of Business and Public
Administration, since 1996. Prior thereto, Professor, Drake University, College
of Business and Public Administration.
*Craig L. Bassett, 46, Treasurer. Second Vice President and Treasurer,
Principal Mutual Life Insurance Company since 1998. Director - Treasury
1996-1998. Prior thereto, Associate Treasurer.
*Michael J. Beer, 37, Financial Officer. Senior Vice President and Chief
Operating Officer, Princor Financial Services Corporation and Principal
Management Corporation, since 1997. Prior thereto, Vice President and Chief
Operating Officer 1995-1997. Prior thereto, Financial Officer.
*David J. Brown, 38, 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, 41, Assistant Treasurer. Assistant Treasurer, Principal
Mutual Life Insurance Company since 1998. Senior Accounting and Custody
Administrator 1994-1998; Prior thereto, Senior Investment Cost Accountant
1993-1994.
*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, 1997.
Director Each Account
-------- ------------
James D. Davis $
Roy W. Ehrle $
Pamela A. Ferguson $
Richard W. Gilbert $
Barbara A. Lukavsky $
Richard G. Peebler $*
* Richard G. Peebler received $______ from each of the Accounts. 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, 1997 was as follows:
James D. Davis $ Richard W. Gilbert $
Roy W. Ehrle $ Barbara A. Lukavsky $
Pamela A. Ferguson $ Richard G. Peebler $
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, 1997, 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
(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 agreements with various Sub-Advisors. Under those
Sub-Advisory agreements, the Sub-Advisor agrees to assume the obligations of the
Manager to provide investment advisory services for a specific Account. For
these services, each Sub-Advisor is paid a fee by the Manager.
Accounts: Balanced, Capital Value, Government Securities, Growth, International,
International SmallCap, MidCap, SmallCap and Utilities
Sub-Advisor: Invista Capital Management, Inc. ("Invista"). Invista, an
indirectly wholly-owned subsidiary of Principal Mutual Life Insurance
Company and an affiliate of the Manager, was founded in 1985. It manages
investments for institutional investors, including Principal Mutual Life
Insurance Company. Assets under management as of December 31, 1997 were
approximately $26 billion. Invista's address is 1800 Hub Tower, 699 Walnut,
Des Moines, Iowa 50309.
Accounts: Aggressive Growth and Asset Allocation
Sub-Advisor: Morgan Stanley Asset Management Inc. ("MSAM"). 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 U.S. and
abroad. At December 31, 1997, MSAM managed investments totaling
approximately $____ billion, including approximately $___ billion under
active management and $____ billion as Named Fiduciary or Fiduciary
Adviser.
Account: MicroCap
Sub-Advisor: Goldman Sachs Asset Management ("GSAM"), One New York Plaza, New
York, NY 10004, is a separate operating division of Goldman, Sachs & Co.
("Goldman Sachs"). Goldman Sachs provides a wide range of fully
discretionary investment advisory services including quantitatively driven
and actively managed U.S. and international equity portfolios and global
fixed-income portfolios, commodity and currency products, and money market.
Account: MidCap Growth
Sub-Advisor: The Dreyfus Corporation ("Dreyfus")., located at 200 Park Avenue,
New York, New York 10166, was formed in 1947. The Dreyfus Corporation is a
wholly-owned subsidiary of Mellon Bank, N.A., which is a wholly-owned
subsidiary of Mellon Bank Corporation ("Mellon"). As of September 30, 1997,
The Dreyfus Corporation managed or administered approximately $93 billion
is assets for approximately 1.7 million investor accounts nationwide.
Account: SmallCap Growth
Sub-Advisor: Berger Associates, Inc. ("Berger"). Berger's address is 210
University Boulevard, Suite 900, Denver, CO 80206. It serves as investment
advisor, sub-advisor, administrator or sub-administrator to mutual funds
and institutional investors. Berger is a wholly-owned subsidiary of Kansas
City Southern Industries, Inc. ("KCSI"). KCSI is a publicly traded holding
company with principal operations in rail transportation, through its
subsidiary The Kansas City Southern Railway Company, and financial asset
management businesses.
