SUPPLEMENT DATED AUGUST 4, 2000
TO THE PROSPECTUS FOR
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
DATED MAY 1, 2000
On page 11, under the Day-to-day Account Management section, replace with the
following:
Since July 2000 Scott D. Opsal, CFA. Mr. Opsal is Chief Investment Officer
of Invista Capital Management and has been with the
organization since 1993. He holds an MBA from the University
of Minnesota and BS from Drake University. He has earned the
right to use the Chartered Financial Analyst designation.
LV 10 S-5
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
ACCOUNTS OF THE FUND
Balanced Account
Bond Account
Capital Value Account
High Yield Account
MidCap Account
Money Market Account
This Prospectus describes a mutual fund organized by Principal Life Insurance
Company. The Fund provides a choice of investment objectives through the
accounts listed above.
The date of this Prospectus is May 1, 2000.
Neither the Securities and Exchange Commission nor any State Securities
Commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary
is a criminal offense.
TABLE OF CONTENTS
ACCOUNT DESCRIPTIONS ............................................. 4
Balanced Account.............................................. 6
Bond Account.................................................. 8
Capital Value Account......................................... 10
High Yield Account............................................ 12
MidCap Account................................................ 14
Money Market Account.......................................... 16
CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS.................... 18
PRICING OF ACCOUNT SHARES.......................................... 22
DIVIDENDS AND DISTRIBUTIONS........................................ 22
MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE..................... 23
The Manager................................................... 23
The Sub-Advisors.............................................. 23
GENERAL INFORMATION ABOUT AN ACCOUNT............................... 29
Shareholders Rights........................................... 29
Purchase of Account Shares.................................... 30
Sale of Account Shares........................................ 30
Financial Statements.......................................... 32
FINANCIAL HIGHLIGHTS............................................... 32
Notes to Financial Highlights................................. 35
ACCOUNT DESCRIPTIONS
The Principal Variable Contracts Fund (the "Fund") is made up of Accounts. Each
Account has its own investment objective. Principal Management Corporation, the
Manager of the Fund, has selected a Sub-Advisor, Invista Capital Management LLC,
for certain Accounts (based on the Sub-Advisor's experience with the investment
strategy for which it was selected). Principal Management Corporation and
Invista are members of the Principal Financial Group. The Manager seeks to
provide a full range of investment approaches through the Fund.
In the description for each Account, you will find important information about
the Account's:
Primary investment strategy
This section summarizes how the Account intends to achieve its investment
objective. It identifies the Account's primary investment strategy (including
the type or types of securities in which the Account primarily invests) and any
policy to concentrate in securities of issuers in a particular industry or group
of industries.
Annual operating expenses
The annual operating expenses for each Account are deducted from Account assets
(stated as a percentage of Account assets) and are shown as of the end of the
most recent fiscal year. The examples are intended to help you compare the cost
of investing in a particular Account with the cost of investing in other mutual
funds. The examples assume you invest $10,000 in an Account for the time periods
indicated. The examples also assume that your investment has a 5% total return
each year and that the Account's operating expenses are the same as the most
recent fiscal year expenses. Although your actual costs may be higher or lower,
based on these assumptions, your costs would be as shown.
Day-to-day Account management
The investment professionals who manage the assets of each Account are listed
with each Account. Backed by their staffs of experienced securities analysts,
they provide the Accounts with professional investment management.
Account Performance
Included in each Account's description is a set of tables and a bar chart. The
bar chart is included to provide you with an indication of the risks involved
when you invest. The chart shows changes in the Account's performance from year
to year.
One of the tables compares the Account's average annual returns with:
o a broad-based securities market index (An index measures the market price
of a specific group of securities in a particular market of securities in a
market sector. You cannot invest directly in an index. An index does not
have an investment advisor and does not pay any commissions or expenses. If
an index had expenses, its performance would be lower.); and
o an average of mutual funds with a similar investment objective and
management style. The averages used are prepared by independent statistic
services.
An Account's past performance is not necessarily an indication of how the
Account will perform in the future.
You may call Principal Mutual Funds (1-800-247-4123) to get the current 7-day
yield for the Money Market Account.
NOTE: Investments in these Accounts are not deposits of a bank and are not
insured or guaranteed by the FDIC or any other government agency.
No salesperson, dealer or other person is authorized to give
information or make representations about an Account other than those
contained in this Prospectus. Information or representations from
unauthorized parties may not be relied upon as having been made by an
Account, the Fund, the Manager or any Sub-Advisor.
GROWTH-ORIENTED ACCOUNT
Balanced Account
The Account seeks to generate a total return consisting of current income and
capital appreciation.
Main Strategies
The Account invests primarily in common stocks and fixed-income securities. It
may also invest in other equity securities, government bonds and notes
(obligations of the U.S. government or its agencies) and cash. Though the
percentages in each category are not fixed, common stocks generally represent
40% to 70% of the Account's assets. The remainder of the Account's assets is
invested in bonds and cash.
In selecting common stocks, the Sub-Advisor, Invista, looks for companies that
have predictable earnings and which, based on growth prospects, are undervalued
in the marketplace. Invista buys stocks with the objective of long-term capital
appreciation. From time to time, Invista purchases stocks with the expectation
of price appreciation over the short term. In response to changes in economic
conditions, Invista may change the make-up of the portfolio and emphasize
different market sectors by buying and selling the portfolio's stocks.
The Account generates interest income by investing in bonds and notes. Bonds and
notes are also purchased for capital appreciation purposes when Invista thinks
that declining interest rates may increase market value. Deep discount bonds
(those which sell at a substantial discount from their face amount) may also be
purchased to generate capital appreciation. The Account may invest in bonds with
speculative characteristics but does not intend to invest more than 5% of its
assets in securities rated below BBB by S&P or Baa by Moody's. Fixed-income
securities that are not investment grade are commonly referred to as junk bonds
or high yield securities. These securities offer a higher yield than other,
higher rated securities, but they carry a greater degree of risk and are
considered speculative by the major credit rating agencies.
Main Risks
The value of the stocks owned by the Account changes on a daily basis. Stock
prices reflect the activities of individual companies and general market and
economic conditions. In the short term, stock prices can fluctuate dramatically
in response to these factors.
Bond values change daily. Their prices reflect changes in interest rates, market
conditions and announcements of other economic, political or financial
information. When interest rates fall, the price of a bond rises and when
interest rates rise, the price declines.
As with all mutual funds, as the value of the Account's assets rise or fall, the
Account's share price changes. If you sell shares when their value is less than
the price you paid, you will lose money.
Investor Profile
The Account is generally a suitable investment if you are seeking long-term
growth but are uncomfortable accepting the risks of investing entirely in common
stocks. Account Performance Information The Account's past performance is not
necessarily an indication of future performance. The bar chart and tables
provide some indication of the risks of investing in the Account by showing
changes in share performance from year to year.
Annual Total Returns
1990 -6.43
1991 34.36
1992 12.80
1993 11.06
1994 -2.09
1995 24.58
1996 13.13
1997 17.93
1998 11.91
1999 2.40
The account's highest/lowest quarterly results during this time period were:
Highest 12.62% (3/31/1991)
Lowest -11.70% (9/30/1990)
Average annual total returns for the period ending December 31, 1999
This table shows how the Account's average annual returns compare with those of
a broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past FivePast Ten Past One Past FivePast Ten
Account Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Balanced 2.40% 13.75% 11.38% S&P 500 Stock Index 21.04% 28.55% 18.21%
Lehman Brothers Government/Corporate Bond Index -2.15 7.61 7.65
Lipper Balanced Fund Average 8.69 16.39 11.94
</TABLE>
Examples
The Examples assume that you invest $10,000 in the Account for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Account's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------
$59 $186 $324 $726
Account Operating Expenses
Management Fees................... 0.57%
Other Expenses.................... 0.01
-----
Total Account Operating Expenses 0.58%
Day-to-day Account Management
Since December 1997 Co-Manager: Martin J. Schafer. Mr. Schafer joined the
Principal in 1977 and has broad experience in residential
mortgage related securities. He served as Director of
Investment Securities at the Principal prior to joining
Invista Capital Management in 1992. He holds a BA in
Accounting and Finance from the University of Iowa.
Since April 1993 Co-Manager: Judith A. Vogel, CFA. Ms. Vogel joined Invista
Capital Management in 1987. She holds an undergraduate
degree in Business Administration from Central College. She
has earned the right to use the Chartered Financial Analyst
designation.
Since February 2000 Co-Manager: Mary Sunderland, CFA. Prior to joining Invista
Capital Management in 1999, Ms. Sunderland managed growth
and technology portfolios for Skandia Asset Management for
10 years. She holds an MBA in Finance from Columbia
University Graduate School of Business and an undergraduate
degree from Northwestern University. She has earned the
right to use the Chartered Financial Analyst designation.
INCOME-ORIENTED ACCOUNT
Bond Account
The Account seeks to provide as high a level of income as is consistent with
preservation of capital and prudent investment risk.
Main Strategies
The Account invests in fixed-income securities. Generally, the Account invests
on a long-term basis but may make short-term investments. Longer maturities
typically provide better yields but expose the Account to the possibility of
changes in the values of its securities as interest rates change. When interest
rates fall, the price per share rises, and when rates rise, the price per share
declines.
