SUPPLEMENT DATED AUGUST 28, 2000
TO THE PROSPECTUS FOR
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
DATED MAY 1, 2000
On page 35, remove the Janus Capital Corporation information and replace with
the following:
Account: LargeCap Growth
Sub-Advisor: Janus Capital Corporation ("Janus"), 100 Fillmore Street,
Denver CO 80306-4928, was formed in 1969. Effective July 12,
2000, Janus is owned in part by Stilwell Financial Inc.
("Stilwell"), which owns approximately 81.5% of the
outstanding voting stock of Janus. Stilwell is a publicly
traded holding company with principal operations in
financial asset management businesses. Thomas H. Bailey,
President and Chairman of the Board of Janus, owns
approximately 12% of Janus' voting stock and, by agreement
with Stilwell, selects at least a majority of Janus' Board,
subject to the approval of Stilwell, which approval cannot
be unreasonably withheld. As of June 30, 2000, Janus managed
or administered over $304 billion in assets.
RF 668 S-6
Part B
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
dated May 1, 2000
This Statement of Additional Information is not a prospectus but is a
part of the prospectus for the Fund. The most recent Fund prospectus,
dated May 1, 2000, and shareholder report are available without charge.
Please call 1-800-247-4123 to request a copy.
Principal Variable Contracts Fund, Inc.
Principal Financial Group
Des Moines, Iowa 50392-0200
Telephone: 1-800-247-4123
TABLE OF CONTENTS
Investment Policies and Restrictions of the Accounts...................... 3
Growth-Oriented Accounts.............................................. 4
Income-Oriented Accounts.............................................. 13
Money Market Account.................................................. 17
Accounts' Investments..................................................... 18
Management of the Fund.................................................... 30
Manager and Sub-Advisors.................................................. 32
Cost of Manager's Service................................................. 34
Brokerage on Purchases and Sales of Securities............................ 38
Determination of Net Asset Value of Account Shares........................ 42
Performance Calculation................................................... 44
Tax Status................................................................ 46
General Information and History........................................... 47
Financial Statements...................................................... 47
Appendix A................................................................ 48
INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND
The following information is about the Principal Variable Contracts Fund, Inc.
which is an incorporated, diversified, open-end management investment company,
commonly called a mutual fund. It supplements the information provided in the
Prospectus under the caption CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS.
The Fund offers multiple Accounts.
There are three categories of Accounts: Growth-Oriented Accounts, which include
Accounts seeking:
o primarily capital appreciation through investments in equity securities
(Aggressive Growth, Blue Chip, Capital Value, Growth, LargeCap Growth,
MicroCap, MidCap, MidCap Growth, MidCap Value, SmallCap, SmallCap Growth
and SmallCap Value);
o total investment return including both capital appreciation and income
through investments in equity and debt securities (Asset Allocation and
Balanced);
o long-term growth of capital primarily through investments in equity
securities of corporations located outside of the U.S. (International and
International SmallCap);
o long-term growth of income and capital through investment in equity
securities of real estate companies (Real Estate);
o to approximate the performance of the Standard & Poor's 500 Composite Stock
Price Index (Stock Index 500); and
o current income and long-term growth of income and capital through
investment in equity and fixed-income securities of public utilities
companies (Utilities).
Income-Oriented Accounts, which include Accounts seeking primarily a high level
of income through investments in debt securities (Bond, Government Securities
and High Yield).
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:
o 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
o 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:
o a statement of its investment objective;
o a description of its investment restrictions that are matters of
fundamental policy; and
o 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. Any subsequent
change in any applicable percentage resulting from market fluctuations or in a
rating by a rating service does 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
o Aggressive Growth Account seeks to achieve 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.
o Asset Allocation Account seeks to generate a total investment return
consistent with the preservation of capital.
o 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.
o Blue Chip Account seeks to achieve growth of capital and income. The
Account attempts to achieve its objective by investing primarily in common
stocks of well capitalized, established companies.
o 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.
o Growth Account seeks growth of capital through the purchase primarily of
common stocks, but the Account may invest in other securities.
o International Account seeks to achieve long-term growth of capital by
investing in a portfolio of equity securities of companies domiciled in any
of the nations of the world.
o International SmallCap Account seeks to achieve 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.
o LargeCap Growth Account seeks to achieve long-term growth of capital. The
Account attempts to achieve its objective by investing primarily in growth
stocks of companies with market capitalizations over $10 billion measured
at the time of investment.
o MicroCap Account seeks to achieve 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.
o MidCap Account seeks to achieve capital appreciation by investing primarily
in securities of emerging and other growth-oriented companies.
o MidCap Growth Account seeks to achieve 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.
o MidCap Value Account seeks to achieve long-term growth of capital. The
Account attempts to achieve its objective by investing primarily in equity
securities of companies with value characteristics and market
capitalizations in the $1 billion to $10 billion range.
o 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.
o SmallCap Account seeks to achieve 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.
o 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 at the time of initial purchase.
o SmallCap Value Account seeks to achieve 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.
o Stock Index 500 Account seeks to achieve long-term growth of capital. The
Account attempts to mirror the investment results of the Standard & Poor's
500 Stock Index.
o Utilities Account seeks to achieve 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 that
are secured by real estate and securities of issuers that 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 each 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 that invest in or sponsor such programs.
Each of these Accounts has also adopted the following restrictions that 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 that 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 that 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 investment 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) Invest more than 5% of its total assets in the securities of any
one issuer (other than obligations issued or guaranteed by the
United States Government or its agencies or instrumentalities)
or purchase more than 10% of the outstanding voting securities
of any one issuer, except that these limitations shall apply
only with respect to 75% of the Account's total assets.
(3) 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.
(4) 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.
(5) 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.
(6) Invest in commodities or commodity contracts, but it may
purchase and sell financial futures contracts and options on
such contracts.
(7) 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.
(8) Purchase 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.
(9) Invest in companies for the purpose of exercising control or
management.
(10) 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).
(11) Invest more than 20% of its total assets in securities of
foreign issuers.
(12) Sell securities short (except where the Account holds or has the
right to obtain at no added cost a long position in the
securities sold that equals or exceeds the securities sold
short).
In addition:
(13) TheAccount may not make loans, except that the Account may (i)
purchase and hold debt obligations in accordance with its
investment objective and policies, (ii) enter into repurchase
agreements, and (iii) lend its portfolio securities without
limitation against collateral (consisting of cash or securities
issued or guaranteed by the United States Government or its
agencies or instrumentalities) equal at all times to not less
than 100% of the value of the securities loaned.
(14) TheAccount 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. 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.
(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 that 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.
(3) 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.
(4) Invest more than 5% of its assets in initial margin and premiums
on financial futures contracts and options on such contracts.
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,
MicroCap, MidCap Growth, Real Estate, SmallCap, SmallCap Growth, SmallCap Value
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 physical commodities or commodity contracts (other
than foreign currencies), 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 that
are secured by real estate and securities of issuers that invest
or deal in real estate.
(4) Borrow money, except it may (a) 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); (b) to the extent permitted by applicable law,
borrow up to an additional 5% of its total assets for temporary
purposes; (c) obtain such short-term credits as may be necessary
for the clearance of purchases and sales of portfolio
securities, and (d) purchase securities on margin to the extent
permitted by applicable law. In addition, the MicroCap Account
may 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.
The Real Estate Account may not invest less than 25% of its total assets in
securities of companies in the real estate industry, and the Utilities Account
may not invest less than 25% of its total assets in securities of companies in
the public utilities industry except that each may, for temporary defensive
purposes, place all of its assets in cash, cash equivalents, bank certificates
of deposit, bankers acceptances, repurchase agreements, commercial paper,
commercial paper master notes, United States government securities, and
preferred stocks and debt securities, whether or not convertible into or
carrying rights for common stock.