Account: SmallCap Value
Sub-Advisor: J.P. Morgan Investment Management, Inc. ("J.P. Morgan Investment").
J.P. Morgan Investment, with principal offices at 522 Fifth Avenue, New
York, NY 10036 is a wholly-owned subsidiary of J.P.Morgan & Co.
Incorporated ("J.P.Morgan") a bank holding company. J.P.Morgan, through
J.P.Morgan Investment and other subsidiaries, offers a wide range of
services to governmental, institutional, corporate and individual customers
and acts as investment adviser to individual and institutional clients. As
of December 31, 1997, J.P.Morgan and its subsidiaries had total combined
assets under management of approximately $250 billion.
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:
<TABLE>
<CAPTION>
Office Held With Office Held With
Name The Fund The Manager/Invista
<S> <C> <C>
Craig Bassett Treasurer Treasurer (Manager)
Michael J. Beer Financial Officer Senior Vice President & Chief
Operating Officer (Manager)
Arthur S. Filean Vice President and Secretary Vice President (Manager)
Ernest H. Gillum Assistant Secretary Assistant Vice President, Registered
Products (Manager)
J. Barry Griswell Director and Chairman Director and Chairman of
of the Board the Board (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)
</TABLE>
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>
Net Asset Value of Fund
First Next Next Next Over
Account $100 million $100 million $100 million $100 million $400 million
- ------------------------------------- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Aggressive Growth and
Asset Allocation 0.80% 0.75% 0.70% 0.65% 0.60%
Balanced, High Yield and Utilities 0.60% 0.55% 0.50% 0.45% 0.40%
International 0.75% 0.70% 0.65% 0.60% 0.55%
International SmallCap 1.20% 1.15% 1.10% 1.05% 1.00%
MicroCap and SmallCap Growth 1.00% 0.95% 0.90% 0.85% 0.80%
MidCap 0.65% 0.60% 0.55% 0.50% 0.45%
MidCap Growth and Real Estate 0.90% 0.85% 0.80% 0.75% 0.70%
Small Cap 0.85% 0.80% 0.75% 0.70% 0.65%
Small Cap Value 1.10% 1.05% 1.00% 0.95% 0.90%
All Other 0.50% 0.45% 0.40% 0.35% 0.30%
</TABLE>
Management Fee
Net Assets as of For Year Ended
Account December 31, 1997 December 31, 1997
----------- ----------------- -----------------
Aggressive Growth $ %
Asset Allocation
Balanced
Bond
Capital Value
Government Securities
Growth
High Yield
International
MidCap
Money Market
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, International SmallCap, MidCap, SmallCap and Utilities
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%.
Under a Sub-Advisory Agreement between Berger and the Manager, Berger
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the SmallCap Growth Account. The Manager pays Berger a
fee that is accrued daily and payable monthly. The fee is based on the net asset
value of the Account as follows: first $100 million of net assets - the fee is
0.50%; next $200 million - 0.45%; and net assets over $300 million - 0.40%.
Under a Sub-Advisory Agreement between Dreyfus and the Manager, Dreyfus
performs all the investment advisory responsibilities of the Manager under the
Management Agreement for the MidCap Growth Account. The Manager pays Dreyfus a
fee that is accrued daily and payable monthly. The fee is based on the net asset
value of the Account as follows: first $50 million of net assets - the fee is
0.40%; and net assets over $50 million - 0.35%.
Under a Sub-Advisory Agreement between GSAM and the Manager, GSAM performs
all the investment advisory responsibilities of the Manager under the Management
Agreement for the MicroCap Account. The Manager pays GSAM a fee that is accrued
daily and payable monthly. The fee is based on the net asset value of the
Account as follows: first $50 million of net assets - the fee is 0.50%; next
$150 million - 0.45%; and net assets over $200 million - 0.40%.