Under normal circumstances, the Account invests at least 65% of its assets in:
o debt securities and taxable municipal bonds;
o rated, at purchase, in one of the top four categories by S&P or
Moody's, or
o if not rated, in the Manager's opinion are of comparable quality.
o similar Canadian, Provincial or Federal Government securities payable in
U.S. dollars; and
o securities issued or guaranteed by the U.S. Government or its agencies.
The rest of the Account's assets may be invested in securities that may be
convertible (may be exchanged for a fixed number of shares of common stock of
the same issuer) or nonconvertible including:
o domestic and foreign debt securities;
o preferred and common stock;
o foreign government securities; and
o securities rated less than the four highest grades of S&P or Moody's but
not lower BB- (S&P) or Ba3 (Moody's). Fixed-income securities that are not
investment grade are commonly referred to as junk bonds or high yield
securities. These securities offer a higher yield than other, higher rated
securities, but they carry a greater degree of risk and are considered
speculative by the major credit rating agencies.
During the fiscal year ended December 31, 1999, the average ratings of the
Account's assets based on market value at each month-end, were as follows (all
ratings are by Moody's):
0.69% in securities rated Aa
19.06% in securities rated A
68.52% in securities rated Baa
11.60% in securities rated Ba
0.13% in securities rated B
Under unusual market or economic conditions, the Account may invest up to 100%
of its assets in cash and cash equivalents. When doing so, the Account is not
investing to achieve its investment objectives.
Main Risks
When interest rates fall, the price of a bond rises and when interest rates
rise, the price declines. In addition, the value of the securities held by the
Account may be affected by factors such as credit rating of the entity that
issued the bond and effective maturities of the bond. Lower quality and longer
maturity bonds will be subject to greater credit risk and price fluctuations
than higher quality and shorter maturity bonds.
As with all mutual funds, if you sell your shares when their value is less than
the price you paid, you will lose money.
Investor Profile
The Account is generally a suitable investment if you are seeking monthly
dividends to produce income or to be reinvested in additional Account shares to
help achieve modest growth objectives without accepting the risks of investing
in common stocks.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance. The bar chart and tables provide some indication of the risks of
investing in the Account by showing changes in share performance from year to
year.
Annual Total Returns
1990 5.22
1991 16.72
1992 9.38
1993 11.67
1994 -2.90
1995 22.17
1996 2.36
1997 10.60
1998 7.69
1999 -2.59
The account's highest/lowest quarterly results during this time period were:
Highest 8.25% (6/30/1995)
Lowest -3.24% (3/31/1996)
Average annual total returns for the period ending December 31, 1999
This table shows how the Account's average annual returns compare with those of
a broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past FivePast Ten Past OnePast FivePast Ten
Account Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C>
Bond -2.59% 7.73% 7.77% Lehman Brothers BAA Corporate Index -0.82% 8.49% 8.48%
Lipper Corporate Debt BBB Rated Fund Average -1.68 7.71 8.01
</TABLE>
Examples
The Examples assume that you invest $10,000 in the Account for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Account's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------
$51 $160 $280 $628
Account Operating Expenses
Management Fees................ 0.49%
Other Expenses................. 0.01
-----
Total Account Operating Expenses 0.50%
Day-to-day Account Management
Since November 1996 Scott A. Bennett, CFA. Mr. Bennett has been with the
Principal organization since 1988. He holds an MBA and a BA
from the University of Iowa. He has earned the right to use
the Chartered Financial Analyst designation.
GROWTH-ORIENTED ACCOUNT
Capital Value Account
The Account seeks to provide long-term capital appreciation and secondarily
growth of investment income.
Main Strategies
The Account invests primarily in common stocks and may also invest in other
equity securities. To achieve its investment objective, the Sub-Advisor,
Invista, invests in securities that have "value" characteristics. This process
is known as "value investing." Value stocks tend to have higher yields and lower
price to earnings (P/E) ratios than other stocks.
Securities chosen for investment may include those of companies that Invista
believes can be expected to share in the growth of the nation's economy over the
long term. The current price of the Account's assets reflects the activities of
the individual companies and general market and economic conditions. In the
short term, stock prices can fluctuate dramatically in response to these
factors. Because of these fluctuations, principal values and investment returns
vary.
In making selections for the Account's investment portfolio, Invista uses an
approach described as "fundamental analysis." The basic steps are involved in
this analysis are:
o Research. Invista researches economic prospects over the next one to two
years rather than focusing on near term expectations. This approach is
designed to provide insight into a company's real growth potential.
o Valuation. The research findings allow Invista to identify the prospects
for the major industrial, commercial and financial segments of the economy.
Invista looks 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. It then uses this information to judge the prospects for each
industry for the near and intermediate term.
o Ranking. Invista then ranks the companies in each industry group according
to their relative value. The greater a company's estimated worth compared
to the current market price of its stock, the more undervalued the company.
Computer models help to quantify the research findings.
o Stock selection. Invista buys and sells stocks according to the Account's
own policies using the research and valuation ranking as a basis. In
general, Invista buys stocks that are identified as undervalued and
considers selling them when they appear overvalued. Along with attractive
valuation, other factors may be taken into account such as:
o events that could cause a stock's price to rise or fall;
o anticipation of high potential reward compared to potential risk; and
o belief that a stock is temporarily mispriced because of market
overreactions.
Main Risks
The value of the stocks owned by the Account changes on a daily basis. The
current price reflects the activities of individual companies and general market
and economic conditions. In the short term, stock prices can fluctuate
dramatically in response to these factors. As with all mutual funds, if you sell
shares when their value is less than the price you paid, you will lose money.
Investor Profile
The Account is generally a suitable investment if you are seeking long-term
growth and are willing to accept the risks of investing in common stocks but
prefer investing in companies that appear to be considered undervalued relative
to similar companies.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance. The bar chart and tables provide some indication of the risks of
investing in the Account by showing changes in share performance from year to
year.
Annual Total Returns
1990 -9.86
1991 38.67
1992 9.52
1993 7.79
1994 0.49
1995 31.91
1996 23.50
1997 28.53
1998 13.58
1999 -4.29
The account's highest/lowest quarterly results during this time period were:
Highest 17.85% (3/31/1991)
Lowest -17.01% (9/30/1990)
Average annual total returns for the period ending December 31, 1999
This table shows how the Account's average annual returns compare with those of
a broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past FivePast Ten Past OnePast FivePast Ten
Account Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Value -4.29% 17.88% 12.94% S&P 500 Barra Value Index(1) 12.72% 22.94% 15.37%
S&P 500 Stock Index 21.04 28.55 18.21
Lipper Large-Cap Value Fund Average(2) 11.23 22.56 15.06
<FN>
(1) This index is now the benchmark against which the Account measures its
performance. The Manager and portfolio manager believe it better
represents the universe of investment choices open to the Account
under its investment philosophy. The index formerly used is also
shown.
(2) Lipper has discontinued calculation of the Average previously used for
this Account. This chart reflects information for the discontinued
Average for years prior to 1999. The newly assigned Average will be
reflected for 1999 and beyond.
</FN>
</TABLE>
Examples
The Examples assume that you invest $10,000 in the Account for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Account's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------
$44 $138 $241 $542
Account Operating Expenses
Management Fees.................. 0.43%
Other Expenses................... 0.00
-----
Total Account Operating Expenses 0.43%
Day-to-day Account Management
Since November 1996 Catherine A. Zaharis, CFA. Ms. Zaharis joined Invista
Capital Management in 1987. She holds a BA in Finance from
the University of Iowa and an MBA from Drake University. She
has earned the right to use the Chartered Financial Analyst
designation.
INCOME-ORIENTED ACCOUNT
High Yield Account
The Account seeks a high current income.
Main Strategies
The Account invests in high yield, lower or unrated fixed income securities
commonly known as "junk bonds". The Account invests its assets in securities
rated Ba1 or lower by Moody's or BB+ or lower by S&P. The Account may also
invest in unrated securities that the Manager believes to be of comparable
quality. These securities are considered to be speculative with respect to the
issuer's ability to pay interest and repay principal. The Account does not
invest in securities rated below Caa (Moody's) or below CCC (S&P) at the time of
purchase. The SAI contains descriptions of the securities rating categories.
Investors assume special risks when investing in the Account. Compared to higher
rated securities, lower rated securities may:
o have a more volatile market value, generally reflecting specific events
affecting the issuer;
o be subject to greater risk of loss of income and principal (issuers are
generally not as financially secure);
o have a lower volume of trading, making it more difficult to value or sell
the security; and
o be more susceptible to a change in value or liquidity based on adverse
publicity and investor perception, whether or not based on factual
analysis.
The Account tries to minimize the risks of investing in lower rated securities
by diversification, investment analysis and attention to current developments in
interest rates and economics conditions. Although the Account's Manager
considers securities ratings when making investment decisions, it performs its
own investment analysis. This analysis includes traditional security analysis
considerations such as: experience and managerial strength changing financial
condition borrowing requirements or debt maturity schedules responsiveness to
changes in business conditions relative value based on anticipated cash flow
earnings prospects
The Manager continuously monitors the issuers of the Account's securities to
determine if the issuers will have sufficient cash flow and profits to meet
required principal and interest payments. It also monitors each security to
assure the security's liquidity so the Account can meet requests for sales of
Account shares.
For defensive purposes, the Account may invest in other securities. During
periods of adverse market conditions, the Account may invest in all types of
money market instruments, higher rated fixed income securities or any other
fixed income securities consistent with the temporary defensive strategy. The
yield to maturity on these securities is generally lower than the yield to
maturity on lower rated fixed income securities.