(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.
Each of these Accounts has also adopted the following restrictions that 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 illiquid securities
and in repurchase agreements maturing in more than seven days.
(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 25% (20% for each of the SmallCap and Utilities
Accounts, 10% for each of the MidCap Growth and SmallCap Value
Accounts) of its total assets in securities of foreign issuers.
This restriction does not apply to the International SmallCap
Account.
(5) Invest more than 5% of its assets in initial margin and premiums
on financial futures contracts and options on such contracts.
(6) Invest in real estate limited partnership interests or real
estate investment trusts except that this restriction shall not
apply to either the MicroCap or Real Estate Accounts.
(7) 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.
Blue Chip Account, LargeCap Growth Account, MidCap Value Account and Stock Index
500 Account
Each of the following numbered restrictions is a matter of fundamental policy
and may not be changed without shareholder approval. The Blue Chip, Large Cap
Growth, MidCap Value and Stock Index 500 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 physical commodities or commodity contracts (other
than foreign currencies), but it may purchase and sell financial
futures contracts and options on such contracts, swaps and
securities backed by physical commodities.
(3) Invest in real estate, although it may invest in securities that
are secured by real estate and securities of issuers that invest
or deal in real estate.
(4) Borrow money, except it may (a) 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); (b) to the extent permitted by applicable law,
borrow up to an additional 5% of its total assets for temporary
purposes; (c) obtain such short-term credits as may be necessary
for the clearance of purchases and sales of portfolio
securities, and (d) purchase securities on margin to the extent
permitted by applicable law.
(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. This limit does not apply to purchases of
debt securities or commercial paper.
(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, provided that, when the
Account has adopted a temporary defensive posture, there shall
be no limitation on the purchase of obligations issued or
guaranteed by the U.S. Government, its agencies or
instrumentalities. This restriction applies to the Stock Index
500 Account except to the extent that the Standard & Poor's 500
Stock Index also is so concentrated.
(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.
Each of these Accounts has also adopted the following restrictions that 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 illiquid securities
and in repurchase agreements maturing in more than seven days.
(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 25% (20% for the Blue Chip Account, 10% for the
Stock Index 500 Account) of its total assets in securities of
foreign issuers.
(5) enter into (i) any futures contracts and related options for
purposes other than bona fide hedging transactions within the
meaning of Commodity Futures Trading Commission ("CFTC")
regulations if the aggregate initial margin and premiums required
to establish positions in futures contracts and related options
that do not fall within the definition of bona fide hedging
transactions will exceed 5% of the fair market value of an
Account's net assets, after taking into account unrealized
profits and unrealized losses on any such contracts it has
entered into; and (ii) any futures contracts if the aggregate
amount of such Account's commitments under outstanding futures
contracts positions would exceed the market value of its total
assets.
(6) Invest in real estate limited partnership interests or real
estate investment trusts except that this restriction shall not
apply to the LargeCap Growth Account.
(7) 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
o Bond Account seeks to provide as high a level of income as is consistent
with preservation of capital and prudent investment risk.
o 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.
o 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, except that these limitations shall apply
only with respect to 75% of the total assets of each Account.
(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 that 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
that 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
o 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, 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.
(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 that is not
a fundamental policy and may be 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.
ACCOUNTS' INVESTMENTS
The following information supplements the discussion of the Accounts" investment
objectives and policies in the Prospectus under the caption "CERTAIN INVESTMENT
STRATEGIES AND RELATED RISKS."
Fundamental Analysis
Selections of equity securities for the Accounts, except the Aggressive Growth,
Asset Allocation, LargeCap Growth, MicroCap, MidCap Growth , MidCap Value 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:
o 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.
o Second, given some conviction as to the likely economic climate, the
Sub-Advisor 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,
the Sub-Advisor evaluates the prospects for each industry for the near and
intermediate term.
o 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 "company-by-company" 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. The Sub-Advisor primarily uses
a bottom-up approach in selecting securities for the MidCap Value Account,
although a limited top-down analysis will be used as well.
The LargeCap Growth Account uses a bottom-up approach in building its portfolio
that seeks to identify individual companies with earnings growth potential that
may not be recognized by the market at large. Although themes may emerge in the
Account, securities are generally selected without regard to any defined
industry sector or other similarly defined selection procedure.
Restricted Securities
Each of the Accounts (except Government Securities and Money Market) has adopted
investment restrictions that limit its investments in illiquid securities to 15%
of its assets. The Board of Directors has adopted procedures to determine the
liquidity of Rule 4(2) short-term paper and of restricted securities under Rule
144A. Securities determined to be liquid under these procedures are excluded
from this limit when applying the preceding investment restrictions.
Generally, restricted securities are not readily marketable because they are
subject to legal or contractual restrictions upon resale. They are sold only in
a public offering with an effective registration statement or in a transaction
that is exempt from the registration requirements of the Securities Act of 1933.
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 be permitted to sell a
security. If, during such a period, adverse market conditions were to develop,
the Account might obtain a less favorable price than existed when it decided to
sell. Restricted securities and other securities not readily marketable are
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 may invest in foreign securities to the indicated
percentage of its assets (debt securities issued in the United States pursuant
to a registration statement filed with the Securities and Exchange Commission
are not treated as foreign securities for purposes of these limitations.):
o International and International SmallCap Accounts - 100%;
o Aggressive Growth, LargeCap Growth, MicroCap, Real Estate and SmallCap
Growth Accounts - 25%;
o Bond, Capital Value, High Yield, SmallCap and Utilities Accounts - 20%.
o Balanced, Growth, MidCap, MidCap Growth, MidCap Value, SmallCap Value and
Stock Index 500 Accounts - 10%.
The Money Market Account does not invest in foreign securities other than those
that are United States dollar denominated. All principal and interest payments
for the security are payable in U.S. dollars. The interest rate, 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.
For purposes of these restrictions, foreign securities include:
o companies organized under the laws of countries outside of the U.S.;
o companies for which the principal securities trading market is outside of
the U.S.; and
o companies, regardless of where its securities are traded, that derive 50%
or more of their total revenue from either goods or services produced
outside the U.S. or sales made outside of the U.S.
Investment in foreign securities presents certain risks including: 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. In addition, there may be reduced
availability of public information concerning issuers compared to domestic
issuers. Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements that apply to domestic issuers. Transactions in foreign securities
may be subject to higher costs. Each Account's investment in foreign securities
may also result in higher custodial costs and the costs associated with currency
conversions.
Securities of many foreign issuers may be less liquid and their prices more
volatile than those of comparable domestic issuers. Foreign securities markets,
particularly those in emerging market countries, are known to experience long
delays between the trade and settlement dates of securities purchased and sold.
Such delays may result in a lack of liquidity and greater volatility in the
price of securities on those markets. As a result of these factors, the Board of
Directors of the Fund has adopted Daily Pricing and Valuation Procedures for the
Accounts that set forth the steps to be followed by the Manager and/or
Sub-Advisor to establish a reliable market or fair value if a reliable market
value is not available through normal market quotations. Oversight of this
process is provided by the Executive Committee of the Board of Directors.
Securities of Smaller Companies
The Accounts may invest in 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 Government Securities Account) may invest in the
securities of unseasoned issuers. Unseasoned issuers are companies with a record
of less than three years continuous operation, including the operation of
predecessors and parents. Unseasoned issuers by their nature have only a limited
operating history that can be used for evaluating the company's 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 company's 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.
Spread Transactions, Options on Securities and Securities Indices, and Futures
Contracts and Options on Futures Contracts
Each of the Accounts may engage in the practices described under this heading.