Under a Sub-Advisory Agreement between J.P.Morgan Investment and the
Manager, J.P.Morgan Investment performs all the investment advisory
responsibilities of the Manager under the Management Agreement for the SmallCap
Value Account. The Manager pays J.P.Morgan Investment a fee that is accrued
daily and payable monthly. The fee is based on the net asset value of the
Account as follows: first $50 million of net assets - the fee is 0.60%; next
$250 million - 0.55%; and net assets over $300 million - 0.50%.
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,
1997 1996 1995
Aggressive Growth $000,000 $491,699 $180,022
Asset Allocation 000,000 425,427 272,724
Balanced 000,000 420,010 206,614
Bond 000,000 260,242 122,783
Capital Value 000,000 816,437 591,891
Government Securities 000,000 360,968 202,554
Growth 000,000 357,833 137,029
High Yield 000,000 75,111 64,422
International 000,000 376,123 172,258
MidCap 000,000 606,697 264,411
Money Market 000,000 208,822 140,895
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 the Accounts
(except the Aggressive Growth, Asset Allocation, MicroCap, MidCap Growth,
SmallCap Growth and SmallCap Value Accounts) were last approved by the
shareholders of each Account on November 24, 1997. The First Amendment to the
Management Agreement, the First Amendment to the Sub-Advisory Agreement between
Principal Management and Invista (adding the International SmallCap, SmallCap
and Utilities Accounts), the Sub-Advisory Agreement between Principal Management
and Berger, the Sub-Advisory Agreement between Principal Management and Dreyfus,
the Sub-Advisory Agreement between Principal Management and GSAM, and the
Sub-Advisory Agreement between Principal Management and J.P.Morgan Investment
were approved by the Fund's Board of Directors on December 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 Balanced,
Capital Value, Government Securities, Growth, International, International
SmallCap, MidCap, SmallCap and Utilities Accounts, Invista; in the case of the
Sub-Advisory Agreement for each of the Aggressive Growth and Asset Allocation
Accounts, MSAM; for the Sub-Advisory Agreement for the MicroCap Account, GSAM,
for the Sub-Advisory Agreement for the MidCap Growth Account, Dreyfus, for the
Sub-Advisory Agreement for the SmallCap Growth Account, Berger, and for the
Sub-Advisory Agreement for the SmallCap Value Account, J.P.Morgan Investment
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, Berger, Dreyfus, GSAM,
Invista, J.P. Morgan Investment, 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, industries, economic factors and trends, portfolio strategy
and performance of client accounts). 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
__________________ 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, 1997 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 $______,
$______, $______, $______, $______, $______ and $______, 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 1997 1996 1995
-----------------------------------------------------------------
Aggressive Growth $418,468 $250,591 $102,404
Asset Allocation 164,992 109,360 35,476
Balanced 58,053 46,458 18,780
Capital Value 135,417 183,156 142,577
Growth 33,836 45,131 28,870
International 230,351 156,842 78,939
MidCap 54,019 63,355 31,588
Brokerage commissions paid to affiliates during the year ended December 31,
1997 were as follows:
<TABLE>
<CAPTION>
Commissions Paid to Principal Financial Securities, Inc.
Total Dollar As Percent of As Percent of Dollar Amount
Account Amount Total Commissions of Commissionable Transactions
- -------------- ------ ----------------- ------------------------------
<S> <C> <C> <C>
Balanced $18,197 31.34% 43.17%
Capital Value 2,310 1.71% 2.03%
Growth 4,747 14.03% 16.38%
</TABLE>
<TABLE>
<CAPTION>
Commissions Paid to Morgan Stanley and Co.
Total Dollar As Percent of As Percent of Dollar Amount
Account Amount Total Commissions of Commissionable Transactions
- -------------- ------ ----------------- ------------------------------
<S> <C> <C> <C>
Asset Allocation $ 2,974 1.80% 1.29%
Capital Value 7,155 5.28% 6.12%
Growth 1,250 3.69% 3.83%
International 10,411 4.37% 4.20%
MidCap 2,250 4.17% 2.54%
</TABLE>
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 for the Aggressive Growth,
Asset Allocation, MicroCap, MidCap Growth, SmallCap Growth and SmallCap Value
Accounts. 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 Berger, Dreyfus, GSAM, J.P. Morgan
Investment or 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, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. 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-Advisor, 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.