Main Risks
The market for higher-yielding, lower rated securities has not been tested by an
economic recession. An economic downturn may severely disrupt the market for
these securities. This could cause financial stress to the issuer negatively
affecting the issuer's ability to pay principal and interest. This may also
negatively affect the value of the Account's securities. In addition, if an
issuer defaults the Account may have additional expenses if it tries to recover
the amounts due it.
Some securities the Account buys have call provisions. A call provision allows
the issuer of the security to redeem it before its maturity date. If a bond is
called in a declining interest rate market, the Account would have to replace it
with a lower yielding security. This results in a decreased return for
investors. In addition, in a rising interest rate market, a higher yielding
security's value decreases. This is reflected in a lower share price for the
Account.
Investor Profile
The Account is generally a suitable investment if you are seeking monthly
dividends to provide income or to be reinvested in Account shares for growth.
However, it is suitable only for that portion of your investments for which you
are willing to accept potentially greater risk. You should carefully consider
your ability to assume the risks of this Account before making an investment and
be prepared to maintain your investment in the Account during periods of adverse
market conditions. This Account should not be relied on to meet short-term
financial needs. As with all mutual funds, if you sell your shares when their
value is less than the price you paid, you will lose money.
During the fiscal year ended December 31, 1999, the average ratings of the
Account's assets based on market value at each month-end, were as follows (all
ratings are by Moody's):
0.41% in securities rated A 0.19% in securities rated Ca
45.27% in securities rated Ba 1.77% in securities rated C
51.92% in securities rated B 0.44% in securities rated D
The above percentages for Ba, B and D rated securities include unrated
securities in the amount of 0.36%, 0.28% and 0.04%, respectively, which the
Manager considers to be of comparable quality.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance. The bar chart and tables provide some indication of the risks of
investing in the Account by showing changes in share performance from year to
year.
Annual Total Returns
1990 -7.70
1991 27.29
1992 14.58
1993 12.31
1994 0.62
1995 16.08
1996 13.13
1997 10.75
1998 -0.56
1999 1.76
The account's highest/lowest quarterly results during this time period were:
Highest 9.96% (3/31/1991)
Lowest -6.31% (9/30/1998)
Average annual total returns for the period ending December 31, 1999
This table shows how the Account's average annual returns compare with those of
a broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past FivePast Ten Past OnePast FivePast Ten
Account Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C>
High Yield 1.76% 8.03% 8.39% Lehman Brothers High Yield
Composite Bond Index 2.39% 9.31% 10.72%
Lipper High Current Yield Fund Average 4.53 8.89 10.08
</TABLE>
Examples
The Examples assume that you invest $10,000 in the Account for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Account's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------
$68 $214 $373 $835
Account Operating Expenses
Management Fees................... 0.60%
Other Expenses.................... 0.07
-----
Total Account Operating Expenses 0.67%
Day-to-day Account Management
Since April 1998 Mark P. Denkinger, CFA. Mr. Denkinger joined the Principal
organization in 1990. He holds an MBA and BA in Finance from
the University of Iowa. He has earned the right to use the
Chartered Financial Analyst designation.
GROWTH-ORIENTED ACCOUNT
MidCap Account
The Account seeks to achieve capital appreciation by investing primarily in
securities of emerging and other growth-oriented companies.
Main Strategies
Stocks that are chosen for the Account by the Sub-Advisor, Invista, are thought
to be responsive to changes in the marketplace and have the fundamental
characteristics to support growth. The Account may invest for any period in any
industry, in any kind of growth-oriented company. Companies may range from well
established, well known to new and unseasoned. While small, unseasoned companies
may offer greater opportunities for capital growth than larger, more established
companies, they also involve greater risks and should be considered speculative.
Under normal market conditions, the Account invests at least 65% of its assets
in securities of companies with market capitalizations in the $1 billion to $10
billion range. Market capitalization is defined as total current market value of
a company's outstanding common stock.
The Account may invest up to 20% of its assets in securities of foreign
companies. Foreign stocks carry risks that are not generally found in stocks of
U.S. companies. These include the risk that a foreign security could lose value
as a result of political, financial and economic events in foreign countries. In
addition, foreign securities may be subject to securities regulators with less
stringent accounting and disclosure standards than are required of U.S.
companies.
Main Risks
The values of the stocks owned by the Account change on a daily basis. The
current share price reflects the activities of individual companies and general
market and economic conditions. The Account's share price may fluctuate more
than that of funds primarily invested in stocks of large companies. Mid-sized
companies may pose greater risk due to narrow product lines, limited financial
resources, less depth in management or a limited trading market for their
stocks. In the short term, stock prices can fluctuate dramatically in response
to these factors. Because of these fluctuations, principal values and investment
returns vary. As with all mutual funds, if you sell your shares when their value
is less than the price you paid, you will lose money.
Investor Profile
The Account is generally a suitable investment if you are seeking long-term
growth and are willing to accept the potential for short-term fluctuations in
the value of your investments. It is designed for a portion of your investments.
It is not appropriate if you are seeking income or conservation of capital.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance. The bar chart and tables provide some indication of the risks of
investing in the Account by showing changes in share performance from year to
year.
Annual Total Returns
1990 -12.50
1991 53.50
1992 14.94
1993 19.28
1994 0.78
1995 29.01
1996 21.11
1997 22.75
1998 3.69
1999 13.04
The account's highest/lowest quarterly results during this time period were:
Highest 25.86% (3/31/1991)
Lowest -26.61% (9/30/1990)
Average annual total returns for the period ending December 31, 1999
This table shows how the Account's average annual returns compare with those of
a broad-based securities market index and an index of funds with similar
investment objectives.
<TABLE>
<CAPTION>
Past One Past FivePast Ten Past OnePast FivePast Ten
Account Year Years Years Year Years Years
<S> <C> <C> <C> <C> <C> <C> <C>
MidCap 13.04% 17.59% 15.35% S&P 400 MidCap Index(1) 14.72% 23.05% -- %
S&P 500 Stock Index 21.04 28.55 18.21
Lipper Mid-Cap Core Fund Average(2) 38.27 21.93 16.28
<FN>
(1)This index is now the benchmark against which the Account measures its
performance. The Manager and portfolio manager believe it better
represents the universe of investment choices open to the Account under
its investment philosophy. The index formerly used is also shown.
(2)Lipper has discontinued calculation of the Average previously used for
this Account. This chart reflects information for the discontinued
Average for years prior to 1999. The newly assigned Average will be
reflected for 1999 and beyond.
</FN>
</TABLE>
Examples
The Examples assume that you invest $10,000 in the Account for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Account's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
------------------------------------------------------
$62 $195 $340 $762
Account Operating Expenses
Management Fees.................... 0.61%
Other Expenses..................... 0.00
-----
Total Account Operating Expenses 0.61%
Day-to-day Account Management
Since February 2000 K. William Nolin, CFA. Mr. Nolin joined Invista Capital
Management in 1996. He holds an MBA from The Yale School of
Management and a BA in Finance from the University of Iowa.
He has earned the right to use the Chartered Financial
Analyst designation.
Money Market Account
The Account has an investment objective of as high a level of current income
available from investments in short-term securities as is consistent with
preservation of principal and maintenance of liquidity.
Main Strategies
The Account invests its assets in a portfolio of money market instruments. The
investments are U.S. dollar denominated securities which the Manager believes
present minimal credit risks. At the time the Account purchases each security,
it is an "eligible" security as defined in the regulations issued under the
Investment Company Act of 1940.
The Account maintains a dollar weighted average portfolio maturity of 90 days or
less. It intends to hold its investments until maturity. However, the Account
may sell a security before it matures:
o to take advantage of market variations;
o to generate cash to cover sales of Account shares by its shareholders; or
o upon revised valuation of the security's issuer.
The sale of a security by the Account before maturity may not be in the best
interest of the Account. The Account does have an ability to borrow money to
cover the sale of Account shares. The sale of portfolio securities is usually a
taxable event.
It is the policy of the Account to be as fully invested as possible to maximize
current income. Securities in which the Account invests include:
o U.S. Government securities which are issued or guaranteed by the U.S.
Government, including treasury bills, notes and bonds.
o U.S. Government agency securities which are issued or guaranteed by
agencies or instrumentalities of the U.S. Government. These are backed
either by the full faith and credit of the U.S. Government or by the credit
of the particular agency or instrumentality.
o Bank obligations consisting of:
o certificates of deposit which generally are negotiable certificates
against funds deposited in a commercial bank or
o bankers acceptances which are time drafts drawn on a commercial bank,
usually in connection with international commercial transactions.
o Commercial paper that is short-term promissory notes issued by U.S. or
foreign corporations primarily to finance short-term credit needs.
o Short-term corporate debt consisting of notes, bonds or debentures which at
the time of purchase by the Account has 397 days or less remaining to
maturity.
o Repurchase agreements under which securities are purchased with an
agreement by the seller to repurchase the security at the same price plus
interest at a specified rate. Generally these have a short duration (less
than a week) but may have a longer duration.
o Taxable municipal obligations that are short-term obligations issued or
guaranteed by state and municipal issuers that generate taxable income.
Main Risks
As with all mutual funds, the value of the Account's assets may rise or fall.
Although the Account seeks to preserve the value of an investment at $1.00 per
share, it is possible to lose money by investing in the Account. An investment
in the Account is not insured or guaranteed by the FDIC or any other government
agency.