In the following discussion, the terms "the Account," "each Account" or "the
Accounts" refer to each of the Accounts that may engage in these transactions.
Spread Transactions
Each Account may purchase 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 relation 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 is 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 invests and on securities indices based on securities in which the
Account invests. 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 the
right to buy a specific 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 the right to sell to the Account a specific security at a specified
price at any time before the option expires. In both situations, the Account
receives a premium from the purchaser of the option.
The premium received by an Account 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 generates 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 comply with applicable regulatory
and exchange cover requirements. The Accounts usually own the underlying
security covered by any outstanding call option. With respect to an outstanding
put option, each Account deposits and maintains 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. The Account executes a closing transaction by
purchasing an option of the same series as the option previously written. The
Account has 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. An Account purchases
call options in anticipation of an increase in the market value of securities
that it ultimately intends to buy. During the life of the call option, the
Account is 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 exceed 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. An Account purchases
put options in anticipation of a decline in the market value of the underlying
security. During the life of the put option, the Account is 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 enough to cover the premium and
transaction costs.
Once an Account purchases an option, it may close out its position by selling an
option of the same series as the option previously purchased. The Account has 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 engage in
transactions in put and call options on securities indices for the same purposes
as they engage in transactions in options on securities. When an Account writes
call options on securities indices, it holds 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 that provides a
secondary market for an option of the same series. The Accounts generally
purchase or write only those options for which there appears to be an active
secondary market. However, there is no assurance that a liquid secondary market
on an exchange exists for any particular option, or at any particular time. If
an Account is unable to effect closing sale transactions in options it has
purchased, it has to exercise its options in order to realize any profit and may
incur transaction costs upon the purchase or sale of underlying securities. If
an Account is unable to effect a closing purchase transaction for a covered
option that it has written, it is not 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 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 seeks to hedge against a
decline in securities owned by the Account or an increase in the price of
securities that the Account plans to purchase. An Account may also purchase and
sell futures contracts and related options to maintain cash reserves while
stimulating full investment in equity securities and to keep substantially all
of its assets exposed to the market.
Futures Contracts.
When an Account sells a futures contract based on a financial instrument, the
Account is 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
is 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. 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 Accounts usually liquidate
futures contracts on financial instruments in this manner, they may make or take
delivery of the underlying securities when 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. The amount of the settlement is based on the difference in value of
the index between the time the contract was entered into and the time it is
liquidated (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.
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 (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. It
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, a process known as "marking to market." The fluctuations make the
long or short positions in the futures contract more or less valuable. 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.
Any 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 Account seeks to establish more accurately 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, sells futures contracts in anticipation of a rise in
interest rates that would cause a decline in the value of its debt investments.
When this kind of hedging is successful, the futures contract increases 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 also sells 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 purchases 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 reflects an increase or a decrease from the premium originally paid.
Options on futures can be used to hedge substantially the same risks addressed
by the direct purchase or sale of the underlying futures contracts. For example,
if an Account anticipates 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 is not 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. The Account must maintain
with its custodian all or a portion of the initial margin requirement on the
underlying futures contract. It 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 and Sub-Advisor's ability to predict correctly the factors
affecting the market values of the Account's portfolio securities. For example,
if an Account is hedged against the possibility of an increase in interest rates
that would adversely affect debt securities held by the Account and the prices
of those debt securities instead increases, the Account loses part or all of the
benefit of the increased value of its securities it hedged because it has
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 enters into a futures
contract or related option only if there appears to be a liquid secondary
market. There can be no assurance, however, that such a liquid secondary market
exists 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 continues 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.
The Accounts are required to operate within certain guidelines and restrictions
with respect to their use of futures and options thereon which have been
established by the CFTC. In particular, an Account is excluded from registration
as a "commodity pool operator" if it complies with Rule 4.5 adopted by the CFTC.
This Rule does not limit the percentage of an Account's assets that may be used
for futures margin and related options premiums for a bona fide hedging
position. However, under the Rule each Account must limit its aggregate initial
futures margin and related option premiums to no more than 5% of the Account's
net assets for hedging strategies that are not considered bona fide hedging
strategies under the Rule.
The Accounts may enter into futures contracts and related options transactions
only for bona fide hedging purposes as permitted by the CFTC and to a limited
extent to enhance returns. Each Account determines 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 may sell futures contracts or
acquire puts to protect against a decline in the price of securities that the
Account owns. Each Account may 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 places 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.
Forward Foreign Currency Exchange Contracts
The Accounts (except the Government Securities and Money Market Accounts) may,
but are not obligated to, enter into forward foreign currency exchange contracts
with securities dealers, financial institutions or other parties deemed credit
worthy by the Account's Sub-Advisor to hedge the value of portfolio securities
denominated in or exposed to foreign currencies. MidCap Value can also engage in
foreign currency exchange transactions on a spot basis. Currency transactions
include forward currency contracts, exchange listed currency futures contracts
and options thereon, and exchange listed or 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 specified future date at a price set at the time of the contract.
The Accounts enter into forward foreign currency exchange contracts only for the
purpose of "hedging," that is limiting the risks associated with changes in the
relative rates of exchange between the U.S. dollar and foreign currencies in
which securities owned by an Account are denominated or exposed. It should be
noted that the use of forward foreign currency exchange contracts does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange between the currencies that can be achieved at
some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they also tend to limit any potential gain that might result if the value of the
currency increases.
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 sales 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.
They could also cause hedges the Account 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 of the Accounts may invest in repurchase agreements. None of the Accounts
may enter into repurchase agreements that do not mature within seven days if any
such investment, together with other illiquid securities held by the Account,
amount to more than 15% of its total assets. The MicroCap Account (together with
other registered investment companies having management agreements with Goldman
or its affiliates) may transfer uninvested cash balances into a single joint
account, the daily aggregate balance of which will be invested in one or more
repurchase agreements. The LargeCap Growth Account (together with other
registered investment companies having management agreements with Janus or its
affiliates) may transfer uninvested cash balances into a single joint account,
the daily aggregate balance of which will be invested in one or more repurchase
agreements. Repurchase agreements 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 sells back to the seller and that the seller repurchases 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. 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 that are designed to minimize such risks.
These procedures include entering into repurchase agreements only with large,
well-capitalized and well-established financial institutions that the Account's
Manager or Sub-Advisor believes present minimum credit risks. In addition, the
value of the collateral underlying the repurchase agreement is always 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 default of the
obligation to repurchase are less than the repurchase price, the Account could
suffer a loss.
Lending of Portfolio Securities
All of the Accounts may lend their portfolio securities. None of the Accounts
will lend its portfolio securities if, as a result, the aggregate of such loans
made by the Account would exceed the limits established by the Investment
Company Act. Portfolio securities may be lent 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. While such securities are on loan,
the borrower pays the Account any income accruing thereon. 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 terminates. Any gain or loss in the market value of the borrowed securities
that occurs during the term of the loan belongs to the Account and its
shareholders. An Account pays reasonable administrative, custodial and other
fees in connection with such loans and may pay a negotiated portion of the
interest earned on the cash or government securities pledged as collateral to
the borrower or placing broker. An Account does not normally retain voting
rights attendant to securities it has lent, 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. The securities are subject to market fluctuations that involve the
risk for the purchaser that yields available in the market at the time of
delivery are higher than those obtained in the transaction. Each Account only
purchases securities on a when-issued or delayed delivery basis with the
intention of acquiring the securities. However, an Account may sell the
securities before the settlement date, if such action is deemed advisable. At
the time an Account commits to purchase securities on a when-issued or delayed
delivery basis, it records the transaction and reflects the value of the
securities in determining its net asset value. Each Account also establishes a
segregated account with its custodian bank in which it maintains cash or liquid
assets equal in value to the Account's commitments for 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 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.