<TABLE>
<CAPTION>
The following table shows as of December 31, 1997 average annual total
return for each of the Accounts for the periods indicated:
Account 1-Year 5-Year 10-Year
- -------------------------- ------- -------- -------
<S> <C> <C> <C>
Aggressive Growth 30.86% 28.83%(2) N/A
Asset Allocation 18.19% 14.38%(2) N/A
Balanced 17.93% 12.57% 12.96%
Bond 10.60% 8.44% 9.62%
Capital Value 28.53% 17.80% 15.23%
Government Securities 10.39% 7.38% 9.36%
Growth 26.96% 18.98%(1) N/A
High Yield 10.75% 10.45% 9.87%
International 12.24% 12.67%(1) N/A
MidCap 22.75% 18.18% 18.29%
</TABLE>
(1) Period beginning May 1, 1994 and ending December 31, 1997.
(2) Period beginning June 1, 1994 and ending December 31, 1997.
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, 1997, the Money Market Account's yield was _____%. 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, 1997, the Money Market
Account's effective yield was _____%.
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
On December 31, 1997, certain Funds sponsored by Principal Mutual Life Insurance
Company were reorganized into Accounts of the Principal Variable Contracts Fund,
Inc., a corporation incorporated in the State of Maryland. The new series
adopted the assets and liabilities of the corresponding Fund. The old Fund names
and the corresponding Account are shown below:
Fund Account
---- -------
Principal Aggressive Growth Fund, Inc. Aggressive Growth Account
Principal Asset Allocation Fund, Inc. Asset Allocation Account
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Government Securities Fund, Inc. Government Securities Account
Principal Growth Fund, Inc. Growth Account
Principal High Yield Fund, Inc. High Yield Account
Principal Money Market Fund, Inc. Money Market Account
Principal World Fund, Inc. International Account
The Articles of Incorporation for the Principal Variable Contracts Fund, Inc.
were amended on February ___, 1998 to reflect the addition of the following new
Accounts:
International SmallCap Account SmallCap Account
MicroCap Account SmallCap Growth Account
MidCap Growth Account SmallCap Value Account
Real Estate Account Utilities Account
FINANCIAL STATEMENTS
The financial statements for the Accounts for the fiscal period ended
December 31, 1997 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:
To be added by amendment.
(2) Part B:
None
(b) Exhibits
(1) Amendment and Restatement of the Articles
of Incorporation
(2) Bylaws (Filed 10/23/97)
(5a) Management Agreement (Filed 10/23/97)
(5a1) First Amendment to Management Agreement
(5b) Investment Service Agreement (Filed 10/23/97)
(5c) Sub-Advisory Agreement - Invista Capital
Management, Inc. (Filed 10/23/97)
(5c1) First Amendment to Sub-Advisory Agreement
(5d) Sub-Advisory Agreement - Morgan Stanley Asset
Management, Inc. (Filed 10/23/97)
(5e) Sub-Advisory Agreement - Berger
Associates, Inc. (to be added by amendment)
(5f) Sub-Advisory Agreement - Dreyfus Corporation
(to be added by amendment)
(5g) Sub-Advisory Agreement - Goldman Sachs Asset
Management (to be added by amendment)
(5h) Sub-Advisory Agreement - J.P. Morgan
Investment Management, Inc. (to be added by
amendment)
(8a) Domestic Custody Agreement (Filed 10/23/97)
(8b) Global Custody Agreement (Filed 10/23/97)
(9) Agreement and Plan of Reorganization and
Liquidation (Filed 10/23/97)
(11) Consent of Independent Auditors
(to be filed by amendment)
(12) Audited Financial Statements as of
December 31, 1997, including the Report of
Ernst & Young LLP, independent auditors for
the Registrant.(to be added by amendment)
(16) Total Return Performance Quotation
(Filed 4/12/96)
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 Balanced Fund, Inc.(a Maryland Corporation) 0.74% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal Blue Chip Fund, Inc.(a Maryland Corporation) 0.95% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal Bond Fund, Inc.(a Maryland Corporation) 1.35% of shares
outstanding owned by Principal Mutual Life Insurance Company
(including subsidiaries and affiliates) on January 30, 1998.