Investor Profile
The Account is generally a suitable investment if you are seeking monthly
dividends to produce income without incurring much principal risk or for your
short-term needs.
Account Performance Information
The Account's past performance is not necessarily an indication of future
performance. The bar chart and tables provide some indication of the risks of
investing in the Account by showing changes in share performance from year to
year.
Annual Total Returns
1990 8.01
1991 5.92
1992 3.48
1993 2.69
1994 3.76
1995 5.59
1996 5.07
1997 5.04
1998 5.20
1999 4.84
The 7-day yield for the period ended December 31, 1999 was 5.47%. To obtain the
Account's current yield information, please call 1-800-247-4123.
Average annual total returns for the period ending December 31, 1999
This table shows the Account's average annual returns over the periods
indicated.
Past One Past FivePast Ten
Account Year Years Years
Money Market 4.84% 5.20% 4.94%
Examples
The Examples assume that you invest $10,000 in the Account for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Examples also assume that your investment has a 5% return each year and that the
Account's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your cost would be:
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------
$53 $167 $291 $653
Account Operating Expenses
Management Fees.................... 0.50%
Other Expenses..................... 0.02
-----
Total Account Operating Expenses 0.52%
Day-to-day Account Management
Since June 1999 Co-Manager: Alice Robertson. Ms. Robertson has been with the
Principal organization since 1990. She holds an MBA from
DePaul and a BA in Economics from Northwestern University.
Since March 1983 Co-Manager: Michael R. Johnson. Mr. Johnson has been with
the Principal organization since 1982. He holds a BA from
Iowa State University. He is a Fellow of the Life Management
Institute.
CERTAIN INVESTMENT STRATEGIES AND RELATED RISKS
The Statement of Additional Information (SAI) contains additional information
about investment strategies and their related risks.
Securities and Investment Practices
Equity securities include common stocks, preferred stocks, convertible
securities and warrants. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. Although equity securities have a
history of long term growth in value, their prices fluctuate based on changes in
a company's financial condition and on overall market and economic conditions.
Smaller companies are especially sensitive to these factors.
Fixed-income securities include bonds and other debt instruments that are used
by issuers to borrow money from investors. The issuer generally pays the
investor a fixed, variable or floating rate of interest. The amount borrowed
must be repaid at maturity. Some fixed-income securities, such as zero coupon
bonds, do not pay current interest, but are sold at a discount from their face
values.
Fixed-income securities are sensitive to changes in interest rates. In general,
bond prices rise when interest rates fall and fall when interest rates rise.
Longer term bonds and zero coupon bonds are generally more sensitive to interest
rate changes.
Bond prices are also affected by the credit quality of the issuer. Investment
grade debt securities are medium and high quality securities. Some bonds may
have speculative characteristics and be particularly sensitive to economic
conditions and the financial condition of the issuers.
Note: The Capital Value and MidCap Accounts invest primarily in equity
securities. The Balanced Account invests in a mix of equity and debt
securities. The Bond and High Yield Accounts invest primarily in debt
securities.
Repurchase Agreements and Loaned Securities
Each of the Accounts may invest a portion of its assets in repurchase
agreements. Repurchase agreements typically involve the purchase of debt
securities from a 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 on a specific date. 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 while the Account holds the security. In the event of a default or
bankruptcy by a selling financial institution, the affected Account bears a risk
of loss. To minimize such risks, the Account enters into repurchase agreements
only with large, well-capitalized and well-established financial institutions.
In addition, the value of the collateral underlying the repurchase agreement is
always at least equal to the repurchase price, including accrued interest.
Each of the Accounts may lend its portfolio securities to unaffiliated
broker-dealers and other unaffiliated qualified financial institutions.
Currency Contracts
The Accounts (except Money Market) may each enter into forward currency
contracts, currency futures contracts and options, and options on currencies for
hedging and other non-speculative purposes. A forward currency contract involves
a privately negotiated obligation to purchase or sell a specific currency at a
future date at a price set in the contract. An Account will not hedge currency
exposure to an extent greater than the aggregate market value of the securities
held or to be purchased by the Account (denominated or generally quoted or
currently convertible into the currency).
Hedging is a technique used in an attempt to reduce risk. If an Account's
Manager or Sub-Advisor hedges market conditions incorrectly or employs a
strategy that does not correlate well with the Account's investment, these
techniques could result in a loss, regardless of whether the intent was to
reduce risk or to increase return. These techniques may increase the volatility
of an Account and may involve a small investment of cash relative to the
magnitude of the risk assumed. In addition, these techniques could result in a
loss if the other party to the transaction does not perform as promised.
Additionally, there is the risk of governmental action through exchange controls
that would restrict the ability of the Account to deliver or receive currency.
Forward Commitments
Each of the Accounts may enter into forward commitment agreements. These
agreements call for the Account to purchase or sell a security on a future date
at a fixed price. Each of these Accounts may also enter into contracts to sell
its investments either on demand or at a specific interval.
Warrants
Each of the Accounts (except Money Market) may invest up to 5% of its total
assets in warrants. A warrant is a certificate granting its owner the right to
purchase securities from the issuer at a specified price, normally higher than
the current market price. Up to 2% of an Account's total assets may be invested
in warrants that are not listed on either the New York or American Stock
Exchanges.
Risks of High Yield Securities
The Balanced, Bond, and High Yield Accounts may, to varying degrees, invest in
debt securities rated lower than BBB by S&P or Baa by Moody's or, if not rated,
determined to be of equivalent quality by the Manager. Such securities are
sometimes referred to as high yield or "junk bonds" and are considered
speculative.
Investment in high yield bonds involves special risks in addition to the risks
associated with investment in high rated debt securities. High yield bonds may
be regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments. Moreover, such securities may,
under certain circumstances, be less liquid than higher rated debt securities.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities. The ability of an
Account to achieve its investment objective may, to the extent of its investment
in high yield bonds, be more dependent on such creditworthiness analysis than
would be the case if the Account were investing in higher quality bonds.
High yield bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher-grade bonds. The prices of high
yield bonds have been found to be less sensitive to interest rate changes than
more highly rated investments, but more sensitive to adverse economic downturns
or individual corporate developments. If the issuer of high yield bonds
defaults, an Account may incur additional expenses to seek recovery.
The secondary market on which high yield bonds are traded may be less liquid
than the market for higher-grade bonds. Less liquidity in the secondary trading
market could adversely affect the price at which an Account could sell a high
yield bond and could adversely affect and cause large fluctuations in the daily
price of the Account's shares. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the value and
liquidity of high yield bonds, especially in a thinly traded market.
The use of credit ratings for evaluating high yield bonds also involves certain
risks. For example, credit ratings evaluate the safety of principal and interest
payments, not the market value risk of high yield bonds. Also, credit rating
agencies may fail to change ratings in a timely manner to reflect subsequent
events. If a credit rating agency changes the rating of a portfolio security
held by an Account, the Account may retain the security if the Manager thinks it
is in the best interest of shareholders.
Options
Each of the Accounts (except Money Market) may buy and sell certain types of
options. Each type is more fully discussed in the SAI.
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 Bond, Capital Value and High Yield Accounts - 20%;
o Balanced and MidCap 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.; an
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
Fund. These procedures outline the steps to be followed by the Manager and
Sub-Advisor to establish a reliable market or fair value if a reliable market
value is not available through normal market quotations. The Executive Committee
of the Board of Directors oversees this process.
Securities of Smaller Companies
The MidCap Account invests 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 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
The Accounts 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.
Temporary or Defensive Measures
For temporary or defensive purposes in times of unusual or adverse market
conditions, the Accounts may invest without limit in cash and cash equivalents.
For this purpose, cash equivalents include: bank certificates of deposit, bank
acceptances, repurchase agreements, commercial paper, and commercial paper
master notes which are floating rate debt instruments without a fixed maturity.
In addition, an Account may purchase U.S. Government securities, preferred
stocks and debt securities, whether or not convertible into or carrying rights
for common stock.
Portfolio Turnover
"Portfolio Turnover" is the term used in the industry for measuring the amount
of trading that occurs in an Account's portfolio during the year. For example, a
100% turnover rate means that on average every security in the portfolio has
been replaced once during the year.
Accounts with high turnover rates (more than 100%) often have higher transaction
costs (which are paid by the Account) and may generate short-term capital gains.
You can find the turnover rate for each Account, except for the Money Market
Account, in the Account's Financial Highlights table.
Please consider all the factors when you compare the turnover rates of different
funds. A fund with consistently higher total returns and higher turnover rates
than another fund may actually be achieving better performance precisely because
the managers are active traders. You should also be aware that the "total
return" line in the Financial Highlights section already includes portfolio
turnover costs.
PRICING OF ACCOUNT SHARES
Each Account's shares are bought and sold at the current share price. The share
price of each Account is calculated each day the New York Stock Exchange is
open. The share price is determined as of the close of business of the Exchange
(normally at 3:00 p.m. Central Time). When your order to buy or sell shares is
received, the share price used to fill the order is the next price calculated
after the order is placed.
For all Accounts, except the Money Market Account, the share price is calculated
by:
o taking the current market value of the total assets of the Account
o subtracting liabilities of the Account
o dividing the remainder by the total number of shares owned by the Account.
The securities of the Money Market Account are valued at amortized cost. The
calculation procedure is described in the Statement of Additional Information.
The Money Market Account reserves the right to determine a share price more than
once a day.