Industry Concentrations
Each of the Accounts, except the Real Estate and Utilities Accounts, may not
concentrate its investments in any particular industry. The Stock Index 500
Account may concentrate its investments in a particular industry only to the
extent that the S&P 500 Stock Index is concentrated. For purposes of 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'Neill & Co., Incorporated. The LargeCap Growth Account uses Bloomberg
L.P. industry classifications. The other Accounts use industry classifications
based on the "Directory of Companies Filing Annual Reports with the Securities
and Exchange Commission."
Money Market Instruments
The Money Market Account invests all of its available assets in money market
instruments maturing in 397 days or less. The types of instruments that the
Account purchases 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.
o U.S. agency obligations include, but are not limited to, the Bank for
co-operatives, Federal Home Loan Banks, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association.
o 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 are supported by the full faith and credit of the U.S.
Treasury. Others, such as those issued by the Federal National Mortgage
Association, are supported by discretionary authority of the U.S.
Government to purchase certain obligations of the agency or
instrumentality. Still others, such as those issued by the Student Loan
Marketing Association, are supported 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 overseas branches of U.S. commercial banks and foreign
banks, which in the Manager's opinion, are of comparable quality. However,
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 that are
insured by the Federal Savings and Loan Insurance Corporation. The Account
may acquire obligations of U.S. banks that are not members of the Federal
Reserve System or of the Federal Deposit Insurance Corporation.
Any obligations of foreign banks must 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 only buys short-term
instruments where the risks of adverse governmental action are believed by
the Manager to be minimal. The Account considers these factors along with
other appropriate factors in making an investment decision to acquire such
obligations. It only acquires those which, in the opinion of management,
are of an investment quality comparable to other debt securities bought by
the Account. The Account invests 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
occasionally invests in certificates of deposit that 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 U.S. or foreign
corporations.
(5) Short-term Corporate Debt -- Corporate notes, bonds and debentures that at
the time of purchase have 397 days or less remaining to maturity.
(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 "ACCOUNTS' INVESTMENTS - Repurchase Agreements.")
The ratings of nationally recognized statistical rating organization (NRSRO),
such as Moody's Investor Services, Inc. ("Moody's") and Standard and Poor's
("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, including ratings of NRSROs other than Moody's and
S&P, are the initial criteria for selection of portfolio investments, but the
Manager further evaluates these securities.
Portfolio Turnover
Portfolio turnover normally differs for each Account, varies from year to year
(as well as within a year) and is affected by portfolio sales necessary to meet
cash requirements for redemptions of Account shares. This requirement may in
some cases limit the ability of an Account to effect certain portfolio
transactions. 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 that are paid 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 were as follows (annualized when reporting
period is less than one year):
1999 1998
Aggressive Growth 89.6% 155.6%
Asset Allocation 86.7% 162.7%
Balanced 21.7% 24.2%
Blue Chip 16.2% N/A
Bond 40.1% 26.7%
Capital Value 43.4% 22.0%
Government Securities 19.7% 11.0%
Growth 65.7% 9.0%
High Yield 93.8% 87.8%
International 65.5% 33.9%
International SmallCap 241.2% 60.3%
LargeCap Growth 39.6% N/A
MicroCap 88.9% 55.3%
MidCap 79.6% 26.9%
MidCap Growth 74.1% 91.9%
MidCap Value 154.0% N/A
Real Estate 101.9% 5.6%
SmallCap 111.1% 45.2%
SmallCap Growth 98.0% 166.5%
SmallCap Value 89.7% 53.4%
Stock Index 500 3.8% N/A
Utilities 23.0% 9.5%
Fund History
Organization and Share Ownership: Effective January 1, 1998, certain Funds
sponsored by Principal Life Insurance Company were reorganized into a series of
the Principal Variable Contracts Fund, Inc., a corporation incorporated in the
State of Maryland on May 27, 1997. Each of the Accounts of 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 13, 1998 to reflect the
addition of the following new Accounts: International SmallCap; MicroCap; MidCap
Growth; Real Estate; SmallCap; SmallCap Growth; SmallCap Value; and Utilities.
The Articles of Incorporation were also amended on February 1, 1999 to reflect
the addition of the Blue Chip, LargeCap Growth, MidCap Value and Stock Index 500
Accounts. Principal Life Insurance Company owns 100% of each Account's
outstanding shares.
MANAGEMENT OF THE FUND
Under Maryland law, a Board of Directors oversees the Fund. The Directors have
financial or other relevant experience and meet several times during the year to
review contracts, Fund activities and the quality of services provided to the
Fund. Other than serving as Directors, most of the Board members have no
affiliation with the Fund or service providers.
The current Directors and Officers are shown below. Each person (except
Aschenbrenner, Gilbert and Kimball who do not serve as directors of Principal
Special Markets Fund, Inc.) also has the same position with other mutual funds
that are also sponsored by Principal Life Insurance Company. Unless an address
is shown, the mailing address for the Directors and Officers is Principal
Financial Group, Des Moines, Iowa 50392.
* John E. Aschenbrenner, 50, Director. Executive Vice President, Principal
Life Insurance Company since 2000; Senior Vice President, 1996-2000; Vice
President - Individual Markets 1990-1996. Director, Principal Management
Corporation and Princor Financial Services Corporation.
@ James D. Davis, 66, Director. 4940 Center Court, Bettendorf, Iowa.
Attorney. Vice President, Deere and Company, Retired.
*# Ralph C. Eucher, 47, Director and President. Vice President, Principal Life
Insurance Company since 1999. Director and Executive Vice President,
Princor Financial Services Corporation and Director and President,
Principal Management Corporation.
@ Pamela A. Ferguson, 56, Director. 4112 River Oaks Drive, Des Moines, Iowa.
Professor of Mathematics, Grinnell College since 1998. Prior thereto,
President, Grinnell College.
Richard W. Gilbert, 59, Director. Gilbert Communications, 5040 Arbor Lane,
#302, Northfield, Illinois 60093. President, Gilbert Communications, Inc.
since 1993. Prior thereto, President and Publisher, Pioneer Press.
*# J. Barry Griswell, 51, Director and Chairman of the Board. Chief Executive
Officer & President, Principal Life Insurance Company since 2000;
President, 1998-2000. Executive Vice President, 1996-1998; Senior Vice
President, 1991-1996. Director and Chairman of the Board, Principal
Management Corporation and Princor Financial Services Corporation.
@ William C. Kimball, 52, Director. 4700 Westown Parkway, Suite 300, West Des
Moines, Iowa 50266-6730. Chairman and CEO, Medicap Pharmacies, Inc. since
1998. Prior thereto, President and CEO.
# Barbara A. Lukavsky, 59, Director. 13731 Bay Hill Court, Clive, Iowa.
President and CEO, Barbican Enterprises, Inc. since 1997. President and
CEO, Lu San ELITE USA, L.C. 1985-1998.
* Craig L. Bassett, 48, Treasurer. Second Vice President and Treasurer,
Principal Life Insurance Company since 1998. Director - Treasury 1996-1998.
Prior thereto, Associate Treasurer.
* Michael J. Beer , 39, 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.
* Arthur S. Filean, 61, Vice President and Secretary. Senior Vice President,
Princor Financial Services Corporation and Principal Management
Corporation, since 2000. Vice President, Princor Financial Services
Corporation, 1990-2000. Vice President, Principal Management Corporation,
1996-2000.
* Ernest H. Gillum, 44, Vice President and Assistant Secretary. Vice
President - Product Development, Princor Financial Services Corporation and
Principal Management Corporation, since 2000. Vice President - Compliance
and Product Development, Princor Financial Services Corporation and
Principal Management Corporation, 1998-2000. Prior thereto, Assistant Vice
President, Registered Products, 1995-1998. Prior thereto, Product
Development and Compliance Officer.