Principal Capital Value Fund, Inc. (a Maryland Corporation)
27.36% of outstanding shares owned by Principal Mutual Life
Insurance Company (including subsidiaries and affiliates) on
January 30, 1998.
Principal Cash Management Fund, Inc. (a Maryland Corporation)
2.34% of outstanding shares owned by Principal Mutual Life
Insurance Company (including subsidiaries and affiliates) on
January 30, 1998.
Principal Government Securities Income Fund, Inc. (a Maryland
Corporation) 0.40% of shares outstanding owned by Principal
Mutual Life Insurance Company (including subsidiaries and
affiliates) on January 30, 1998.
Principal Growth Fund, Inc. (a Maryland Corporation) 0.48% of
outstanding shares owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal High Yield Fund, Inc. (a Maryland Corporation) 16.72%
of shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal International Emerging Markets Fund, Inc. (a Maryland
Corporation) 66.10% of shares outstanding owned by Principal
Mutual Life Insurance Company (including subsidiaries and
affiliates) on January 30, 1998.
Principal International Fund, Inc. (a Maryland Corporation)
23.63% of shares outstanding owned by Principal Mutual Life
Insurance Company (including subsidiaries and affiliates) on
January 30, 1998.
Principal International SmallCap Fund, Inc. (a Maryland
Corporation) 61.51% of shares outstanding owned by Principal
Mutual Life Insurance Company (including subsidiaries and
affiliates) on January 30, 1998.
Principal Limited Term Bond Fund, Inc. (a Maryland Corporation)
45.48% of shares outstanding owned by Principal Mutual Life
Insurance Company(including subsidiaries and affiliates) on
January 30, 1998.
Principal MidCap Fund, Inc. (a Maryland Corporation) 0.60% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998
Principal Real Estate Fund, Inc. (a Maryland Corporation) 95.34%
of shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998
Principal SmallCap Fund, Inc.(a Maryland Corporation) 88.70% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998
Principal Special Markets Fund, Inc. (a Maryland Corporation)
96.92% of shares outstanding of the International Emerging
Markets Portfolio, 50.28% of the shares outstanding of the
International Securities Portfolio, 96.87% of shares outstanding
of the International SmallCap Portfolio and 100% of the shares
outstanding of the Mortgage-Backed Securities Portfolio were
owned by Principal Mutual Life Insurance Company (including
subsidiaries and affiliates) on January 30, 1998
Principal Tax-Exempt Bond Fund, Inc. (a Maryland Corporation)
0.56% of shares outstanding owned by Principal Mutual Life
Insurance Company (including subsidiaries and affiliates) on
January 30, 1998.
Principal Tax-Exempt Cash Management Fund, Inc. (a Maryland
Corporation) 0.99% of shares outstanding owned by Principal
Mutual Life Insurance Company (including subsidiaries and
affiliates) on January 30, 1998.
Principal Utilities Fund, Inc. (a Maryland Corporation) 1.45% of
shares outstanding owned by Principal Mutual Life Insurance
Company (including subsidiaries and affiliates) on January 30,
1998.
Principal Variable Contracts Fund, Inc. (a Maryland Corporation)
100% of shares outstanding of the following Accounts owned by
Principal Mutual Life Insurance Company and its Separate Accounts
on January 30, 1998: Aggressive Growth, Asset Allocation,
Balanced, Bond, Capital Value, Government Securities, Growth,
High Yield, International, MidCap and Money Market.
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. The Admar Group, Inc. (a Florida Corporation) a national
managed care service organization that developes and manages
preferred provider organizations.
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.