NOTES:
o If current market values are not readily available for a security, its fair
value is determined using a policy adopted by the Fund's Board
of Directors.
o An Account's securities may be traded on foreign securities markets that
generally complete trading at various times during the day prior to the
close of the New York Stock Exchange. The values of foreign securities used
in computing share price are determined at the time the foreign market
closes. Occasionally, events affecting the value of foreign securities
occur when the foreign market is closed and the New York Stock Exchange is
open. If the Manager believes the market value is materially affected, the
share price will be calculated using the policy adopted by the Fund
o Foreign securities markets may trade on days when the New York Stock
Exchange is closed (such as customary U.S. holidays) and an Account's share
price is not calculated. As a result, the value of an Account's assets may
be significantly affected by such trading on days when you cannot purchase
or sell shares of the Fund.
DIVIDENDS AND DISTRIBUTIONS
The issuer of an equity security held by an Account may make a dividend payment.
When an Account receives a dividend, it increases the net asset value of a share
of the Account.
An Account accrues interest daily on its fixed-income securities in anticipation
of an interest payment from the issuer of the security. This accrual increases
the net asset value of an Account.
The Money Market Account (or any other Account holding commercial paper)
amortizes the discount on commercial paper it owns on a daily basis. This
increases the net asset value of the Account.
NOTE: As the net asset value of a share of an Account increases, the unit
value of the corresponding division also reflects an increase. The
number of units you own in the Account are not increased.
MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE
The Manager
Principal Management Corporation (the "Manager") serves as the manager for the
Principal Variable Contracts Fund, Inc. In its handling of the business affairs
of the Fund, the Manager provides clerical, recordkeeping and bookkeeping
services, and keeps the financial and accounting records required for the
Accounts.
The Manager is a subsidiary of Princor Financial Services Corporation and an
affiliate of Principal Life Insurance Company. It has managed mutual funds since
1969. As of December 31, 1999, the Funds it managed had assets of approximately
$6.42 billion. The Manager's address is Principal Financial Group, Des Moines,
Iowa 50392-0200.
The Sub-Advisors
The Manager has signed contracts with various Sub-Advisors. Under the
Sub-Advisory agreements, the Sub-Advisor agrees to assume the obligations of the
Manager to provide investment advisory services for a specific Account. For
these services, each Sub-Advisor is paid a fee by the Manager.
Accounts: Balanced, Capital Value and MidCap
Sub-Advisor: Invista Capital Management, LLC ("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. 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.
Duties of the Manager and Sub-Advisor
The Manager or the Sub-Advisor provides the Board of Directors of the Fund a
recommended investment program. Each program must be consistent with the
Account's investment objective and policies. Within the scope of the approved
investment program, the Manager or the Sub-Advisor advises each Account on its
investment policies and determines which securities are bought and sold, and in
what amounts.
The Manager is paid a fee by each Account for its services, which includes any
fee paid to the Sub-Advisor. The fee paid by each Account (as a percentage of
the average daily net assets) for the fiscal year ended December 31, 1999 was:
Management Other Total Operating
Account Fees Expenses Expenses
Balanced 0.57% 0.01% 0.58%
Bond 0.49 0.01 0.50
Capital Value 0.43 0.00 0.43
High Yield 0.60 0.07 0.67
MidCap 0.61 0.00 0.61
Money Market 0.50 0.02 0.52
The Fund and the Manager, under an order received from the SEC, may enter into
and materially amend agreements with Sub-Advisors without obtaining shareholder
approval. For any Accounts as to which the Fund is relying on the order, the
Manager may:
o hire one or more Sub-Advisors;
o change Sub-Advisors; and
o reallocate management fees between itself and Sub-Advisors.
The Manager will continue to have the ultimate responsibility for the investment
performance of these Accounts due to its responsibility to oversee Sub-Advisors
and recommend their hiring, termination and replacement. The Fund will not rely
on the order as to any Account until it receives approval from:
o contract owners who have assets in the Account, or
o in the case of a new Account, the Account's sole initial shareholder before
the Account is available to contract owners, and
the Fund states in its prospectus that it intends to rely on the order with
respect to the Account. The Manager will not enter into an agreement with an
affiliated Sub-Advisor without that agreement, including the compensation to be
paid under it, being similarly approved. The Fund has received the necessary
shareholder approval and intends to rely on the order with respect to the
Aggressive Growth, Asset Allocation, LargeCap Growth, MicroCap, MidCap Growth,
MidCap Value, SmallCap Growth and SmallCap Value Accounts (not available through
the FVLI policy).
MANAGERS' COMMENTS
Principal Management Corporation and its Sub-Advisors are staffed with
investment professionals who manage each individual Account. Comments by these
individuals in the following paragraphs summarize in capsule form the general
strategy and results of each Account for 1999. The accompanying graphs display
results for the past 10 years or the life of the Account, whichever is shorter.
Average annual total return figures provided for each Account in the graphs
reflect all expenses of the Account and assume all distributions are reinvested
at net asset value. The figures do not reflect expenses of the variable life
insurance contracts or variable annuity contracts that purchase Account shares;
performance figures for the divisions of the contracts would be lower than
performance figures for the Accounts due to the additional contract expenses.
Past performance is not predictive of future performance. Returns and net asset
values fluctuate. Shares are redeemable at current net asset value, which may be
more or less than original cost.
The various indices included in the following graphs are unmanaged and do not
reflect any commissions or fees which would be incurred by an investor
purchasing the securities included in the index. Investors cannot invest
directly into these or any indices.
Growth-Oriented Accounts
Balanced Account
(Martin Schafer, Mary Sunderland and Judith Vogel)
In the stock market, technology was THE place to be for performance. Nothing
else came close. Early in the year it was the largest and most liquid technology
stocks that garnered investors' attention. By the fourth quarter, Y2K liquidity
and unprecedented money flows into speculative technology and Internet sector
funds sent already strong technology stocks through the roof. Valuation was
seemingly given no consideration as aggressive growth and momentum strategies
won over value, hands down.
The macro-economic picture was constructive for the broad market (especially
cheaper stocks) with strong real GDP growth, improving corporate profits, and
interest rates moving up. Typically value stocks outperform under these
conditions. Yet it was the most richly priced companies that performed the best
in 1999 and it was these stocks that boosted index returns for the year. The
narrow bull market in technology continues to hide a broader bear market
underway in the U.S. as evidenced by the fact that 70% of the universe of 6,000
common stocks are actually down in price since April of 1998.
With ten-year Treasury yields up 1.75% over the year, fixed-income markets
stalled in 1999. Bonds produced negative returns as too-strong economic growth
in the U.S., improving global demand, and resulting fears of inflation spooked
fixed-income investors. Negative bond returns couldn't compete with
off-the-chart equity returns, which contributed to extreme negative sentiment
toward fixed-income investments, especially toward the end of the year.
The Balanced Account was underweighted in technology throughout the year, based
on high valuations of most tech stocks. While the prices of leading technology
stocks appeared to fully discount very optimistic growth expectations, the
stocks of many financial, energy, healthcare, and consumer staples companies
were cheap. Despite huge valuation disparities, the market continued to bid
already expensive tech stocks higher. Not having enough technology exposure was
the single largest detriment to the Account's total performance, which landed in
the low single digits for the year.
There is no independent market index against which to measure returns of
balanced portfolios, however, we show the S&P 500 Stock Index and the Lehman
Government/Corporate Bond Index for your information.
Comparison of Change in Value of $10,000 Invesmtnet in the Balanced Account,
Lipper Balanced Fund Average, Lehman Brothers Government/Corporate Bond Index
and S&P 500 Stock Index
Total Returns *
As of December 31, 1998
1 Year 5 Year 10 Year
-----------------------
2.40% 13.75% 11.38%
Lipper Lehman
Balanced S&P 500 Balanced Govt Corp
Account Index Fund Avg Bond Index
------- ----- -------- ----------
10,000 10,000 10,000 10,000
1990 9,357 9,689 9,945 10,828
1991 12,572 12,642 12,607 12,575
1992 14,181 13,605 13,495 13,528
1993 15,750 14,974 14,943 15,020
1994 15,420 15,171 14,566 14,493
1995 19,212 20,865 18,231 17,281
1996 21,734 25,652 20,740 17,782
1997 25,630 34,207 24,680 19,518
1998 28,684 43,982 28,007 21,366
1999 29,371 53,236 30,441 20,907
Note: Past performance is not predictive of future performance.
Capital Value Account
(Catherine A. Zaharis)
The market divergence has been the most dramatic in performance since the late
1960's. It has been a very simple process to determine which stocks will
outperform. On average, stocks with earnings underperformed the market. Stocks
with high P/E ratios tended to outperform the market. For the Capital Value
Account, this means the history of the account and its philosophy and process
fly in the face of what has worked the past year on Wall Street.
The Account Managers prefer to invest in companies that have earnings, but
prefer not to pay a premium for those earnings. In 1999 this led the Account
into consumer staples, financials and health care. The only problem was that
while technology was the favored sector, these three sectors were closer to the
bottom of relative returns.
Account Managers have struggled with this year and how to deal with markets that
do not favor value investors, and in fact punish them severely. Account Managers
have reviewed their process in a detailed manner and added some flexibility
without compromising philosophy. Valuations are now analyzed by sector versus
the overall market. For example comparing paper company stocks to technology
stocks, technology will nearly always look expensive. But, when looking at
technology as its own universe, many attractive opportunities appear. This
approach will work better in an environment where there is minimal change in
portfolio emphasis.