* Jane E. Karli, 43, Assistant Treasurer. Assistant Treasurer, Principal Life
Insurance Company since 1998; Senior Accounting and Custody Administrator
1994-1998; Prior thereto, Senior Investment Cost Accountant.
* Layne A. Rasmussen, Controller. Controller - Mutual Funds, Princor
Financial Services Corporation since 1995.
* Michael D. Roughton, 48, Counsel. Vice President and Senior Securities
Counsel, Principal Life Insurance Company since 1999. Counsel 1994-1999.
Counsel, Invista Capital Management, Inc., Princor Financial Services
Corporation, Principal Investors Corporation and Principal Management
Corporation.
* Jean B. Schustek, 48, Assistant Vice President and Assistant Secretary.
Assistant Vice President - Registered Products, Princor Financial Services
Corporation since 2000. Prior thereto, Compliance Officer - Registered
Products.
* Traci L. Weldon, 34, Assistant Counsel. Counsel, Principal Life Insurance
Company since 1999. Assistant Counsel 1998-1999. Assistant State Attorney
General, Iowa Attorney General's Office, 1994-1998. Prior thereto,
Investment Banker, Kirkpatrick Pettis.
* Considered to be "Interested Persons" as defined in the Investment
Company Act of 1940, as amended, because of current or former
affiliation with the Manager or Principal Life.
@ Member of Audit and Nominating Committee
# Member of Executive Committee (which is selected by the Board and which
may exercise all the powers of the Board, with certain exceptions, when
the Board is not in session. The Committee must report its actions to
the Board.)
COMPENSATION TABLE
fiscal year ended December 31, 1999
Compensation from Compensation from
Director the Fund Fund Complex*
-------- ----------------- -----------------
James D. Davis $28,050 $55,050
Pamela A. Ferguson $24,600 $50,850
Richard W. Gilbert $28,050 $50,100
William C. Kimball** $3,450 $19,500
Barbara A. Lukavsky $26,250 $50,250
The Fund did not provide retirement benefits for any of the directors.
* Total compensation from the 20 investment companies included in the fund
complex for the fiscal year ended December 31, 1999.
**Elected to the Board on November 2, 1999.
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 Financial Services, Inc. The
Manager is an affiliate of Principal 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 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, Blue Chip, Capital Value, Government Securities,
Growth, International, International SmallCap, MidCap, SmallCap,
Stock Index 500 and Utilities
Sub-Advisor: Invista Capital Management, LLC ("Invista"). Invista, an
indirectly wholly-owned subsidiary of Principal Life Insurance
Company and an affiliate of the Manager, was founded in 1985. It
manages investments for institutional investors, including
Principal Life Insurance Company. Assets under management as of
December 31, 1999 were approximately $35.3 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. ("Morgan Stanley"). Morgan
Stanley, 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. As of
December 31, 1999, Morgan Stanley managed investments totaling
approximately $184.9 billion as named fiduciary or fiduciary
adviser. On December 1, 1998 Morgan Stanley Asset Management Inc.
changed its name to Morgan Stanley Dean Witter Investment
Management Inc. but continues to do business in certain instances
using the name Morgan Stanley Asset Management.
Account: LargeCap Growth
Sub-Advisor: Janus Capital Corporation ("Janus"), 100 Fillmore Street, Denver
CO 80206-4928, was formed in 1969. Kansas City Southern
Industries, Inc. owns approximately 82% of the outstanding voting
stock of Janus, most of which it acquired in 1984. As of January
31, 2000, Janus managed or administered over $256 billion in
assets.
Account: MicroCap
Sub-Advisor: Goldman Sachs Assets Management ("GSAM"), 32 Old Slip, 17th
Floor, New York, NY 10005. As of September 1, 1999, the
Investment Division ("IMD") was established as a new operating
division of Goldman, Sachs & Co. ("Goldman Sachs"). This newly
created entity includes GSAM. GSAM provides a wide range of
discretionary investment advisory services, quantitatively
driven and actively managed to U.S. and international equity
portfolios, U.S. and global fixed-income portfolios, commodity
and currency products and money market accounts. As of December
31, 1999, GSAM, along with other units of IMD, had assets under
management of $258.5 billion.
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 December 31, 1999, The Dreyfus Corporation
managed or administered approximately $119.6 billion in assets
for approximately 1.7 million investor accounts nationwide.
Account: MidCap Value
Sub-Advisor: Neuberger Berman Management, Inc. ("Neuberger Berman") is an
affiliate of Neuberger Berman LLC. Neuberger Berman is located at
605 Third Avenue, 2nd Floor, New York, NY 10158-0180. Together
with Neuberger Berman, the firms manage more than $54 billion in
total assets (as of December 31, 1999) and continue an asset
management history that began in 1939.
Account: SmallCap Growth
Sub-Advisor: Berger LLC ("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 Berger Associates, Inc. which 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. Assets under management
for Berger as of December 31, 1999 were approximately $7.1
billion.
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, 1999, J.P. Morgan and its subsidiaries had total
combined assets under management of approximately $349 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>
John E. Aschenbrenner Director Director (Manager)
Craig Bassett Treasurer Treasurer (Manager)
Michael J. Beer Financial Officer Executive Vice President
& Chief Operating Officer (Manager)
Ralph C. Eucher Director and Director and President
President (Manager)
Arthur S. Filean Vice President and Secretary Senior Vice President (Manager)
Ernest H. Gillum Vice President and Vice President - Product
Assistant Secretary Development (Manager)
J. Barry Griswell Director and Chairman Director and Chairman of
of the Board the Board (Manager)
Layne A. Rasmussen Controller Controller - Mutual Funds (Manager)
Michael D. Roughton Counsel Counsel (Manager; Invista)
Jean B. Schustek Assistant Vice President and Assistant Vice President (Manager)
Assistant Secretary
</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 Account
First Next Next Next
Account $250 million $250 million $250 million $250 million Thereafter
<S> <C> <C> <C> <C> <C>
Blue Chip, Capital Value and Growth 0.60% 0.55% 0.50% 0.45% 0.40%
International 0.85 0.80 0.75 0.70 0.65
LargeCap Growth 1.10 1.05 1.00 0.95 0.90
MidCap Value 1.05 1.00 0.95 0.90 0.85
Overall Fee
Stock Index 500 0.35%
</TABLE>
<TABLE>
<CAPTION>
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 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>
<TABLE>
<CAPTION>
Management Fee
Net Assets as of For Year Ended
Account December 31, 1999 December 31, 1999
<S> <C> <C>
Aggressive Growth $379,062,318 0.75%
Asset Allocation 89,710,561 0.80
Balanced 209,747,312 0.57
Blue Chip 6,453,467 0.60
Bond 125,066,660 0.49
Capital Value 367,926,766 0.43
Government Securities 137,787,470 0.49
Growth 345,881,593 0.45
High Yield 13,677,725 0.60
International 197,235,476 0.73
International SmallCap 40,039,774 1.20
LargeCap Growth 7,044,631 1.10
MicroCap 6,417,668 1.00
MidCap 262,349,825 0.61
MidCap Growth 14,264,295 0.90
MidCap Value 5,755,642 1.05
Money Market 120,923,710 0.50
Real Estate 10,560,284 0.90
SmallCap 26,109,643 0.85
SmallCap Growth 39,675,181 1.00
SmallCap Value 11,080,457 1.10
Stock Index 500 46,088,322 0.35
Utilities 30,684,146 0.60
</TABLE>
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, Blue Chip, Capital Value, Government Securities,
Growth, International, International SmallCap, MidCap, SmallCap, Stock Index 500
and Utilities Accounts. The Manager compensates Invista for its sub-advisory
services as provided in the Sub-Advisory Agreement. The Manager may periodically
reallocate management fees between itself and Invista.