Subsidiaries organized and wholly-owned by Princor Financial Services
Corporation:
a. Principal 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 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. Principal Health Care Management Corporation (an Iowa
Corporation) provide management services to health
maintenance organizations.
b. Principal Health Care of the Carolinas, Inc. (a North
Carolina Corporation) a health maintenance organization.
c. Principal Health Care of Delaware, Inc. (a Delaware
Corporation) a health maintenance organization.
d. Principal Health Care of Florida, Inc. (a Florida
Corporation) a health maintenance organization.
e. Principal Health Care of Georgia, Inc. (a Georgia
Corporation) a health maintenance organization.
f. Principal Health Care of Illinois, Inc. (an Illinois
Corporation) a health maintenance organization.
g. Principal Health Care of Indiana, Inc. (a Delaware
Corporation) a health maintenance organization.
h. Principal Health Care of Iowa, Inc. (an Iowa Corporation) a
health maintenance organization.
i. Principal Health Care of Kansas City, Inc. (a Missouri
Corporation) a health maintenance organization.
j. Principal Health Care of Louisiana, Inc. (a Louisiana
Corporation) a health maintenance organization.
k. Principal Health Care of Nebraska, Inc. (a Nebraska
Corporation) a health maintenance organization.
l. Principal Health Care of Pennsylvania, Inc. (a Pennsylvania
Corporation) a health maintenance organization.
m. Principal Health Care of St. Louis, Inc. (a Delaware
Corporation) a health maintenance organization.
n. Principal Health Care of South Carolina, Inc. (A South
Carolina Corporation) a health maintenance organization.
o. Principal Health Care of Tennessee, Inc. (a Tennessee
Corporation) a health maintenance organization.
p. Principal Health Care of Texas, Inc. ( a Texas Corporation)
a health maintenance organization.
q. 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 (Hong Kong) Limited (a Hong Kong
Corporation) group life and group 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 (individual
group), annuities and pension.
f. Principal Mexico Compania de Seguros, S.A. de C.V. (a Mexico
Corporation) a life insurance company (individual and
group), personal accidents.
g. Qualitas Medica, S.A. (an Argentina HMO) a health
maintenance organization.
h. Afore Confia-Principal, S.a. de C.V. (a Mexico Corporation),
pension.
i. Zao Principal International (a Russia Corporation) inactive.
j. Principal Trust Company (Asia) Limited (an Asia trust
company).
Subsidiaries owned by Principal International Argentina, S.A.:
a. Ethika Administradora de Fondos de Jubilaciones y Pensions
S.A. (an Argentina company) a pension company.
b. Principal Compania de Seguros de Retiro, S.A. (an Argentina
Corporation) an individual annuity/employee benefit company.
c. Principal Life Compania de Seguros, 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) group life and supplemental health, individual
annuities.
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: January 31, 1998
(1) (2)
Title of Class Number of Holders
Common-Principal Variable Contracts Fund, Inc.
Aggressive Growth Account 1
Asset Allocation Account 1
Balanced Account 1
Bond Account 1
Capital Value Account 1
Government Securities Account 1
Growth Account 1
High Yield Account 1
International Account 1
MidCap Account 1
Money Market Account 1
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,
Principal 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 Same See Part B
Treasurer
*Michael J. Beer Same See Part B
Senior 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 Vice President-Operations
Vice President Princor Financial Services
- Operations Corporation
*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
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
Principal Management Corporation serves as investment adviser and dividend
disbursing and transfer agent for, Principal Balanced Fund, Inc., Principal Blue
Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital Value Fund, Inc.,
Principal Cash Management Fund, Inc., Principal Government Securities Income
Fund, Inc., Principal Growth Fund, Inc., Principal High Yield Fund, Inc.,
Principal International Emerging Markets Fund, Inc., Principal International
Fund, Inc., Principal International SmallCap Fund, Inc., Principal Limited Term
Bond Fund, Inc., Principal MidCap Fund, Inc., Principal Real Estate Fund, Inc.,
Principal SmallCap Fund, Inc., Principal Special Markets Fund, Inc., Principal