Comparison of Change in Value of $10,000 Investment in the Capital Value
Account, Lipper Large-Cap Value Fund Average, S&P 500 Stock Index and S&P 500
Barra Value Index
Total Returns *
As of December 31, 1999
1 Year 5 Year 10 Year
-----------------------
-4.29% 17.88% 12.94%
Capital S&P 500 S&P 500 Lipper
Value Stock Barra Value Large-Cap Value
Account Index Index Fund Average
------- ----- ----- ------------
10,000 10,000 10,000 10,000
1990 9,014 9,689 9,315 9,555
1991 12,499 12,642 11,416 12,334
1992 13,690 13,605 12,617 13,442
1993 14,746 14,974 14,965 14,995
1994 14,818 15,171 14,869 14,854
1995 19,547 20,865 20,369 19,432
1996 24,139 25,652 24,850 23,470
1997 31,027 34,207 32,300 29,840
1998 35,240 43,982 37,038 34,498
1999 33,730 53,236 41,479 38,372
Note: Past performance is not predictive of future performance.
MidCap Account
(William Nolin)
In 1999, the Midcap Account trailed the S&P 400 Index slightly, despite rallying
strongly in the fourth quarter. Technology was the story for the market as a
whole. It was a strange year, with technology up strongly and almost everything
else unchanged. The divergence between the Account and the Index was mainly due
to several technology stocks in the Index performing well which were not in the
Account. One of these companies is no longer in the Index and the others
continue to be overvalued.
The Account changed portfolio managers in the fourth quarter of 1999. The
underlying philosophy of investing and the fundamental analysis process will not
change.
Going forward the Account is positioned to take advantage of the growth in
technology and communications. Technology will continue to benefit from the
substitution of capital for labor, the growth of the Internet, and the
acceleration of global economic growth. The cost of labor is going up 3% per
year, while the cost of capital equipment is falling 4% per year. This
divergence is causing companies either to provide their workers with better
tools or replace those workers with machines. This process is being accelerated
by the low availability of workers in this country. Communications benefit from
many of the same trends as technology. Valuations remain high in these sectors,
but Account Managers believe the strong business fundamentals justify the
valuations.
Comparison of Change in Value of $10,000 Investment in the MidCap Account,
Lipper Mid-Cap Core Fund Average, S&P 500 Stock Index and S&P 400 MidCap Index
Total Returns *
As of December 31, 1999
1 Year 5 Year 10 Years
----------------------
13.04% 17.59% 15.35%
S&P 400 Lipper
MidCap S&P 500 MidCap Mid-Cap Core
Account Index Index Index
------- ----- ----- ------------
10,000 10,000 10,000 10,000
1990 8,750 9,689 9,488 9,644
1991 13,431 12,642 14,239 14,586
1992 15,437 13,605 15,933 15,915
1993 18,414 14,974 18,152 18,255
1994 18,558 15,171 17,500 17,881
1995 23,942 20,865 22,911 23,633
1996 28,996 25,652 27,305 27,868
1997 35,594 34,207 36,111 33,338
1998 36,906 43,982 43,012 37,392
1999 41,719 53,236 49,343 51,702
Note: Past performance is not predictive of future performance.
Important Notes of the Growth-Oriented Accounts:
The values of these indexes will vary according to the aggregzte value of the
common equity of each of the securities included. The indexes represented asset
types which are subject to risk, including possible loss of principal. You
cannot invest directly in an index. An index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
Lehman Brothers Government/Corporate Bond Index: This index consists of publicly
issued securities from the Government Index and the Corporate Index. The
Government Index includes U.S. Treasuries and Agencies. The Corporate Index
includes U.S. Corporate and Yankee debentures and secured notes from the
Industrial, Utility, Finance, and Yankee categories.
Lipper Balanced Fund Average: This average consists of mutual funds which
attempt to conserve principal by maintaining at all times a balanced portfolio
of both stocks and bonds. Typically, the stock/bond ratio ranges around 60%/40%.
The one year average currently contains 449 mutual funds.
Lipper Large-CapValue Fund Average: This average consists of funds which invest
at least 75% of their equity assets in companies with market capitalizations of
greater than 300% of the dollar-weighted median market capitalization of the S&P
Mid-Cap 400 Index. These funds seek long-term growth of capital by investing in
companies that are considered to be undervalued relative to a major unmanaged
stock index based on price-to-current earnings, book value, asset value, or
other factors. The one-year average currently contains 279 funds.
Lipper Mid-Cap Core Fund Average: This average consists of funds that invest at
least 75% of their equity assets in companies with market capitalizations of
less than 300% of the dollar weighted median market capitalization of the S&P
Mid-Cap 400 Index. These funds have wide latitude in the companies in which they
invest. The one-year average currently contains 144 funds.
Lipper Mid-Cap Growth Fund Average: This average consists of funds that invest
at least 75% of their equity assets in companies with market capitalizations of
less than 300% of the dollar weighted median market capitalization of the S&P
Mid-Cap 400 Index. These funds normally invest in companies with long-term
earnings expected to grow significantly faster than the earnings of the stocks
represented in a major unmanaged stock index. The one-year average currently
contains 230 funds.
Standard & Poor's 500 Barra Value Index: This is a market
capitalization-weighted index of the stocks in the Standard & Poor's 500 Index
having the highest book to price ratios. The index consists of approximately
half of the S&P 500 on a market capitalization basis.
Standard & Poor's 500 Stock Index: This is an unmanaged index of 500 widely held
common stocks representing industrial, financial, utility and transportation
companies listed on the New York Stock Exchange, American Stock Exchange and the
Over-the-Counter market.
Standard & Poor's MidCap 400 Index: This index measures the performance of the
mid-size company segment of the U.S. Market.
Note: Mutual fund data from Lipper Inc.
Income-Oriented Accounts:
Bond Account
(Scott A. Bennett)
Interest rates moved significantly higher last year as the world economy
rebounded from the emerging market crisis of 1998 and investors became less
interested in holding super-safe U.S. Treasury obligations. The increase in
rates pushed most fixed-income product returns negative for the year, including
the Bond Account.
Corporate bonds performed relatively well in this environment, significantly
outperforming Treasuries, as investors put additional money into higher yielding
assets. The fundamentals continued to be very positive for U.S. corporations
with strong U.S. and world economies producing strong earnings growth with
little inflation. The Account was positioned to take advantage of this rebound
through an increase in holdings of higher yielding securities.
The performance of the Account was below expectations in 1999 due to
underperformance of several holdings. The corporate bond market has become more
equity like in its increasing hostility towards companies reporting below
expected earnings or any whiff of other problems. Given the expectation of
further downside risk, several of the Account's holdings were sold after
year-end 1999, including J.C. Penney and Rite Aid Corporation.
Account Managers expect underlying economic fundamentals to remain strong which
is positive for corporate securities. Corporate yield premiums to Treasuries
remain high and should produce long-term performance relative to Treasuries.
Comparison of Change in Value of $10,00 Investment in the Bond Account, Lipper
Corporate Debt BBB Rated Fund Average and Lehman Brothers BAA Corporate Index
Total Returns *
As of December 31, 1999
1 Year 5 Year 10 year
-----------------------
-2.59% 7.73% 7.77%
Lehman Lipper
Bond BAA BBB
Account Index Average
10,000 10,000 10,000
1990 10,522 10,528 10,573
1991 12,281 12,561 12,455
1992 13,432 13,742 13,481
1993 14,999 15,518 15,142
1994 14,565 15,022 14,467
1995 17,793 18,435 17,370
1996 18,214 19,176 17,924
1997 20,144 21,304 19,731
1998 21,693 21,577 20,964
1999 21,131 21,400 20,612
Note: Past performance is not predictive of future performance.
High Yield Account
(Mark Denkinger)
In spite of the continual strength of the U.S. economy, the high yield market
continued to be under pressure during 1999. The High Yield Account posted a net
return of 1.76% for the year, trailing the Lipper High Current Yield Fund
Average of 4.53% and the Lehman Brothers High Yield Index gross return of 2.39%.
The High Yield Account's performance was negatively impacted by the
underperformance of several holdings that experienced financial difficulties
throughout the year as the market continued to punish issuers with poor results.
The high yield market typically thrives on a strong economy, unfortunately as of
late, this has not been the case. An important factor negatively impacting the
high yield market is mutual fund cash flows. Cash inflows into mutual funds,
which are reported weekly, have historically been one of the few indicators of
high yield demand. Mutual fund inflows for 1999 totaled $5.0 billion,
substantially behind the $19.3 billion in 1998. Combine this weak demand with a
healthy new issue calendar of $101 billion during the year and the results were
investors demanding higher yields to compensate for lower demands.
The most noteworthy trend in the high yield market has been increased
volatility, primarily driven by the equity markets. Big swings in the Dow and
NASDAQ, and more specifically on individual stocks, have correlated highly with
non-Treasury fixed-income products. Any hint of bad news may have the issuers
severely punished. While this trend is nothing new to the fixed-income market,
the magnitude is far beyond what has been experienced before. This trend is
likely to continue until more stability in the equity markets is seen.
The High Yield Account maintains a BB- average quality, primarily composed of BB
and B bonds. This is a relatively conservative risk position compared to other
funds in the high yield market. Account Managers have maintained the Account's
overweighting in BB's, supporting a belief that BB's are undervalued. As market
conditions improve, Account Managers will more aggressively move into the B
market. The Account is well diversified with numerous industries, with the
largest weightings in telecommunications, media and energy. With high yield
spreads setting recent highs, Managers continue to believe the high yield market
looks attractive over the long-term and that these short-term fluctuations
create a buying opportunity.