Under a Sub-Advisory Agreement between Morgan Stanley and the Manager, Morgan
Stanley performs all the investment advisory responsibilities of the Manager
under the Management Agreement for the Aggressive Growth and Asset Allocation
Accounts. The Manager pays Morgan Stanley 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%.
Invest in real estate limited partnership interests except that this restriction
shall not apply to either the MicroCap or Real Estate Accounts.
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 Goldman and the Manager, Goldman performs
all the investment advisory responsibilities of the Manager under the Management
Agreement for the MicroCap Account. The Manager pays Goldman 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 Janus and the Manager, Janus performs all
the investment advisory responsibilities of the Manager under the Management
Agreement for the LargeCap Growth Account. The Manager pays Janus a fee that is
accrued daily and payable monthly. The fee is based on the net asset value of
the Account as follows: first $250 million of net assets - the fee is 1.10%;
next $250 million - 1.05%; next $250 million - 1.00%; next $250 million - 0.95%;
and thereafter - 0.90%.
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%.
Under a Sub-Advisory Agreement between Neuberger Berman and the Manager,
Neuberger Berman performs all the investment advisory responsibilities of the
Manager under the Management Agreement for the MidCap Value Account. The Manager
pays Neuberger Berman a fee that is accrued daily and payable monthly. The fee
is based on the net asset value of the Account as follows: first $250 million of
net assets - the fee is 1.05%; next $250 million - 1.00%; next $250 million -
0.95%; next $250 million - 0.90%; and thereafter - 0.85%.
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 Life Insurance Company and some or all of the
administrative duties and services may be delegated by the Manager to Principal
Life Insurance Company or affiliate thereof.
Each Account pays for certain corporate expenses incurred in its operation.
Among such expenses, the Account pays brokerage commissions on portfolio
transactions, transfer taxes and other charges and fees attributable to
investment transactions, 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:
<TABLE>
<CAPTION>
Management Fees For Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Aggressive Growth $2,148,624 $1,436,590 $907,800
Asset Allocation 688,699 650,963 566,727
Balanced 1,218,845 958,526 665,902
Blue Chip 24,000
Bond 619,181 488,898 358,818
Capital Value 1,708,021 1,480,275 1,124,855
Government Securities 692,022 576,926 426,977
Growth 1,366,818 989,512 650,659
High Yield 84,208 87,806 87,845
International 1,225,255 1,045,627 768,332
International SmallCap 250,499 94,388
LargeCap Growth 43,238*
MicroCap 59,482* 36,591
MidCap 1,522,214 1,504,567 1,145,372
MidCap Growth 95,048* 36,858
MidCap Value 37,469*
Money Market 440,147 306,233 224,424
Real Estate 99,831 64,493
SmallCap 149,481 60,975
SmallCap Growth 153,958* 42,319
SmallCap Value 94,464* 42,234
Stock Index 500 61,479*
Utilities 150,219 56,185
* before waiver
</TABLE>
The Management Fees shown above include the fee paid to the Account's
Sub-Advisor, if any. Fees paid to each Sub-Advisor for the most recent and
immediately preceding fiscal periods were as follows:
<TABLE>
<CAPTION>
Sub-Advisor Fees For Years Ended December 31,
1999 1998 1997
<S> <C> <C> <C>
Aggressive Growth $865,212 $534,127 $403,710
Asset Allocation 289,465 375,391 272,596
Balanced 317,009 154,678 65,013
Blue Chip 2,581
Bond 156,996
Capital Value 300,404 189,590 138,908
Government Securities 85,485 30,334 23,421
Growth 228,539 111,780 84,191
High Yield 48,910
International 163,906 68,263 91,476
International SmallCap 98,129 21,431
LargeCap Growth 21,715
MicroCap 29,765 18,365
MidCap 186,260 134,225 112,374
MidCap Growth 42,338 16,479
MidCap Value 17,849
Money Market 43,383
Real Estate 55,330
SmallCap 64,460 16,533
SmallCap Growth 77,425 21,273
SmallCap Value 51,599 23,146
Stock Index 500 8,861
Utilities 26,410 7,405
</TABLE>
For the period ended December 31, 1999, the Manager waived a portion of its fee
as follows:
LargeCap Growth $ 2,452 SmallCap Growth $ 3,049
MicroCap 13,239 SmallCap Value 23,900
MidCap Growth 14,359 Stock Index 500 15,995
MidCap Value 2,400
The Manager intends to continue the waivers and, if necessary, pay expenses
normally payable by the Accounts through December 31, 2000 in an amount that
will maintain total operating expenses as follows:
LargeCap Growth 1.20% SmallCap Growth 1.06%
MicroCap 1.06% SmallCap Value 1.16%
MidCap Growth 0.96% Stock Index 500 0.40%
MidCap Value 1.20%
The Management Agreement and Investment Service Agreement under which Principal
Capital Management, a subsidiary of Principal Life Insurance Company, has agreed
to furnish certain personnel, services and facilities required by the Manager to
enable it to fulfill its responsibilities for the Accounts were last approved by
the Fund's Board of Directors on September 13, 1999. The Management Agreement
was last approved by shareholders on November 2, 1999. The Sub-Advisory
Agreements between the Manager and Berger, the Manager and Dreyfus, the Manager
and Goldman, the Manager and Invista, the Manager and Janus, the Manager and
J.P. Morgan Investment, the Manager and Morgan Stanley, and the Manager and
Neuberger Berman were also approved by the Fund's Board of Directors on
September 13, 1999.
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. In either event
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 Life Insurance Company or its subsidiaries, the Fund and
1) in the case of the Sub-Advisory Agreement for each of the Balanced,
Blue Chip, Capital Value, Government Securities, Growth,
International, International SmallCap, MidCap, SmallCap, Stock Index
500, and Utilities Accounts, Invista;
2) in the case of the Sub-Advisory Agreement for each of Aggressive
Growth and Asset Allocation, Morgan Stanley;
3) for the Sub-Advisory Agreement for LargeCap Growth, Janus;
4) for the Sub-Advisory Agreement for MicroCap, Goldman;
5) for the Sub-Advisory Agreement for MidCap Growth, Dreyfus;
6) for the Sub-Advisory Agreement for MidCap Value, Neuberger Berman;
7) for the Sub-Advisory Agreement for SmallCap Growth, Berger; and
8) for the Sub-Advisory Agreement for SmallCap Value, J.P. Morgan
Investment.
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, Goldman,
Invista, J.P. Morgan Investment, Janus, Morgan Stanley, Neuberger Berman or
Principal 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, of certain accounts allocated portfolio transactions to
certain brokers during the fiscal year ended December 31, 1999 due to research
services provided by such brokers. These portfolio transactions resulted in
commissions paid as follows:
Amount Paid for
Account Account Research Services
Aggressive Growth $36,363
Asset Allocation 1,923
Balanced 22,617
Capital Value 7,570
Growth 89,872
International SmallCap 538
International 43,263
LargeCap Growth 462
MidCap Growth 2,555
MicroCap 1,756
MidCap 72,499
SmallCap Growth 3,500
Utilities 1,140
Subject to the rules promulgated by the SEC, as well as other regulatory
requirements, a Sub-Advisor also may allocate orders to broker-dealers
affiliated with the Sub-Advisor. The Sub-Advisor shall determine the amounts and
proportions of orders allocated to the Sub-Advisor or affiliate. The Board of
Directors of the Fund will receive quarterly reports on these transactions.
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 that provided research, statistical or other factual information.