Tax-Exempt Bond Fund, Inc., Principal Tax-Exempt Cash Management Fund, Inc.,
Principal Utilities Fund, Inc. and Principal Variable Contracts 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 Balanced Fund, Inc.,
Principal Blue Chip Fund, Inc., Principal Bond Fund, Inc., Principal Capital
Value Fund, Inc., Principal Cash Management Fund, Inc., Principal Government
Securities Income Fund, Inc., Principal Growth Fund, Inc., Principal High Yield
Fund, Inc., Principal International Emerging Markets Fund, Inc., Principal
International Fund, Inc., Principal International SmallCap Fund, Inc., Principal
Limited Term Bond Fund, Inc., Principal MidCap Fund, Inc., Principal Real Estate
Fund, Inc., Principal SmallCap Fund, Inc., Principal Special Markets Fund, Inc.,
Principal Tax-Exempt Bond Fund, Inc., Principal Tax-Exempt Cash Management Fund,
Inc., Principal Utilities Fund, Inc., Principal Variable Contracts 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 Section 408 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
Lynn A. Brones Vice President - None
The Principal Investment Network
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 Vice President - None
The Principal Operations
Financial Group
Des Moines, IA 50392
Ernest H. Gillum Assistant Vice President - Assistant
The Principal Registered Products Secretary
Financial Group
Des Moines, IA 50392
William C. Gordon Insurance License Officer None
The Principal
Financial Group
Des Moines, IA 50392
Thomas J. Graf Director 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
Kelly A. Paul Systems/Technology - None
The Principal Officer
Financial Group
Des Moines, IA 50392
Layne A. Rasmussen Controller - None
The Principal Mutual Funds
Financial Group
Des Moines, IA 50392
Martin R. Richardson Operations Officer - None
The Principal Broker/Dealer Services
Financial Group
Des Moines, IA 50392
Elizabeth R. Ring Controller 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 12th day of February, 1998.
Principal Variable Contracts 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 February 12, 1998
S. L. Jones (Principal Executive _________________
Officer)
(J. B. Griswell)*
_____________________________ Director and February 12, 1998
J. B. Griswell Chairman of the Board _________________
/s/ M. J. Beer
_____________________________ Financial Officer February 12, 1998
M. J. Beer (Principal Financial _________________
and Accounting Officer)
(J. D. Davis)*
_____________________________ Director February 12, 1998
J. D. Davis _________________
(R. W. Erhle)*
_____________________________ Director February 12, 1998
R. W. Ehrle _________________
(P. A. Ferguson)*
_____________________________ Director February 12, 1998
P. A. Ferguson _________________
(R. W. Gilbert)*
_____________________________ Director February 12, 1998
R. W. Gilbert _________________
(R. E. Keller)*
_____________________________ Director February 12, 1998
R. E. Keller _________________
(B. A. Lukavsky)*
_____________________________ Director February 12, 1998
B. A. Lukavsky _________________
(R. G. Peebler)*
_____________________________ Director February 12, 1998
R. G. Peebler _________________
*By /s/ S. L. Jones
_____________________________________
S. L. Jones
President and Director
Pursuant to Powers of Attorney
Previously Filed or Included
AMENDMENT AND RESTATEMENT
OF THE
ARTICLES OF INCORPORATION
OF
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
FIRST: The Articles of Incorporation are hereby amended by striking out Articles
5 and 6 of the Articles and inserting in lieu thereof the following: ARTICLE V
Capital Stock
Section 1. Authorized Shares: The total number of shares of stock which
the Corporation shall have authority to issue is two billion three hundred
million (2,300,000,000) shares, of the par value of one cent ($.01) each and of
the aggregate par value of twenty-three million dollars ($23,000,000). 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 class, and the bearing of expenses solely by a series
or class may be appropriately reflected (in a manner 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
International SmallCap 100,000,000
MicroCap 100,000,000
Midcap 100,000,000
MidCap Growth 100,000,000
Money Market 500,000,000
Real Estate 100,000,000
SmallCap 100,000,000
SmallCap Growth 100,000,000
SmallCap Value 100,000,000
Utiltiies 100,000,000
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 be nine. The names of the directors who shall hold office
until the next 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.