Comparison of Change in Value of $10,000 Investment in the High Yield Account,
Lipper High Current Yield Fund Average and Lehman Brothers High Yield Composite
Bond Index
Total Returns *
As of December 31, 199
1 Year 5 Year 10 Year
----------------------
1.76% 8.03% 8.39%
High Lehman Lipper
Yield High Yield High Current
Account Index Yield Avg
10,000 10,000 10,000
1990 9,230 9,041 8,950
1991 11,750 13,217 12,346
1992 13,463 15,299 14,550
1993 15,120 17,918 17,351
1994 15,215 17,733 16,686
1995 17,661 21,132 19,436
1996 19,980 23,530 22,093
1997 22,127 26,532 24,956
1998 22,003 27,028 25,066
1999 22,390 27,674 26,201
Note: Past performance is not predictive of future performance.
Important Notes of the Income-Oriented Accounts:
The values of these indexes will vary according to the aggregzte value of the
common equity of each of the securities included. The indexes represented asset
types which are subject to risk, including possible loss of principal. You
cannot invest directly in an index. An index does not have an investment adviser
and does not pay any commissions or expenses. If an index had expenses, its
performance would be lower.
The High Yield Account is subject to the greater risks associated with high
yield bonds.
Lehman Brothers, BAA Corporate Index: This is an unmanaged index of all publicly
issued fixed rate nonconvertible, dollar-denominated, SEC-registered corporate
debt rated Baa or BBB by Moody's or S&P.
Lehman Brothers High Yield Index: This is an unmanaged index of all publicly
issued fixed, dollar-denominated, SEC-registered corporate debt rated Ba1 or
lower with at least $100 million outstanding and one-year or more to maturity.
Lipper Corporate Debt BBB Rated Funds Average: This average consists of mutual
funds investing at least 65% of their assets in corporate and government debt
issues rated by S&P or Moody's in the top four grades. The one year average
currently contains 132 mutual funds.
Lipper High Current Fund Average: This average consists of mutual funds
investing in high (relative) current yield fixed income securities with no
quality or maturity restrictions. The mutual funds tend to invest in lower grade
debt issues. The one year average currently contains 339 mutual funds.
Note: Mutual fund data from Lipper Inc.
GENERAL INFORMATION ABOUT AN ACCOUNT
Eligible Purchasers
Only certain eligible purchasers may buy shares of the Accounts. Eligible
purchasers are limited to 1) separate accounts of Principal Life Insurance
Company or of other insurance companies, 2) Principal Life Insurance Company or
any of its subsidiaries or affiliates, 3) trustees of other managers of any
qualified profit sharing, incentive or bonus plan established by Principal Life
Insurance Company or any of its subsidiaries or affiliates for employees of such
company, subsidiary or affiliate. Such trustees or managers may buy Account
shares only in their capacities as trustees or managers and not for their
personal accounts. The Board of Directors of the Fund reserves the right to
broaden or limit the designation of eligible purchaser.
Each Account serves as the underlying investment vehicle for variable annuity
contracts and variable life insurance policies that are funded through separate
accounts established by Principal Life. It is possible that in the future, it
may not be advantageous for variable life insurance separate accounts and
variable annuity separate accounts to invest in the Accounts at the same time.
Although neither Principal Life nor the Fund currently foresees any such
disadvantage, the Fund's Board of Directors monitors events in order to identify
any material conflicts between such policy owners and contract holders. Material
conflict could result from, for example 1) changes in state insurance laws, 2)
changes in Federal income tax law, 3) changes in the investment management of an
Account, or 4) differences in voting instructions between those given by policy
owners and those given by contract holders. Should it be necessary, the Board
would determine what action, if any, should be taken. Such action could include
the sale of Account shares by one or more of the separate accounts which could
have adverse consequences.
Shareholder Rights
The following information applies to each Account of the Principal Variable
Contracts Fund, Inc. Each Account share is eligible to vote, either in person or
by proxy, at all shareholder meetings for that Account. This includes the right
to vote on the election of directors, selection of independent auditors and
other matters submitted to meetings of shareholders of the Account. Each share
has equal rights with every other share of the Account as to dividends,
earnings, voting, assets and redemption. Shares are fully paid, non-assessable
and have no preemptive or conversion rights. Shares of an Account are issued as
full or fractional shares. Each fractional share has proportionately the same
rights including voting as are provided for a full share. Shareholders of the
Fund may remove any director with or without cause by the vote of a majority of
the votes entitled to be case at a meeting of all Account shareholders.
The bylaws of the Fund provide that the Board of Directors of the Fund may
increase or decrease the aggregate number of shares that the Fund has the
authority to issue, without a shareholder vote.
The bylaws of the Fund also provide that the Fund does not need to hold an
annual meeting of shareholders unless one of the following is required to be
acted upon by shareholders under the Investment Company Act of 1940: election of
directors, approval of an investment advisory agreement, ratification of the
selection of independent auditors, and approval of the distribution agreement.
The Fund intends to hold shareholder meetings only when required by law and at
such other times when the Board of Directors deems it to be appropriate.
Shareholder inquiries should be directed to: Principal Variable Contracts Fund,
Inc., Principal Financial Group, Des Moines, Iowa 50392-0200.
Non-Cumulative Voting
The Fund's shares have non-cumulative voting rights. This means that the holders
of more than 50% if the shares voting for the election of directors of the Fund
can elect 100% of the directors if they choose to do so. In such event, the
holders of the remaining shares voting for the election of directors will not be
able to elect any directors.
Principal Life votes each Account's shares allocated to each of its separate
accounts registered under the Investment Company Act of 1940 and attributable to
variable annuity contracts or variable life insurance policies participating in
the separate accounts. The shares are voted in accordance with instructions
received from contract holders, policy owners, participants and annuitants.
Other shares of each Account held by each separate account, including shares for
which no timely voting instructions are received, are voted in proportion to the
instructions that are received with respect to contracts or policies
participating that separate account. Shares of each of the Accounts held in the
general account of Principal Life or in the unregistered separate accounts are
voted in proportion to the instructions that are received with respect to
contracts and policies participating in its registered and unregistered separate
accounts. If Principal Life determines, under applicable law, that an Account's
shares held in one or more separate accounts or in its general account need not
be voted according to the instructions that are received, it may vote those
Account shares in its own right.
Purchase of Account Shares
Shares are purchased from Princor Financial Services Corporation, the Fund's
principal underwriter. There are no sales charges on shares of the Accounts.
There are not restrictions on amounts to be invested in shares of the Accounts.
Shareholder accounts for each Account are maintained under an open account
system. Under this system, an account is opened and maintained for each
investor. Each investment is confirmed by sending the investor a statement of
account showing the current purchase and the total number of shares owned. The
statement of account is treated by each Account as evidence of ownership of
Account shares. Share certificates are not issued.
Sale of Account Shares
This section applies to eligible purchasers other than the separate accounts of
Principal Life and its subsidiaries.
Each Account sells its shares upon request. There is no charge for the sale. A
shareholder sends a written request to the Account requesting the sale of any
part or all of the shares. The letter must be signed exactly as the account is
registered. If payment is to be made to the registered shareholder or joint
shareholder, the Account does not require a signature guarantee. If payment is
to be made to another party, the shareholder's signature(s) must be guaranteed
by a commercial bank, trust company, credit union, savings and loan association,
national securities exchange member or brokerage firm. Shares are redeemed at
the net asset value per share next computed after the request is received by the
Account in proper and complete form.
Sales proceeds are generally sent within three business days after the request
is received in proper form. However, the right to sell shares may be suspended
during any period when 1) trading on the New York Stock Exchange is restricted
as determined by the SEC or when the Exchange is closed for other than weekends
and holidays, or 2) an emergency exists, as determined by the SEC, as a result
of which i) disposal by a fund of securities owned by it is not reasonably
practicable, ii) it is not reasonably practicable for a fund to fairly determine
the value of its net assets; or iii) the SEC permits suspension for the
protection of security holders.
If payments are delayed and the instruction is not canceled by the shareholder's
written instruction, the amount of the transaction is determined as of the first
valuation date following the expiration of the permitted delay. The transaction
occurs within five days thereafter.
In addition, payments on surrenders attributable to a premium payment made by
check may be delayed up to 15 days. This permits payment to be collected on the
check.
Restricted Transfers
Shares of each of the Accounts may be transferred to an eligible purchaser.
However, if an Account is requested to transfer shares to other than an eligible
purchaser, the Account has the right, at its election, to purchase the shares at
the net asset value next calculated after the receipt of the transfer request.
However, the Account must give written notification to the transferee(s) of the
shares of the election to buy the shares within seven days of the request.
Settlement for the shares shall be made within the seven day period.
Financial Statements
You will receive an annual financial statement for the Fund, examined by the
Fund's independent auditors, Ernst & Young LLP. That report is a part of this
prospectus. You will also receive a semiannual financial statement that is
unaudited. The following financial highlights are derived from financial
statements that were audited by Ernst & Young LLP.