<TABLE>
Total Brokerage Commissions Paid
Fiscal Year Ended December 31,
<CAPTION>
Account 1999 1998 1997
<S> <C> <C> <C>
Aggressive Growth $383,741 $606,022 $418,468
Asset Allocation 82,189 214,204 164,992
Balanced 72,544 80,504 58,053
Blue Chip 7,147
Capital Value 386,580 237,630 135,417
Growth 351,610 101,607 33,836
International 582,113 303,293 230,351
International SmallCap 286,006 52,240
LargeCap Growth 5,446
MicroCap 28,837 21,437
MidCap 348,022 137,283 54,019
MidCap Growth 18,685 12,242
MidCap Value 19,510
Real Estate 51,993 24,283
SmallCap 48,350 33,400
SmallCap Growth 15,710 8,899
SmallCap Value 13,044 8,292
Stock Index 500 20,618
Utilities 27,922 23,668
</TABLE>
Brokerage commissions paid to affiliates during the periods indicated were as
follows:
<TABLE>
Commissions Paid to Goldman Sachs
<CAPTION>
Total Dollar As Percent of As Percent of Dollar Amount
Account Year Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C> <C>
Aggressive Growth 1999 $21,137 5.51% 5.17%
1998 30,744 5.07 4.97
Asset Allocation 1999 2,759 3.36 3.41
1998 11,868 5.54 4.62
Balanced 1999 2,110 2.91 1.44
1998 3,630 4.51 1.72
Blue Chip 1999 10 0.14 0.30
Capital Value 1999 42,634 11.03 8.40
Growth 1999 8,500 2.42 2.80
1998 4,620 4.55 5.03
International 1999 30,962 5.32 4.69
1998 25,436 8.39 14.38
International SmallCap 1999 20,328 7.11 7.41
1998 1,424 2.73 3.32
LargeCap Growth 1999 299 5.49 3.60
MicroCap 1999 1,813 6.29 6.05
1998 2,737 12.77 17.07
MidCap 1999 8,258 2.37 1.74
1998 640 0.47 0.59
MidCap Growth 1999 401 2.15 1.36
1998 3,853 31.47 36.02
MidCap Value 1999 145 0.74 1.16
Real Estate 1999 895 1.72 1.92
SmallCap 1999 990 2.05 3.06
1998 300 0.90 1.44
SmallCap Growth 1999 120 0.76 1.78
1998 325 3.65 5.03
SmallCap Value 1999 771 5.91 3.53
Utilities 1999 1,345 4.82 3.38
</TABLE>
<TABLE>
Commissions Paid to J. P. Morgan Securities
<CAPTION>
Total Dollar As Percent of As Percent of Dollar Amount
Account Year Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C> <C>
Aggressive Growth 1999 $15,755 4.11% 3.78%
1998 34,133 5.63 6.32
Asset Allocation 1999 1,551 1.89 1.65
1998 10,678 4.98 5.47
Balanced 1999 11,821 16.29 18.28
1998 1,330 1.65 2.41
Blue Chip 1999 4,845 67.79 70.20
Capital Value 1999 11,210 2.90 3.77
1998 4,375 1.84 1.95
Growth 1999 15,652 4.45 4.88
1998 3,496 3.44 2.41
International 1999 12,629 2.17 2.17
1998 1,261 0.42 0.73
International SmallCap 1999 478 0.17 0.19
LargeCap Growth 1999 127 2.33 1.15
MicroCap 1999 785 2.72 1.69
1998 827 3.86 2.29
MidCap 1999 11,203 3.22 3.17
1998 1,040 0.76 0.62
MidCap Growth 1999 264 1.41 0.85
1998 78 0.64 0.31
MidCap Value 1999 22 0.11 0.12
Real Estate 1999 6,400 12.31 11.93
1998 2,355 9.70 8.86
SmallCap 1999 2,055 4.25 5.29
1998 120 0.36 0.91
SmallCap Growth 1999 420 2.67 3.39
Utilities 1999 1,290 4.62 5.23
</TABLE>
<TABLE>
Commissions Paid to Morgan Stanley and Co.
<CAPTION>
Total Dollar As Percent of As Percent of Dollar Amount
Account Year Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C> <C>
Aggressive Growth 1999 $41,604 10.84% 12.29%
Asset Allocation 1999 11,734 14.28 18.67
1998 751 0.35 0.27
1997 2,974 1.80 1.29
Balanced 1999 3,890 5.36 5.21
1998 3,155 3.92 2.11
1996 1,300 2.80 1.82
Blue Chip 1999 155 2.17 2.40
Capital Value 1999 8,075 2.09 2.81
1998 4,620 1.94 1.77
1997 7,155 5.28 6.12
1996 3,650 1.99 1.48
Growth 1999 16,129 4.59 3.43
1998 6,598 6.49 5.30
1997 1,250 3.69 3.83
International 1999 51,822 8.90 9.14
1998 25,872 8.53 8.46
1997 10,411 4.37 4.20
1996 3,176 2.02 1.78
International SmallCap 1999 17,293 6.05 7.44
1998 5,697 10.91 15.49
Large Cap Growth 1999 276 5.07 2.43
MicroCap 1999 800 2.77 3.10
1998 30 0.14 0.14
MidCap 1999 17,020 4.89 4.21
1998 2,248 1.64 2.19
1997 2,250 4.17 2.54
MidCap Growth 1999 2,067 11.06 12.50
1998 210 1.72 1.15
MidCap Value 1999 185 0.95 1.25
Real Estate 1999 1,945 3.74 3.68
1998 4,600 18.94 15.04
SmallCap 1999 385 0.80 1.32
1998 220 0.66 0.86
SmallCap Growth 1999 162 1.03 1.33
SmallCap Value 1999 535 4.10 3.47
1998 158 1.90 0.75
Stock Index 500 1999 23 0.11 1.41
Utilities 1999 500 1.79 1.61
</TABLE>
<TABLE>
Commissions Paid to Neuberger Berman
<CAPTION>
Total Dollar As Percent of As Percent of Dollar Amount
Account Year Amount Total Commissions of Commissionable Transactions
<S> <C> <C> <C> <C>
Aggressive Growth 1999 $1,040 0.27% 0.28%
Asset Allocation 1999 116 0.14 0.15
MicroCap 1999 83 0.29 0.50
MidCap Value 1999 12,220 62.63 64.65
</TABLE>
Goldman Sachs Asset Management, a separate operating division of Goldman Sachs &
Co., acts as sub-advisor for an account of Principal Variable Contracts Fund,
Inc. J.P. Morgan Investment Management Inc., an affiliate of J.P. Morgan
Securities, acts as a sub-advisor of an account of Principal Variable Contracts
Fund, Inc. In addition, Neuberger Berman Management, Inc., an affiliate of
Neuberger Berman LLC, acts as a sub-advisor of an account of Principal Variable
Contracts Fund, Inc.
Morgan Stanley and Co. is affiliated with Morgan Stanley Asset Management, Inc.,
which acts as sub-advisor to two accounts of the Principal Variable Contracts
Fund and one fund included in the Fund Complex. On December 1, 1998 Morgan
Stanley Asset Management, Inc. changed its name to Morgan Stanley Dean Witter
Investment Management, Inc. but continues to do business in certain instances
using the name Morgan Stanley Asset Management.
The Manager acts as investment advisor for each of the funds sponsored by
Principal Life Insurance Company and places orders to trade portfolio securities
for the funds and the Bond, High Yield, Money Market and Real Estate Accounts.