SECOND: The Fund desires to restate its Articles of Incorporation so that, as
amended, said Articles of Incorporation shall be restated as follows:
ARTICLE I
Incorporator
The undersigned Arthur S. Filean and Michael D. Roughton, 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 two billion three hundred million
(2,300,000,000) shares, of the par value of one cent ($.01) each and of the
aggregate par value of twenty-three million dollars ($23,000,000). 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 class, and the bearing of expenses solely by a series
or class may be appropriately reflected (in a manner 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
International SmallCap 100,000,000
MicroCap 100,000,000
Midcap 100,000,000
MidCap Growth 100,000,000
Money Market 500,000,000
Real Estate 100,000,000
SmallCap 100,000,000
SmallCap Growth 100,000,000
SmallCap Value 100,000,000
Utilities 100,000,000
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 be nine. The names of the directors who shall hold office
until the next 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 12th day of February, 1998
/s/ Arthur S. Filean
-----------------------------------
Arthur S. Filean
/s/ Michael D. Roughton
-----------------------------------
Michael D. Roughton
FIRST AMENDMENT TO THE
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
MANAGEMENT AGREEMENT
The Management Agreement executed and entered into by and between Principal
Variable Contracts Fund, Inc., a Maryland corporation, and Principal Management
Corporation (formerly known as Princor Management Corporation), an Iowa
corporation, on the 1st day of July, 1997, is hereby amended to including the
following:
SCHEDULE 6
Management Fees
MidCap Growth and Real Estate Accounts
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
------------------ ------------------------
First $100 Million 0.90%
Next $100 Million 0.85%
Next $100 Million 0.80%
Next $100 Million 0.75%
Thereafter 0.70%
SCHEDULE 7
Management Fees
MicroCap and SmallCap Growth Accounts
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
------------------ ------------------------
First $100 Million 1.00%
Next $100 Million 0.95%
Next $100 Million 0.90%
Next $100 Million 0.85%
Thereafter 0.80%
Schedule 8
MANAGEMENT FEES
SmallCap Account
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
------------------ ------------------------
First $100 Million 0.85%
Next $100 Million 0.80%
Next $100 Million 0.75%
Next $100 Million 0.70%
Thereafter 0.65%
Schedule 9
MANAGEMENT FEES
SmallCap Value Account
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
------------------ ------------------------
First $100 Million 1.10%
Next $100 Million 1.05%
Next $100 Million 1.00%
Next $100 Million 0.95%
Thereafter 0.90%
Schedule 10
MANAGEMENT FEES
International SmallCap Account
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
------------------ ------------------------
First $100 Million 1.20%
Next $100 Million 1.15%
Next $100 Million 1.10%
Next $100 Million 1.05%
Thereafter 1.00%
Schedule 11
MANAGEMENT FEES
Utilities Account
Average Daily Net Fee as a Percentage of
Assets of the Fund Average Daily Net Assets
------------------ ------------------------
First $100 Million 0.60%
Next $100 Million 0.55%
Next $100 Million 0.50%
Next $100 Million 0.45%
Thereafter 0.40%
Executed this 2nd day of February, 1998
Principal Management Corporation Principal Variable Contracts Fund, Inc.
/s/ S. L. Jones /s/ A. S. Filean
by:_________________________________ by:____________________________________
FIRST AMENDMENT TO THE
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
SUB-ADVISORY AGREEMENT
The Sub-Advisory Agreement executed and entered into by and between Principal
Management Corporation (formerly known as Princor Management Corporation), an
Iowa corporation, and Invista Capital Management, Inc., an Iowa corporation, on
the 1st day of July, 1997, is hereby amended to add certain series of the
Corporation to the Agreement. Appendix A therefore now reads as follows:
PRINCIPAL VARIABLE CONTRACTS FUNDS, INC.
SUB-ADVISORY AGREEMENT - APPENDIX A
Invista Capital Management, Inc. serves as Sub-Advisor for:
Balanced Account
Capital Value Account
Government Securities Account
Growth Account
International Account
International SmallCap Account
MidCap Account
SmallCap Account
Utilities Account
Executed this 12th day of February , 1998
Principal Management Corporation
/s/ A. S. Filean
by:_________________________________
Invista Capital Management, Inc.
/s/ C. R. Barnes
by:_________________________________