FINANCIAL HIGHLIGHTS
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
Selected data for a share of Capital Stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
BALANCED ACCOUNT(a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....................... $16.25 $15.51 $14.44 $13.97 $11.95
Income from Investment Operations:
Net Investment Income................................... .56 .49 .46 .40 .45
Net Realized and Unrealized Gain (Loss) on Investments.. (.19) 1.33 2.11 1.41 2.44
Total from Investment Operations .37 1.82 2.57 1.81 2.89
Less Dividends and Distributions:
Dividends from Net Investment Income.................... (.57) (.49) (.45) (.40) (.45)
Distributions from Capital Gains........................ (.62) (.59) (1.05) (.94) (.42)
Excess Distributions from Capital Gains(b).............. (.02) -- -- -- --
Total Dividends and Distributions (1.21) (1.08) (1.50) (1.34) (.87)
Net Asset Value, End of Period............................. $15.41 $16.25 $15.51 $14.44 $13.97
Total Return............................................... 2.40% 11.91% 17.93% 13.13% 24.58%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)................ $209,747 $198,603 $133,827 $93,158 $45,403
Ratio of Expenses to Average Net Assets................. .58% .59% .61% .63% .66%
Ratio of Net Investment Income to Average Net Assets 3.36% 3.37% 3.26% 3.45% 4.12%
Portfolio Turnover Rate................................. 21.7% 24.2% 69.7% 22.6% 25.7%
BOND ACCOUNT(a) 1999 1998 1997 1996 1995
Net Asset Value, Beginning of Period....................... $12.02 $11.78 $11.33 $11.73 $10.12
Income from Investment Operations:
Net Investment Income................................... .81 .66 .76 .68 .62
Net Realized and Unrealized Gain (Loss) on Investment... (1.12) .25 .44 (.40) 1.62
Total from Investment Operations (.31) .91 1.20 .28 2.24
Less Dividends and Distributions:
Dividends from Net Investment Income.................... (.82) (.66) (.75) (.68) (.63)
Excess Distributions from Capital Gains(b).............. -- (.01) -- -- --
Total Dividends and Distributions (.82) (.67) (.75) (.68) (.63)
Net Asset Value, End of Period............................. $10.89 $12.02 $11.78 $11.33 $11.73
Total Return............................................... (2.59)% 7.69% 10.60% 2.36% 22.17%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)................ $125,067 $121,973 $81,921 $63,387 $35,878
Ratio of Expenses to Average Net Assets................. .50% .51% .52% .53% .56%
Ratio of Net Investment Income to Average Net Assets.... 6.78% 6.41% 6.85% 7.00% 7.28%
Portfolio Turnover Rate................................. 40.1% 26.7% 7.3% 1.7% 5.9%
</TABLE>
See accompanying notes.
Selected data for a share of Capital Stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
CAPITAL VALUE ACCOUNT(a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....................... $37.19 $34.61 $29.84 $27.80 $23.44
Income from Investment Operations:
Net Investment Income................................... .78 .71 .68 .57 .60
Net Realized and Unrealized Gain (Loss) on Investments.. (2.41) 3.94 7.52 5.82 6.69
Total from Investment Operations (1.63) 4.65 8.20 6.39 7.29
Less Dividends and Distributions:
Dividends from Net Investment Income..................... (.80) (.71) (.67) (.58) (.60)
Distributions from Capital Gains........................ (3.13) (1.36) (2.76) (3.77) (2.33)
Excess Distributions from Capital Gains(b).............. (.89) -- -- -- --
Total Dividends and Distributions (4.82) (2.07) (3.43) (4.35) (2.93)
Net Asset Value, End of Period............................. $30.74 $37.19 $34.61 $29.84 $27.80
Total Return............................................... (4.29)% 13.58% 28.53% 23.50% 31.91%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)................ $367,927 $385,724 $285,231 $205,019 $135,640
Ratio of Expenses to Average Net Assets................. .43% .44% .47% .49% .51%
Ratio of Net Investment Income to Average Net Assets.... 2.05% 2.07% 2.13% 2.06% 2.25%
Portfolio Turnover Rate................................. 43.4% 22.0% 23.4% 48.5% 49.2%
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD ACCOUNT(a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....................... $8.06 $8.90 $8.72 $8.39 $7.91
Income from Investment Operations:
Net Investment Income................................... .72 .80 .76 .80 .76
Net Realized and Unrealized Gain (Loss) on Investments.. (.58) (.85) .18 .30 .51
Total from Investment Operations .14 (.05) .94 1.10 1.27
Less Dividends and Distributions:
Dividends from Net Investment Income.................... (.72) (.79) (.76) (.77) (.77)
Excess Distributions from Net Investment Income (b)..... (.04) -- -- -- (.02)
Total Dividends and Distributions (.76) (.79) (.76) (.77) (.79)
Net Asset Value, End of Period............................. $7.44 $8.06 $8.90 $8.72 $8.39
Total Return............................................... 1.76% (.56)% 10.75% 13.13% 16.08%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)................ $13,678 $14,043 $15,837 $13,740 $11,830
Ratio of Expenses to Average Net Assets................. .67% .68% .68% .70% .73%
Ratio of Net Investment Income to Average Net Assets.... 8.52% 8.68% 8.50% 9.21% 9.09%
Portfolio Turnover Rate................................. 93.8% 87.8% 32.0% 32.0% 35.1%
</TABLE>
See accompanying notes.
FINANCIAL HIGHLIGHTS (Continued)
PRINCIPAL VARIABLE CONTRACTS FUND, INC.
Selected data for a share of Capital Stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
MIDCAP ACCOUNT(a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period....................... $34.37 $35.47 $29.74 $25.33 $19.97
Income from Investment Operations:
Net Investment Income................................... .12 .22 .24 .22 .22
Net Realized and Unrealized Gain on Investments......... 4.20 .94 6.48 5.07 5.57
Total from Investment Operations 4.32 1.16 6.72 5.29 5.79
Less Dividends and Distributions:
Dividends from Net Investment Income.................... (.12) (.22) (.23) (.22) (.22)
Distributions from Capital Gains........................ (1.67) (2.04) (.76) (.66) (.21)
Total Dividends and Distributions (1.79) (2.26) (.99) (.88) (.43)
Net Asset Value, End of Period............................. $36.90 $34.37 $35.47 $29.74 $25.33
Total Return............................................... 13.04% 3.69% 22.75% 21.11% 29.01%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)................ $262,350 $259,470 $224,630 $137,161 $58,520
Ratio of Expenses to Average Net Assets................. .61% .62% .64% .66% .70%
Ratio of Net Investment Income to Average Net Assets.... .32% .63% .79% 1.07% 1.23%
Portfolio Turnover Rate................................. 79.6% 26.9% 7.8% 8.8% 13.1%
MONEY MARKET ACCOUNT(a) 1999 1998 1997 1996 1995
Net Asset Value, Beginning of Period....................... $1.000 $1.000 $1.000 $1.000 $1.000
Income from Investment Operations:
Net Investment Income................................... .048 .051 .051 .049 .054
Less Dividends from Net Investment Income.................. (.048) (.051) (.051) (.049) (.054)
Net Asset Value, End of Period............................. $1.000 $1.000 $1.000 $1.000 $1.000
Total Return............................................... 4.84% 5.20% 5.04% 5.07% 5.59%
Ratio/Supplemental Data:
Net Assets, End of Period (in thousands)................ $120,924 $83,263 $47,315 $46,244 $32,670
Ratio of Expenses to Average Net Assets................. .52% .52% .55% .56% .58%
Ratio of Net Investment Income to Average Net Assets.... 4.79% 5.06% 5.12% 5.00% 5.32%
</TABLE>
See accompanying notes.
Notes to Financial Highlights
(a) Effective January 1, 1998 the following mutual funds were reorganized into
the Principal Variable Contracts Fund, Inc. as follows:
Former Fund Name Current Account Name
Principal Balanced Fund, Inc. Balanced Account
Principal Bond Fund, Inc. Bond Account
Principal Capital Accumulation Fund, Inc. Capital Value Account
Principal High Yield Fund, Inc. High Yield Account
Principal Emerging Growth Fund, Inc. MidCap Account
Principal Money Market Fund, Inc. Money Market Account
(b) Dividends and distributions which exceed net investment income and net
realized gains for financial reporting purposes but not for tax purposes
are reported as dividends in excess of net investment income or
distributions in excess of net realized gains on investments. To the extent
distributions exceed current and accumulated earnings and profits for
federal income tax purposes, they are reported as tax return of capital
distributions.
Additional information about the Fund is available in the Statement of
Additional Information dated May 1, 2000 and which is part of this prospectus.
Information about the Fund's investments is also available in the Fund's annual
and semi-annual reports to shareholders. In the Fund's annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. The
Statement of Additional Information and annual and semi-annual reports can be
obtained free of charge by writing or telephoning Princor Financial Services
Corporation, P.O. Box 10423, Des Moines, IA 50306. Telephone 1-800-451-5447.
Information about the Fund can be reviewed and copied at the Securities and
Exchange Commission's Public Reference Room in Washington, D.C. Information on
the operation of the public reference room may be obtained by calling the
Commission at 800-SEC-0330. Reports and other information about the Fund are
available on the Commission's internet site at http://www.sec.gov. Copies of
this information may be obtained, upon payment of a duplicating fee, by writing
the Public Reference Section of the Commission, Washington, D.C. 20549-6009.
The U.S. Government does not insure or guarantee an investment in the Fund.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any financial institution, nor are shares of the Fund federally insured by
the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other agency.
Principal Variable Contracts Fund, Inc. SEC File 811-01944