Orders to trade portfolio securities for the other Accounts are placed by the
sub-advisor for the specific Account. If, in carrying out the investment
objectives of the Accounts, occasions arise when purchases or sales of the same
equity securities are to be made for two or more of the Accounts or Funds at the
same time, (or, in the case of Accounts managed by Invista, for two or more
Funds and any other accounts managed by Invista), the Manager or Invista may
submit the orders to purchase or, whenever possible, to sell, to a broker/dealer
for execution on an aggregate or "bunched" basis. The Manager (or, in the case
of Accounts managed by Invista, Invista) may create several aggregate or
"bunched" orders relating to a single security at different times during the
same day. On such occasion, the Manager (or, in the case of Accounts managed by
Invista, Invista) will employ a computer program to randomly order the Accounts
whose individual orders for purchase or sale make up each aggregate or "bunched"
order. Securities purchased or proceeds of sales received on each trading day
with respect to each such aggregate or "bunched" orders shall be allocated to
the various Accounts (or, in the case of Invista, the various Accounts or Funds
and other client accounts) whose individual orders for purchase or sale make up
the aggregate or "bunched" order by filling each Account's or Fund's (or, in the
case of Invista, each Account's or Fund's or other client account's) order, in
the sequence arrived at by the random ordering. Securities purchased for funds
(or, in the case of Invista, Accounts, Funds and other clients accounts)
participating in an aggregate or "bunched" order are 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 are 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, Goldman, J.P. Morgan
Investment, Janus, Morgan Stanley, or Neuberger Berman acts as investment
sub-advisor or advisor is to be made at the same time, the securities are
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 do 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 considered reliable, prices provided by market
makers, that 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 that 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 that 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 are valued on an amortized cost
basis. Under this method of valuation, a security is initially valued at cost;
thereafter, the Account assumes a constant proportionate amortization in value
until maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price that
would be received upon sale of the security. Use of the amortized cost valuation
method by the Money Market Account requires the Account to maintain a dollar
weighted average maturity of 90 days or less and to purchase only obligations
that have remaining maturities of 397 days or less or have a variable or
floating rate of interest. In addition, the Account can invest only in "Eligible
Securities" as that term is defined in Regulations issued under the Investment
Company Act of 1940 (see the Fund's Prospectus for a more complete description)
determined by the Board of Directors to present minimal credit risks.
The Board of Directors has established procedures designed to stabilize, to the
extent reasonably possible, the Account's price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures include a directive
to the Manager to test price the portfolio or specific securities thereof upon
certain changes in the Treasury Bill auction interest rate for the purpose of
identifying possible deviations in the net asset value per share calculated by
using available market quotations or equivalents from $1.00 per share. If such
deviation exceeds 1/2 of 1%, the Board of Directors will promptly consider what
action, if any, will be initiated. In the event the Board of Directors
determines that a deviation exists which may result in material dilution or
other unfair results to shareholders, the Board will take such corrective action
as it regards as appropriate, including: the sale of portfolio instruments prior
to maturity; the withholding of dividends; redemptions of shares in kind; the
establishment of a net asset value per share based upon available market
quotations; or splitting, combining or otherwise recapitalizing outstanding
shares. The Account may also reduce the number of shares outstanding by
redeeming proportionately from shareholders, without the payment of any monetary
compensation, such value at $1.00 per share.
PERFORMANCE CALCULATION
Each of the Accounts may from time to time advertise its performance in terms of
total return. The figures used for total return and yield are based on the
historical performance of an Account, or its corresponding, predecessor mutual
fund, show the performance of a hypothetical investment and are not intended to
indicate future performance. Total return and yield will vary from time to time
depending upon market conditions, the composition of an Account's portfolio and
operating expenses. These factors and possible differences in the methods used
in calculating performance figures should be considered when comparing an
Account's performance to the performance of some other kind of investment. The
calculations of total return and yield for the Accounts do not include the fees
and charges of the separate accounts that invest in the Accounts and, therefore,
do not reflect the investment performance of those separate accounts.
Each Account may also include in its advertisements performance rankings and
other performance-related information published by independent statistical
services or publishers, such as Lipper Analytical Services, Weisenberger
Investment Companies Services, Money Magazine, Forbes, The Wall Street Journal,
Barron's and Changing Times, and comparisons of the performance of an Account to
that of various market indices, such as the S&P 500 Index, Lehman Brothers GNMA
Index, Dow Jones Industrials Index, and the Salomon Brothers Investment Grade
Bond Index.
Total Return
When advertising total return figures, each of the Growth-Oriented Accounts and
Income-Oriented Accounts will include its average annual total return for each
of the one, five and ten year periods (or if shorter, the period during which
its corresponding predecessor fund's registration statement has been in effect)
that end on the last day of the most recent calendar quarter. Average annual
total return is computed by calculating the average annual compounded rate of
return over the stated period that would equate an initial $1,000 investment to
the ending redeemable value assuming the reinvestment of all dividends and
capital gains distributions at net asset value. In its advertising, an Account
may also include average annual total return for some other period or cumulative
total return for a specified period. Cumulative total return is computed by
dividing the ending redeemable value (assuming the reinvestment of all dividends
and capital gains distributions at net asset value) by the initial investment.
The following table shows as of December 31, 1999 average annual total return
for each of the Accounts for the periods indicated:
<TABLE>
<CAPTION>
Account 1-Year 5-Year 10-Year
<S> <C> <C> <C>
Aggressive Growth 39.50% 32.01% 28.82%(1)
Asset Allocation 19.49% 16.01% 14.32%(1)
Balanced 2.40% 13.75% 11.38%
Blue Chip 1.15%(2)
Bond -2.59% 7.73% 7.77%
Capital Value -4.29% 17.88% 12.94%
Government Securities -0.29% 7.96% 7.75%
Growth 16.44% 20.45% 18.94%(3)
High Yield 1.76% 8.03% 8.39%
International 25.93% 17.29% 14.41%(3)
International SmallCap 93.81% 39.24%(4)
LargeCap Growth 32.47%(2)
MicroCap -1.07% -12.05%(4)
MidCap 13.04% 17.59% 15.35%
MidCap Growth 10.67% 4.09%(4)
MidCap Value 10.24%(2)
Real Estate -4.48% -6.58%(4)
SmallCap 43.58% 8.24%(4)
SmallCap Growth 95.69% 52.17%(4)
SmallCap Value 21.45% 1.88%(4)
Stock Index 500 8.93%(2)
Utilities 2.29% 10.43%(4)
<FN>
(1) Period beginning June 1, 1994 and ending December 31, 1999.
(2) Period beginning May 1, 1999 and ending December 31, 1999.
(3) Period beginning May 1, 1994 and ending December 31, 1999. (4) Period
beginning May 1, 1998 and ending December 31, 1999.
</FN>
</TABLE>
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, 1999, the Money Market Account's yield was 5.47%. 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, that 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, 1999, the Money Market Account's
effective yield was 5.62%.
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 fluctuates 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 is 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 that 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 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:
<TABLE>
<CAPTION>
Fund Account
<S> <C>
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
</TABLE>
The Articles of Incorporation for the Principal Variable Contracts Fund, Inc.
were amended on February 13, 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
The Articles of Incorporation for the Principal Variable Contracts Fund, Inc.
were amended on February 1, 1999 to reflect the addition of the following new
Accounts:
Blue Chip Account MidCap Value Account
LargeCap Growth Account Stock Index 500 Account
FINANCIAL STATEMENTS
The financial statements for the Accounts for the fiscal period ended December
31, 1999 appearing in the Annual Report to Shareholders and the report thereon
of Ernst and Young LLP, independent auditors, 801 Grand Avenue, Des Moines, Iowa
50309, 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: Bondsthat 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 that 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 that make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that 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: Bondsthat 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 that 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 that 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: Bondsthat 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 that are rated Ca represent obligations that are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C: Bonds that 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-1A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be
given a "+" designation.
SP-2A satisfactory capacity to pay principal and interest.
SP-3A speculative capacity to pay principal and interest.
